Archive for the ‘Federal Reserve’ Category
During its recent committee meeting, the Federal Reserve announced that it is time to shut off the government money taps, winding up most of the U.S. specialty liquidity programs and starting by shutting down currency swaps with most foreign central banks by February 1, 2010. At the time, the Fed did not even address the risk of inflation or hyperinflation in the short term. Thus, the expectation is that interest rates will remain at ultra-low levels close to zero for at least the first half of 2010, if not longer. Eventually, however, interest rates will have to go up if the economy finally starts growing at a faster pace.
My favorite investment analyst must be ready to have kittens. Of course, Jim Rogers has advocated the abolition of the Federal Reserve for a number of years, and this latest government bailout must have him steaming.
He argues that it was the central bank that helped create (but not exclusively) the housing crisis that we’re experiencing now. This precipitated the credit crunch and, subsequently, the financial crisis on Wall Street.
Commodity prices were then hit hard, as Wall Street investment banks sold everything in order to cover their losses from failed mortgages. It’s a vicious cycle, there’s no doubt about it. The fact of the matter is that the market must be allowed to correct itself, especially since the marketplace created the problem in the first place.
Rogers is buying airline stocks now and he likes the yen, the Swiss franc and agricultural commodities. He is very bearish on the U.S. dollar, and the $700-billion Wall Street bailout package must be the icing on the cake.
One thing I’m really starting to realize is that the monetary policy cycle is much longer in duration than most people give it credit for. While former Fed Chairman Greenspan was hailed as a great steward of the economy and Wall Street capital markets, that whole picture is now being unwound.
All the years of exceptionally reduced interest rates and easy money have now come to a head. Now we have a hungover real estate market, growing inflation, and a weak Main Street economy.
There really is a long-term, cumulative effect to monetary policy and, although it takes a long time to develop, the … Read More
Yesterday, the U.S. Federal Reserve Open Market Committee met to set interest rates — and it did what most expected, which is nothing. “Standing Pat” is the official term when the Fed neither raises nor reduces interest rates. Here’s the statement the FOMC issued yesterday after its meeting:
“Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation expectations have increased.” Old news, especially for those who regularly read this column.
In my many years of watching the Fed, I’ve learned one thing: They are slow to react. Remember all that talk by Bernanke, Paulson and even the President earlier this month about a stronger U.S. dollar being in the best interest of the country? Well, that talk certainly wasn’t translated into an interest-rate hike yesterday.
At the most, the Fed now is simply “talking” about inflation being a bigger problem in light of a bottoming-out economy. But I don’t believe the Fed is convinced inflation really is a big problem.
My question continues to be the same:
Aside from oil prices and food prices, what else is rising in price these days? We know housing prices are falling. The stock market is down about 10% since mid-May. Automobiles and consumer products are declining in price. (And if inflation was out of check as we read in most newspapers, wouldn’t the price of gold be over $1,000 an ounce?)
So, is all the worry about inflation justified?
Let’s answer this question with another question: If all the worry about inflation was justified, wouldn’t the Fed have raised interest rates at least a … Read More
A 75-basis-point cut in the Fed Funds rate to 2.25% by the Federal
Reserve on Tuesday along with some decent earnings from several financial institutions helped to drive robust buying in the markets. Yet the fiasco that is occurring at The Bear Stearns Companies, Inc. (NYSE/BSC) remains a concern that the credit crunch may get worse.
Yesterday, in a widely anticipated move, the U.S. Federal Reserve reduced interest rates one more time — by one quarter point to two percent. Wednesday was the seventh consecutive interest rate cut by the Fed.
The big surprise for investors yesterday?
The Fed said that inflation “expectations” have risen, while it also removed its usual “downside” risk to the economy language that has accompanied the Fed’s past few interest rate cuts. The surprise was that the Fed indirectly told the market that it may be through with interest rate cuts for now.
And how did the stock market take it?
You’d think a stock market so fixated with every move the Fed makes would tank on news that the Fed may be done with interest rate cuts for some time. But, instead, the Dow Jones Industrial Average registered an insignificant loss of only 12 points!
The S&P 500 was up almost five percent in April, capping the best month for the S&P 500 in about five years. But we need to look deeper, at specific industries, to see what the stock market is really telling us.
There are two very important stock group charts I want to talk about today.
First, let’s look at the Dow Jones U.S. Retail Index. The index, which comprises the largest retailers in America, bottomed out in March 2008, and it is now up 11.9% from its 2008 low. If U.S. consumers are in such bad shape, if they’re cutting down on their spending like the popular media is telling us, why is a leading market indicator on retail sales up almost 12%?
The second … Read More
I have to say that I’m very nervous about the prospects for the stock market. One part of me is really bullish, while the other is very uneasy about the future for stock prices.
I’m bullish because the stock market has already pulled back significantly and quickly from its recent high. Corporate earnings are good, monetary policy is accommodative, and the credit crisis is mostly behind us.
I’m bearish because the economy is slowing, the housing market will take another couple of years to right itself, the dollar is dropping and, from a technical perspective, the broader market doesn’t look healthy.
The fact of the matter is that I don’t think any full-time Street analyst has a real defined view of where this stock market is headed. This is why I wrote previously that I feel we’re at some kind of crossroads.
If I had to put it concisely, I’d say my outlook for the broader market is uneasy hopefulness. I have to guess that there’s a 50% chance of more price weakness over the coming quarters, and a 50% chance of a new uptrend. This certainly makes for a difficult environment is which to speculate.
The good news is that there are great investment opportunities out there. I admit, however, that the number of attractive new investment opportunities in the equity market has diminished significantly over the last several months.
I’d be a buyer in this market, but I’m also perfectly content to be sitting on the sidelines.
The stock market needs a greater catalyst for a new market rally to develop than it does to resume a downtrend. … Read More
The overview of the U.S. Federal Reserve System (Fed) on its web site states that it was founded in 1913 with the mandate to provide a more stable monetary and financial system. Over the years, its role has expanded, and the Fed is now responsible for four general areas:
Formulating monetary policy in pursuit of maximum employment, stable prices, meaningful inflation, and moderate long-term rates
Supervising and regulating banking institutions
Maintaining the stability of the financial system and containing systemic risk in financial markets
Providing financial services to depository institutions, including the U.S. government and foreign official institutions.
It has always been a tall order for the Fed to simultaneously achieve maximum employment, stable prices, and moderate interest rates. The unprecedented globalization of the world’s economies and financial markets has made the job ever more demanding with changes in the Fed’s policy having implications far beyond the U.S. borders.
Observing how closely financial markets scrutinize and wildly react to testimonies, releases of minutes from FOMC meetings, and speeches by the Fed’s governors, one gets the impression that the Fed’s primary function appears to be tipping off the market.
During March 2006 alone, the Fed Members gave 11 public speeches plus three testimonies to Congress, including the March 28, 2006 testimony by Ben Bernanke on the economic outlook. As if that in itself wasn’t more than enough to digest, the retired chairman, Alan Greenspan, has become a top-paid public speaker. Given that during his 19 years at the Fed’s helm, he steered the market through a number of crises to a gain of 600% — his comments still move the market. … Read More
What does this picture tell you about the state of the U.S. economy and the changing spending habits of consumers?
The U.S. Federal Reserve released a report yesterday stating consumer borrowing in the U.S. fell $1.2 billion in September–the biggest monthly decline since April, 1992. Loans for automobiles dropped the most, down by an annual rate of 3.2% in September.
In the same report, the Fed said borrowing on credit cards rose in September.
At this point in the economic cycle, consumers are obviously reducing their borrowing activities for big ticket items such as cars (we already know the homebuilders are hurting). Are consumers loading up their credit cards with smaller purchases or are their credit card balances remaining fat? No one really knows for sure.
But we do know this: American consumers are cutting back on spending. It could be higher interest rates… it could be the falling housing market putting the breaks on for most consumers… or maybe consumers are just tapped out. Whatever the reason, or combination of reasons, to account for consumer cutbacks on borrowing, I’ve never seen an economy expand when consumer buying is contracting.
Who came up with the concept that lower oil and energy prices would help consumers continue spending? I haven’t seen this idea come to fruition yet. Nor do I believe lower gas prices will make much of a difference on consumer spending.
Would I own a consumer good stock right now? Not me. I see 2007 as being a very difficult year for consumers and the economy. Now if someone can just tell me why the stock market sits near … Read More
Thinking about the current state of the stock market, I can’t help but be optimistic for the rest of 2006. Corporations are running lean operations and both large and small companies alike are suitably profitable.
Inflation is a concern, but the Federal Reserve is dealing with it in a reasonable fashion. Job growth is solid and building and construction, particularly in the housing market, remains very strong. All in all, it’s hard not to be bullish going forward.
The broader market has already expressed its bullish view, with the main market averages doing very well since November of 2005. The current trend is positive and there is no reason for this to change over the very near term.
I think an aggressive equity portfolio should most definitely hold some alternative energy plays, some precious metal stocks, and several special situation opportunities. Special situation stocks are hard to define, but I categorize them as being attractive businesses that don’t necessarily fall into any traditional type of industry group.
Companies that I’ve mentioned before in this column that I consider special situations include PetMed Express, Focus Media, Color Kinetics, and Fuel-Tech, to name only a few.
Every equity portfolio, in my view, always needs to own a handful of these kinds of companies, which are so innovative that they actually redefine the business practices of the industries they were previously a part of. In a way, these kinds of companies innovate so much that they create a new industry category for themselves.
Attractive special situation stocks are more difficult to discover in the stock market, but rest assured, they are always out … Read More
The U.S. Commerce Department just reported a surge in U.S. retail sales for January, 2006. Retail sales, excluding autos, were up 2.2 percent last month, the best posting in six years. With autos included, retail sales were up 2.3 percent–the largest one month gain (including autos) since May, 2004.
With the retail sales numbers for January being double what economists had expected, bond prices were hammered on fears the Fed would continue raising interest rates. Now, according to the futures market, 98% of traders believe the Fed will raise rates on March 28 and 68%, up from 56%, believe the Fed will raise rates again at its May 10 meeting.
Yes, in an unbelievable string of interest rate hikes, it looks the Fed will raise interest rates 16 times in a row. Ask a 2004 buyer of a luxury condo or home if they ever thought interest rates would rise back up so fast and they’ll likely be astounded.
Bottom line: the Federal Funds Rate could be at 5 percent be this May, pushing interest rates up to their highest level in years. Is it any wonder the housing market is taking such a beating? After all, between one-third and half of all U.S. mortgages are variable rate.
If the positive numbers keep coming out, it looks like the first quarter of 2006 will be an economic “big” winner for the United States. Some economists are boosting their forecast for U.S. economic growth in the first quarter to between 4% and 5%. If this happens, you can count on interest rates continuing to rise as the Fed tries to cool … Read More
As widely expected, outgoing Federal Reserve Chairman Alan Greenspan made his exit by lifting the fed funds rate by another 25-basis points to 4.50 percent: the 14th increase since rates began to ratchet up in June 2004. The increase did not surprise the market, but traders and investors were clearly taken back by the Fed’s apparent change of tone regarding its interest rate policy.
Until last Tuesday’s FOMC meeting, the central bank had used the word “measured” to describe its established policy of gradually increasing interest rates by 25-basis points at a time. The market got used to gradual increases and was pumped with the expectation that rate increases would stop this year.
Based on the recent weaker than expected GDP growth and the fact that the Fed does not want to halt the economic growth, I believe rates may end this year at around 5 percent.
But at the Fed meeting, a twist was thrown in that clearly makes you wonder what the Fed is planning and, at the same time, increases the uncertainty in the markets.
The Fed took the word “measured” out and said that “some further policy firming may be needed” in order to keep inflation at bay. So now the debate will pit the word “measured” against the phrase “some further policy firming.” What this does mean? I think the Fed under the incoming new Chairman, Ben Bernanke, wants to make sure inflation is under control and is warning the market that it may have to increase interest rates by more than 25-basis points at a time if inflationary pressures mount, despite there being little … Read More
The following are not my words, but recent statements from Roger Ferguson, vice-chairman of the U.S. Federal Reserve and the much-touted eventual replacement of Alan Greenspan:
“Clearly, some households have become burdened with excessive debt and may have considerable financial stress should their income become disrupted.”
“One cannot definitely rule out of the possibility that hiring will fall short of expectations over the next several months,” said Ferguson, noting many of the layoffs might be permanent.
Now why would a key Fed member say such things? Whatever the reason, it was enough for a Washington Bureau Chief to release an article this past weekend entitled “U.S. Job Growth May Be Blip.”
Peter Morton made some very positive conclusions:
— Three times as many jobs were created in March than were expected;
— Initial jobless claims came in last week at their lowest level since January 12, 2001; and
— Optimism of U.S. manufacturing executives about the prospects for the next six months reached a recent record in the first quarter.
These three positive economic facts do not fit with the Fed vice- chairman’s remarks. But here is my simple, layman’s observation:
As I scan the newspapers each day (my readings include the New York Times, Wall Street Journal, The Globe and Mail, National Post, Financial Times, among others) and peruse company press releases, why is it that I only see companies announcing job layoffs and I do not see companies hiring?
I read about ABC Company firing 3,000 people here and DEF Company laying off 5,000 people there, but I do not read about companies hiring big like they did … Read More
I have never been a big fan of our Federal Reserve Chairman, Mr. Alan Greenspan. Yesterday, when he urged congress to curtail Social Security benefits for future retirees, I have to admit any hope of me ever becoming a fan ended.
In what could only be described as “trickery” or “sleight of hand,” our esteemed Fed chief suddenly pronounced that the retirees that make up the Baby Boom generation, scheduled to begin retiring in 2008 to 2010, will only compound our deficit problems.
This might have come as a surprise to congress and Mr. Greenspan, but, to most baby boomers, who by the way have paid into the system for countless years, the news was somewhat expected.
We never really trusted the Government in the `60s, and, although we might have set aside our distrust in pursuit of family and employment for the last forty or so years, few of us trust our elected officials to look out for us in 2004. We know that we have to look after ourselves.
Just the other week, Chairman Greenspan was postulating that our growing deficit, as a function of GDP, was of no real concern to him. As my grandmother used to say, “Amazing how fast the weather can change” when any of us recant or change our decisions.
Besides, here at PROFIT CONFIDENTIAL, we can’t help but chuckle at the irony of a 78-year-old multi-millionaire suggesting to the powers that be that they curtail the retirement benefits of future generations.
The real irony, however, is that Greenspan never even mumbled a word about how the existing administration got us into this … Read More
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