End of Summer Linkfest: Week in Review

Shock & Awe!

That’s what Larry Kudlow asked for on Monday night, and that’s what the Fed delivered on Tuesday: A stunning half point cut in both the Fed Funds Rate and the Discount Window. Markets responded with the best week since March, and the best 2 week period in 3 years.

Hotnot_20070921 By the numbers, the biggest equity winners were Emerging Markets (up 4.8%) and the Russell 2000 (up 3.8%) and Global Stocks (plus 3.0%). The biggest loser was the U.S. dollar, down 1.2% for the week. The weak greenback lit up everything that is dollar denominated: Crude Oil popped 4.5%, Gold was up 3.1%, and Commodity Futures gained 2.8%. REITs tacked on 2.9% for the week.

Major U.S. indices did well, (though were not as strong as some of the asset classes mentioned above). The Dow and SPX each gained 2.8%, with the Nasdaq right behind at 2.7%, trailed by European stocks at +2.4%. Corporate bonds were plus ~1%, while Treasuries were slightly negative.

Barron’s Trader column noted:

"Bulls groping for a pulse also took comfort in strong quarterly earnings reported by Oracle (ORCL), Nike (NKE) and Goldman Sachs (GS). The emphatic half-percentage-point cut allayed recent doubts about the Federal Reserve’s willingness to strike pre-emptively — or as some would say, prematurely — to ward off economic ills. That helped traders rediscover their inner gambler, suppressed for much of this summer, and riskier bets outperformed safer investments in the ensuing rally.

Stocks had begun to rally even before Tuesday’s rate cut, and finished Friday with their biggest two-week haul of this bull market. The Dow Jones Industrial Average racked up its best weekly point gain since March 2003, adding 378, or 2.8%, to 13,820; it is now just 1.3% off its 14,000 midsummer peak."

We have links to get at, and sins to atone for. Time to get busy:

INVESTING & TRADING

Cautious Fed Turns Aggressive, Surprises With 50: Federal Reserve officials chose to go the whole hog yesterday in response to a risk assessment, not a current reality.The Federal Open Market Committee reduced its target for the overnight lending rate by a half-percentage point, to 4.75 percent, the first cut in four years. Separately, the Federal Reserve Board also lowered the discount rate by the same amount, to 5.25 percent. It had reduced it by a half point on Aug. 17.The size of the move surprised many analysts and economists, partly because public statements by several Fed officials included skepticism about whether the financial-market turmoil of the last two months is having much of an impact on the economy.That turmoil "has the potential to intensify the housing correction and to restrain economic growth more generally,” the committee said in a statement. (Bloomberg)  see also: What spooked the Fed into a half point cut?   

U.S. Stocks Surge the Most Since March After Fed Cuts Rates: U.S. stocks posted the biggest weekly gain since March, pushing the Dow Jones Industrial Average to within 181 points of a record, after the Federal Reserve cut its benchmark interest rate by half a percent. (Bloomberg)    

Capital, not liquidity, is the problem: There are several odd features about current financial difficulties. They appear to have been initiated by relatively minor problems, rising defaults in a subsection of the US housing market, when the world’s economy was otherwise in splendid shape. If this is enough to cause the financial system to have a “heart attack”, there must be underlying systemic problems. What are these?  (FT)

Fears of dollar collapse ?   

Oracle: What Market Malaise? As investors looked to Oracle for any signs the summer’s market turmoil might crimp tech-sector sales, the software giant put at least some concerns to rest. Oracle (ORCL) sailed past analysts’ estimates for sales, profit, and orders for its August quarter and issued an upbeat forecast for the period that ends in November.Oracle’s fiscal first-quarter results include a 26% gain in sales, a 25% jump in profit, and the largest advance in new order bookings in a decade. Numbers like that could augur a bullish start to the string of tech earnings reports due in October. Updates from Intel (INTC), IBM (IBM), Microsoft (MSFT), and SAP (SAP) are all on tap. Investors are looking for signs that a volatile August stock market and a credit and housing crisis could spill over into technology spending. But with corporate software buying packed into the last three months of the year and information technology budgets set through the end of 2007, Wall Street may have to wait a bit longer for a clear picture. (BusinessWeek) 

Fire-Sale Nation:  The alarming lesson of the iPhone price cut: High-profile price-chopping tends to occur whenever companies freak out
about the vicious combination of a slowing consumer economy and the
prospect of getting stuck with big inventories of unsold goods. The
tactic often works in the short term. The hype over insanely low prices
functions as a form of free advertising, and the lower prices tend to
attract buyers. Apple announced on Sept. 10 that it had sold its 1 millionth iPhone. Hovnanian’s preliminary results
show that it notched sales of 2,130 units over the weekend. (The
company reported inventory of about 3,200 homes on July 31.) For the
entire third quarter, Hovnanian delivered about 3,500 homes. (Slate)

Yield Curve Is Banks’ Silver Lining: With the tough news about credit trouble for banks and
other financial companies in recent weeks, it has been easy to overlook
an important variable for bank profits that has turned positive — the
yield curve. For banks, the greater the spread between short and
long rates, the better. In anticipation of the Federal Reserve
announcing a rate cut after today’s meeting, the yields on the Treasury
two-year note and 10-year note have reached their widest gap since
April 2005 — though at 0.41 percentage point, it’s a smaller gap than
at many points in the past. (Wall Street Journal)

Investor Known for Turnarounds Looks at Mortgages:   Wilbur L. Ross Jr., the investor who made his name by successfully buying distressed companies like steel producers, now sees an opportunity in the mortgage business. A  firm controlled by Mr. Ross bid $435 million yesterday to buy the service unit of American Home Mortgage, which collects payments from homeowners. American Home was the nation’s 10th-largest housing lender until it sought bankruptcy protection this summer when it lost the support of the banks that financed its loans. (New York Times)

Dubai, Qatar, Abu Dhabi Counter M&A Slowdown With $25 Billion of Takeovers: The Persian Gulf states, flush with cash from burgeoning oil revenues, are buying overseas assets at a record rate and countering the paucity of acquisitions hampered by the summer’s surge in corporate borrowing costs. (Bloomberg)

U.S. Commercial Paper Slump Extends to Sixth Week:
The U.S. commercial paper market shrank for a sixth week, extending the
biggest slump in at least seven years and signaling Federal Reserve
interest-rate cuts haven’t yet drawn investors back to short-term debt.
Short-term debt maturing in 270 days or less fell $48.1 billion in the
week ended yesterday to a seasonally adjusted $1.87 trillion, including
a $32.1 billion decline in financial firms’ commercial paper.
Asset-backed debt dropped $15.6 billion, according to the Fed in
Washington. (Bloomberg)

Merrill Says Fair Value Adjustments Made for Subprime:  Merrill Lynch & Co., the biggest underwriter of collateralized debt obligations, signaled that the subprime-mortgage crisis may hurt third-quarter earnings. The New York-based firm said in a regulatory filing today that it made "fair value adjustments” for potential losses to date on unspecified holdings and financing commitments. Merrill fell 49 cents to $74.65 as of 4:26 p.m. in composite trading on the New York Stock Exchange, making it the day’s second-biggest decliner on the 12-member Amex Securities Broker/Dealer Index. (Bloomberg)



ECONOMY

The Wall of worry continues to build:

• The Fed cut was the most significant news of the week:

-Bernanke Blinks   
-You can parse the FOMC Statement Changes;
-I Love the Smell of Repos in the Morning . . .      

Lagging Consumer Stocks Offer A Warning Signal Amid Euphoria:
Stocks just had their best two weeks since 2004, but to get a sense of
what the market thinks of the economy’s future prospects, look at
consumer-oriented stocks. They have lagged behind, which may not bode
well for the months ahead. Investors have started to pile into sectors
such as technology to prepare for an eventual reignition of growth. But
they have shied away from consumer stocks that are likely to suffer
from what remains of the slowdown. Record oil prices, which tend to sap
everyday consumers’ spending power away from the pump, also have
weighed on the sector.  (Wall Street Journal)

• On Moral Hazard:

- If we take away risk, then capitalism is finished (UK Telegraph)
- Has Fed Risked Creating Moral Hazard? (WSJ) 

Rate Cut Has Foes on Main Street With a freeze-up in financial markets threatening to turn the nation’s housing slump into a broader economic downturn, Fed officials have strongly hinted they are inclined to cut the central bank’s main target for short-term rates from the current 5.25%. Wall Street expects a cut of a quarter or a half percentage point. But, in an unscientific reader poll by The Wall Street Journal’s online edition, 39% of the nearly 3,000 responses said the Fed shouldn’t cut rates at all. The poll was anonymous.  Ordinarily, Americans welcome lower interest rates. But many feel differently this time. Some think the economy is fine and inflation is the main danger. But a moral element is also at work: Many think a rate cut would reward foolish speculation and Wall Street greed at the expense of the thrifty. (Wall Street Journal)

INFLATION…OR DEFLATION???   

 


TECHNOLOGY & SCIENCE

• Google explains their approach to Google Docs. They are deadly serious about taking out one of the two most profitable Microsoft business lines.

• Robert X. Cringely takes some media and tech websites to task for lazy, inaccurate reporting: "I Report, You Decide"

5 nutritious habits of the planet’s healthiest countries (CNN)

Fox tries new lure for iPod crowd: Beginning this week, season premiere episodes of seven Fox Broadcasting programs will be made available for free through Apple’s iTunes store, a move that highlights the TV industry’s race to harness the Internet and try out potential business partners.  The Fox-Apple deal is designed to expose iPod users to the upcoming season of new and returning prime-time shows. Executives with the News Corp.-owned network hope that free downloads of such shows as "Prison Break," "Bones," "American Dad" and "K-Ville" will entice viewers to watch later installments on TV or pay to download them from the iTunes store.  (L.A. Times)   

 



MUSIC BOOKS MOVIES TV FUN!

• The new season of Curb Your Enthusiasm started recently, and the show is still hysterical. A recent episode (Who Is The Anonymous Donor?) is filled with the sorts of intertwined plots and focus on minutia that made Seinfeld so briliant –only its covering R (pretty close to X!) -rated material. Uproariously, laugh out loud funny.

The 10 Best Animated Movies for Traumatizing Kids      

• TV critic Marvin Kitman asks "Is Keith Olbermann the New Ed Murrow?"   

 

Today is Yom Kippur, the holiest day of the year for Jews. My favorite quote on the subject comes from Jon Stewart, comparing Yom Kippur to Lent and, therefore, Jews to Catholics,
Stewart said, “You give up something for 40 days. We go one day without
eating. Even in sin, you pay retail.”

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Fear of a Dollar Collapse, part II

Yesterday, we discussed the potential impact of the ongoing weakening of the US dollar.

Today, we look at a few printing press Money Supply issues. Our focus: The spread between the Fed liquidity action (a/k/a Repos) and the M2 money supply measures.

This is simply a measure of how much cash the Fed is injecting into the system.

The following Bloomberg chart shows the spread between the two of these monetary measures. It is quite instructive:

Mzm_m2_spread

>

Speaking of surges: As you can clearly see above (bottom left chart), the amount of MZM (repos) versus M2 during 2007 is enormous.

This means that the Fed is "inflating" at a rate faster today than it did right after 9/11, or during the deflationary scare of 2003.

As we asked Wednesday night, "What did the Fed Chair and the FOMC see that spooked them into a half point (over) reaction?"  I am not sure what is was (and we’ve discussed many of the potential issues over the past 2 years), but the Fed is obviously scared witless. 

The manifestations of this free  printing press are many: Any commodity priced in plentiful dollars will cost more. Crude is now $82; and Inflation Fears Send Gold to 27-Year High.

Why? One way to think about it is supply and demand. Print ALOT more dollars and each one is worth a little less. 

Or, consider it this way: Extracting Oil or Gold from the earth ain’t easy: We have to explore for Oil, determine where it is, how deep, what quality, etc. Then we have to use lots of heavy machinery to extract it, ship it to where it gets processed, refined, used in chemical manufacturing. Some of it gets refined into gasoline, and it is then transported to a network of gasoline stations, and it gets pumped into your car — all for less per gallon than diet Coke or peach Snapple!

For gold, the process is not all that dissimilar.

Just crank up the printing press: Its cheap and easy. But why should us gold and oil producers exchange our hard won commodities (its hard work) for pieces of paper you people are simply cranking out for free? Either give us something of real value — or instead, we will insist on more of your crappy ittle pieces of green paper.

Thus, the inflationary repercussions of a "free money" policy. In fact, every commodity that is priced in dollars can potentially see much higher prices:  Gold, Oil, Wheat, Soybeans, Copper, Timber, Corn, etc.

Its easy to understand why inflation has been called The Cruelest Tax.

~~~

BTW, for those of you without a pricey Bloomberg terminal on their desks, a good source for (free) data of this kind is the Federal Reserve Bank of St. Louis’ publication, Monetary Trends. There are always a solid collection of charts showing money supply, economic conditions, etc. Not to get too wonky on you, but this is simply pornography for econ geeks.

There are a few charts after the jump worth reviewing. For the less visual of you, they show that Money Supply continues to grow at a rapid pace, that bank borrowings are increasing.

>

Sources:
Monetary Trends
Federal Reserve Bank of St. Louis’
October 2007
http://research.stlouisfed.org/publications/mt/20071001/mtpub.pdf

Where Crude Goes Now May Depend on Dollar
Futures Close Near $82
MATT CHAMBERS
WSJ, September 20, 2007; Page C1
http://online.wsj.com/article/SB119019169756632291.html

Inflation Fears Send Gold to 27-Year High
Weakening Dollar Also an Influence; Metal Hits $732.40
ALLEN SYKORA
WSJ, September 21, 2007; Page C6
http://online.wsj.com/article/SB119028926640733763.html

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