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Bianco Research L.L.C.

An Arbor Research & Trading Affiliated Company


Independent Objective Original

What Is The Feds Plan And Will It Work?


The Big Picture Conference, New York City
October 10, 2012

Long-Term Interest Rates - 1900 to 2011

CFNAI vs ECRI
Comparing The Chicago Fed National Activity Index (CFNAI)
To The Economic Cycle Research Institute (ECRI) Growth Rate
30

3.00
Oct-09, 26.70

2.00

ECRI Growth Rate (Red Line)

10

Apr-11
7.38

May-10
0.31

1.00
Sept-12
2.70

0.00
Aug-12
-0.47

-10

Oct-11
-9.40

Jul-10
-10.50

-20

-1.00

-2.00

-30

-3.00

Nov-08
-29.00

October 10, 2012

Jul-12

Jan-12

Jul-11

Jan-11

Jul-10

-4.00
Jan-10

Jan-09
-3.66

Jul-09

Jan-09

Jul-08

Jan-08

Jul-07

Jan-07

-40

Bianco Research, L.L.C

CFNAI 3-Month Average (Blue Line)

20

Bloomberg Median Q3 2012 U.S. Real GDP Forecast


Bloomberg Median Q3 2012 U.S. Real GDP Forecast
3.40%

3.40%

3.20%

3.20%

3.00%

3.00%

8/11/2011, 3.0%

2.80%

2.80%

5/9/2012
2.5%

2.60%

2.60%

2.40%

2.40%

11/18/2011, 2.3%

2.20%

2.20%

7/13/2012, 2.2%

2.00%

U.S. Real GDP Forecast

U.S. Real GDP Forecast

1/12/2011, 2.9%

2.00%

1.80%

1.80%

8/10/2012, 1.8%

Bianco Research, L.L.C

October 10, 2012

10/30/2012

9/20/2012

8/11/2012

7/2/2012

5/23/2012

4/13/2012

3/4/2012

1/24/2012

12/15/2011

11/5/2011

9/26/2011

8/17/2011

7/8/2011

5/29/2011

4/19/2011

3/10/2011

1/29/2011

12/20/2010

1.60%

11/10/2010

1.60%

Bloomberg Median Q4 2012 U.S. Real GDP Forecast


3.40%

3.40%

3.20%

3.20%

3.00%

3.00%

2.80%

2.80%

2.60%

2.60%

9/22/2011, 2.5%
2.40%

2.40%

2.20%

2.20%

7/20/2012, 2.2%
8/10/2012, 2.0%

2.00%

U.S. Real GDP Forecast

U.S. Real GDP Forecast

Bloomberg Median Q4 2012 U.S. Real GDP Forecast

2.00%

Bianco Research, L.L.C

October 10, 2012

10/30/2012

9/20/2012

8/11/2012

7/2/2012

5/23/2012

4/13/2012

3/4/2012

1/24/2012

12/15/2011

11/5/2011

9/26/2011

8/17/2011

7/8/2011

5/29/2011

4/19/2011

3/10/2011

1/29/2011

1.80%

12/20/2010

1.80%

Citigroup Surprise Index


Citigroup Economic Surprise Index
United States
100

100
1/9/2012

3/4/2011
8/15/2007

1/31/2007

75

9/4/2008

5/28/2009

12/2/2011

2/3/2012

75

9/3/2009

5/12/2006

10/8/2012
43.40

50

50

11/14/2011

25

25

-25

-25
9/28/2011

-50

-50
2/28/2006

7/20/2012

8/25/2010

10/13/2006

-75

-75
8/19/2011

-100

-100

3/28/2008
6/3/2011

-125

-125
12/5/2008

Bianco Research, L.L.C

October 10, 2012

1/11/2013

9/21/2012

6/1/2012

2/10/2012

10/21/2011

7/1/2011

3/11/2011

11/19/2010

7/30/2010

4/9/2010

12/18/2009

8/28/2009

5/8/2009

1/16/2009

9/26/2008

6/6/2008

2/15/2008

10/26/2007

7/6/2007

3/16/2007

11/24/2006

8/4/2006

4/14/2006

-150

12/23/2005

-150

The Trend In Earnings

Bianco Research, L.L.C

October 10, 2012

Guidance Trends
Company Guidance Trends
14

14

12

12

10

10

The Daily Number of Companies Offering Guidance (3-Month Average):


Red = UP Guidance (Guidance Greater Than Current Earnings Estimates)
Blue = DOWN Guidance (Guidance Less Than Current Earnings Estimates)
Black = NEUTRAL Guidance (Guidance Same As Current Earnings Estimates)

Bianco Research, L.L.C

October 10, 2012

10/3/2012

7/11/2012

4/18/2012

1/25/2012

11/2/2011

8/10/2011

5/18/2011

2/23/2011

12/1/2010

9/8/2010

6/15/2010

3/19/2010

12/21/2009

9/24/2009

6/30/2009

Guidance Index
3-Month Company Guidance Index
0.35

0.35
11/8/2010
6/14/2011

0.25
6/5/2002

0.25

6/7/2004
1/4/2012
7/22/2008

0.15

6/14/2006

6/6/2012

0.05

0.15

0.05
3/16/2012

-0.05

-0.05
Biggest Negative Since July 2009
2/13/2007

-0.15

-0.15

Company Guidance vs. Consensus Estimates


-0.25

-0.25

3-month average of:


(UP minus DOWN) + 1/2 NEUTRAL
Total Offering Guidance

-0.35

-0.35
10/9/2000
2/12/2009

Bianco Research, L.L.C

October 10, 2012

10/25/2012

5/10/2012

11/24/2011

6/9/2011

12/23/2010

7/7/2010

1/14/2010

7/23/2009

1/30/2009

8/8/2008

2/19/2008

8/24/2007

3/6/2007

9/8/2006

3/16/2006

9/21/2005

3/31/2005

10/7/2004

4/19/2004

10/22/2003

5/2/2003

11/7/2002

5/20/2002

11/23/2001

6/5/2001

12/11/2000

-0.45

6/21/2000

-0.45

Q3 2012 S&P 500 Earnings Expectations


Q3 2012 S&P 500 Earnings Expectations
Operating Earnings Estimates Year-Over-Year Change
10%

10%

8%

8%
All S&P 500
Companies

6%

6%

4%

4%
S&P 500 Less Financials

2%

2%

0%

0%
10/5/2012
-1.70%

-2%

-2%

-4%

-4%
10/5/2012
-5.30%

Bianco Research, L.L.C

October 10, 2012

10/19/2012

9/28/2012

9/7/2012

8/17/2012

7/27/2012

7/6/2012

6/15/2012

5/25/2012

5/4/2012

4/13/2012

3/23/2012

3/2/2012

2/10/2012

1/20/2012

1/3/2012

-6%
12/21/2011

-6%

Q4 2012 S&P 500 Earnings Expectations


Q4 2012 S&P 500 Earnings Expectations
Operating Earnings Estimates Year-Over-Year Change
20%

20%

18%

18%

16%

16%
All S&P 500
Companies

14%

14%
S&P 500 Less Financials

12%

12%
10/5/2012
10.20%

10%

10%

8%

8%
10/5/2012
6.70%

Bianco Research, L.L.C

October 10, 2012

10/19/2012

9/28/2012

9/7/2012

8/17/2012

7/27/2012

7/6/2012

6/15/2012

5/25/2012

5/4/2012

4/13/2012

3/23/2012

3/2/2012

2/10/2012

1/20/2012

1/3/2012

6%
12/21/2011

6%

10

Bianco Research, L.L.C


October 10, 2012
1/10/2014

1/25/2013

2/10/2012

2/25/2011

3/12/2010

4/17/2009

5/2/2008

5/18/2007

6/2/2006

120

1/30/2009, 112.79

100
100

90
90

80
80

Estimates For The Next Year


One Year Ago
70

60
60

50
50

Trailing 12-Month Operating Earnings

30
30

20
20

Earnings Per Share

110

6/17/2005

7/2/2004

7/18/2003

8/2/2002

8/17/2001

40

9/1/2000

9/17/1999

10/2/1998

10/17/1997

70

11/1/1996

11/17/1995

12/2/1994

12/17/1993

12/31/1992

1/17/1992

2/1/1991

Earnings Per Share

Actual versus Forecasted Earnings


S&P 500 Operating Earnings
5/3/2013
118.91

120

110

40

11

Earnings Forecast Error Rate


Error Rates
Current 12-Month Trailing Operating Earning versus Forward 12-month Forecast 12 Months Ago
20%

20%
12/17/2004
8.39%

10%

5/19/1995
2.49%

12/31/2010
6.36%

10%

5/19/2000
-0.90%

0%

0%
1/10/1997
-6.32%

-10%

-10%
10/5/2012
-11.71%

1/8/1999
-13.35%

-20%

-20%

4/10/1992
-19.91%
12/21/2001
-25.18%

-30%

-40%

-30%

-40%

Estimates For The Next Year


One Year Ago

-50%

-50%
10/30/2009, -51.12%

Bianco Research, L.L.C

October 10, 2012

1/10/2014

1/25/2013

2/10/2012

2/25/2011

3/12/2010

4/17/2009

5/2/2008

5/18/2007

6/2/2006

6/17/2005

7/2/2004

7/18/2003

8/2/2002

8/17/2001

9/1/2000

9/17/1999

10/2/1998

10/17/1997

11/1/1996

11/17/1995

12/2/1994

12/17/1993

12/31/1992

1/17/1992

-60%

2/1/1991

-60%

12

Q3 2012 S&P 500 Revenue Expectations


Q3 2012 S&P 500 Revenue Expectations
Sales Estimates Year-Over-Year Change
5.00%

6.00%
S&P 500 Less
Financials

5.00%

4.00%

Year-Over-Year Change

All S&P 500


Companies
3.00%

2.00%
2.00%
1.00%
1.00%

Year-Over-Year Change

4.00%
3.00%

0.00%
0.00%

10/5/2012, -0.6

-1.00%

-1.00%

Bianco Research, L.L.C

October 10, 2012

10/19/2012

9/28/2012

9/7/2012

8/17/2012

7/27/2012

7/6/2012

6/15/2012

6/1/2012

5/11/2012

4/20/2012

3/30/2012

3/8/2012

2/24/2012

2/3/2012

1/6/2012

-2.00%

12/23/2011

-2.00%

13

Q4 2012 S&P 500 Revenue Expectations


Q4 2012 S&P 500 Revenue Expectations
Sales Estimates Year-Over-Year Change
7.00%

7.00%

6.00%

6.00%
S&P 500 Less
Financials
5.00%
All S&P 500
Companies

4.00%

4.00%

3.00%

3.00%

2.00%

2.00%

Year-Over-Year Change

Year-Over-Year Change

5.00%

10/5/2012, 1.4%

Bianco Research, L.L.C

October 10, 2012

10/19/2012

9/28/2012

9/7/2012

8/17/2012

7/27/2012

7/6/2012

6/15/2012

6/1/2012

5/11/2012

0.00%
4/20/2012

0.00%
3/30/2012

1.00%

3/8/2012

1.00%

14

Bernanke Explains The Wealth Effect


Bernanke told us in his speech August 31 in Jackson Hole:
After nearly four years of experience with large-scale asset purchases, a substantial body of empirical
work on their effects has emerged. Generally, this research finds that the Federal Reserves largescale purchases have significantly lowered long-term Treasury yields. For example, studies have
found that the $1.7 trillion in purchases of Treasury and agency securities under the first LSAP
program reduced the yield on 10-year Treasury securities by between 40 and 110 basis points. The
$600 billion in Treasury purchases under the second LSAP program has been credited with lowering
10-year yields by an additional 15 to 45 basis points.12 Three studies considering the cumulative
influence of all the Federal Reserves asset purchases, including those made under the MEP, found
total effects between 80 and 120 basis points on the 10-year Treasury yield.13 These effects are
economically meaningful.
LSAPs also appear to have boosted stock prices, presumably both by lowering discount rates and by
improving the economic outlook; it is probably not a coincidence that the sustained recovery in U.S.
equity prices began in March 2009, shortly after the FOMCs decision to greatly expand securities
purchases. This effect is potentially important because stock values affect both consumption and
investment decisions.
While there is substantial evidence that the Federal Reserves asset purchases have lowered longerterm yields and eased broader financial conditions, obtaining precise estimates of the effects of these
operations on the broader economy is inherently difficult, as the counterfactualhow the economy
would have performed in the absence of the Federal Reserves actionscannot be directly observed. If
we are willing to take as a working assumption that the effects of easier financial conditions on the
economy are similar to those observed historically, then econometric models can be used to estimate
the effects of LSAPs on the economy. Model simulations conducted at the Federal Reserve generally
find that the securities purchase programs have provided significant help for the economy. For
example, a study using the Boards FRB/US model of the economy found that, as of 2012, the first two
rounds of LSAPs may have raised the level of output by almost 3 percent and increased private payroll
employment by more than 2 million jobs, relative to what otherwise would have occurred.15
Bianco Research, L.L.C

October 10, 2012

15

Bernanke Explains The Wealth Effect - 2


This is not the first time the Federal Reserve has laid out this argument. In a
November 4, 2010 Washington Post op-ed, the day after QE2 was approved, Ben
Bernanke defended their actions with the following passage:
Easier financial conditions will promote economic growth. For example,
lower mortgage rates will make housing more affordable and allow more
homeowners to refinance. Lower corporate bond rates will encourage
investment. And higher stock prices will boost consumer wealth and help
increase confidence, which can also spur spending. Increased spending will
lead to higher incomes and profits that, in a virtuous circle, will further
support economic expansion.
And in January 2011 Bernanke said:
Federal Reserve Board Chairman Ben Bernanke said Thursday that a
controversial $600 billion bond buying plan has contributed to a stronger
stock market. Our policies have contributed to a stronger stock market just
as they did in March 2009 when we did the first iteration of this program,
Bernanke said at a Federal Deposit Insurance Corp. forum on small
businesses. A stronger economy helps small businesses more than larger
businesses. Interest rates are higher but thats mostly because the news is
better. It has responded to a stronger economy and better expectations.
Bianco Research, L.L.C

October 10, 2012

16

Our View Of The Wealth Effect


QE does produce lower interest rates, or at least the belief that rates are too low.
This then pushes investors out the risk curve which is why stocks have such an
immediate and positive reaction whenever QE is speculated.

The Federal Reserve is playing politics in regards to the effect of QE on


commodity prices.
There is no reason to believe the risk curve ends at low-rated stocks. How much
QE affects food and gasoline prices can be debated, but to argue there is no effect
at all, and will never be an effect under any scenario, merely because the Federal
Reserve does not want to answer for these higher prices, is just wrong.
The argument that higher asset prices produce a wealth effect is only partially
correct. Two conditions must be met for a wealth effect to ensue. Net worth must
reach a new high and it must be perceived to be permanent. This is why housing
produced such a powerful wealth effect before 2006. Home prices always went up
and their gains were perceived to be permanent. Currently we have a retracement
of losses and a widespread distrust of financial markets. These conditions will not
produce any wealth effect and we believe they have not.

Bianco Research, L.L.C

October 10, 2012

17

Flows Into Domestic Mutual Funds And ETFs

250

200

200

150

150

100

100

50

50

Bianco Research, L.L.C

October 10, 2012

8/31/2012

8/31/2011

8/31/2010

8/31/2009

8/31/2008

8/31/2007

-150

8/31/2006

-150

8/31/2005

-100

8/31/2004

-100

8/31/2003

-50

8/31/2002

-50

8/31/2001

Billions of Dollars

250

Billions of Dollars

12-Month Net New Assets In Foreign Equity Mutual Funds and ETFs
& 12-Month Net New Assets In Domestic Equity Mutual Funds and ETFs

18

Weekly Equity Mutual Fund Flows


25

-25

-25
5/26/2010
-29.95

1/30/2008
-42.50

-50

8/10/2011
-58.66

3/11/2009, -56.41

-75
-100

-50
-75
-100

10/15/2008, -107.51

-125

-125

20

20

Rolling 4 Week Sum Of The Net New Cash Flow into Domestic Equity Mutual Funds
5/13/2009, 11.10

10

4/20/2011
2.12

2/22/2012
0.3

10

0
-10

-20

10/14/2009
-15.79

7/23/2008
-21.06
1/30/2008
-33.30

-30
-40

-20

9/15/2010
5/26/2010 -17.93
-23.62

-30
-40

3/11/2009, -39.23

8/10/2011
-47.68

-50

billions of dollars

billions of dollars

-10

-50

-60

-60
10/15/2008, -70.04

-70

-70

-80

-80

30

billions of dollars

billions of dollars

50

25

30

Rolling 4 Week Sum Of The Net New Cash Flow into World Equity Mutual Funds

20

20

10

10

-10

6/2/2010
-6.87

2/6/2008
-9.46

-20

-10
8/10/2011
-10.98

3/11/2009, -17.19

billions of dollars

billions of dollars

Rolling 4 Week Sum Of The Net New Cash Flow into Total Equity Mutual Funds
50

-20

-30

-30
10/15/2008, -37.47

-40

-40

9/23/2009, 11.27

10

billions of dollars

15

Rolling 4 Week Sum Of The Net New Cash Flow into Hyrbid Mutual Funds

10

-5

-5

-10

8/10/2011
-8.59

3/11/2009, -9.26

-15

-10
-15

10/15/2008, -16.35

October 10, 2012

10/31/2012

7/11/2012

3/21/2012

11/30/2011

8/10/2011

4/20/2011

9/8/2010

12/29/2010

5/19/2010

1/27/2010

10/7/2009

6/17/2009

2/25/2009

11/5/2008

7/16/2008

3/26/2008

12/5/2007

8/15/2007

4/25/2007

-20

1/3/2007

-20

Bianco Research, L.L.C

billions of dollars

15

19

Who Believes In QE3?


Richmond Federal Reserve (September 15) Richmond Fed President Lacker Comments on FOMC Dissent
Further monetary stimulus now is unlikely to result in a discernible improvement in growth, but if it does, its also likely to
cause an unwanted increase in inflation.
The Wall Street Journal (September 17) George P. Shultz, Michael J. Boskin, John F. Cogan, Allan H. Meltzer and
John B. Taylor: The Magnitude of the Mess Were In
The Fed is adding to the uncertainty of current policy. Quantitative easing as a policy tool is very hard to manage. Traders
speculate whether and when the Fed will intervene next. The Fed can intervene without limit in any credit marketnot only
mortgage-backed securities but also securities backed by automobile loans or student loans. This raises questions about why
an independent agency of government should have this power.
Dallas Federal Reserve (September 19) Richard W. Fisher: Comments to the Harvard Club of New York City on
Monetary Policy (With Reference to Tommy Tune, Nicole Parent, the FOMC, Velcro, Drunken Sailors and Congress)
The truth, however, is that nobody on the committee, nor on our staffs at the Board of Governors and the 12 Banks, really
knows what is holding back the economy.
MarketBeat (WSJ Blog) (September 27) Feds Plosser: Monetary Policy Shouldnt Be a Day Trader
The hawk in the house isnt pleased. Philly Fed President Charles Plosser, a veteran central-bank official who has publicly
opposed the Feds latest accommodative efforts, says many of his colleagues are too focused on how markets react in the
short-term to Fed stimulus, as opposed to taking longer, more pragmatic views.
Bloomberg.com (October 1) Volcker Says Fed Bond-Buying Has No Effect on Inflation
Paul Volcker, former chairman of the Federal Reserve, said the U.S. central banks latest bond-buying program isnt creating
inflationary pressure. Its not going to have a profound effect on the economy and its not going to have any effect on inflation
in the short run, Volcker said today at a forum sponsored by Bloomberg Link at the New York Athletic Club. The basic
situation is not an inflationary situation.
CNBC (October 5) Effect of Jobs Report on 2012 Election
At the very end of this interview Austan Goolsbee and Ed Lazear were both asked about the effectiveness of QE3. Both
agreed it would not be very effective although Goolsbee did concede that the Fed was doing what it had to do.

Bianco Research, L.L.C

October 10, 2012

20

The Fed Now Has A Formal Inflation Target


The Fed Now Has A Formal Inflation Target
4.5%

4.5%

4.0%

4.0%

3.5%

3.5%
3.0%

2.5%

2.5%

2.0%

2.0%
7/31/2012
1.65%

1.5%

7/31/2012
1.30%

1.0%

1.5%
1.0%

Annual rate of change

Annual rate of change

9/30/2011
2.87%

Fed's Target

3.0%

Core PCE
0.5%

0.5%

Headline PCE

Bianco Research, L.L.C

October 10, 2012

1/31/2013

5/31/2012

9/30/2011

1/31/2011

5/31/2010

-1.0%
9/30/2009

-1.0%
1/31/2009

-0.5%

5/31/2008

-0.5%

9/30/2007

0.0%

1/31/2007

0.0%

21

The Fed Adopts An Inflation Target

The Federal Reserve Janaury 25, 2012 Press Release


The inflation rate over the longer run is primarily determined by
monetary policy, and hence the Committee has the ability to
specify a longer-run goal for inflation. The Committee judges that
inflation at the rate of 2 percent, as measured by the annual
change in the price index for personal consumption expenditures,
is most consistent over the longer run with the Federal Reserves
statutory mandate. Communicating this inflation goal clearly to the
public helps keep longer-term inflation expectations firmly
anchored, thereby fostering price stability and moderate long-term
interest rates and enhancing the Committees ability to promote
maximum employment in the face of significant economic
disturbances.

Bianco Research, L.L.C

October 10, 2012

22

Why 2%, Why Not?


During the Q&A portion of Bernankes March 29 speech at George Washington University, a
student asked the following:
Q: You mentioned in your lecture the dangers of deflation from the Great Depression and more
recently in Japan. And one of the arguments for maintaining a target inflation rate above zero is to
provide a cushion against possibility of deflation. Yet in the last two recessions in the United States,
theres been a pretty significant fear of deflation causing the Fed to keep monetary policy pretty
very accommodative in the beginning of the last decade and even more so at this point. Do you
think that 2 percent is enough of a cushion to prevent deflation, and have you considered higher
inflation target rates? Thank you.

MR. BERNANKE: Well, thats a thats a great question. And theres been a lot of research on
it. It seems like the international consensus is pretty much around 2 percent. I mean, almost all
central banks that have a target either have a 2 percent target or a 1 (percent) to 3 percent target or
something like that. And theres a trade-off here because on the one hand, you want to have it
above zero, as you say, in order to avoid or reduce deflation risk, but on the other hand, if inflation
is too high, its going to create problems for markets; its going to make the economy less
efficient. And so theres a trade-off, you know, which what level of inflation gives you at least
some reasonable buffer against deflation but is not so high that it makes markets work less well.
And so again, the international consensus has been around 2 percent. And thats sort of where the
Fed has been informally for quite a while. So thats what we announce, and thats, you know you
know, for foreseeable future, thats where we plan to stay. But its obviously an issue that
researchers will continue to look at, trying to address exactly that trade-off that youre referring to.
Bianco Research, L.L.C

October 10, 2012

23

The Fed Cannot Waver From 2%


In an April 25 press conference following the FOMC meeting, Bernanke
was again questioned on the topic and answered with the following:
MR. BERNANKE: I guess the question is, does it make sense to actively seek a
higher inflation rate in order to achieve a slightly increased reduction a
slightly increased pace of reduction in the unemployment rate? The view of the
committee is that that would be very reckless. We have we, the Federal
Reserve, have spent 30 years building up credibility for low and stable inflation,
which has proved extremely valuable in that weve been able to take strong
accommodative actions in the last four or five years to support the economy
without leading to a(n) unanchoring of inflation expectations or a destabilization
of inflation. To risk that asset for what I think would be quite tentative and
perhaps doubtful gains on the real side would be a, I think, unwise thing to do.
Rather than use these questions as an opportunity for greater transparency and
understanding, Bernanke offers canned responses such as, theres been a lot
of research on it or, the international consensus is pretty much around 2
percent. Had he more time to explain the Federal Reserves rationale,
Bernanke may have pointed to a mid-2008 research paper written by Roberto
Billi and George Kahn of the Kansas City Federal Reserve.
Bianco Research, L.L.C

October 10, 2012

24

Now Its Ok If Inflation Expectations Go Above 2%


In a September 13, 2012 press conference following the
FOMC meeting, Bernanke said:

Q: I'm sorry. I just need to follow up. Does this -- so you're


saying it does not include greater tolerance for inflation; that
you will -- you would reverse course if inflation were to be
above your target level, even given that statement?
MR. BERNANKE: Well, if inflation goes above target level, as
we talked about in our statement in January, we take a
balanced approach. We bring inflation back to the target over
time, but we do it in a way that takes into account the
deviations of both of our objectives, you know, from their
targets.

Bianco Research, L.L.C

October 10, 2012

25

10-Year TIPS Breakeven Inflation Rate


10-Year TIPS Breakeven Inflation Rate
2.75
7/4/2008
2.598

2.50

1/11/2010, 2.465

2.25

4/29/2010
2.431

9/14/2012
2.639

2.75
2.50

10/9/2012
2.563

2.25

6/10/2009
2.070

9/10/2007
2.189

2.00

4/11/2011, 2.66
3/20/2012
2.434

2.00

1.75

1.75
9/22/2011, 1.713

1.50

Operation
Twist

8/24/2010
1.512

1.50

QE 2

1.25

1.25

1.00

1.00
3/6/2009
0.846

0.75

0.75
TIPS Breakeven (Thick Line/Left Scale)
Yield of the 10-Year Treasury Note minus the
Yield of 10-Year TIPS Note

0.50

0.50

QE 1

0.25

0.25

12/31/2008, 0.120

11/20/2008, 0.041

Bianco Research, L.L.C

October 10, 2012

1/15/2013

10/7/2012

6/29/2012

3/21/2012

12/12/2011

9/3/2011

5/26/2011

2/15/2011

11/7/2010

7/30/2010

4/21/2010

1/11/2010

10/3/2009

6/25/2009

3/17/2009

12/7/2008

8/29/2008

5/21/2008

2/11/2008

11/3/2007

7/26/2007

4/17/2007

1/7/2007

0.00

9/29/2006

0.00

26

5-Year Forward/5-Year Inflation Breakeven Rates


5-Year Forward/5-Year Inflation Breakeven Rates
3.50

3.50
5/20/2004, 3.34
5/3/2010, 3.08
5/1/2006
2.83

3.00

11/1/2010
3.08

10/8/2012
3.03

3.00

11/9/2009, 2.89

1/23/2008
2.77

2.50

2.50
6/30/2005
2.34

2.00

2.00
9/22/2011
1.99

8/24/2010, 1.92

10/8/2008, 1.68

1.50

1.50

1.00

1.00
11/20/2008, 0.71

0.50

0.50

12/31/2008, 0.41

Bianco Research, L.L.C

October 10, 2012

11/26/2012

7/9/2012

2/20/2012

10/3/2011

5/13/2011

12/24/2010

8/6/2010

3/18/2010

10/26/2009

6/8/2009

1/19/2009

9/1/2008

4/14/2008

11/26/2007

7/9/2007

2/19/2007

9/29/2006

5/12/2006

12/23/2005

8/5/2005

3/17/2005

10/28/2004

6/10/2004

0.00

1/20/2004

0.00

27

Central Bank Balance Sheets


Central Bank Balance Sheets
(China, ECB, U.S. and Japan)
5

5
6/30/2012
4.50

4
8/31/2012, 3.88

3
8/31/2012
2.81

The Federal Reserve


Balance Sheet

The ECB Balance Sheet


(Converted to Dollars)

Trillions of Dollars

Trillions of Dollars

PBoC - Chinese Central Bank Balance


Sheet (Converted To Dollars)

8/31/2012, 1.91

BoJ Balance Sheet


(Converted To Dollars)

Bianco Research, L.L.C

October 10, 2012

1/31/2013

1/31/2012

1/31/2011

1/31/2010

1/31/2009

1/31/2008

1/31/2007

1/31/2006

1/31/2005

1/31/2004

1/31/2003

1/31/2002

28

The Biggest Six Central Bank Balance Sheets


The Biggest Six Central Bank Balance Sheets
(U.S., U.K, ECB, Japan, China, and Switzerland)
15

15

14

14
7/31/2012
13.54

13
12

12
11

11/30/2010, 10.87
12/31/2008, 10.12

10
9

10
9

2/28/2009, 8.95

Trillions of Dollars

11

Trillions of Dollars

13

8
8/31/2008, 7.23

6
5/31/2006
4.99

Bianco Research, L.L.C

October 10, 2012

11/30/2012

5/31/2012

11/30/2011

5/31/2011

11/30/2010

5/31/2010

11/30/2009

5/31/2009

11/30/2008

5/31/2008

11/30/2007

5/31/2007

11/30/2006

5/31/2006

29

6 Central Bank Balance Sheets As A % Of World Market Cap


The Size Of The Six Central Bank Balance Sheets
As A Percent Of World Market Capitalization
35%

35%
1/31/2009, 33.28%

11/30/2011, 29.91%

7/31/2012
28.17%

6/30/2010
24.80%

25%

25%
7/31/2011
23.45%

4/30/2010
22.01%

20%

4/30/2011
21.55%

20%

8/31/2008, 15.14%

15%
5/31/2006
11.39%

15%

6/30/2007
9.53%

Bianco Research, L.L.C

October 10, 2012

11/30/2012

5/31/2012

11/30/2011

5/31/2011

11/30/2010

5/31/2010

11/30/2009

5/31/2009

11/30/2008

5%
5/31/2008

5%
11/30/2007

10%

5/31/2007

10%

11/30/2006

Balance Sheets / World Market Cap

30%

9/30/2011, 29.23%

5/31/2006

Balance Sheets / World Market Cap

30%

30

Gratuitous Commercial For Bianco Research

An Offer For Conference Attendees


Between Now and October 31 you can view our research at
www.biancoresearch.com
Go To Log-In Using Invitation Code on our Home Page
Invitation Code = TBP2012 (case sensitive)
Enjoy

Bianco Research, L.L.C

October 10, 2012

31

Europe: The Cycle Continues


Bloomberg.com (September 12, 2012) pain Says No Urgency to Seek Bailout as ECB
Eases Yields
Prime Minister Mariano Rajoy told Parliament its not clear if Spain needs help as the European
Central Banks crisis plan has cut borrowing costs. Theres no urgency because the ECBs move
put the Treasury in a more comfortable position, Deputy Economy Minister Fernando Jimenez
Latorre said. The important thing is that when whatever assistance that is needed is requested,
that it should be well received in the markets, Jimenez Latorre told reporters in Madrid
today.Spanish 10-year bond yields have fallen about 80 basis points since ECB President Mario
Draghi said on Sept. 6 the bank could buy cash-strapped nations debt if they seek help from the
regions government-run rescue mechanism first..
Comment
This story, particularly the highlighted passage above, is a perfect example of what we wrote
about last month:
This highlights the all too familiar pattern of the European crisis. When markets slump and
things look bad, European leaders will promise anything/everything to stop the decline, no
matter how politically distasteful it might be. Markets then rally on the hope that Europe has
turned the corner. However, these rallies embolden European leaders to not follow through
on the politically difficult promises made at the depth of the crisis. The markets then fall
again on this disappointment until another crisis emerges forcing European leaders to
promise something else that will last only until the markets rally once again.

Bianco Research, L.L.C

October 10, 2012

32

Spain 10-Year Yields


Spain 10-Year Yields
8.00%

8.00%
7/25/2012, 7.75%

7.50%

7.50%

8/3/2012
7.44%

6/18/2012, 7.29%

7.00%

7.00%

OMT
LTRO

11/17/2011, 6.78%

6.50%

6.50%

8/2/2011, 6.46%

6.00%

6.00%
11/30/2010, 5.67%

5.50%
6/17/2010
4.99%

5.00%

5.50%

9/10/2012
5.55%

SMP

5.00%
8/18/2011, 4.90%
3/2/2012
4.85%

4.50%

4.50%

4.00%

4.00%
10/12/2010, 3.95%
4/5/2010, 3.81%

Bianco Research, L.L.C

October 10, 2012

11/15/12

10/04/12

08/23/12

07/12/12

05/31/12

04/19/12

03/08/12

01/26/12

12/15/11

11/03/11

09/22/11

08/11/11

06/30/11

05/19/11

04/07/11

02/24/11

01/13/11

12/02/10

10/21/10

09/09/10

07/29/10

06/17/10

05/06/10

03/25/10

02/11/10

3.50%
12/31/09

3.50%

33

Italy 10-Year Yields


Italy 10-Year Yields
8.00%

8.00%

7.50%

7.50%

11/9/2011, 7.48%
1/9/2012
7.16%
7/25/2012
6.71%

7.00%

7.00%

8/5/2011
6.40%

6.50%

6.50%

7/12/2011
6.02%

6.00%

6.00%
12/7/2011
5.76%

5.50%
11/30/2010
4.80%

5.00%

4.50%

5.00%
8/18/2011
4.87%

5/7/2010
4.36%

5.50%

3/10/2011
5.02%
9/20/2012
4.99%

3/9/2012
4.68%

2/2/2011 5/16/2011
4.59%
4.54%

4.50%

4.00%

4.00%

Bianco Research, L.L.C

October 10, 2012

11/15/12

10/04/12

08/23/12

07/12/12

05/31/12

04/19/12

03/08/12

01/26/12

12/15/11

11/03/11

09/22/11

08/11/11

06/30/11

05/19/11

04/07/11

3.50%

02/24/11

01/13/11

12/02/10

09/09/10

07/29/10

06/17/10

05/06/10

03/25/10

02/11/10

12/31/09

3.50%

10/21/10

10/12/2010
3.71%

34

Ireland 9-Year Yields


Ireland 9-Year Yields
15.00%

15.00%
7/18/2011, 14.12%

14.00%

14.00%

13.00%

13.00%

12.00%

12.00%

11.00%

11.00%
11/28/2011
9.74%

10.00%

10.00%

9.00%

9.00%
5/16/2012
7.72%

8.00%
9/29/2011
7.58%

7.00%

8.00%
7.00%

6.00%

6.00%

5.00%

9/20/2012, 4.97%

8/6/2010, 4.89%

4.00%

12/31/09
01/28/10
02/25/10
03/25/10
04/22/10
05/20/10
06/17/10
07/15/10
08/12/10
09/09/10
10/07/10
11/04/10
12/02/10
12/30/10
01/27/11
02/24/11
03/24/11
04/21/11
05/19/11
06/16/11
07/14/11
08/11/11
09/08/11
10/06/11
11/03/11
12/01/11
12/29/11
01/26/12
02/23/12
03/22/12
04/19/12
05/17/12
06/14/12
07/12/12
08/09/12
09/06/12
10/04/12

4.00%

5.00%

Bianco Research, L.L.C

October 10, 2012

35

Tax Cuts

Bianco Research, L.L.C

October 10, 2012

36

The Debt Ceiling


The Debt Ceiling
$16.50

$16.50
10/9/2012
16.1230

$16.00

$15.50

Administration intentionally slowing


debt sales to avoid hitting the limit as
long as possible

$15.00

$15.00

$14.50

$14.50

y = 0.0051x + 13.707
R2 = 0.9836

Bianco Research, L.L.C

October 10, 2012

1/4/2013

10/12/2012

7/20/2012

4/27/2012

2/3/2012

8/19/2011

$13.50

5/27/2011

$13.50

3/4/2011

$14.00

12/10/2010

$14.00

11/11/2011

Trillions of Dollars

$15.50

$16.00

Trillions of Dollars

Blue = Debt Subject To Debt Ceiling Limit


Red = Debt Ceiling Limit

16.3940

37

Obama To Be Re-Elected President In 2012


Barack Obama To Be Re-Elected President In 2012
Intrade.com Betting
80

80
30-Sep-12, 78.7

76

76
Osama Bin Laden is
pronounced dead

72

3-Oct-12, 74
72

68

68

64
12-Mar-12, 61.4

16-Apr-12
61.40

22-Jul-12
59.5

9-Feb-12, 60.7

60

56

64
9-Oct-12
63.8
60
9-Sep-12
57.6
56

23-Jan-12, 55.9
12-Nov-11
52.3

30-Aug-12
55.7

6-Jun-12, 52.3

52

52

19-Jun-12
52.4

8-Jan-12, 50.2

Chance of Being Re-Elected

Chance of Being Re-Elected

2-May-11
69.9

48

48

Bianco Research, L.L.C

October 10, 2012

10/3/2012

8/24/2012

7/15/2012

6/5/2012

4/26/2012

3/17/2012

2/6/2012

44

12/28/2011

10/9/2011

8/30/2011

7/20/2011

6/10/2011

4/30/2011

3/21/2011

2/9/2011

12/31/2010

44

11/18/2011

16-Oct-11
46.5

38

Election 2012 Trial Heat: Obama vs Romney


Election 2012 Trial Heat: Obama vs. Romney
Gallup Organization
52.0%

50.0%

52.0%
These are the results when registered voters are asked: "Suppose the presidential election were held
today. If Barack Obama were the Democratic Party's candidate and Mitt Romney were the Republican
Party's candidate, who would you vote for Barack Obama, the Democrat or Mitt Romney, the
Republican?" Those who are undecided are further asked if they lean more toward Obama or Romney
and their leanings are incorporated into the results. Each five-day rolling average is based on
telephone interviews with approximately 2,200 registered voters; Margin of error is 3 percentage
points.

50.0%

Obama
48.0%

48.0%

46.0%

46.0%

44.0%

44.0%

Romney
42.0%

40.0%

40.0%

4/15/2012
4/20/2012
4/26/2012
5/1/2012
5/7/2012
5/12/2012
5/17/2012
5/22/2012
5/27/2012
6/2/2012
6/7/2012
6/12/2012
6/17/2012
6/22/2012
6/27/2012
7/2/2012
7/8/2012
7/13/2012
7/18/2012
7/23/2012
7/29/2012
8/3/2012
8/8/2012
8/13/2012
8/18/2012
8/23/2012
8/28/2012
9/2/2012
9/7/2012
9/12/2012
9/17/2012
9/22/2012
9/27/2012
10/2/2012
10/7/2012

42.0%

Bianco Research, L.L.C

October 10, 2012

39

Obamas Approval Ratings


Obama's Approval Ratings
Gallup Poll
70%

70%
1/24/2009, 69%
5/2/2009, 68%

Last (Oct 5 to Oct 7)


Approval = 51%
Disapproval = 44%

66%

66%

62%

62%
Bin Laden
Bounce

58%
5/13/2010
52%

54%

58%

Convention
Bounce

54%

6/21/2012
51%

1/21/11
51%

5/1/2012, 51%

50%

50%

46%

46%
6/9/2010, 44%

42%

42%
8/17/2010, 41%
10/23/10
41%

38%

38%
10/20/2011
38%

Bianco Research, L.L.C

October 10, 2012

10/24/2012

8/25/2012

6/24/2012

4/25/2012

2/25/2012

12/20/2011

10/20/2011

8/19/2011

6/19/2011

4/18/2011

2/16/2011

12/9/2010

10/5/2010

8/6/2010

6/5/2010

4/3/2010

2/2/2010

11/26/2009

9/27/2009

7/27/2009

5/25/2009

3/25/2009

34%

1/23/2009

34%

40

The Pattern Of Winners


Comparing Obama's Odds of Re-Election To Previous Winners' Odds
Intrade.com Betting
90

90

Odds of the Democratic nominee


winning the election in 2008

85

85

80
Odds of George Bush being
re-elected in 2004

75

75

70

70

65

65

60

60

55

Chance of Being Re-Elected

Chance of Being Re-Elected

80

55

Odds of Barack Obama


being re-elected in 2012

50

50
30-Jul-11
50.0

16-Sep, 48.7

Bianco Research, L.L.C

October 10, 2012

9-Nov

28-Oct

16-Oct

4-Oct

22-Sep

10-Sep

29-Aug

17-Aug

4-Aug

23-Jul

11-Jul

29-Jun

17-Jun

5-Jun

24-May

11-May

29-Apr

17-Apr

5-Apr

24-Mar

12-Mar

28-Feb

16-Feb

4-Feb

23-Jan

11-Jan

30-Dec

18-Dec

45

6-Dec

45

41

Bianco Research, L.L.C


October 10, 2012

8/29/2012, 92.1

10/3/2012

90

9/13/2012

8/24/2012

70

8/4/2012

7/15/2012

6/25/2012

6/5/2012

5/16/2012

4/26/2012

4/6/2012

3/17/2012

2/26/2012

2/6/2012

1/17/2012

12/28/2011

12/8/2011

11/18/2011

10/29/2011

10/9/2011

9/19/2011

8/30/2011

8/10/2011

7/20/2011

6/30/2011

6/10/2011

5/21/2011

4/30/2011

4/10/2011

3/21/2011

3/1/2011

2/9/2011

1/20/2011

12/31/2010

The Republicans Control The House After 2012 Elections


The Republicans Control The House After 2012 Elections
Intrade.com Betting

95

90

10/7/2012
89

95

85
85

80
80

75
75

9/29/2012, 71.2

70

65
65

60
60

55
55

50
50

45
45

42

Bianco Research, L.L.C


October 10, 2012
10/3/2012

70

9/13/2012

75

8/24/2012

8/4/2012

7/15/2012

6/25/2012

6/5/2012

5/16/2012

4/26/2012

4/6/2012

3/17/2012

2/26/2012

2/6/2012

1/17/2012

12/28/2011

12/8/2011

11/18/2011

10/29/2011

10/9/2011

9/19/2011

8/30/2011

8/10/2011

7/20/2011

6/30/2011

6/10/2011

5/21/2011

4/30/2011

4/10/2011

3/21/2011

10

3/1/2011

35

2/9/2011

80

1/20/2011

12/31/2010

Who Will Control The Senate?


Who Will Control The Senate?
Intrade.com Betting

90
90

85
85

Republicans

80

10/1/2012
66.9

40

Democrats

15

Neither Party will contol The Senate

75

70

65
65

60
60

55
55

50
50

45
45

40

35

30
30

25
25

20
20

15

10

5
5

0
0

43

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