Janet Yellen's debut performance yesterday before the Senate Committee on Banking, Housing, and Urban Development may have inadvertently pointed investors toward the best profit opportunities in the continuing financial asset bubble.
The key is a single phrase, one with two meanings that signals where the real money will be made before the bubble goes "pop."
And we know from Yellen's testimony the bubble will keep growing...
Asked repeatedly when she saw quantitative easing (QE) - the monthly purchase of $85 billion in government treasuries and mortgage-backed securities - ending, Yellen stuck to the approved script. As outgoing Chairman Bernanke said many times before her, Yellen said that the Fed will consider winding down the buys "when [it] sees growth that's strong enough for progress to continue." Although the Fed "sees strength in the private sector," the overall recovery is too "fragile" to consider taking away the stimulus.
"The bottom line is that Janet Yellen is even more dovish than Ben Bernanke," says Keith Fitz-Gerald, Money Morning's chief investment strategist. "We're looking at zero level interest rates to continue well into 2014, possibly even into 2016."
"In fact," he says, "given what we now know about [Yellen], I can even envision her increasing stimulus from $85 billion a month to $90 billion or even $100 billion a year or two from now if the economy has a major misfire. Given the lack of recovery, it's not beyond the realm of possibility anymore."
This means that stock markets are likely to continue rising, even as revenue and earnings slow, Fitz-Gerald says.
And Yellen's testimony pointed investors toward the best profit opportunities in the continuing bubble.Interest Rate Sensitivity for QE Profit
In her testimony, Yellen responded to a question from Sen. Mendoza (D-TK) about wealth disparity, saying that while Federal Reserve policy aims to "benefit all Americans broadly," its policies begin to "ripple out" from "interest rate-sensitive sectors."
At face value - indeed, in the economic theory that seems to drive the Fed - "interest rate-sensitive" indicates a firm that builds and sells products that are bought with debt. The classic example is housing, where most people buy a house by taking out a mortgage loan.
But there's another meaning, says Fitz-Gerald...
"There's the traditional meaning, and there's the one Wall Street uses. That one says 'This low rate allows me to carry my trade, and go on a buying binge.'"
In other words, one of the first beneficiaries of the continued quantitative easing market is mergers and acquisitions (M&A). And the M&A volume has been rising steadily since the market bottomed in 2009.
According to IntraLinks Dealflow Indicator, which tracks early-stage M&A, the number of announced advisor mandates that reach due diligence, year-over-year growth has risen every quarter by as much as 50%. In part, the third-quarter report says, this is due to financial advisors trying to complete deals before any announcement of the end of quantitative easing.
Furthermore, deal value has been rising as well. In 2012, the total value of announced deals was $2.5 trillion, up from $1.7 trillion in 2009, according to mergermarket, an M&A intelligence service. Although this number is far from the $3.6 trillion in deals done at the height of the market in 2007, it is still a sign of improvement in the market.
Chasing specific deals is a very risky game, but owning the advisors who handle the nuts and bolts of a deal for a substantial fee is a sound way to get a piece of the action.
As of Q1 2013, JP Morgan (NYSE: JPM) was leading the advisory league table in value, having handled $124 billion in deals, including four of the top 10, according to mergermarket. Morgan Stanley (NYSE: MS) was number one in terms of quantity, having handled 56 deals.
Of course, investing in financial stocks based purely on quantitative easing will put you even more at the mercy of the Fed - when it takes away the punch bowl, they will be the first hit. So take your profits and follow Keith's advice for protecting yourself when taper comes.
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