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Hackett Advisors in the News


FOCUS: Markets' Focus On Quantitative Easing Overlooks Other Factors


21 October 2010, 12:34 p.m.
By Debbie Carlson
Of Kitco News
www.kitco.com


(Kitco News) --The financial markets have been focusing on the likelihood of a second round of quantitative easing from the Federal Reserve in November, yet some market watchers wonder if there are not other factors that could influence trade.

Commodity and equity markets have been rallying on ideas that the Fed will pump more liquidity into the system with quantitative easing, perhaps as soon as the next Federal Open Market Committee meeting in early November. That meeting ends after the mid-term election, so any action taken won’t skew the outcome. Expectations are that the Fed could inject perhaps $500 billion over time, much less than the first round of easing.

But some market watchers wonder if issues like the uncertainty with U.S. home foreclosures might not turn the view of investors back to other problems after any Fed move. Last week, when it was discovered that several banks had signed off on thousands of foreclosures without reading the documents, shares of bank stocks fell. Bank of America, which bought the beleaguered mortgage giant Countrywide, is getting punished most for what’s being called “robo-signing.” While some homeowners are victims of fraud, others may be using this loophole to delay foreclosure.

Tom Pawlicki, analyst at MFGlobal said the news could be positive for gold if it becomes a focus for the trade, especially if gold is seen as a safe-haven. He said holders of mortgage-backed securities like Pimco and the New York Federal Reserve and six others joined to sue Bank of America to repurchase $47 billion in mortgages because of fraud allegations in the re-packaging process.

“The lawsuit may be perceived as another wealthy Wall Street type seeking a bailout from its bad bets. It may also be positive for gold because the sharp degree of weakness in bank stocks witnessed in May and June was caused by concerns over banks’ holdings of Greek debt,” he said. “Now concerns center around banks’ holdings of mortgage debt, which could again benefit gold again if safe-haven comes back into play.”

Shawn Hackett of Hackett Financial Advisers said there’s a very good chance that the market will start to focus on something else. “The basis for QE2 is that the economy is in shambles. The first QE didn’t do the trick, which is why this one is taking place. If we had a booming economy we wouldn’t need it,” he said.

He said the foreclosure uncertainty could be an issue if left unresolved. Given that stock, commodity and bond prices are all rising – which is not normal – something like a revisiting of bank debt could be the factor that causes these markets to diverge. “Something is going to crack it,” Hackett said.

BNP Paribas said while the impact on banks might be limited, it could easily hurt the shaky housing market further and could weaken the U.S. economy again.

“The markets initial reaction to this event is likely to see the Fed printing more money weakening the (dollar). However, this interpretation could be misleading regarding the potential risk impact should the US economy slip again. The (dollar) short position is significant…. Hence, a decline of shares will see investors liquidating carry positions, pushing volatility up and the (dollar) higher,” they said.

And a higher dollar would cause gold to swoon. “Look at how sensitive gold was Tuesday, falling $40,” Hackett said.

Still others think that issues like the robo-signing are just small events that might have a short-lived impact on financial markets and that the Fed’s actions will continue to reverberate. “People are really worried about the size of the U.S. government debt, not the bank debt,” said Jim Smitherman, commodities broker at Coquest.

He noted while commodities and equities have both risen on the back of another round of liquidity injected into the global system, that’s also keeping a lid on equities. “They’re keeping us from failing, but they’re also not letting the market do the job its needs to do to take care of this problem on its own. It’s also keeping the dollar down, days like Tuesday notwithstanding,” he said.

Thus, he said, commodity prices as a whole will rally for at least another six months if the Fed eases. “People will still want hard assets until they’re convinced the Fed has stopped printing money,” Smitherman said.

Alan Bush, senior financial analyst at Archer Financial Services, said while the impact of the robo-signing will linger, the concerns over it are diminishing already. In fact, he thinks because the economy is growing and the low interest rate environment, equity markets will continue to rally.

If the Fed signals at the next FOMC meeting it will ease, gold should take another real leg higher into year end, with a move to $1,500 an ounce, said Spencer Patton of Steel Vine Investments. “The market will always be thirsty for more Fed action.”

How the world reacts to any easing by the Fed is key, Patton added. “If China decides to incrementally start buying gold in place of the disaster that is U.S. debt denominated in U.S. dollars, gold will have a floor that will last all year,” he said.

Further down the road, Hackett said the problem will come if the second round of easing doesn’t boost the economy. “If printing money doesn’t work, the question is what will be what do we do now? There is no Plan B,” he said. “That’s when the markets will lose all faith in the Fed. They’ll have a failed policy.”

He said with a failed policy the Fed will have to reassess what to do if printing money is no longer an option. That could cause investors who have purchased gold on the idea of the Fed printing money continuously to reconsider those positions. “They’ve been a significant buyer of gold,” he said.

Further, he said, if the Fed’s hands are tied, it could lead to deflation, which would pressure all asset prices, including gold.

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