Economists React to Fed

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More good stuff courtesy of the WSJ (online only). The online version’s offerings continues to be a terrific yet overlooked resource for investors.

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The Federal Reserve’s decision to increase its key lending-rate target by a quarter of a percentage point was widely expected on Wall Street. Here’s what some economists had to say about the Fed’s move and what to expect for interest rates going forward:

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The FOMC’s game plan to raise the interest rate at a "measured" pace has been working. The economy is in a self-sustaining mode. Despite the earlier surge in energy costs, the core inflation rate is within the range of price stability. Nevertheless, the central bank believes inflation could be a problem later. … The FOMC wants to position itself to combat inflation if necessary. This is the reason for reducing accommodation by mopping up excess liquidity.
– Sung Wohn Sohn, Wells Fargo

There is little incentive for policymakers to alter their message at this point. As a result, the three key aspects of the statement that might be used to send a signal to the markets — the "accommodative" phrase, the formal growth/inflation risk assessment, and the "measured" language — were all left unaltered. We expect rate hikes at each of the next two meetings — on February 2 and March 22. At this point, the market is just about fully priced for such a policy path.
– David Greenlaw, Morgan Stanley

We do not expect the Fed to pause any time soon, nor do we expect them to step up the pace of rate hikes until core PCE inflation moves above 2%. The Fed is to be applauded for the acceleration of the release of the minutes which should prove to be a valuable communication tool for the market.
– John Ryding, Conrad DeQuadros, and Elena Volovelsky, of Bear Stearns

As in November, the Fed says the economy is expanding at a "moderate pace despite the earlier rise in energy prices." Note "earlier" is new in this statement, an acknowledgment that the recent move in prices has been downwards but perhaps also hinting that the full impact of the summer/fall increase might not yet be in the data. In the labor market, the situation continues "to improve gradually."
– Ian Shepherdson, High Frequency Economics

All of this is consistent with the notion that the FOMC continues to believe that it will be able to tighten at a "measured" pace. However, this will be dependent on evidence that the economy continues to grow at an adequate rate, and that there are no significant surprises (either to the upside or the downside) on the core inflation front.
– Joshua Shapiro, Maria Fiorini Ramirez Inc.

While the FOMC’s next move is likely to be "data dependent," today’s policy statement seems to predispose the FOMC toward action rather than a "pause."  If they are pondering a "pause," or alternatively a bolder move, Fed officials will probably want to communicate such a shift through public statements or well-placed press conduits. For now, it looks most likely that the FOMC plans to continue adjusting the funds rate at the "measured pace" of 25 basis points at each meeting.
– David Resler, Nomura Securities International

With the Fed signaling its intention to continue raising rates, bond investors really should start taking note. Longer-term rates are way too low if the Fed is indeed headed back to a neutral level. Since I believe that rate is in the 4% to 4.5% range, the current 4.15% 10-year yield is not sustainable. Mid- and long-term rates will have to move upward to reflect the trend in short-term rates.
– Joel L. Naroff, Naroff Economic Advisors

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Source:
Economists React
Tim Annett
WSJ, December 14, 2004 3:16 p.m.
http://online.wsj.com/article/0,,SB110305418929299916,00.html

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Cold Caller Blues

Once again, guest poster Rob Fraim delivers some market related humor:

Back in the 19th century when I started in this business I had to go to the company home office for several weeks of training. On one of the final days all of the rookie brokers were required to make a presentation to the class – a speech regarding the business, goals, aspirations, motivation, blah, blah.

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“Since so much of the new-guy training back at the firm where I started in the business was about sales stuff (rather than teaching us anything about investing) I wrote a song. I had my guitar with me and so instead of giving a yada-yada speech I sang my song.”

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Cold Caller Blues lyrics:

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Category: Markets

Gold — I’m telling you, this idea is gold, Jerry

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This may have gotten overlooked last week — if you follow currency, sentiment, or precious metals, its an interview worth reading.

Let me once again mention that the Online WSJ is well worth $40 a year — and it also includes access to Barron’s. 

Here’s an excerpt of the interview:

Gold prices have surged 50% since early 2002 to more than $450 an ounce, and some market watchers are brazenly slapping a $1,000 price target on the metal for the near future.

That crystal-ball forecast seems heady. But John Bridges, a senior gold analyst at J.P. Morgan Chase & Co. since 1995 and author of "The Golden Goose" newsletter, says gold has already hit that level — even passed it — when adjusted for inflation. But he still has "problems with gold as an investment."

And it’s not all about the flailing dollar. Other factors, some real (supply-and-demand) and some eccentric (Indian thoughts of the afterlife) are playing a role, says Joseph Foster, portfolio manager of the $290 million Van Eck International Investors Gold fund, the first of its kind in the U.S. that dates back to 1956. He calls gold "the ultimate form of currency."

Can gold keep shining? Is $1,000 an ounce a realistic target? And how does inflation factor in? Messrs. Bridges and Foster answer our questions.

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The Wall Street Journal Online: Gold is up 14% since late 2003, but the Amex Gold Bug index (a basket of gold stocks) is down 11% from a year ago. Why hasn’t the price of gold filtered into the price of many gold-oriented stocks?

Mr. Bridges: We’re positive on gold as hedge against the weaker dollar. Even if the dollar does recover, the strain on the world’s economic system by these swings in currencies suggests having gold as insurance isn’t such a bad idea.

Gold producers are suffering quite significantly from higher energy prices. Diesel has become quite a big part of some mining operating costs — as much as 20%. Then you also have the strength of the resource currencies — the Australian and Canadian dollars and the South African rand. Even the Peruvian sol is appreciating against the dollar. A lot of these big diversified miners have operations in these countries, and that’s affecting their operations.

Mr. Foster: We went through a severe correction back in
April and May, for both gold and gold shares. They were down
substantially. If you look at the performance since then through the
end of November, the Philadelphia Gold and Silver index (XAU) is up
37%. Gold prices are up 20%. So you look over that longer time frame,
and the shares have done fairly well. They’ve significantly
outperformed gold.

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The Ten Rules of Trading

Rev Shark, who write an excellent trading diary for RealMoney, refers to trader Daniel Rosenblum’s 10 rules successful trading.

Since this not anywhere else on line, and because Daniel did such a nice job with it, here’s a taste of his perspective — for your reading and investing pleasure:

1. Don’t swing for the fences; Never put it all on red.

Never, ever, let one trade determine your profit and loss for the year, or if it goes wrong, put your capital at risk. I did it once and the memory of that experience burns me almost daily. In most cases, margin should be avoided and "doubling down" a bad trade is a sucker’s bet. Most times it just pays to take the loss and move on. The good thing about being a trader is that every day there are new opportunities to make money. Just make sure you can stay in the game.

2. When the market is bad, its time to be more cautious.

Sounds obvious, but when the market is below key moving averages, unless that trade looks really enticing, it is probably better to sit on your hands. We did a lot of hand-sitting during the bear market and we survived better than most.

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