Archive for September 10th, 2007
Technical Market
Okay so we got to 1490 and moved lower for technical and fundamental reasons. We have then found support at 1440 and look to be moving up today. The strong close could move into Tuesday. This should get us above 1460 by the Tuesday close. It is too tough to interpret the weeks news but we should be trading in the 1440-1470 range until the Fed meeting. If you think the Fed will cut I’m finding 1440 on the S&P 500 to be the time to buy.
The Need for Transparency By Central Banks
Exerpt from “Imperfect Knowledge, Adaptive Learning, and the Bias Against Activist Monetary Policies”
“The main focus of the paper is on validating the claim that policies that are designed to be efficient under rational expectations can perform very poorly when knowledge is incomplete and agents learn adaptively. The evidence shown in the paper confirms that, when agents do not possess complete knowledge of the structure of the economy and rely instead on an adaptive learning technology, a bias toward conservatism arises, suggesting that society is better off by appointing a policymaker whose degree of inflation aversion is higher than its own.
The evidence shown in the paper confirms that, when agents do not possess complete knowledge of the structure of the economy and rely instead on an adaptive learning technology, a bias toward conservatism arises, suggesting that society is better off by appointing a policymaker whose degree of inflation aversion is higher than its own.”
In other words, when the public feels it is not looking at the same data as the Central Bank, and thus feel they have to adapt on the fly, then the public tends to feel that the Central Bank should not take on an activist nature and should be more concerned about inflation than need be.
This is at the same time alarming and at the same time a positive thing. Money market funds that have invested in sub-prime commercial paper have come under scrutiny of late. However, if these are the worst players in the market then we don’t have as much to worry about as some would have us believe. In a bloomberg article it states,
“As a sign of stability, money market funds never allow their share price to rise above or fall under $1 for each dollar invested.
A money market fund that invests in sub-prime debt increases the risk that its share price could drop below $1. If 5 percent of a fund’s holding is sub-prime debt, and in a worst-case situation that asset collapses, then the value of the fund could drop to 95 cents.”
So if these are the worst actors in this, Wells Fargo (barely), Credit Suisse, and AIM are the places you don’t want to be. Fidelity is only 1.5% of their total holdings and Morgan Stanley is 4%. This would then represent only a small percentage of investors who are potentially at a great risk in their money market funds. Not to mention,
“Even if a fund’s value dropped below a dollar, banks and fund companies wouldn’t allow investors to lose money, says Peter Crane, founder of Crane Data LLC, the Westborough, Massachusetts-based publisher of the Money Fund Intelligence Newsletter.
“Fund companies will support the funds,” he says. “They won’t let them break $1 a share. The odds of money market funds breaking the buck are virtually nil.”
Just once has a money market fund failed. In 1994, a fund run by Community Bankers Mutual Fund of Denver invested in securities that defaulted. Investors were paid 96 cents a share, and the fund was liquidated.
The fund had invested 27.5 percent of its assets in adjustable- rate securities, whose values were tied to interest rate changes, the SEC found. The fund lost money as interest rates increased.” Link
This evidence to the fact that too many people are worried about sub-prime as it pertains to money market funds.
Japan’s GDP Contraction
Bloomberg just came out with that GDP growth forcast for Japan revised downward, just about ending the chance of a rate hike from the BOJ for 2007. This is good for the orderliness of the carry trade as it ontinues to unwind.
