Archive for October 2007
A conventional valuation which is established as the outcome of the mass psychology of a large number of ignorant individuals is liable to change violently as the result of a sudden fluctuation of opinion due to factors which do not really make much difference to the prospective yield; since there will be no strong roots of conviction to hold it steady.
ETF’s
Highest 5 Year Growth Rates
PEW Poll on Globalization
These two make me want to move to Bangladesh and South Korea. Our negative approach to globalization under a president that loves it absolutely astounds me. For the second one, click on it then click zoom in after.
Commercial Paper – Update
As noted before the Federal Reserve cut interest rates on Sept. 18th, the commercial paper market was starting to show signs of life. After which, we see further improvement.
In one day Asset Backed Commercial Paper we have seen a decrease in the rate by 43 basis points and in the 90 day we have seen a 97 basis point move. I still believe further liquidity is needed to solve this and we are 50 basis points away on the Federal Funds rate from getting there. Bill Gross of PIMCO believes we need to see 3.75, and I do not doubt his knowledge (he has certainly been doing this longer and better than I), I just doubt that we will get that. Given the inflation expectations, I do not believe the Fed will go below 4.25 unless we get action from the BOE and more holds from the ECB.
Also, we have a report out of bloomberg about major banks meeting with the tresury secretary Hank Paulson to discuss solutions for the Asset Backed Commerical Paper market, “The one-month London interbank offered rate, a benchmark for corporate borrowing, has fallen 5 basis points in the past two days, to 5.06 percent. A basis point is 0.01 percentage point. The rate reached 5.82 percent on Sept. 7, up half a percentage point from July, as demand for short-term funds soared…The talks are the latest effort by policy makers to help restore liquidity to credit markets, a campaign started by the Fed in August, when it cut the charge on direct loans. Fed officials have said this month that while there are signs of improvement, some markets remain under stress.”
Sources: Federal Reserve, Bloomberg
Got Ya
Who thought the retail sales would be better than expected? Exactly, no one. and the PPI shows us that outside of energy and food inflation continues to decline at a steady pace. The other two have their own issues that cannot be controlled by the FED. Food has the wheat issues in Australia and Europe in addition to the corn ethanol craze. Then oil is just staying expensive due to global growth, a beast that has its good and bad points. Consumer sentiment is a bit lower than expected but once again I’m not a big fan of these polls unless they’re off a cliff. After a correction in the market that makes headlines on the front page that is expected and the fact that they are still spending shows that their sentiment isn’t putting them in the bed crying.
Random Musings: The NILE downgrade is about as big of a joke as the BIDU downgrade. Some people just have nothing to do or want a buy point, this is once again a buy point not a sell.
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Finally, Some Buy Points
The market moved quite a bit off the larger than expected decrease in the federal budget deficit. Then, we met some resistance at the 1575 level for the S&P, in addition to very hawkish language out of the ECB. Of course this is just as credible as William Poole from the FED saying we would be raising rates right before we lowered them. Thus the inevitable, creating buying opportunities. We’ve been breaking through technical levels such as 1561, 1555, 1552,and for now sticking at 1548 leaving us with 1540-1538. This is just fine with me as I expect GE to tell us tomorrow (as they did last quarter) that the global economy is strong and this should be bullish for the stock market. It could of course be mixed with retail sales but then again should be supported by Big Ben (no, not the football player) giving a speech that I believe will be bullish for the market.
The selling in tech off of a BIDU downgrade is not founded in fundamentals but rather in a need to lock in profits.
In the end I see a 2-3% sell off as a buying point and I am picking up GE, perhaps adding to WB. This is, for now, not the time to sell.
Gold Is Not A Hedge vs Inflation
I’ve said before that gold is not an inflation hedge, citing the cyclical movements in gold and that the myth of it being an inflation hedge ends up keeping the false perception alive.
“Gold reached a record high of $850 an ounce in January 1980. If since then the spot price of bullion kept pace with U.S. inflation as measured by the consumer-price index, gold would now be selling for $2,119.84. Instead, it stood at $732.05 in London trading yesterday, only about a third of what it should be if it were truly an effective inflation hedge.
History shows that since 1988, the correlation between bullion and U.S. inflation expectations is just 36 percent, according to Goldman Sachs Group Inc. That means the price of gold rises and falls with inflation expectations 36 percent of the time. The relationship between gold and U.S. consumer-price inflation is less, at only 23 percent. And the metal’s correlation with U.S. core inflation, which excludes food and energy costs, is even lower, at 7 percent…Investors seeking protection from inflation would have been better off in the U.S. stock market. On Jan. 30, 1980, the Standard & Poor’s 500 Index stood at 115.20. Adjusting the index to compensate for the increase in the CPI since then would put it at 287.30 today. Yet on Oct. 3, the S&P 500 closed at 1539.59, more than five times the inflation-break-even level.”
Source: Bloomberg
Jobs Come Back?
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Everything comes in line except non-farm payroll coming in 5k short of consensus. This was appropriately treated as bullish as it leave the economy on lukewarm but not in the freezer. This shouldn’t work as an argument against keeping interest rates unchanged though I predict it will be used. Yet, it is important to know that this is not what the Fed has on the top of the list of things to watch for, though assuradly is not at the bottom either.
Technically we passed the 1555 mark on the S&P 500 and closed above it as well. 1561 has become the short term resistance. This resistance may be short lived as the futures point to a very strong open as we start the build up into earnings season with names like YUM, MOS, AA, COST, MON, PEP, GE reporting next week. On the economic front we’ve got international trade numbers, retail sales, and PPI as well.
New World – Old Thinking
We have entered a new century with an old century attitude. This is similar to what we did moving into the 20th century. We came strolling on in, with a newly created central bank that was on the job and had the countries back. However, they did not understand the implications of credit risk. They further did not understand how negative deflation is in a credit based society. In the 1920’s we became fully introduced to credit and that was fine and well, times were good. Then the Fed contained liquidity thinking that inflation was the fear. Truth is, inflation was out there, and had the globe continued to grow so would inflationary pressures. Thing is, they forgot about the fact that we were using credit more than ever. There in lies the Federal Reserves mistake in the late 1920’s.
Fast forward to today. Things are humming along out of a sizable downturn in the economy and the equity markets. Then lo and behold, liquidity dries up, the yield curve flat to inverted, a housing recession capable of matching that of the 1930’s, and banks start to fear that they will need all the cash they’ve got. What happens? They don’t lend, they can’t, not with the prospects of redemptions and even bank runs. The area hit next is the commercial paper market, companies can’t finance short term projects. Specifically those in the asset backed commercial paper market which lost over 200 billion in about a month. Bill Gross summarises as;
“The past few weeks have exposed a giant crack in modern financial architecture, created by youthful wizards and endorsed as a diversifying positive by central bankers present and past. While the newborn derivatives may hedge individual institutional and sector risk, they cannot eliminate the Waldos. In fact, the inherent leverage that accompanies derivative creation may foster systemic risk when information is unavailable or delayed in its release. Nothing within the current marketplace allows for the hedging of liquidity risk and that is the problem at the moment. Only the central banks can solve this puzzle with their own liquidity infusions and perhaps a series of rate cuts. The markets stand by with apprehension.”
The unwinding of credit will be the true success or failure of the next few years. Debt is fine, companies like Google were founded on massive debt, it is how people are able to buy homes. Yet, we once again have entered a new century with an old century perspective. thankfully, it looks as though the Federal Reserve gets it. The next question is, does the general public get it?
Talk of protectionism, have for those on Wall St., that of which never truly goes away, and a misunderstanding of finance. It is easy to say, people didn’t understand and were even doped into sub-prime loans with teaser rates. The bad guys are out to get us all and they are even being bailed out. Such things are easy, simplistic, and wrong. When the economy is in trouble it is not a concern of who gets bailed out, who gets hurt. It is, what is best for the collective? Even harder to swallow, that we just have not educated our general public about the financial world. The grasp of differentiating student loans at 3% vs credit card debt at 18%, non-fixed rates can move up drastically and AMRS can reset at a rate where you’re unable to pay, diversifying assets away from just home value is value-able if not more valuable than what the home is worth. If the average American has their money tied to just home equity and perhaps a CD bank account then if home prices decline, as they are, rates get cut and they lose both ways.
We have entered a world where structured products have linked the financial world so much to main street than they can no longer be viewed as disconnected. Like it or not we are all connected From New York to Kansas City to Shanghai all the way back to London. If we handle this right, we will accept these things as well as the fact that we are overly hopped up on leverage. It is a good thing, but there is such a case of too much of a good thing. I think the Fed gets it (BOE perhaps doesn’t), the big banks get it, I wonder how many others do.
