Archive for August, 2012

Bernanke’s “On the Other Hand” Speech

Friday, August 31st, 2012

To the disappointment of many on Wall Street, and to the relief of many in the real world, the Federal Reserve Board did not announce a third quantitative easing program (QE3) today.

But Fed Chairman Ben Bernanke did not rule out a QE3 in the future.

Op-ed writers and politicians are often criticized for taking an “on the other hand” approach, in which they combine criticism and praise in the same commentary or speech.  Of course, Mr. Bernanke is not an op-ed writer, but his highly anticipated Jackson Hole speech today would certainly qualify as an “on the other hand” speech.  Both supporters and opponents of ongoing monetary easing could find plenty to like – and plenty to dislike – in what he had to say.

Consider a few excerpts from Reuters:

“Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

Sounds like QE3 is coming!

“Key sectors such as manufacturing, housing, and international trade have strengthened, firms’ investment in equipment and software has rebounded, and conditions in financial and credit markets have improved.”

Oh, wait … I guess we don’t need it.

“ … the costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant.”

Yes, there will be a QE3!

” … the bar for the use of nontraditional policies is higher than for traditional policies. In addition, in the present context, nontraditional policies share the limitations of monetary policy more generally.”

Well, no … I guess not.

Also of interest, he says that, “It is critical that fiscal policymakers put in place a credible plan that sets the federal budget on a sustainable trajectory in the medium and longer runs.”

Keep in mind that Congress has not passed a budget in three years.  On the other hand:

“However, policymakers should take care to avoid a sharp near-term fiscal contraction that could endanger the recovery.”

So there will be no QE3 now.  On the other hand …

The Fed and Facebook

Friday, August 24th, 2012

On the surface, The Federal Reserve Board and Facebook have nothing in common.

But media speculation about Fed action is very similar to the speculation that preceded Facebook’s IPO.

For a year or so before the IPO, it seemed that every business reporter was writing about when Facebook’s IPO would take place.  While some of the better journalists talked to analysts who questioned the company’s valuation, there was also a great deal of hype about the impact Facebook’s IPO was going to have on the economy and on the environment for IPOs.

Goggle “Facebook IPO” and you’ll find 122,000,000 results!

Yet it would be an understatement to say that Facebook has failed to live up to expectations.  The stock has been trading at well below its IPO offering price and, rather than give a boost to other IPOs, Facebook’s offering has discouraged other companies from going public.

More recently, media has been buzzing with speculation about another round of quantitative easing by The Fed.

It may not happen, although recent economic news of weakening economies in Europe, China and the U.S. may lead to Fed action.  Minutes from the Federal Open Market Committee’s July meeting, which were just released on Wednesday, also suggest Fed “accommodation.”

As we noted in our previous blog entry, the U.S. stock market has been riding high of late, based on speculation about Fed action, although since then dismal economic news has been taking its toll.

However, as we said in our previous post, two rounds of quantitative easing have done little to help the economy and a third is likely to have the same result – especially since the market already jumped higher in anticipation of round three.

However, the other consequence of this speculation is that the dollar is weakening.  If QE3 takes place, it would add to inflationary pressure and rising prices will make it even more difficult for consumers to make purchases.

So, like Facebook, The Fed action is likely to a big disappointment.

Global Weakening

While the market has been rallying in anticipation of Fed action, this week investors decided that bad economic news outweighed any positive influence from potential Fed action.

The Dow Jones Industrial Average (DJIA) fell for four straight days.  Why?  As The Wall Street Journal summarized, “In the U.S., new jobless figures disappointed. A report on manufacturing in China showed the biggest drop in nine months for the world’s second-largest economy. In Europe, a widely watched survey suggested that business activity across the continent continued a recent contraction in August.

Germany—Europe’s usual engine of growth—faced its biggest decline in new orders in three years, according to data provider Markit.”

Some will take heart, knowing that this weakening will increase pressure on The Fed to take action.  Others will not.

Stock Rally Built On Wishful Thinking

Monday, August 20th, 2012

“This is the most disrespected rally I’ve ever seen.”

John Buckingham, Al Frank Asset Management

Stock prices have rallied and are closing in on their highest level in five years.  After six consecutive weeks of gains, the Dow Jones Industrial Average is up 9.7% since early June.

Any increase in stock prices is, of course, good news.  But the market rally has little to do with market fundamentals.  It’s not due to improved corporate earnings, higher employment or other economic news.

The market has been rallying based on the belief that The Federal Reserve Board will approve another round of quantitative easing.

A rally built on wishful thinking is a rally that should be approached with caution.  Investors have, indeed, been cautious, withdrawing $70 billion from stock mutual funds since the year began.  Likewise, trading volume has been low.

With the economy showing signs of tepid improvement, it is becoming less and less likely that The Fed will move forward with another round of quantitative easing (QE3).  And if The Fed does not take action, investors fear that the rally will not only come to an end, but gains based on the potential for another round of quantitative easing will turn to losses.

So what will happen if The Fed moves forward with QE3?  Like QE1 and QE2, it will likely have much, if any, economic impact.  In fact, it’s a given that each round of quantitative easing will be less effective than the one before it.

Like previous rounds of easing, investors could expect stock prices to rise, as quantitative easing makes stocks more attractive relative to other investments.  Except, given that the market has already rallied in anticipation of QE3, announcing QE3 may have little impact at this point.

 

Is Everybody Happy?

Friday, August 10th, 2012

Forget about growth in GDP, the unemployment rate, inflation, stock prices and all things relevant to money.

Federal reserve Chairman Ben Bernanke suggested this week that happiness should be used to measure the country’s economic strength.

According to Bernanke, economics isn’t just about money, it’s also about understanding and promoting “the enhancement of well-being.”  We’re not sure how or whether “well-being” can be enhanced, but it’s probably a good thing that measuring happiness is about as feasible as measuring a person’s thoughts.

Of course, there is a Misery Index, which is calculated by combining the unemployment and inflation rates.  The Misery Index hit a 28-year high of 12.7 in June 2011.  It has since dropped to 9.83, but few Americans are dancing with joy these days.

Perhaps Bernanke is hinting that The Fed’s next stimulus plan will be to pass out prescriptions to anti-depressants to all Americans.

French Tax Policy: One For You, Three For Me

Friday, August 10th, 2012

French President Francois Hollande’s proposal to take three quarters of the money earned by France’s wealthiest earners is bound to create an economic boost – for Belgium, Germany and other European countries.

The number of high earners in France is low, so the tax will not raise significant revenue, but it very likely will drive many wealthy taxpayers to relocate in other countries with lower rates.  Even many young professionals with the potential to become more successful will likely relocate, according to blogger Mike “Mish” Shedlock, an advisor with SitkaPacific Capital Management.

In comparison, Sweden has a top rate of 57%, Belgium has a top rate of 55% and Great Britain reduced its top rate to 45% from 50%.  France’s top rate is already scheduled to increase from its current 41% to 44%.

President Hollande’s idea of taxing those who earn more than €1,000,000 ($1.24 million) a year at a 75% rate, but “even young, dynamic people pulling in €200,000 are wondering whether to remain in a country where making money is not considered a good thing,” Vincent Grandil, a partner at Altexis, told Newsmax.

“Here, someone who is a self-made man, creating jobs, and ending up as a millionaire, is viewed with suspicion,” Grandil said.  “This is big cultural difference between France and the United States.”

Apparently, he has not been to the United States recently.

Dog Days Not So Slow

Monday, August 6th, 2012

Another near-miss “flash crash,” more European craziness, buzz about more action from The Federal Reserve Board and a stock market that rises along with the unemployment rate … who says things slow down during the summer?

Goodnight, Knight?

Whenever a terrorist is caught, it’s natural to have a queasy feeling and wonder what would have happened if the terrorist had not been caught.  Worse still is the fear that maybe the next terrorist will succeed.

Knight Trading’s runaway algorithm last week caused a similar reaction.  Wednesday opened with heavy trading in 150 stocks.  Fortunately, the glitch was traced to a rogue algorithm fairly quickly (but not quickly enough).  Such algorithms are programmed to buy or sell stocks based on certain criteria.  The rogue acted more like a day trader than a Knight trader.

As Dennis Dick, a trader for Bright Trading LLC told The Wall Street Journal, “The algorithm just kept trading.  There are algorithmic errors every day, but they’re caught immediately – this went on for nearly half an hour.”

Think about that.  If algorithmic errors take place every day, how long will it be before we experience another “flash crash?”  You likely remember the “flash crash” of May 6, 2010.  It erased $862 billion of share value in 20 minutes, briefly sending the Dow Jones Industrial Average plummeting 998.5 points.  The age of electronic trading has brought investors many other stress-inducing errors.  The most recent example before last week, of course, was the malfunction on the NASDAQ exchange during the first day of trading.  It certainly isn’t entirely NASDAQ’s fault, but Facebook’s share price has yet to recover.

Doing “Whatever It Takes”

European Central Bank (ECB) President Mario Draghi spurred a rally in late July by promising to do “whatever it takes” to save the euro.  To the financial world, it sounded as though dreams of European bond buying, ala America’s quantitative easing, were finally coming true.  But then the ECB met … and did nothing.

Of course, buying bonds to keep borrowing costs low so that troubled countries can borrow more money at lower rates doesn’t really address the problem, given that spending too much money has been the cause of Europe’s problems in the first place.

Fed Signals

Ending a two-day policy meeting on Wednesday, the Federal Reserve Board made statements that indicate additional stimulus (i.e., more quantitative easing) is in our future.  The Fed said it will “closely monitor” the economy and “will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions.”  Based on a Wall Street Journal translation, “The Fed will move if growth and employment don’t pick up soon on their own.”

Unless Ben Bernanke pulls a Mario Draghi.

Unemployment Rate and Market Rise

The good news is that the American economy produced 163,000 new jobs in July, significantly more than the 100,000 predicted.  However, the bar was set low.  There weren’t even enough new jobs to keep up with population growth and jobs being eliminated, as the unemployment rate inched up from 8.2% to 8.3%.  The labor force participation rate slipped to 63.7%, down from 66.4% in 2007, according to the Bureau of Labor Statistics.

As Zerohedge.com pointed out, there is plenty of confusion about what’s happening in the economy.  The blog noted that the Institute for Supply Management reported that the employment index dipped below 50 for the first time since 2011 (down to 49.3 from 52.3), so “in other words, the employment in the U.S. services sector is now contracting.”

However, this is what passes for good news these days.  The Dow Jones Industrial Average responded with a 217.29 point gain (1.69%), its third largest percentage gain this year.