2014: The Elephant in the Room?

Heading in to next year, equity markets have a lot of positive momentum. This momentum is carried forward by Central Bank policies around the globe. But, at a certain point the music stops and investors are left looking for a seat. Is 2014 the year?

Is Fed Tapering Priced In?

With the Fed meeting this week, markets are anxiously waiting on any news about the Fed bond buying policy, QE3. Most financial market participants think that a taper event would be a non-event in the bond market, meaning that rates would not go up. We are not certain they are 100% correct. If you look at the 10yr Treasury chart, you can clearly see that we are but 12 basis points away from the highs, which occurred on 9/5/13 just a few days before the Fed decided NOT to taper. Therefore, one could say that the 10yr is ‘ready’ for a taper. However, if you look at the 3yr and 5yr charts this is not the case. The yield of the current 3yr is 28 basis points away from the high and the 5yr is 32 basis points away from the highs of 9/5/13. If you bought a 5yr today at 1.53% yield and it rose to a 1.85% yield in one month, as an example, the return on the bond would be -15.1%.  Yes, one can hold it to maturity, but given the current circumstances in the market and facing the Fed, it is a matter of ‘when’ not ‘if’ as to a tapering event. As a result, we continue to believe that a little patience with a very small opportunity loss may well be worth the wait.

Today's GDP Revision- Xavier's Thoughts

For those of you that eat, drink (non-alcoholic), and sleep fixed income (not salary, but the market type), like some of us do, today is a day of contemplation. We had a very positive 3Q GDP, which is fuller of hot air than all of the used car-salesmen put together (no disrespect meant to any or all salespeople).  Most of the good GDP news was inventory accumulation (biggest since 1998). Now, inventory growth can be good,  as long as it is sold. However, consumers are not buying, so we will have to see if today’s high will be tomorrow’s low.

Now for the fun part. The yield curve is the steepest it has been all year!  That means more roll-down opportunities.  Under this scenario we want bullet structures or deep discount callable securities. Therefore mortgaged backed pass-thrus are a no-no. So, you might be wondering about CMBS. They are not pass-thrus. They are bullet structured! So are DUS bonds. Anyhow, the point of all of this is to say that we are very well positioned for this market environment and for today I am very happy. That, for a fixed income portfolio manager,is like drinking a double espresso right after his cappuccino.

Thanks for listening!

Happy Thanksgiving!

In keeping with our holiday-themed posts, Happy Thanksgiving! Cutler launched a redesign of Cutler.com today. Let us know what you think! We've put a Thanksgiving themed article in the Commentary and News page of the site.

Thanks, Matt, for sharing the www.fool.com article below. For disciples of the market, there are a lot of fun truths here:

• Some "finance" humor

Happy Halloween!

Cutler's Jacksonville office shows off some Halloween Spirit!

Gov. Shutdown - Cutler Investment Group's thoughts

We were asked by Reuters our opinion on the government shutdown, specifically how long it might last. While predicting the levers of Congress is difficult, one thing is for certain- a compromise will be reached at some point. Specifically, we responded to Reuters with the quote below. You can find the whole article at this link.

"The House of Representatives and the President have each staked out intractable positions, and at this point we don’t have clarity on a possible resolution. The stock market is the barometer of the economic damage from the shutdown, and the immediate reaction of stocks being positive has not provided an impetus for any of the political actors to change course. The shutdown will continue to drag on GDP, an effect that ultimately will hurt stock prices. We believe that this will be a catalyst for compromise, and we anticipate stocks will begin to reflect this economic drag within the next week."