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Monthly Archives: July 2013

Emerging Markets Fall the Most in a Week on China Concerns

“Emerging-market stocks fell, heading for the biggest drop in more than a week, as growth in Chinese service industries slowed and consumer shares sank amid surging oil prices. South Korea’s won led currencies lower.

Daphne International Holdings Ltd. (210), a footwear retailer, sank the most in four years in Hong Kong as crude climbed above $100 a barrel for the first time since September and the city’s retail sales trailed estimates. Industrial & Commercial Bank of China Ltd. tumbled 2.5 percent.Fubon Financial Holding Co. (2881) slumped 5.1 percent in Taipei after raising $850 million from a share sale. The won and India’s rupee both weakened 0.9 percent versus the dollar, while the ruble fell 0.2 percent, heading for its lowest level in a year.

The MSCI Emerging Markets Index lost 1.6 percent to 916.99 at 2:56 p.m. in Hong Kong, poised for the biggest drop since June 24. Oil’s surge, sparked by political turmoil in Egypt and an industry report showing U.S. stockpiles shrank, threatens to curb consumer spending power and spur inflation for energy-importing countries such as China and India. China’s non-manufacturing purchasing managers’ index fell to 53.9 in June, the lowest level since September, even as the government seeks to boost the economy’s reliance on services.

“Investors are hoping the spike is temporary because a sustained and continued gain in oil prices will hurt economic growth prospects,” said Allan Yu, who helps manage about $10 billion at Manila-based Metropolitan Bank & Trust Co. “Given the size of its economy, a slowdown in China will have an impact on its neighboring markets.”

China, Indonesia…”

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The Yen Gains on Safety, The Euro Falls, and The Aussie Hits Multi Year Lows

“The euro fell the most in two weeks against the yen as Portugal’s bonds slumped after two ministers resigned from the government, reigniting speculation Europe’s debt crisis is worsening.

The 17-nation currency dropped for a second day against the dollar as borrowing costs also increased in Spain and Italy. The yen strengthened against all of its 16 major counterparts as declines in stocks boosted demand for Japan’s currency as a haven. Australia’s dollar fell to the weakest since September 2010 after Reserve Bank Governor Glenn Stevens said the economy “will probably get” a lower currency if needed. The pound rose after U.K. services expanded……

The euro dropped 1 percent to 129.30 yen at 6:53 a.m. in New York, the biggest decline since June 14. The shared currency fell 0.2 percent to $1.2958 after sliding 0.7 percent yesterday. The yen strengthened 0.8 percent to 99.79 per dollar.

Portugal’s 10-year bond yield jumped above 8 percent for the first time since November after Prime Minister Pedro Passos Coelho told voters in a televised speech from Lisbon late yesterday that he’s trying to hold his government together.

Second Resignation

Portuguese Foreign Affairs Minister Paulo Portas, leader of junior coalition party CDS, quit yesterday in protest at the government’s budget policy. Portas was the second minister to resign this week after finance chief Vitor Gaspar stepped down, saying his credibility had been compromised by the government’s failure to meet budget targets set by the European Union.

The euro also weakened after a report showed services industries in the region shrank at a faster pace in June than initially estimated.

An index of services activity based on a survey of purchasing managers was 48.3 last month, Markit Economics said. That’s less than an initial estimate of 48.6 on June 20 and below the level of 50 that divides expansion from contraction.

The euro has still gained 4.6 percent this year, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The dollar gained 6.7 percent, the best performer, and the yen tumbled 8.7 percent.

Aussie Drops…”

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CDS Worries in Portugal Send Yields Higher and European Markets Lower

“Contracts protecting against losses on Portuguese sovereign and corporate bonds led increases in Europe’s credit-default swap markets as the nation’s borrowing costs jumped.

Swaps insuring Portugal’s sovereign debt surged as much as 105 basis points to 507, the biggest advance since May 2010 and the highest level in eight months, according to data compiled by Bloomberg. Contracts on EDP-Energias de Portugal SA, the country’s biggest utility, climbed 60 basis points to 392.5 basis points at 11:40 a.m. in London, while Banco Comercial Portugues SA increased 47 basis points to 593 and Banco Espirito Santo SA rose 44 basis points to 560.

Portugal’s 10-year bond yield topped 8 percent for the first time this year after two ministers quit the coalition government, putting budget cuts at risk as the country works to meet the terms of its bailout program. Rating downgrades of European banks and unrest in Egypt also drove up credit risk.

“Portugal is almost certainly going to become a crisis,” Bill Blain, a strategist at Mint Partners Ltd in London, wrote in a note to clients today. “When politicians walk away from government, you know a new election is coming. That’s the point economic reform dies.”

The cost of insuring European corporate debt against default rose to the highest in a week, signaling deterioration in perceptions of credit quality.

Credit Risk

The Markit iTraxx Crossover Index of default swaps on 50 companies with mostly high-yield credit ratings climbed 22 basis points to 478. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings added 5.5 basis points to reach 120.

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers increased 13 basis points to 176 and the subordinated index rose 20 to 262….”

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Poor China Service Data Sends Asian Markets Reeling

“Asian stocks dropped for the first time in six days as resource companies retreated after metals prices slid overnight and an official report showed China’s services industry expanded at a slower pace.

BHP Billiton Ltd., the world’s largest mining company, sank 3.2 percent. Tokyo Electric Power Co. led declines on the Asia-Pacific equity benchmark after the Japanese utility soared 19 percent yesterday. Suntory Beverage & Food Ltd. (2587) gained 1.5 percent on its debut in Tokyo after raising almost $4 billion in Asia’s largest public offering this year. Nikkei 225 Stock Average futures dropped as Portugal’s government bond yields surged on political infighting that threaten austerity plans.

The MSCI Asia Pacific Index lost 1.1 percent to 130.12 as of 6:11 p.m. in Hong Kong, with all 10 industry groups declining. Investors are waiting on U.S. jobs figures for signs the Federal Reserve may start tapering record stimulus as China’s economy slows and Europe’s debt crisis lingers.

“Economic growth is slowing in China and is holding the market back,” Stephen Corry, a Hong Kong-based chief investment strategist at LGT Group, a private banking and asset-management group that oversees about $107 billion, said in a phone interview. “It’s difficult to see much upside. GDP growth will struggle to meet the government’s 7.5 percent target for 2013. Valuations are rock bottom but that’s not a good enough indication to purchase.”

The benchmark MSCI Asia Pacific Index retreated 8.9 percent through yesterday from an almost five-year high on May 20. That gauge yesterday traded at 12.7 times average estimated earnings, compared with 14.6 for the Standard & Poor’s 500 Index and 12.7 times for the Stoxx Europe 600 Index, according to data compiled by Bloomberg.

Utilities Drop….”

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Egypt’s Mursi Refuses to Step Down, Clashes Ensue Sending Black Gold Higher

“Egypt’s military said it was ready to sacrifice itself in the fight against “fools,” while President Mohamed Mursi vowed to defend his legitimacy with his life as time ran out on the army’s ultimatum to end the political crisis.

The showdown is pitting the country’s first democratically elected president against detractors who claim he’s sold out the goals of the 2011 uprising against Hosni Mubarak to advance Islamist interests. Clashes between his supporters and critics left at least 18 dead and 619 wounded over the past 24 hours, said Ahmed El-Ansari, deputy head of the national ambulance service.

“If the price of safeguarding legitimacy is my own blood, I am ready to sacrifice it,” Mursi said in a late night televised speech. “There is no alternative to constitutional legitimacy.”

The army said July 1 it would impose its own plan if Mursi didn’t end Egypt’s political crisis and meet the people’s demands within 48 hours. The state-run Al-Ahram newspaper summed up the stakes in a headline reading: “Today: Removal or Resignation.”

The unrest helped to send West Texas Intermediate crude oil prices above $100 a barrel for the first time since September.

Ahram newspaper reported, without saying where it got the information, that if Mursi didn’t resign, he may be forced to leave office. The military plan would also include replacing the country’s constitution and installing an interim government to be headed by a military leader, Ahram said.

Sacrifice Our Blood

“We swear to God that we will sacrifice for Egypt, and its people, our blood against all terrorists, extremists or fools,” the military’s top brass said in a statement posted on a Facebook page affiliated with the Supreme Council of the Armed Forces….”

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Don’t Time the Market, Your Chances of Success 50% of the Time are 0.0000000…

“Keith Fitz-Gerald writes: Many investors are understandably nervous when it comes to what the markets will do this week. Some are downright agitated.

My take? Keep calm.

The markets are doing what they need to be doing right now. The big swings we’re experiencing lately are not a sign that the markets are broken. Far from it.

On the heels of a 137.43% run off March 2009 lows, the pullback we experienced last week was absolutely normal. Long overdue, in fact.

I’m actually glad to see the volatility because it means the markets are working normally. A little give and take is absolutely essential when it comes to bigger gains and better returns.

Hard to stomach with everything that’s going on? Yup…which is why It’s worth noting that the markets have posted positive second half gains 26 of 26 times since WWII when the S&P 500 has turned in positive January and February returns. Those aren’t bad odds.

So now on with the show…what is the biggest mistake you can make right now?

Let me put it this way – it’s something locked in our brains. And it loses investors more money than every other investment “problem” combined. Let me show you something:

The probability of correctly timing the stock market just 50% of the time is a mere:


Jamie Dimon has higher odds of being the next Fed Chairman.

Why are we so incredibly bad at something that seems so basic? Like I said, it’s a “brain thing.” Let me explain…

The Volatile Mind

You hear a lot about the term volatility when the markets jump like this. But most people don’t really understand what it means. Volatility is simply a measure of the variation in price of any financial instrument over time. Unfortunately, the news has preconditioned investors to understand it as a negative influence because volatility rises when the markets drop.

In fact, quite the opposite is true. Volatility is really an expression of both up and down market movement. The key is in learning how to manage it so that your portfolio is not disproportionately impacted by either big down days or lost opportunity that comes from massive upswings.

Take the DOW, for instance. Over the past 110 years we’ve experienced two World Wars, multiple currency defaults, the Korean Conflict, Vietnam, the Gulf Wars, terrorism, presidential assassination, inflation, deflation, the Financial Crisis…and the index still rose 35,174%.

The markets have endured plenty of “volatility” over the years. In fact, if you look far enough back, you find that the markets actually do a pretty good job under conditions that should have killed them.

What makes short-term volatility so dangerous is the impact it has on your mind and specifically on your decision making.

I’ve written about this before but it bears repeating:Investors systematically deviate from otherwise rational decision making when the markets drop.

Scientists think this is because of decisions that get made under duress when the primary concern is losing money are made using reactionary segments of the brain rather than those that are anticipatory.

Whether Bernanke cuts QE has nothing to do with it. He and his central banking buddies are sideshow inputs at best. So is the notion of a Chinese credit crunch, a European meltdown or any of half a dozen other things investors are worried about at the moment.

The Good the Bad and…”

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Kyle Bass Says Full Blown Recession Will Come to China if They Do Not Change

“In a June letter to investors, Hayman Capital’s Kyle Bass turned his attention to a new target in Asia, according to Absolute Return.

China, he says could see a “full-scale recession” as early as next year if they do not curb the current pace of the credit expansion.

According to reports from the Wall Street Journal, Chinese officials have been equally worried about reckless lending, and intervened last month in the form of rising rates (which in turn resulted in the recent spate of Chinese bank liquidity crunches).

Bass seems to fear however, that this intervention is not enough. He also said that the People’s Bank of China would not be able to ensure the country’s growth with easy money because of the “inescapable law of diminishing marginal returns.”

From the letter (via Absolute Return):

“The scale and pace of credit expansion in China over the last 5 years is truly staggering. The compounded annual growth of bank assets as measured by the China Banking Regulatory Commission has been 30.8%,” Bass wrote. “To give some perspective, a 30.8% compounded annual growth of credit in the U.S. equivalent over 5 years would be an expansion of $33 trillion. This rate of credit growth is three times the total credit system growth experienced in the U.S. at the peak of the bubble in 2006…”

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$DB Puts Out a Report on 33 Stocks That Will Outperform

“Deutsche Bank’s U.S. Equity Strategy team led by David Bianco are concerned about stock market volatility in the near-term as interest rates rise.

“The S&P should stay above 1525 given tentative signs of 10yr yields stabilizing around 2.5% and unshaken oil prices and Euro,” wrote Bianco. “A further near-term jump in yields could spark fears of a surge and dislocate credit, FX, and commodity markets, but this is not likely.”

However, he continues to be bullish on the long-run. He sees the S&P 500 at 2,000 by the end of 2015.

With this framework in mind, Bianco and his team offer 33 buy-rated stocks on his latest “What To Buy Now” list.

Each have a market capitalization over $10 billion, a price-earning ratio on 2013 EPS below 20, 2013 EPS growth above 5 percent, and a net debt to market cap ratio below 30 percent (excluding Financials).

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Market Update

U.S. equities had a decent rally underway until news out of Egypt suggested that the army was going to oust the president and suspend the constitution. Hundreds of thousands of people are in the streets and some minor clashes have been reported between supporters of president Morsi and haters of Morsi.

The U.S. and the UN are urging dialogue, but there seems to be no chance of this and the fear is that this will erupt into much more than a military coupe.

For the most part U.S. equities are down a tad as opposed to tanking.

Oil remains high and closing in on a hundo while gold is still down paring about half it losses on the day.

Financials led the rally this morning and remain in good relative strength given the reversal of this morning’s rally.

Currently basic materials lead to the downside, followed by conglomerates and the transportation sector.

Today’s new highs include $BMO, $UDR, $BMO, $QUAD, $TOYOF,$OUTR, $ANGI, & $SLXP, new lows find $CCJ, $CTR, $BXE, $MHK, $UTEK, $TSU, $KKR, $TICC, $EXP, $JRO, $SNPS, $PCAR, $ITRI, $TRLA, $DIS, $ATO, $PX, $HUM, $IRBT, $PX, $WLH, $BBRY, $FMS, $OLED, $BBY, $CLF, & $ERC

Market update

[youtube://http://www.youtube.com/watch?v=gViK0ytvt78 450 300]

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State Tax Collections Rise 5.7% in 32 States

“The financial condition of states looked dire after the 2008-09 financial crisis, but now things are starting to look up.

In 32 states for which data are available, state tax collections in the first 10 months of fiscal year 2013 were 5.7 percent higher on average than in the same period last year, according to a June report from the Center on Budget and Policy Priorities.

Just a year ago the Center wrote that “states’ ability to fund services remains hobbled by slow economic growth.” At that point, 31 states still suffered from budget deficits, CNBC reports.

States appear to be handling their increased revenue wisely. State “rainy day” funds surged to $57.7 billion, or 8.3 percent of spending, in fiscal 2013, from $32.5 billion, or 5.2 percent of spending in fiscal 2010, according to the National Association of State Budget Officers. …”

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How Derivatives Help “To Evade Taxes, Circumvent Accounting Rules and Deceive Clients”

“While Warren Buffett has called derivatives “weapons of mass destruction,” they should be called “weapons of mass deception” since they are often used to evade taxes, circumvent accounting rules and deceive clients, New York Times columnist Floyd Norris writes.

Even national governments may have used the weapons of mass deception.

European newspapers recently revealed that Italy had used derivatives in the 1990s to make its budget deficit seem smaller in order to enter the eurozone, the Financial Times reported. 

Those derivatives could now mean a loss of 8 billion euros ($10.4 billion).

The European Union may have known about the financial smoke and mirrors but chose to overlook it, Norris noted, adding that joining the euro was more a political than an economic event at the time.

Companies — or nations it now seems — can use derivative contracts called futures contracts in which banks make large upfront payments in return for larger payments in the future.

Sounds like a loan, right? Except the company — or country — does not report the contract on its balance sheet or can report it in a misleading way in order to make its finances seem stronger. Enron was probably the most famous user of futures contracts, specifically prepaid forward contracts.

In credit default swaps, another type of derivatives, speculators pay a fee in return for a payoff when a company or country defaults.

That sounds like insurance, but if it were regulated as such, the issuing company would have to follow insurance regulations and hold reserves to pay claims.

AIG, probably the most famous user of credit default swaps, needed a government bailout when it couldn’t pay its losing bets on its swaps.

Current accounting rules do an inadequate job of requiring companies to report their derivative contracts, Norris argued.

Companies can net their derivatives positions, that is, offset a position’s gain against another position’s loss even if the two positions have little in common, he explained.

Most other countries require banks to ….”

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Fortune: Increasing Consumer Spending May Be an Illusion

“Rising consumer spending may be encouraging Federal Reserve officials to wind down their stimulus efforts.

For instance, Fed Governor Jeremy Stein has cited consumer spending as a reason for optimism in the economy.

“Consumers generally seem to be showing some signs of strength,” Stein said after a speech last week.

Yet increasing consumer spending may be an illusion.

Although consumer spending increased, the bulk of additional spending was on big-ticket items such as autos and home improvement, writes Fortune senior editor Stephen Gandel.

In reality, average consumers are not financially better off and are not spending more, economist Dean Baker, co-director of the Center for Economic and Policy Research, tells Gandel.

Companies paid special dividends at the end of last year to avoid higher 2013 taxes, and the stock market is up this year. Both of those factors primarily benefit the wealthy and explain the greater spending on big-ticket items, Baker says.

As the memory of the special dividends fades and the stock market flags, spending by the wealthy might falter.

Consumer spending has been flat across all income groups, according to Dennis Jacobe, chief economist for Gallup.

Americans’ self-reported daily spending averaged $90 in June, unchanged from May and not much different from March’s $89, he writes in a Gallup blog. Upper-income spending averaged $143 last month, not much different from the $150 in May and essentially the same as April’s $140.

Spending has not weakened despite the end of the payroll tax cut and federal budget cuts. Stock market gains, increased optimism about housing and refinance benefits from low mortgage rates may have helped support spending.

“The lack of increased consumer spending is somewhat disappointing given Americans’ relatively high level of economic confidence in May and June,” Jacobe says.

“However, it is hard for spending to increase without real job growth. Further, as this disconnect illustrates, economic confidence is often a necessary but not sufficient reason for consumer spending to increase.

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State of the Union: Lower Expectations for Living Standards

“Thought it is barely above the poverty line, many Americans believe that they can live on $24,000 a year. The number is implausibly low, but perhaps a sign that many people have set their financial aims downward since the start of the Great Recession.

A new Gallup poll on financial security in the U.S. shows that:


About seven in 10 Americans, including a majority of those making more than $24,000 a year, say they have enough money to do what they need to do. However, it is not until Americans reach $48,000 a year in annual income that a majority say they can handle a substantial purchase or unexpected major expense.


It is safe to suppose that a major purchase would include something as basic as a car, and that an unexpected major expense would include a long illness. So, it is a powerful irony that so many Americans believe that they could go broke on incomes that are just below the national average household income of $51,000.


The federal government sets poverty thresholds at various levels based on family size. The threshold for a family of four is $23,021. So, put simply, based on Gallup’s data, Americans who can live on $24,000 a year sit just above the level at which people are considered abjectly poor.


One has to wonder if the $24,000 threshold would have been nearly as low in 2007, before the economy was gutted and unemployment was well above 15%, when people who work part time but would like to work full time and those who gave up on finding work were included. Whatever equity these people had in real estate likely was demolished. In many cases, hope for social advancement, base on income at least, was extinguished.


The data leads to one other conclusion, which is that the economic recovery will hit its limits as people who make more than $48,000 run through the portion of their incomes devoted to discretionary spending. At some point…”

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Chip Sales Hit Three Year Highs

“For all the news that sales of personal computers (PCs) and laptops are declining, chipmakers are doing all right, thank you very much. Semiconductor sales rose 4.6% in May to post their largest month-over-month gain in three years.

Sales totals come from the Semiconductor Industry Association (SIA), which said that total sales reached $24.7 billion in May. That was up 1.3% from the $24.4 billion in sales toted up in May 2012. Year to date, chip sales are up 1.5%.

Monthly sales growth was highest in the Asia Pacific region, up 5.9%, followed by the Americas, where sales rose 5.6%. Sales in Japan grew by 0.9%, while sales in Europe rose just 0.3%.

Year-over-year Japanese sales fell 18.4%, but they rose 5.8% in Asia Pacific. Sales in the Americas rose 3%, and European sales rose a scant 0.1%.

On the basis of a three-month moving average, Asia Pacific sales were up 9.8%, European sales rose 5.5%, Americas sales rose 2.9% and Japanese sales fell 3.6%….”

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ISM Data Hits the Skids, Reading Not Seen Since 2009

“The Institute for Supply Management (ISM) has released its Report on Business for the month of June, and the numbers are pretty bad. In fact, the June report appears to be a four-year low at 47.0. The ISM represents that this is the worst reading since May of 2009. The ISM is trying to signal that the news is not as bad as might appear. It shows that future optimism did not flinch, suggesting the drop in current conditions could be temporary.

Tuesday’s report was positive on the jobs component and on the purchase volumes. The report sentiment represents that business impediments had a less favorable tone compared to last month. “No difficulties” was still the most popular response, but working capital shortages increased and skilled labor shortages decreased. Here is a breakdown of some of the data:

  • The six-month outlook came in at 66.1….”

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$GM and $HMC Team Up to Bring Fuel Cell Cars to the Masses

General Motors and Honda plan to team up in an effort to bring zero-emission hydrogen fuel-cell technology to the mass market by the end of the decade, the makers formally announced Tuesday morning.

Both GM and Honda have already begun fielding small test fleets of hydrogen-powered vehicles—as have a number of competitors including Toyota and Mercedes-Benz—but the goal of the new effort is to help solve resolving technical hurdles while driving costs down to mass-market levels. The makers also hope that by making a serious commitment to fuel cell technology they will encourage the energy industry to expand the availability of hydrogen, something essential to encourage consumer acceptance.

“The widespread use of future fuel cell vehicles requires a significant advance in cost reduction…and in the refueling infrastructure that will support them,” Tetsuo Iwamura, president of American Honda Motor Co., was expected to say according to remarks prepared for a Tuesday news conference. “Two companies can do more together than the simple sum of our individual efforts.”….”

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$F June Sales Rise 13%

“DETROIT (TheStreet) — Once again in June, automakers are reporting strong sales led by double-digit increases in pickup truck sales, a sign of the reviving economy and the strength of the home construction market.

Ford (F_) said sales rose 13% to 235,643 units, its best total in June since 2006. F-Series sales rose 24% to 68,009, F-Series’ best June since 2005. Chrysler said sales rose 8% to 156,686 units, its best June total since 2007. Ram truck sales rose 23% to 30,935, tops among Chryslerbrands…”

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El-Erian: Fed’s Economic Projections Overly Optimistic

“The Federal Reserve’s economic forecasts are probably too high, says Mohamed El-Erian, CEO of fund giant Pimco.

The central tendency of predictions by Fed policymakers calls for economic growth of 2.3 to 2.6 percent for this year and 3 to 3.5 percent for 2014. Gross domestic product expanded only 1.8 percent in the first quarter.

Fed Chairman Ben Bernanke said June 19 that the central bank would probably start tapering its quantitative easing later this year if the economic expansion matches its projections.

Editor’s Note: The Final Turning Predicted for America. See Proof.

“If the forecasts prove correct, which, unfortunately, we question given current economic realities, the Fed would have a positive reason to exit gradually from its prolonged highly experimental monetary policies,” El-Erian told The New York Times in an email.

“It is also apparent that the Fed is getting more concerned about the ‘costs and risks’ of its policy experimentation.”

Interest rates spiked after Bernanke’s June 19 comments, sending the 10-year Treasury yield to a 22-month high of 2.66 percent last Monday. The yield stood at 2.49 percent mid-day Monday.

While the rate increase may have created some bargains among Treasurys, El-Erian said, “investors should also note that markets remain vulnerable to technical overshoots and, thus, quite a bit of volatility.” ….”

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