Fed and Markets

I rarely find anything to disagree about with Gary B. Smith (Chartman for Bulls & Bears, and  columnist on RealMoney) — so when I do, I find it noteworthy. His comments yesterday on the Fed and Markets were exactly one of those incidents:

"OK, here’s a trivia question: Over the past 10 years, when has the Federal Reserve raising rates caused the market to decline?

The answer? Never.

I’ve shown the chart below on a few occasions, but with Fed Talk likely to heat up soon, it’s worth looking at again.

The chart maps out what the market has done over the past decade or so along with what the Fed was doing with the fed funds rate. As you can see, they’ve pretty much followed one another up and down."


click for larger chart


chart courtesy of Real Money


What the Chartman is overlooking is that the Fed’s impact on markets
is not typically coincidental — meaning, the result of their actions
does not show up as an instantaneous correlation. Instead, the
causative relationship between what the Fed does and the market’s
subsequent reaction typically includes a 6 to 9 months lag. Just look at he chart GBS used:

In late 1995 / early ’96 — the Fed cut — markets were higher 6 months later;

From late ’99 to early ’00 — the Fed raised — markets were lower 6 months later;

From late ’02 to early ’03 — the Fed cut — markets were higher 6 months later;

would explain the delay between the Fed event (cut or hike) and the
reaction simply: the subsequent impact on the economy takes about a
year, and therefore corporate profits take that at least that long to
improve or decay (at least those attributable to Fed action). Hence,
even a 6 month lag in stock prices is anticpating the impact of Fed
action further down the road. The entire process takes a while to work their way through the system.

So where are we today?

From late ’04 to ’05 — the Fed tightened; Let’s see where markets are 6 months later.


ADP’s Gains Need to Be Processed
Gary B. Smith
RealMoney.com, 7/26/2005 8:35 AM EDT

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Give It Away

I get some interesting questions about my interest in music/film. (You may have noticed that commentary on this subject tends to run on Tuesdays). In particular, I find the intersection between technology and entertainment to be fascinating. Clearly, its been a huge driver of so many new innovations and products, from iPods to plasma screens to TiVos.   

Understand where my criticisms of the recording industry come from: While I am interested in music and film as a fan, my issues with some of the poor decision making of the labels and studios comes from a business/investment perspective.

As an investor, I want to know how the Labels have managed their key assets, how they have strategized, what their  business model is for the future, how they incorporated new technology, what their responses are to changing consumer tastes. 

In short, they have done a horrible job. Not just recently, but historically. The recording industry has failed to recognize several key ideas:   

- all business models are temporary;
- change is ever present;
- adapt or die.

On that note, I would like to share a terrific commentary/rant from music industry insider Bob Lefsetz. His take on the Music Industry’s failure to adapt to P2P and other new tech is fascinating:

Give It Away
"Call it the Metallica Rule.  When you can’t get arrested, give it
away.  When you’re a star, arrest people for stealing your music.

Radio’s over.  The model is done.  Unless iPods start coming with
commercials  and every Internet radio station has to have twenty
minutes of ads, terrestrial radio is done.  Oh, it will survive in a
fashion.  As a place for news and talk.  But for music it’s history.

OH NO, you say. It’s in all those cars!

Don’t be a fucking idiot.  Of course radio counts today. But if
you’re thinking about today, you’re just as dumb as the major labels.
Because really, it’s what’s gonna happen TOMORROW!

Look at major label release schedules.  It’s not like the seventies
anymore.  If something doesn’t have hit potential, it doesn’t come
out.  Furthermore, that which DOES come out is tweaked endlessly,
making it palatable for sporting events and fashion shows, but it lacks
that one essential ingredient of TRUE hit music…it doesn’t touch your

It’s all about the bottom line . . . 

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