Summers 'Likely' To be Named
My guess is many on Wall Street thought "no way" when they first heard the
name Larry Summers mentioned as the possible next Fed chairman. Back on August
19 we made the argument that President Obama's "artificial bubble" comments
seemed to point to Summers, rather than Janet Yellen. From CNBC:
A source from Team Obama told CNBC that Larry Summers will likely be
named chairman of the Federal Reserve in a few weeks though he is "still
being vetted" so it might take a little longer. It's largely come down
to a two-horse race between Summers, a former Treasury secretary, and Fed
Vice Chairman Janet Yellen for the next Fed chief.
Tapering, Now This?
Wall Street has been so focused on the Fed's probable bond tapering schedule
that the early reports of Summers being a serious contender did not seem to
register. Wall Street has spliced all the sound bites together from the past
few weeks and the reality of a Larry-led Fed may be sinking in. From CNBC:
Speculation that Larry Summers is the favored candidate to take over
Ben Bernanke as Fed chief has resurfaced in recent weeks, prompting a strong
backlash from some industry watchers, with one going as far as labeling
his potential appointment as a "black swan" event. "There is a lot to be
said that the next Fed chair is going to be picking up a surgery in the
middle of surgery, think of it that way--that's very difficult to do -
That could be the black swan that people aren't expecting," Bouroudjian,
CEO of Bull and Bear Partners, told CNBC, referring to the difference between
Summers and Bernanke policies.
Janet Yellen is unquestionably the more market-friendly choice. The markets
are beginning to morph into a "risk-off" stance as Yellen's dream job is in
question. The chart below shows the performance of stocks relative to bonds.
When the ratio is rising, demand for growth-oriented stocks is greater than
the demand for more conservative bonds. The ratio is taking on a concerning
look similar to the October 2012 correction in stocks.
Military Strikes Tend To Spook Markets
Since rising oil prices can send negative ripples through the global economy,
financial markets keep a close eye on anything that could potentially disrupt
normal shipping and production patterns. Military action against Syria appears
to becoming more likely by the day. From Reuters:
Obama told Americans on Wednesday evening that a military strike against
Syria was in their interest following the gas attack and Britain said armed
action would be legal, but intervention looked set to be delayed until
U.N. investigators report back after leaving Syria on Saturday.The U.S.
and its allies have "no smoking gun" proving Assad personally ordered
the attack on a rebel-held Damascus neighborhood in which hundreds of people
were killed, U.S. national security officials said.
Investment Implications
Our market
model uses the chart below to help us answer the question, "Would I rather
be long or would I rather be short?" Like the stock vs. bond chart we presented
above, the long (SPY) vs. short (SH) ratio below is taking on a look very
similar to the periods where stocks corrected in October 2012 and May 2013.
We have reduced risk on four separate occasions in recent weeks. If concerns
about the Fed or military action spark further deterioration in the risk-on/risk-off
ratios we track, we will continue to reduce our exposure to equities. In terms
of adding some defensive positions to our portfolios, we will be watching the
emerging relative strength in gold (GLD), bonds (TLT), and shorts (SH).