The Week in Review, October 15, 2010 Saturday, Oct 23 2010 

Another slow start to the week as investors waited patiently on 3rd quarter earnings and additional information concerning the foreclosure problems in the banking industry.

China shocked global markets by raising their one year lending rate from 5.31% to 5.56% and the deposit rate from 2.25% to 2.5% just a week after raising reserve requirements at the largest banks. This sent global markets tumbling but the PBOC may be successful in letting the air out of a property bubble by taking a proverbial shot across the bow.

China now joins a litany of central banks across Asia who have begun a rate raising cycle aimed at shutting down the easy credit which has been prevalent over the past two years.

Strong earnings from IBM and Apple buoyed the tech sector and the markets rallied on Wednesday.

The Bank of Canada chose to hold steady with interest rates as they wait to see how the slowdown in the US plays out.

Economic statistics out of Germany indicate a stronger than expected economy. The stronger Euro does not seem to be affecting exports.

England is looking to cut approximately 8% of the public sector jobs in order to implement austerity measures.

Next Week

This weekend – G20 finance ministers and central bankers meet in Korea.

Monday – Bernanke, Dudley, and Bullard all speak

Tuesday – Riksbank meeting

Wednesday – US durable goods, Reserve Bank of New Zealand meeting, Bank of Japan target rate released

Thursday –

Friday – Japan CPI, US 3rd Q GDP, Canada 3rd Q GDP, US Chicago PMI

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

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FOMC Statement Commentary – Move along not much to see here. Tuesday, Sep 21 2010 

The September statement was a much shortened version of the August statement as it appears the FOMC committee has accepted that the recovery will be slower than expected.

The new policy of reinvesting MBS principal payments into Treasury securities will continue for the foreseeable future.

Call it QE2 or call it shifting assets it appears as though the Federal Reserve’s strategy is not to shrink the balance sheet but to maintain size while it moves from the MBS market to the Treasury market. The strategy being employed is a bit dangerous, not in the near term, but in the distant future.

Currently, it is a net positive that the Federal Reserve is shifting operations from one area of the bond market to another as the invisible hand becomes less active within the market returning it to a sense of normalcy.

Mr. Hoenig was once again the dissenting voice and lone hawk believing that current policy was far too loose and that the Federal Reserve should shrink the size of its balance sheet rather than continue to reinvest proceeds of principal payments into Treasury securities.

Week in Review – August 27, 2010 Saturday, Aug 28 2010 

Weakness in the US continued this week as economic reports continued to show that the slowdown in the United States continued into July. US markets rebounded off of oversold levels earlier in the week to stage a nice rally into the weekend. The 10,000 level on the Dow is providing significant support to the market along with 2100 on the NASDAQ.

AAII released very negative Investor Sentiment numbers which portend a contrarian rally.

Existing home sales plummeted to record lows and inventories surged to new highs. The second wave of defaults are now starting. It is going to be interesting to see if the additional houses coming to market are from banks, the gray market, or new foreclosures.

If the bulk of the new supply is coming from banks it is a good sign as bad loans are being dealt with in a constructive manner. The gray market would be bad for the economy in the short term but good in the long term. As gray market properties come to market it would be a signal that investors who were attempting to ride out the cycle have become exasperated and thrown in the towel. Investors

2nd Quarter GDP was revised lower to 1.6% but still came in above estimates. The primary cause was a jump in imports as Chinese firms took advantage of an export subsidy that expired in July by pushing product out the door to the United States and elsewhere around the world.

German 2nd Quarter GDP showed that Europe’s largest economy is beginning to pick up steam as exports, housing, and consumption all showed solid growth despite the weak conditions across Europe.

I mentioned a week or so ago that the inclusion of the statement by Hoenig at the end of the FOMC meeting would make the minutes of the August 10th meeting an interesting read. The Wall Street Journal reported that 7 of the 17 top Federal Reserve officials had reservations about purchasing US Treasuries making the upcoming minutes a must read.

Next week:

Monday – European Economic, Business, and Consumer confidence for August
Tuesday – Canadian 2nd Quarter GDP, Chicago PMI, and minutes from FOMC meeting
Wednesday – China manufacturing PMI, US ISM
Thursday – Europe 2nd Quarter GDP, US Factory Orders
Friday – US August Unemployment rate

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

August 10th FOMC statement – Shuffling the Deck Chairs or much ado about Nothing Friday, Aug 13 2010 

August 10th FOMC statement – Shuffling the Deck Chairs or much ado about Nothing

The much vaulted Federal Reserve meeting has come and gone leaving the markets disappointed with the inaction on the part of the Federal Reserve.

Traders and market participants expecting the Federal Reserve to begin unwinding the quantitative easing by decreasing the size of its balance sheet were disappointed. Instead of selling mortgage backed securities into the market possibly raising rates the Federal Reserve has decided to shift the amount of maturing securities and principal repayments into 2-10 year Treasury holdings.

This is not quantitative easing nor is any new money being created. Instead the deck chairs are merely being shuffled around as the Federal Reserve would not like to see mortgage rates rise but see the need to help support Treasury functions.

The most interesting portion of the statement was the ending paragraph with Kansas City Bank President Thomas J. Hoenig stating the following, “who judges that the economy is recovering modestly, as projected. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and limits the Committee’s ability to adjust policy when needed. In addition, given economic and financial conditions, Mr. Hoenig did not believe that keeping constant the size of the Federal Reserve’s holdings of longer-term securities at their current level was required to support a return to the Committee’s
policy objectives.”

The inclusion of this paragraph indicates that there must have been a spirited debate within the policy room between Mr. Hoenig, who is known as a hawk, and his fellow board members who see the need to keep rates low and the balance sheet at current levels. This makes the coming release of the August minutes quite interesting as to the scope and fervor of the debate.

The Federal Reserve has found itself backed into the corner. By leaving rates at 0 they encourage the carry trade and speculation while discouraging lending. Banks are hoping that they can muddle through the current period until their balance sheets are cleaned up to the point where they can begin easing credit and accepting risk.

On the other side of the equation, if they move rates higher the Federal Reserve risks stalling a slow recovery as businesses are wary of adding workers to the payroll.

If rates were to rise, borrowing costs would increase and sending the US Budget deficit to even more stratospheric heights. The flip side is that the banks would earn less on the spread of their Treasury holdings forcing them back into the lending market.

Another danger is the potential for an invisible hand to begin working in the Treasury market holding rates low and capping any potential rise.

The Fed has already taken the first step in terms of tightening by removing the excess stimulus and slowing money supply growth. But further steps need to be taken in the short-term to show that they are serious about moving the economy back onto a sustained growth track.

With other central banks around the world slowing raising rates and removing the excess stimulus the Fed is walking a dangerous tightrope where low rates will encourage the use of the US Dollar as a medium to induce the carry trade for overseas economies as high structural unemployment constraints long-term GDP growth.

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.