Yellen’s Nomination Makes U.S. Investors Cautious

Waiting on Yellen

Over the past three weeks or so, stocks in the United States basically have been in a holding pattern. The benchmark S&P 500 Index essentially has flatlined of late. Part of the reason for that leveling off is the tentative approach traders are taking to the new Fed Chair nominee, Janet Yellen.

While most observers seem to think that Yellen, who currently serves as Vice Chair of the Federal Reserve, will be a “dove” when it comes to the central bank and the role that it plays in Wall Street’s quantitative easing party, nobody knows for sure what the prospective new Fed chief actually will do.

We’ll get the first glimpse of how Yellen comports herself, and about what she thinks of the current economic situation and the role she plays in the drama, tomorrow when she appears before the Senate Banking Committee for her confirmation hearing. I suspect the fireworks might be interesting, as many members, including outspoken Fed critic Rand Paul (R-KY), likely will be aggressive questioners to say the least.

Meanwhile, the somewhat boring market in the United States has been anything but stagnant overseas. Stocks in the emerging markets, like the ones in the iShares MSCI Emerging Markets (EEM), have been very volatile of late. The chart here of EEM shows the recent decline in this market segment. EEM now trades below both the 50- and 200-day moving averages.

On the interest rate front, we’ve seen a spike higher in bond yields, i.e. a decline in bond prices, as interest rates continue to creep higher. The chart here of the 10-Year Treasury Note Yield shows that the benchmark yield now has broken back above its 50-day moving average.

The bottom line here is that things are still very much in a state of flux when it comes to domestic equities, international equities and interest rates. Until we see some clear signals from Yellen, and until this market reacts in a decisive manner, perhaps the best thing you can do with your money is just sit back and wait on Yellen.

A QE Confessional

There was a remarkable mea culpa in today’s Wall Street Journal that I encourage you to read. The op-ed, “Andrew Huszar: Confessions of a Quantitative Easer,” was written by the man who was tasked with implementing the policy at the heart of the Fed’s first round of quantitative easing (QE), the purchase of some $1.25 trillion in mortgage bonds during a 12-month period.

Here’s the eye-popping introduction by Huszar that basically says it all:

“I can only say: I’m sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed’s first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street. But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.”

This incredible admission is something many of us have been saying for some time, and it’s significant that someone from the inside finally had the courage to acknowledge it. The fact is that QE was basically a boom for Wall Street, while Main Street got virtually nothing.

As Huszar put it, “my program wasn’t helping to make credit any more accessible for the average American. The banks were only issuing fewer and fewer loans. More insidiously, whatever credit they were extending wasn’t getting much cheaper. QE may have been driving down the wholesale cost for banks to make loans, but Wall Street was pocketing most of the extra cash.”

If you want to know what QE is all about, and more importantly what it is NOT about, then you have to read Huszar’s confessional.

The ETF Innovation Revolution

The universe of U.S.-based ETF offerings is big and getting bigger all the time. At last count, there were more than 1,500 ETFs, with over $1.64 trillion dollars in assets, and that doesn’t even include international-based funds. So far this year, there has been approximately $168 billion that have flowed into ETFs. And while the total amount of assets in ETFs still is only a fraction of the amount of assets invested in mutual funds (mutual funds hold about $10 trillion), the trend definitely is moving toward ETFs.

I’ve been a big fan of ETFs for many years, and I have been advocating their use in my advisory services for much of the past decade. And while we haven’t abandoned mutual funds altogether, especially for those who have limited choice in a 401(k)-style investment plan, certainly the trend of ETF industry expansion is one that’s taking the investment business by storm.

According to the research my team and I have conducted, there have been more than 150 new ETF offerings through the first 10 months of the year. That’s a very big number, and it speaks to the growing demand and the increasing popularity of ETFs among not only individual investors, but also from institutional investors.

Now, in terms of innovation, there are several fund issuers doing some incredible things. But which firms are doing some of the most interesting things in the ETF industry? To find out, I invite you to check out Successful Investing.

In fact, in our next issue we cover in detail three fund companies breaking new ground with creative offerings, and with active management that can give you the edge on the market. To find out how, click here.

Augustinian Wisdom

“The confession of evil works is the first beginning of good works.”

–Saint Augustine

Given the QE confessional we got today from Andrew Huszar, I thought perhaps a little Augustinian wisdom would be appropriate for this week’s quote. May the good works begin.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Making Money Alert readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Ask Doug now.

In case you missed it, I invite you to read about how you may want to invest your funds in the wake of the domestic market racking up bigger gains than almost every place else. I also invite you to comment about my column in the space provided below.