Stocks have room to run

[flow5]

We'll get another reading  with Thursday's H.3 release. But roc's in MVt (the proxy for real-output), don't oscillate widely between any month except Oct this year.

[flow5]

Widespread FDIC insurance coverage expired on 12/31/2012. This increased the supply of loan-funds in the money & capital markets - i.e., accelerated the turnover of existing money/savings (+Vt). QE3's POMOs have increased the other variable (M) in Fisher's "equation of exchange" (MVt=PT). Thus roc's in MVt (the 10 month roc in the proxy for real-output over the last 100 years), have greatly accelerated relative to the 4th qtr of 2012.

As the Fed's technical staff doesn't know the difference between money & liquid assets, this acceleration in economic output was unexpected & its subsequent deceleration will likewise be unexpected (one time reversal of the BOG's & FDIC's  policy error). Over a 50 year period Vt (not Vi) rose 2.5 times faster than M (had 2.5 times the impact on gDp over & above M).

But we are now on the down side of the curve. Roc's in MVt have peaked. Stocks will start declining prior to 5/1/2013 (the next seasonal inflection point demarcated by bank squaring day).

[bimetalaupt]

With M3 now increasing at 6.6% we should see real growth in Risk asset pricing with increased asset value.....

[flow5]

4/3/2013 marks the next rotation in reserve maintenance requirements. Down till the 17th, then up till 5/1/2013 (next seasonal inflection point).

[bimetalaupt]

Mar 31, 2013 15:58:40 GMT -5 flow5 said:

4/3/2013 marks the next rotation in reserve maintenance requirements. Down till the 17th, then up till 5/1/2013 (next seasonal inflection point).

Flow5,
 With the average Equity Risk Premium of 5.66% vs the average over the last 50 years of 3% ( for beta of 1.00000).. We have more room to expand valuations...  high risk Mutual funds could produce 8% return after the high cost of holding your money.

Just a thought,
BiMetalAuPt


<style type="text/css">tt { font-family: courier;}td { font-family: helvetica, sans-serif;}caption { font-family: helvetica, sans-serif; font-size: 14pt; text-align: left;}</style>

return low beta	5.2246%
10Y T-Note	1.80000%
ERP	3.42460%
erp beta 1	5.65842%
market	7.45842%
ZERO GROWTH	hYPOTHESES
ERT	5.65842%
scf B=1.18	6.67694%
TR	8.47694%
COST	1.27000%
NET	7.20694%
RE 1.42	8.03496%
TOTAL	9.83496%
COST	1.14000%
NET TO INV	8.69496%

[flow5]

We're on the downward slope in the roc in MVt (both proxies). Bernanke seemed to have learned something:

"we may adjust the flow rate of purchases from month to month to appropriately calibrate the amount of accommodation".

The FOMC can't hit any target by just purchasing $40 billion of mortgage-backed securities & $45 billion of Treasury securities each month.

Monetary policy objectives should be formulated in terms of desired roc’s in monetary flows -MVt (our means-of-payment money times its transactions rate-of-turnover) relative to roc’s in real-gDp (it should not target nominal-gDp).

[flow5]

2012-09 ,,,,,,, 0.13 ,,,,,,, 0.63 ,,,,,,, 0.026
2012-10 ,,,,,,, 0.07 ,,,,,,, 0.60 ,,,,,,, 0.025
2012-11 ,,,,,,, 0.10 ,,,,,,, 0.55 ,,,,,,, 0.023
2012-12 ,,,,,,, 0.15 ,,,,,,, 0.50 ,,,,,,, 0.021
2013-01 ,,,,,,, 0.17 ,,,,,,, 0.59 ,,,,,,, 0.025
2013-02 ,,,,,,, 0.16 ,,,,,,, 0.61 ,,,,,,, 0.025
2013-03 ,,,,,,, 0.17 ,,,,,,, 0.51 ,,,,,,, 0.021
2013-04 ,,,,,,, 0.14 ,,,,,,, 0.49 ,,,,,,, 0.020
2013-05 ,,,,,,, 0.10 ,,,,,,, 0.50 ,,,,,,, 0.021
2013-06 ,,,,,,, 0.07 ,,,,,,, 0.47 ,,,,,,, 0.020
2013-07 ,,,,,,, 0.08 ,,,,,,, 0.39 ,,,,,,, 0.016
2013-08 ,,,,,,, 0.04 ,,,,,,, 0.25 ,,,,,,, 0.010

First column = 10 month roc in RRs (the proxy for real-output)
Second column = 24 month roc in RRs (the proxy for inflation)
Third column = 24 month moving average of the 24 month roc in RRs (bond metric)

The data is actually non-conforming. These rocs were originally derived from the G.6 release: - debit & demand deposit turnover.

Note that Oil peaked when the roc in MVt peaked in Feb. Note that real-output just peaked. Note that bonds will continue higher until at least August.

So stocks will stall out on or before the next seasonal inflection point on 5/1. (sideways to down until the 17th)

[flow5]

Stocks are moving higher against the downward rotation in RR balances ending on the 17th. Normally this countercyclical movement would signify strength (i.e., an increase in Vt). 

Falling gasoline prices are boosting economic activity.  On 2/25/2013 gas was $3.851 (all grades).  On 4/8/2013 gas fell to $3.686.

www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=EMM_EPM0_PTE_NUS_DPG&f=W

[flow5]

This projection is without additional POMOs.

2013-01 ,,,,,,, 0.17 ,,,,,,, 0.59 ,,,,,,, 0.025
2013-02 ,,,,,,, 0.16 ,,,,,,, 0.61 ,,,,,,, 0.025
2013-03 ,,,,,,, 0.16 ,,,,,,, 0.49 ,,,,,,, 0.021
2013-04 ,,,,,,, 0.14 ,,,,,,, 0.49 ,,,,,,, 0.020
2013-05 ,,,,,,, 0.10 ,,,,,,, 0.49 ,,,,,,, 0.020
2013-06 ,,,,,,, 0.06 ,,,,,,, 0.47 ,,,,,,, 0.020
2013-07 ,,,,,,, 0.07 ,,,,,,, 0.39 ,,,,,,, 0.016
2013-08 ,,,,,,, 0.04 ,,,,,,, 0.25 ,,,,,,, 0.010

First column is the 10 month proxy for real-output
Second column is the 24 month proxy for inflation
Third column is a bond proxy (24 month moving avg of the 24 month roc)

Roc's (rates-of-change) in required reserves (RRs) mirror roc's in bank debits (although RRs underweight Vt - velocity).

Reading the tea leaves we get that falling gasoline prices are boosting economic activity. On 2/25/2013 gas was $3.851 (all grades). On 4/8/2013 gas fell to $3.676.

We know that economic activity peaked in the 1st qtr (we know that stock prices peak shortly thereafter).

We know that bonds should have had most of their short-term run (until July).
----

The FOMC's technical staff has no formula which supports this input pace. Has bankrupt you Bernanke learned this? "we may adjust the flow rate of purchases from month to month to appropriately calibrate the amount of accommodation".

</SPAN></P>

[flow5]

The short-term volatility in the markets are due to the huge swings in required reserves which have to be maintained by the CBs on a 30 day lagged basis (as opposed to contemporaneous accounting). $12, $8, $5 billion dollar swings are sometimes tradable. The Fed needs to leave the determination of short-term interest rates to the financial markets (not peg a short-term policy rate).

The bankers usually wait as late as they possibly can (until they can make the most accurate calculations). That's one reason why stocks didn't fall until Monday (the other reason is an injection of RRs increases Vt with a lag - that's where the G.6 release debit & demand deposit turnover is necessary).

Today's bank squaring day. The DJIA is down 138 now - it will probably rally until 5/1/2013.

[flow5]

Richmond Fed President Jeffrey Lacker: "I think this strength in the housing market ought to cause us to reconsider those MBS purchases. Housing is on a quite positive trajectory,"

Will housing finally lead the way?

[flow5]

DJIA peaked @ 14,865.14 on 4/11/2013 (momentum driven). Bottomed @ 14,537.14 (one day after rotation). Today up 152 points.

[flow5]

Yahoo: "A report showed contracts to buy previously owned homes rose last month to their highest level since April 2010, showing underlying strength in the housing market recovery, even though the pace of sales growth has cooled in recent months"

"The S&P 500 closed just barely above its previous record hit earlier this month of 1,593.37"

[flow5]

Agricultural prices (end-of-drought), increased oil production (decreased imports), & a rebound in housing activity could set the stage for a longer-term bounce in stocks.  But for now we're looking for a seasonal decline in RRs.

[flow5]

The "Lag" Effect of Money

Responsible monetary policy requires that the Fed control the volume & rate of expansion of the means-of-payment money supply. This is accomplished through the control over the volume & rate of expansion of commercial & Reserve bank credit. But the current $85b pace of purchases won't boost the rate of increase in money (& its utilization rate), anywhere near 2-3% above the rate-of-change (roc) in real-output (i.e., the desired roc in MVt - which is equal to AD -aggregate demand).

For the last 100 years, the lag effects for money flows (MVt) have been mathematical constants. The proxy for real-output climaxes in 10 months. The proxy for inflation climaxes in 24 months. Using this knowledge we know that commodity prices peaked in Feb, & economic activity peaked in March.

Common sense tells us that roads curve & traffic varies. So monetary policy objectives should be formulated in terms of desired roc’s in monetary flows -MVt (our means-of-payment money times its transactions rate-of-turnover) relative to roc’s in real-gDp (not the roc in AD or nominal-gDp). QE3 demonstrates yet again that the Fed neither keeps a good grip on its steering wheel, nor observes actual speed limits.

[flow5]

FOMC press release:

"The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes"

No formula (no rudder or anchor).

[flow5]

Adjusted for changes in reserve requirements 1
Not seasonally adjusted. Millions of dollars.


Two weeks ending 6

Feb 20, 2013
1,726,924
1,726,456
111,485
2,840,991

Mar 6, 2013
1,767,999
1,767,595
119,896
2,885,817

Mar 20, 2013
1,806,349
1,805,957
109,057
2,931,167

Apr 3, 2013
1,840,676
1,840,285
114,123
2,964,266

Apr 17, 2013 p
1,899,783
1,899,386
106,242
3,028,517


See the rotation from highs to lows. Bottomed @ 106,242 on

the 17th - then up until 5/1. 5/1 is the seasonal peak in

required reserve figures. The Fed drains reserves in May.



But this is the very short run. From an economic viewpoint,

the rate-of-change in MVt (transaction based accounts times

their rate of expenditure), there are 2 separate lags. One

is a proxy for real output (& it has always climaxed within 10

months for the last 100 years). The other is a proxy for inflation

(& it climaxes within 24 months).



Yesterday was "bank squaring day" the last day the CBs have

to maintain reserves equal to their transaction based accounts 30

days prior. As these biweekly swings are large, they effect stock

prices. We were down 138 points on the DJIA yesterday because

of a scramble to adjust the CB's balance sheets



www.federalreserve.gov/releases/h3/current/

[flow5]

www.newyorkfed.org/markets/omo/dmm/fedfundsdata.cfm?2013-05-15

Bank squaring day.  Bi-weekly effective FFR continues to  fall (from .149% to .126%) from one maintenance period to the next.  

[flow5]

2013-01 ,,,,,,, 0.17 ,,,,,,, 0.59
2013-02 ,,,,,,, 0.16 ,,,,,,, 0.61
2013-03 ,,,,,,, 0.16 ,,,,,,, 0.49
2013-04 ,,,,,,, 0.15 ,,,,,,, 0.50
2013-05 ,,,,,,, 0.15 ,,,,,,, 0.56
2013-06 ,,,,,,, 0.12 ,,,,,,, 0.54
2013-07 ,,,,,,, 0.12 ,,,,,,, 0.45
2013-08 ,,,,,,, 0.09 ,,,,,,, 0.31
2013-09 ,,,,,,, 0.08 ,,,,,,, 0.29
2013-10 ,,,,,,, 0.02 ,,,,,,, 0.28


First column = 10 month roc
Second column = 24 month roc

Seasonals are reversed this year (May new highs).  Gasoline peaks again in May.  October is a major (multi-year) inflection point.

[flow5]

May 21, 2013 was the top @ 15,387.58

Consolidation until Oct.

[bimetalaupt]

AS OF JUNE `13,2013
WITH THE  MMXIV Platinum: DYNAMIC RESULTS IT HAS DEMONSTRATED: THE GREATER UP SIDE TO THE MARKET (15 MONTHS) THE DOWN SIDE.
......................FAT TAIL...........FAT HEAD..............TOTAL RISK
FAT STUDY MMXIV.......16910.01165........18118.38992.......... -1008.378268

SO TOTAL RISK IS.....-1080.378268+72 = -1008.378268
TODAY'S DJIA............15,248   NOW 15,176.08
FAT HEAD ................18118.39
NET UP SIDE...........2870.26+72=2942.26
COMBINED 50/50.........1790.88 NOW 1975
REWARD RATIO..............2942.26/1008.37=2.918

OR THE MODEL IS IMPLYING FOR EVERY DOLLAR OF RISK DJIA HAS $2.918 IN GAINS.

JUST A MODEL..HAS NO FEELINGS ONLY NUMBERS...

BiMetalAuPt

[flow5]

2013-04 115530 0.15
2013-05 118179 0.14
2013-06 117000 0.09
2013-07 117000 0.10

RR's latest # = 110821

I averaged some figures to get 117000 (best case senario). Going from .14 to .09 represents a significant drop. Therefore I think stocks temporarily topped or flat lined. But even the upcoming drop in Oct is in the process of being minimized. Without any big interruptions in the roc's in RRs, this looks to be a long-term bull market.