Leveling the Playing Field June 16, 2014

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Happy Fathers Day!

Am I the only person that thinks kids activities have gotten out of hand? Im all for
participating, but has it crossed a line? Last weekend entailed 10 baseball games in two
counties and two birthday parties. Practices throughout the week. Thursday was dance.
Friday night was eight hours of dance, getting home around midnight. Saturday was
another seven hours of dance. Sunday is another eight hours of baseball. Am I the only
guy that cant wait for Monday morning to arrive?

Butjust when I think my head is going to explode, my kids take me to Cold Stone for
some The Pie Who Love Me. They dance around to the live music, make silly faces, and
give me big hugs. My six year old says, You make me happy. I melt. Its good to be a
dad. Lets go play some baseball!

Happy Fathers Day to all the dads out there, but especially to my own. He taught me the
value of hard work, self-sacrifice, and that if you treat your clients right, the rest takes
care of itself.

FOMC Announcement Wednesday: Red Stake = Pitching Wedge
Weve never played golf together.
I know this because I dont play golf. Until last weekend, the last time I played golf was
a few years ago. But there I was playing in lovely Hilton Head and one of the gentleman
in my foursome asked me what yardage I had played to the flag. I thought he was joking.
I said, Theres a red stake in the ground over there, so I hit a pitching wedge. And that
is exactly what I did.
Remember Yellens first Q&A session as Fed Chair in March when she responded to a
question about how long a considerable period of time was by using Kentucky
windage? She should have been as precise as Tigers caddy at Pinehurst, but instead she
used the tried and tested JP method of theres a red pole in the ground over there, I
should use a pitching wedge. (Wait, Tiger wasnt at Pinehurst this weekend? Maybe
Yellen should fake a back injury too and help avoid sending another shockwave through
the markets. If a waiter at a DC Perkins calls out sick Wednesday, we might have a news
story).




The dots are nothing more than the distribution of Fed participants projections for the
Fed Funds rate. Last quarter the dots suggested year end Fed Funds (and roughly
LIBOR) of:

2014: 0.25%
2015: 1.00%
2016: 2.25%

Complicating matters is the fact that we lose two dotters, Stein and Pianalto, while
gaining Fischer, Brainard, and Mester. If decoding the dots last quarter required
Benjamin Franklin Gates, this meeting may require Robert Langdon. And if you got that
reference, you watch too many Nicholas Cage movies. And I am pretty sure the
definition of too many Nicholas Cage movies is one.

In all seriousness, Yellen will probably be far more careful with her words this time
around. I dont put much stock in the forecasts of Fed officials because they are known
for being horrible forecasters, so the dots will take on more significance once an actual
hike is on the horizon. Until then, Fed participants are basically pulling out the pitching
wedge because theres a red stake somewhere around.
Treasury Yields
Firstly, this Iraq mess is likely to keep a lid on interest rates and may very well push
Treasury yields down in the coming weeks depending on how it plays out. Every time
Obama speaks about troop involvement, markets get nervous.
Secondly, is this really the longest lasting short squeeze we can ever recall? That made
sense for a week. Maybe two. But demand for US Treasurys is insatiable. Europe is a
mess. Greece will default again, and Spain/Italy/Portugal are in recessions.
JPM released a report last week that made us wonder. In essence, it stated that demand
for US Treasurys exceeds supply by $460B:
- In total, bond demand is expected to stay flat vs. last year as an improvement in
private sector demand offsets Fed tapering.
- After peaking in 2010, government bond supply is on a declining trend due to
declining government budget deficits.
- Spread product supply is also declining driven by European credit supply, which
is contracting in both the Corporate and Agency bond space, and securitized
products in the US (ABS and non-Agency MBS), which are also contracting.
- Mechanically, the decline in the excess bond supply in 2014 vs. 2013 would
imply that the yield of the Global Agg bond index should fall this year by around
40bp by simply looking at what happened before in years with similar excess
bond demand to the one projected for this year, i.e. in 2008, 2011 and 2012.




In other words, despite stocks hitting all-time highs and the US economy slowly
improving, there appears to be reasons for rates to stay low for a considerable period of
time.

All the way until Yellen speaks on Wednesday.


Have a great week and we will update everyone as conditions warrant.
































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