Budget deal spooks Wall Street

Forget celebrating the recently announced bipartisan pact. Taper fears are on the rise.

By InvestorPlace Dec 11, 2013 3:48PM

Image: Stock market (© Zurbar/age fotostock)By Anthony Mirhaydari


This liquidity-addicted, overcooked market maintains the twisted logic of any other kind of junkie. So, good news like a recently announced budget deal is bad news since it jeopardizes the one factor that's been driving stocks higher: the Federal Reserve's $85 billion-a-month QE3 bond-buying stimulus.


Right now, risky assets are under pressure despite the announcement of a small but meaningful bipartisan budget deal Tuesday night that will keep the government going through 2015 and removes the risk of another shutdown showdown in January. That's good news for regular Americans, not just federal employees.


Yet the bankers and hedge funds types are disappointed. That's because the budget deal gives the Fed one less excuse -- as the job market firms -- to keep the cheap money flowing at its upcoming policy announcement on Dec. 18.


Make no mistake: It's all about the Fed right now.


The size of the Fed's balance sheet has a growing statistical relationship to the level of stock prices -- a sign that fundamentals like the real economy and corporate revenue growth matter less and less.

Moreover, on a day-to-day basis, days in which the Fed is buying large quantities of bonds are associated with the majority of the gains we've seen during the past few months; whereas days in which the Fed is inactive, the market tends to drift aimlessly.


If you care about free markets and worry about destabilizing asset price bubbles, this behavior should worry you. It's not healthy. And it's not sustainable.


But it also presents opportunities for nimble traders. As the taper becomes more and more likely -- an event Wall Street has been worrying about since May -- you're seeing relationships that have pushed the market higher start to reverse. And that's creating new opportunities for short-side profits.


The biggest shift, when the taper announcement finally comes, will be in the currency market where the U.S. Dollar should stabilize and move higher. That will put new pressure on emerging market stocks which, as represented by the iShares MSCI Emerging Markets ETF (EEM), have been underperforming since mid-October.


budget-deal-eem


Digging down, EM focused areas like the solar industry are also being hit very hard. Just look at the way the Guggenheim Solar ETF (TAN) is melting down.


budget-deal-TAN


In response, I'm recommending positions such as the ProShares UltraShort MSCI Emerging Markets ETF (EEV) and a short against Trina Solar (TSL) to my clients.

Since I added the TSL short to my Edge Letter Sample Portfolio on Nov. 19, the position has gained more than 33%.


I've also recently covered a short against Tesla Motors (TSLA) for a 15% gain and a quick trade in the ProShares Ultra Crude Oil (UCO) for a 3% gain.


More From InvestorPlace

As of this writing, Anthony Mirhaydari had recommended EEV and TSL short to his clients.

Tags: EEMTAN
63Comments
Dec 11, 2013 5:24PM
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Not to worry.  With Obama's popularity rating in the toilet, the last thing this Administration wants is bad news coming from a tanking Wall Street and a simultaneous rise in public interest rates.  Consequently, the Fed will come up with some excuse to continue the QE3 "stimulus" at least through 2014.

It's the only way now to keep interest rates artificially depressed, since the moment the Federal Government tries to sell $1 trillion each year (= $85 billion per month that the Fed Reserve is currently buying) of US obligations and mortgage-backed securities on the competitive open market, interest rates will pop a full point or two.
Dec 11, 2013 4:09PM
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The best news in the world for inesters and Wall Street dumps. The news is old news and been priced in 48857772994855672 times already. The Fed said the taper is gradual and isnt going to upset any economy. The Fed is not about to purposely do something that will derail anything!!! Plain and simple. the only people driving any bad news are the manipulaters of the markets!!
Dec 11, 2013 5:05PM
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It has been "All about the FED" since the first QE.  Everything else has been background noise.  Sure, many have made money off of it but it is a rug that can be pulled out from under us at any time.   All they have to do is hint at a taper and things dive.  Even "if" the underlying assets were strong, the FED pulling out will swamp any fundamentals you are using to invest.  It's just a game of musical chairs.  When the music stops, you will wish you had gotten out sooner.
Dec 11, 2013 4:38PM
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It is a bad deal but one the GOp has to take.  the Democrats are hell bent on spending us in to oblivion and they are willing to shut the government down to achieve it!  Yes, the Democrats shut the government down. If people pull their heads out and listen it is obvious.  Nancy Pelosi said "THEY WOULD NOT APPROVE A DEAL WITHOUT EXTENDING UNEMPLOYMENT"   --- Let us REPEAT --- WILL NOT APPROVE -- ie for those with the mental disorder -  ie SHUT THE GOVERNMETN DOWN.  They said the same thing during the last budget deal a couple months back but the media spun it as the GOP.  But the Dumbocrats are the ones that said it is our way (FULL OBAMACARE FUNDING OR NOTHING!!!!!) or the highway.

 

But the important take away is that theDemocrats will NEVER do anything about spending and the national debt until it is too late.  Many of these Democrats are just plain stupid and can not see that 20 trillion, 25 trillion ..... is just not going to end well.  The other Democrats know it will be ugly but will bring in their soot after totat progressive control and the end of capitalism.

Dec 11, 2013 3:58PM
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Plain out-- the Federal Reserve sees cooperation in DC to establish a Budget Deal as a sign that we are gaining ground. They WILL end QE immediately. 
Dec 11, 2013 4:38PM
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So take your pick .. they are stupid or worse.
Dec 11, 2013 5:42PM
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Why is the FED tapering worrying the brick-wall street? Cuz there's no more cheap paper money printing. Sooner or later we all know that printing machine has to be thrown out anyway.
Dec 11, 2013 5:46PM
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Is it not obvious?

 

Should not both Democrats and Republicans agree that a 20 trillion dollar national debt is a disaster in the making?  But Democrats will not answer that question honestly.  There party affliation is more important than the country and reality.

 

Should it be obvious to both Democrats and Republicans that only Republicans in Washington talk about the problem?  And that Democrats in Washington are willing to shut the government down in order to continue to run these deficits?  But again the Democrats in mass defend the indefensible. 

 

I honestly don't care to set blame.  We need to eliminate our annual deficts.  On this Democraats should be able to agree, but again they will not because their football team ... I mean their political team is more important than doing the things that need to be done.  It must be a sickness.

 

I think most of this is even clear to Democrat votes themselves, so all they can do is say ... well the GOP spends too.  Well I think that is crap, but forget the blame, the blame does not fix the problem. As much as Democrats want blame to absolve themselves of their party's failure to address the issue, it does not!  They are in power and regardless of who they think started the problem, is not obvious that if they are in power they should be responsible to fix it?  Come on , be honest.

 

And to be honest is to clearly say Democrats in Washington are content to see the national debt co to 20 trillion, 25 trillion, 30 trillion and bust!  IF you love your country or at least love your children, don't vote for these spenders!

Dec 11, 2013 5:18PM
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TAPER SCMAPER - Wall Street today nothing but total FRAUD across the board!
Dec 11, 2013 4:51PM
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This whole thing is like a balloon with a small hole in it.
As long as you constantly blow it up, it looks good.
When you stop, you see the real picture.
The BIT-COIN renegade currency seems to be sweeping the world.
I believe that the dollar, and other currencies have been systematically mismanaged for so long now that people are scared of them.
It doesn't help to have a guy in the white house that considers it his job to collapse the dollar.

Dec 11, 2013 5:55PM
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The face of reality is one the Crock Market hasn't seen for quite a awhile. Money printing, the buying and selling of debt, and crooked finance swindles have become the new economy in an effort to replace the one we once had; the one that was offshored wholesale all over the world, with a tongue and cheek promise and a wink that those jobs would be replaced by nifty new non-manufacturing high paying tech jobs. But those jobs never appeared and the only ones with great high paying jobs are the CEO's who made untold millions ditching our manufacturing base to foreign shores. Only the very wealthy bankers who get essentially free Fed Benny Bucks to play with in the Crock Market think all this is a good thing. But phony money, no matter how much of it you print or have in your 'portfolios', will eventually return to its true market value: nothing.
Dec 11, 2013 7:43PM
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 Budget deal spooks what? How about the 1 trillion a year in welfare how spooky is that?
Dec 11, 2013 7:16PM
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"So, good news like a recently announced budget deal is bad news since it jeopardizes the one factor that's been driving stocks higher: the Federal Reserve's $85 billion-a-month QE3 bond-buying stimulus."

Let's review...
- "The market" dropped due to fear that the Fed might slow down (or "taper") its stimulus program;
- Tapering the stimulus program is a sign of an IMPROVING ECONOMY;
- Therefore, "the market" is DEATHLY AFRAID of an IMPROVING ECONOMY.

Questions...  WHY is "the market" AFRAID of an IMPROVING ECONOMY? Isn't an IMPROVING ECONOMY supposed to be GOOD for business? 

Dec 11, 2013 4:54PM
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What is in the deal? Is bonehead breaking down and going the Democrat and Big Business way. Billions of dollars being printed to prop up the economy. Future inflation like the Carter years are ahead.
Dec 11, 2013 5:44PM
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GOOD NEWS ?   --- BULL  S_H_I_T   !!
One thing you can be sure about with Congress and POTUS --- anything bipartisan means the citizens are going to be bent over and the pervert Uncle Sam is going to town.

This stinkpile is all being orchestrated to be pushed through while everyone is tied up with the annual Christmas retail riots and stressed by all the fake family gatherings  .  Look for more fees, more spending, more debt.

You better contact your representative and senators and tell them NO to any budget deal that raises taxes or fees and/or increases spending.

Dec 11, 2013 7:05PM
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excellent, insightful post anthony - way to cut through all of the clutter about today's action ... really excellent financial journalism here. 

 

note to CG, s.a. the troll, et al ... 

 

"But it also presents opportunities for nimble traders. As the taper becomes more and more likely -- an event Wall Street has been worrying about since May -- you're seeing relationships that have pushed the market higher start to reverse. And that's creating new opportunities for short-side profits."  best to see a professional ....

Dec 11, 2013 6:44PM
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So is this going to be a "correction" or the beginning of a freefall?  OK, who's got the crystal ball?
Dec 11, 2013 8:19PM
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Does anyone seriously think QE is going to end anytime soon? It's all talk. QE is like crack cocaine and we need lots of it to keep this economy going. Our debt is now 17 trillion, and nobody wants to cut our spending to reduce our debt. Everybody has a reason why his job is more important than everybody else's and why he shouldn't be furloughed. If I read this correctly, they'll start pumping out mediocre unemployment stats to justify the Fed's decision to keep QE going. This way the market stops tanking, rates stop rising, the US dollar continues its decline, and everybody's happy (for now). The only problem is we'll end up with even more inflation and more debt to pass on to the next generation of Americans (our kids and grandkids).
Dec 11, 2013 5:57PM
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I wish I could lay bets in Vegas as to when I could predict another Chicken Little article from Anthony.  A fella can only be wrong so many times before he loses all credibility.........and Anthony, your ticket was punched out a lonnnnnnng time ago.  Mark Sanchez may have some day been a franchise quarterback, but you're allowed only so many blown opportunities before you get dumped. To say that

QE3 is "the one factor that's been driving stocks higher", is not only myopic, but just plain wrong.

Randy47 has it exactly right.  The taper is already old news.  There will (probably) be a correction, and then we'll (probably) work our way right back.  Anybody who predicts the Market with certainty, is only certainly an idiot. 

Dec 11, 2013 7:53PM
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I guess this is proof the market isn't tied to how the countries real economy does.

Seems if the economy is in turmoil and 75% of the people are suffering  without a budget and Washington is in disarray then the market does good. Just look at those numbers now. Its been doing great the last 5 years.

Now they're scared theres a budget on the horizon? Talk about a bunch of nut sacks. I hope they do come up with a budget and cut out that $83 BILLION with a B each month for Wall Street Welfare. You guys need to take a bite out of this big ol  $_it sandwich like the rest of us has for the past 5 years. We're tired of being told theres no money left and the US citizens have to take a cut in service or something somewhere in our life.

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