Yesterday, we looked at the week that was. Today, we preview the week that will be.
In my mind, the shock & awe move by the Fed made a few things very clear:
1) The Fed is VERY concerned about a recession in general, and the credit freeze in particular.
2) Inflation — whether it moderates or not — has become less of a concern to the Fed;
3) The US dollar has become a sacrificial virgin.
That 3rd issue may be quite telling: Jack Ablin notes that "growth in the S&P 500, up almost 8% in dollars year-to-date, dwindles to 1% when denominated in euros. If the dollar falls further, U.S. markets become much less compelling for overseas investors."
We get some noteworthy economic news this week: On Tuesday, weekly same Store Sales and Conference Board’s consumer confidence index are released, followed by Existing Home Sales. New Home Sales data is released Thursday. The Housing issue has two problems: There’s too much inventory, and prices are too high. (Gee, do ya think these problems are related?). Also on deck this week: earnings reports from both Lennar (LEN) and KB Home (KBH).
Wednesday we hear the Durable Goods Orders data, and MBA Purchase Applications fdor mortgages. On Thursday, the Final Q2 2007 GDP data is released (old news). We also get Jobless Claims and the Help Wanted Index. Friday sees 4 minor reports, all of which are liekly to contradict each other: Personal Income and Outlays (mediocre), NAPM-Chicago (pretty ok), Construction Spending (good) and Consumer Sentiment (could be good).
As if we haven’t heard enough from the Fed, this week brings speeches from: Philadelphia Fed President Charles Plosser, St. Louis Fed President William Poole, Boston President Eric Rosengren, Chicago President Charles Evans, Fed Governor Frederic Mishkin, Atlanta Fed President Dennis Lockhart, San Francisco Fed President Janet Yellen. Then, just for shoots & giggles, both Poole and Mishkin speak again on Friday (whew!).
Finally, Q3 earnings pre-announcement period is upon us. We could hear some interesting items, both positive and negative, from quite a few belwhethers.
We have links to get at, and sins to atone for. Time to get busy:
INVESTING & TRADING
• A Big Lift, or a Sign of Trouble?: TRADERS were ecstatic when the Federal Reserve cut interest rates by half a percentage point instead of the quarter-point move that many had expected. Whether the good times keep rolling or slow to a crawl as second thoughts emerge may become clear this week. It could go either way, said Ed Yardeni, president of Yardeni Research. It depends on how much largess Wall Street is counting on from the central bank, and for how long. (New York Times)
• The usually soberJon Markman asks: Are we headed for an epic bear market?: Rather than joining the crowd that blames the mess on American slobs
who took on more mortgage debt than they could afford and have
endangered the world by stiffing lenders, he points a finger at three
parties: regulators who stood by as U.S. banks developed ingenious but
dangerous ways of shifting trillions of dollars of credit risk off
their balance sheets and into the hands of unsophisticated foreign
investors; hedge and pension fund managers who gorged on high-yield
debt instruments they didn’t understand; and financial engineers who
built towers of "securitized" debt with math models that were
fundamentally flawed. (MSN)
• Why Firms Like Smucker May Feel Pinch of Debt Crunch:
In recent years, Smucker joined the ranks of other nonfinancial
companies such as Garmin Ltd., Microsoft Corp., Netflix Inc. and Sun
Microsystems Inc. by investing in what had been viewed as relatively
safe investments that produced slightly better returns than cash and
government bonds — and could be sold quickly if needed. Many of these
companies are cash-rich, looking for a secure place to park their
millions. And none are expected to cash out any time soon. The issue
for investors is how these companies determine the "fair" value of
their mortgage-backed securities in the current environment, and
whether they are telling the whole story about how easily these assets
can be liquidated — and for how much. (Wall Street Journal).
• Mark Hulbert asks, How Many Quarters in a Row Can Earnings Really Grow?: A new study has found compelling evidence that companies often tinker with their earnings to make themselves look more attractive.The study found nearly 600 companies over the last four decades that at some point reported earnings increases for at least 20 consecutive quarters — far more than would be expected if no earnings manipulation had taken place. (New York Times)
• An American Prius? Here’s how U.S. carmakers could catch up: When it comes to hybrids, the heavyweight tussle between American and Japanese automakers appears to be a hopeless mismatch. Toyota introduced its gas-electric hybrids in 1997 (when regular was $1.18 per gallon), and in June announced its 1 millionth hybrid sale. In the first eight months of this year, Toyota sold 189,945 hybrids in the United States, with Honda notching a respectable 24,000. As for the Americans? Don’t ask. Ford doesn’t break out sales of Escape and Mercury Mariner hybrids. At General Motors, hybrids—like long-promised market-share gains—are mostly concepts. (Slate)
• Gold, Again, Becomes a Shield Against the Unknown: GOLD is supposed to be a destination for scared money, but as the credit crunch intensified last month, this presumed haven lost value along with many other assets. Only after the worst of the crisis had passed did traders return to gold, sending its price sharply higher. The metal has gained about $80 an ounce, or 12 percent, since mid-August, around the time the stock market reached a trough. While share prices have since had ups and downs, gold’s ascent has been nearly uninterrupted. (New York Times)
• New rich storm into Forbes 400:
Victory lap or last hurrah? Buy-out titans and hedge fund managers
stormed the citadel of US wealth last year, barging their way into the
Forbes 400 annual list of richest Americans on the back of buoyant
capital markets and record merger activity. Nearly half of the 45 new
entrants in the magazine’s latest tally of US billionaires – which was
topped once again by Bill Gates – came from the neighbouring worlds of
private equity and hedge funds. (FT)
• What the big banks aren’t telling you — yet:
With credit markets still largely frozen, unemployment rising and major
corporate expenditures slowing to a halt, every indication suggests
that a surprising number of major financial firms, including Wachovia
(WB, news, msgs), Washington Mutual (WM, news, msgs) and Bank of
America (BAC, news, msgs), will come up short of expectations in
October, kicking off an unpleasant autumn for investors.Investors need
to care more about financial stocks than any others because they make
up more than 20% of the broad market indexes. So let’s get some clarity
on exactly what they’re facing.At the moment, the estimated growth rate
for all S&P 500 Index ($INX) companies in the third quarter is
clocking in at 5.1%. That’s down sharply from the 6.2% growth rate
estimated two months ago and half last year’s growth rate. The funny
thing is that most of those downward revisions of estimates have come
in the industrial, consumer staples and retail sectors of the economy.
Yet the financial industry, which has undoubtedly experienced the worst
business shortfall, has barely received any material earnings-estimate
cuts yet. (MSN)
• Wary Buyers May Scuttle Two Deals: Two more private equity deals showed signs of unraveling yesterday, as buyers and bankers grow increasingly wary of the multibillion-dollar purchases they rushed into only months ago. In the $8 billion buyout of Harman International Industries, the buyers — the private equity firm Kohlberg Kravis Roberts and the investment bank Goldman Sachs — announced yesterday that they intended to walk away from the deal. (New York Times)
• A FESTIVAL OF GREENSPAN:
-Greenspan’s Memoir Shows Dangers of Irrational Book Advances (Bloomberg)
-William Greider looks at The Lies of Alan Greenspan (Nation)
-Greenspan Media Blitz!
-It’s Not His Economy (TIME)
-Greenspan’s Miscues Haunt Bernanke Fed (Bloomberg)
-Greenspan was more a rock star than a feared Fed sage (UK Telegraph)
-GREENSPAN DISCOVERS THAT HUMAN BEINGS ARE … IRRATIONAL! (Slate)
• FedEx Forecasts Bumpy Road for Economy:
FedEx Corp. threw some cold water on hopes that holiday shoppers would
give the uncertain economic outlook a boost. The Memphis, Tenn.,
shipping giant — regarded as an economic gauge because it handles an
average of more than six million packages a day across the world –
reduced its profit target for the year because of an economic outlook
pinched by the weak U.S. housing market and higher energy prices. The
company said that as a result, it would ratchet back on capital
spending. (Wall Street Journal)
• Next to Downsize on Wall Street? The Exchange Floor: When the latest retreat is complete, the exchange floor will be half the size it was at its peak. The “crowd” — the brokers and clerks on the floor — has dwindled to about 1,700 from a high of more than 3,000. Before the exchange became a public company in 2005, its members controlled 1,366 seats, or licenses to trade. Now, about 800 brokers pay the annual $50,000 fee for a license. (New York Times)
• Does the latest financial crisis signal the end of a golden age of stable growth?
IF ECONOMICS were a children’s tale, a long period of rising incomes
and improving living standards would always be followed by a big, bad
recession. Rising unemployment, falling spending and contracting
output—such is the inevitable reckoning for the good times of plentiful
jobs and abundant earnings that went before. The hangover needs to be
commensurate with the party. No country has had it quite so good as
America. For the past 20 years or more its economy has managed an
enviable combination of steady growth and low inflation. To add to its
good fortune, spending has routinely exceeded its income—leading to a
persistent current-account deficit—without any apparent ill effects on
the economy. The occasional setbacks have been remarkably small by
historical standards. At the start of 1991, for instance, America’s GDP
fell for a second successive quarter (a common definition of a
recession). But output soon recovered and by the end of the year had
surpassed its previous peak. The next downturn, in 2001, was shallower
still, with GDP dipping by less than half a percent. (The Economist)
• I am required reading at NYU, in Prof. Nouriel Roubini’s intro to Economics class!
• The Invasion of the Renters: In another manifestation of the housing slump, thousands of property owners across the country are now renting out homes they cannot sell. As a result, developments and condos that once were largely owner-occupied are filling up with renters who some neighbors say are less engaged in their communities and less concerned about maintenance. Fearful of declining property values, some homeowner associations are fighting back — targeting lax landlords and renters with "good neighbor" letters, limiting the number of units that can be rented at any one time, and, in some cases, banning investors from buying altogether. See also Late Mortgage Payments Continue to Climb
• Here’s a real estate related term I had never heard before: NINJA Loan – No Income, No Job or Assets
TECHNOLOGY & SCIENCE
• The Emoticon is 25 years old. Whoop-dee-frickin’-doo :-0
• Ice withdrawal ‘shatters record’
Arctic sea ice shrank to the smallest area on record this year, US
scientists have confirmed.The National Snow and Ice Data Center (NSIDC)
said the minimum extent of 4.13 million sq km (1.59 million sq miles)
was reached on 16 September.The figure shatters all previous satellite
surveys, including the previous record low of 5.32 million sq km
measured in 2005. (BBC) see also: The North Pole Is Melting
• Velociraptor dino ‘had feathers’ (BBC)
• Is The ‘Surge’ Working? Some New Facts (MIT Department of
MUSIC BOOKS MOVIES TV FUN!
• I’m always attracted to books that give insight into the investors
mind. The newest outing from Harvard prof Steven Pinker looks to be
just that sort of book: “The Stuff of Thought: Language as a Window into Human Nature”
explores human cognition: the modesty of its construction and the
majesty of its constructive power. Philosophical realists, for
instance, think perception comes from reality. Idealists think it’s all
in our heads. Its all the same reality, but is organized and
reorganized by the mind. That’s why you can look at the same thing in
different ways. Fascinating concept, completely applicable to the
Bull/Bear debate. Here’s the NYTimes review, a great video of Steven Pinker at TED on The stuff of thought, via Harvard, the Authors home page, and lastly, the book itself.
• This is still one of the funniest movie previews ever: Jerry Seinfeld’s "Comedian."
• The NYT stops charging for older articles, and Jason Kottke discovers these Gems from the archive of the New York Times
• Offline: Wired magazine (print only so far) has a long interview with Director Ridely Scott, all about the making and remaking of Blade Runner. (I’ll post a link once it goes online). Great stuff.
Yesterday was 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.”
Category: Financial Press
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:
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.
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.
Federal Reserve Bank of St. Louis’
Where Crude Goes Now May Depend on Dollar
Futures Close Near $82
WSJ, September 20, 2007; Page C1
Inflation Fears Send Gold to 27-Year High
Weakening Dollar Also an Influence; Metal Hits $732.40
WSJ, September 21, 2007; Page C6