Up and Down Wall Street
SATURDAY, AUGUST 17, 2013
Ben's Ultimate Driving Machine
By RANDALL W. FORSYTH
The possibility of less quantitative easing sends the market off the high road.
A study published in the Proceeding of the National Academy of Sciences that swept through the media last week found that, last year, drivers of fancy autos were the worst in their road manners, being less likely to yield to pedestrians in a crosswalk or more likely to cut in front of other drivers at a four-way stop at an intersection. "BMW drivers were the worst," Paul K. Piff, a researcher at the Institute of Personality and Social Research at the University of California at Berkeley, who conducted the study of 152 drivers in California, told the New York Times. But drivers of the ever-so-socially conscious Toyota Prius hybrids also were more likely to commit "infractions," he added.
This tendency doesn't seem unique to BMW drivers in California or the U.S., for that matter. The U.K.'s Daily Mail reports that the vehicles with the highest incidences of road rage were BMWs, followed closely by Land Rovers and Audis, according to a study of 2,837 motorists by an outfit called VoucherCodesPro. The worst culprits were men 35 to 50 years old who drove blue Bimmers on Fridays around 5:45 p.m.
My personal research (conducted in a dark navy 328i, albeit not late on a Friday afternoon, which is too near Barron's deadline) finds that, contrary to these studies, BMW drivers gain an exaggerated sense of self-confidence from the capabilities of their autos.
Their precision handling, braking, and power instill a sense of nonchalance that lures the driver into what appears untoward behavior to others, like going 80 in a 55-mph zone, because it feels as if you're loafing even at that speed. And I hope that works if I get pulled over.
Investors have been speeding along to record highs—with a significant boost from the trillion-dollar-a-year turbocharger from the Federal Reserve. But the potential for Fed Chairman Ben Bernanke to lift his foot off the gas—to use his metaphor—has been sending markets into reverse.
Last week, U.S. stocks suffered their worst week of 2013, with the Dow Jones Industrial Average shedding 344 points or 2.2% by Friday, after posting its eighth down session of the past 10. And that, in large part, reflected the surge in bond yields on the prospect of the T word—taper—or the reduction in the Fed's $85 billion-a-month purchases of Treasury and agency mortgage-backed securities. The benchmark 10-year Treasury's yield wound up at a two-year closing high of 2.83%, up a hefty 25 basis points (one-quarter of a percentage point) on the week.
That the equity market shudders on the prospect of a taper—beginning possibly as soon as the Sept. 17-18 meeting of the policy-setting Federal Open Market Committee—isn't surprising. Wilshire Associates reckons that a cool $2.9 trillion has been added to the value of U.S. stocks since the third round of quantitative easing—better known as QE3—was announced last September. But the efficacy of quantitative easing in achieving its stated goal of spurring the economy—as opposed to asset prices—has been, at best, modest.
According to an article in the FRBSF Economic Letter by researchers Vasco Curdia of the San Francisco Fed and Andrea Ferrero of the New York Fed, the previous round of Fed purchases—QE2, which totaled $600 billion—added an estimated 0.13 of a percentage point to real growth in gross domestic product and 0.03 of a percentage point to inflation. Moreover, even this negligible boost fades after two years, they add.
Writing in the Washington Post in November 2010 to explain the Fed's decision to engage in QE2, Bernanke asserted that the Treasury purchases would help push up stock prices, increasing consumer wealth and confidence, and thus encouraging spending. The San Francisco Fed article suggests that, while the stock market hovers near historic highs with QE3 still in full swing, the effect on the real economy is rather less pronounced and transitory.
Wall Street is showing itself loath to give up QE3, even gradually. Investors have found that Fed buying has produced rising prices of assets almost across the board, especially in stocks and real estate.
That makes quantitative easing a luxury difficult to forgo, like driving a BMW.
THE STOCK MARKET'S DEPENDENCE on bond yields that, despite their 100-basis-point or so rise from their recent lows of three months ago, remain near historic lows, was amply demonstrated last week by none other than Carl Icahn.
The corporate activist sent out a Twitter tweet that he had accumulated a major position in Apple (ticker: AAPL). That ignited the afterburners on the stock, which already had lifted off from its low of just under $400, touched at the end of June. Apple climbed back over the $500 mark for the first time since January, for a gain of 10.5% on the week, as Icahn called the purchase of the shares a "no brainer," given that the company could borrow at what he estimated to be just 3%.
What's remarkable is that Icahn's Apple investment isn't predicated on the inspired products that sprang from the tech giant when it was led by Steve Jobs, but rather on the sort of financial engineering that Jobs abjured. Since the Apple CEO's passing, however, the company has acceded to calls to manage its capital more efficiently, instituting a dividend (yielding 2.7%, which had been comfortably higher than the 10-year Treasury note until the bond market's backup in yields last week) and share repurchases, in part financed with a record, $16 billion bond offering.
But from the perspective of private-equity and other early-stage investors, these salubrious financial conditions have provided an opportunity to cash out. As noted in this column on May 6, another famed financier, Leon Black of Apollo Global Management (APO), said then "there is a time to reap and a time to sow." Now was the time to harvest the gains made from earlier investments.
Similar sentiments have been voiced by the heads of other big private-equity firms, including Fortress Investment Group (FIG) and Blackstone Group (BX), according to a Bloomberg article a couple of weeks ago.
That has been further exemplified by the roaring market for initial public offerings, which allows private equity to cash out and the public to get in. Whether you want to buy when they're selling is another matter; Blackstone shares have never again seen their June 2007 price of $35, attained in the wake of one of the best-timed initial public offerings in history.
The IPO machine was running flat out until it finally slowed last week for the lazy days of summer. According to Thomson Reuters, through Aug. 15, some 120 deals had been brought to the U.S. market this year, the highest tally for that stretch since the halcyon days of 2007, and up from 87 last year. However, the dollar volume of $28.7 billion was off 6.8% from the year-earlier total, which of course included Facebook (FB).
BUT WHILE THE FED'S LARGESS has been showered on Wall Street, less seems to be finding its way to consumers on Main Street.
Last week saw another parade of weaker-than-expected earnings and sales reports or punk projections from a slew of retailers. After hits to the likes of Abercrombie & Fitch (ANF) and Aeropostale (ARO), retailers from every strata took tumbles, from Macy's (M) in the midrange to Nordstrom (JWN) at the high, along with Wal-Mart (WMT), the discount behemoth. The slow sales of soft goods contrast sharply with recent strong home and auto sales, which demonstrate the divide. The latter depend on credit and wealth, which have been growing in the bull market.
Purchases of clothing depend more on income, which has been sluggish. A sharper-than-expected decline in the early August Reuters University of Michigan consumer sentiment index, to 80 from 85.1, is consistent with the retailers' experience. Meanwhile, news of 4,000 layoffs at Cisco (CSCO) because of a weak outlook is unlikely to boost confidence.
A Fed taper with weak full-time employment would be the "worst of both worlds," writes Steve Wang, research director of Reorient Financial Markets in Hong Kong. Part-time employment is up 1.038 million this year, while full-time jobs are up 172,000, according to the Labor Department's household survey. Meanwhile, the rise in payroll taxes and higher gasoline prices also don't boost consumers' ability or willingness to spend.
The weakness reported by retailers and the pullback of mortgage applications since rates have been on the ascent appears to be giving some Fed officials pause. Two Fed district presidents, James Bullard of St. Louis (a voter on the FOMC this year) and Dennis Lockhart of Atlanta (a nonvoter) suggested that a September taper isn't certain.
In particular, Lockhart noted that there would be another employment report for August (on Sept. 6, the Friday after Labor Day) to add to the data mix. Then there's the ongoing debate as to who will succeed Ben Bernanke and the potential for a government shutdown on Oct. 1.
September historically is the worst month for equities, with an average loss of 0.52% from 1971 to 2012, according to the Stock Trader's Almanac. Given the Fed's evident sensitivity to the stock market, the taper is more likely to be pushed back.
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