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Parsing the Fed

Thursday, June 30, 2005 | 04:11 PM

click for larger graphic

Retro0605fedrelease



via WSJ

Thursday, June 30, 2005 | 04:11 PM | Permalink | Comments (2) | TrackBack (0)
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Verbatim Text Of Federal Reserve's Interest Rate Decision

Thursday, June 30, 2005 | 02:19 PM

Fedfunds_06300532506212005143845_1


The Fed speaketh:

The Federal Open Market Committee decided today to raise its target for the federal funds rate by 25 basis points to 3-1/4 percent.

The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity. Although energy prices have risen further, the expansion remains firm and labor market conditions continue to improve gradually. Pressures on inflation have stayed  elevated, but longer-term inflation expectations remain well contained.

The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal. With underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured. Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.

Voting for the FOMC monetary policy action were: Alan Greenspan, Chairman; Timothy F. Geithner, Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Richard W. Fisher; Edward M. Gramlich; Donald L. Kohn; Michael H. Moskow; Mark W. Olson; Anthony M. Santomero; and Gary H. Stern.

In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the discount rate to 4-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors  of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and  San Francisco.

I nominate this for the most understated phrase on the planet:  In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the discount rate to 4-1/4 percent.


Thursday, June 30, 2005 | 02:19 PM | Permalink | Comments (2) | TrackBack (0)
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Mortgage Rates versus Fed Fund Rates

Thursday, June 30, 2005 | 01:59 PM

The Conundrum continues:

Mortgage0506_1


I cannot find my notes on where this is from, but it looks like the WSJ: 

DESPITE THE FEDERAL RESERVE'S rate raising campaign started June 30, 2004, fixed mortgage rates are lower now than they were a year ago.

The average rate on a 30-year fixed mortgage is 5.66%, down from 6.30% a year ago, according to Bankrate.com's national weekly survey of large lenders. As for one-year adjustable-rate mortgages, the rate is 4.69%, up slightly from 4.43% in June 2004.

While fixed mortgage rates don't move in lock-step with Fed actions, they do tend to be responsive to rate decisions. So the decline in mortgage rates has surprised some economists. At the beginning of the year, economic forecasts from several associations called for fixed mortgage rates to end 2005 near 6.5%. Now, some economists are revising their estimates downward, to 6%.

What's different? One factor is that the core consumer price index, a key inflation indicator that some say has a direct effect on mortgage rates, increased rapidly during the second half of 2004, and economists expected the pace to continue.

But the CPI has plateaued in 2005, remaining at 2.2% through May. "It put inflation fears away and has allowed long term rates to remain low," says Lawrence Yun, economist for the National Association of Realtors.    --Steven Sloan

Thursday, June 30, 2005 | 01:59 PM | Permalink | Comments (3) | TrackBack (0)
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Strange things are afoot with GDP

Thursday, June 30, 2005 | 07:31 AM

Naaf741_economy06292005200926I do not want to become a "nattering nabob of negativity," but I cannot shake the idea that yesterday's GDP numbers had a certain odor about them.

Maybe I'm just an economic curmudgeon.

Perhaps I am too "reality-based" in my perspective.

I simply cannot compromise my belief in hard data (versus hedonics and seasonal adjustments and/or revisions).

Nor can I manage the suspension of disbelief so common amongst the economic cheerleading crowd, both in the private sector, at the Fed, and amongst the elected and appointed government officials.

Look, I understand that a certain degree of economic positivity is required -- for consumer confidence, as well as to prevent the gold bugs and survivialist crowd from scaring everyone into the bomb shelter. I have no desire to cross over to the tinfoil hat wearing fraternity. I accept the necessity of some measure of 'happy' bias in the government models.

But at what point do we cross the line from maintaining a healthy optimistic outlook to cynically manipulating data in boldfaced contradiction of reality?

Unfortunately, I think that line was crossed in yesterday's revised GDP data:

GDP Components:    Q1 Final (Est 3)    Q1 Prelm(est 2)   Q1 Adv(est 1)]
Real GDP                   +3.8%                +3.5%                   +3.1%      

Here's the thing:  Within GDP data, the revision of the Residential Housing is simply too hard to believe: This is data that's widely available from the NAR amongst others. To get there, you need a significant DROP in home prices. That's right, a drop in home prices. The revision from +8.8% to +11.5% is simply enormous. I cannot say for sure that its unprecedented -- but I cannot recall it being this huge in recent memory.

I am not the only one: The (subscription only) MNSI specifically observed:

The Commerce Department said exports and investment in residential structures were revised higher in Q1 . . .The structures revision was due to downward revision to the one-family house price index which resulted in more real sales and less inflation -- an almost unbelievable result given that the housing market is on fire with home prices posting double-digit appreciation on the year in some areas. (emphasis added)

Yesterday's upwardly revised GDP data is believable only if you accepty the premise that HOME PRICES WENT DOWN IN Q1 2005.

Otherwise, the data was gamed.

Follow the bouncing ball:  The revisions to GDP inflation accounted for virtually all the net positive
revisions to growth
.

How? The GDP implicit price deflator. For the quarter, it was was revised downward from 3.16% to 2.89% (a drop of 0.27%). That accomplishes a neat little trick: By (artificially) reducing the rate of inflation, the BEA spikes real GDP growth by the same amount, and total GDP growth revised upward from 3.48% to 3.76% (rounded up to 3.8%), an increase of 0.28%.

The deflator was revised downward from an annualized 3.3% to 1.1%, an astonishing drop of 2.2%, and real housing growth revised from 8.8% to 11.5%, an incease of 2.7%. 

Yet year-over-year housing inflation in the GDP is at just 5.2%. Cranking that number up to reality raises inflation, lowers GDP, and spoils everyone's party.

Forget taking the punchbowl away, this crowd is spiking it with LSD.

Its not like I do not admit when I am wrong. Hell, I expect to be wrong.

But this is beyond the pale.

GDP numbers, IMHO, have now entered the realm of Santa Claus, the Easter Bunny, and honest politicians. They are all fictional characters.

(I hope to have some more on this later)

>

Sources:
NAR Data on Home Sales Q1
http://www.realtor.org/Research.nsf/files/REL0505EHS.XLS/$FILE/REL0505EHS.XLS

First-Quarter GDP Is Revised Upward on Housing Surge
By JEFF BATER
DOW JONES NEWSWIRES, June 30, 2005; Page A2
http://online.wsj.com/article/0,,SB112004797007972800,00.html

ANALYSIS: US Q1 GDP Rev +3.8%: Prices Dn, Expts & Res Inv Up>
By Joseph Plocek
Market News Service International
Wednesday, June 29, 2005 8:31:18 AM (GMT-04:00)

Thursday, June 30, 2005 | 07:31 AM | Permalink | Comments (13) | TrackBack (2)
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Lehman '10 Uncommon Values' Picks

Wednesday, June 29, 2005 | 01:09 PM

Lehman Brother's is out with their annual "10 Uncommon Values" portfolio.

This year's list:

Allstate (ALL)
Applied Materials (AMAT)
Bed Bath & Beyond (BBBY)
Dell (DELL)
Dow Jones (DJ)
Freddie Mac (FRE)
Microsoft (MSFT)
Pfizer (PFE)
Phelps Dodge (PD)
Wal-Mart (WMT)

The list comes from the best bottom-up picks of Lehman's 89 equity analysts. Lehman's website notes: "In its 56-year history, the 10 Uncommon Values Portfolio has significantly outperformed the S&P 500 Index."

Dow Jones that the firm says the portfolio has outperformed the S&P 500 73% of the time, and delivered a 14.3% average annual return vs the S&P's 8.2%.

There is actually an ETF Index for this: UVI

Here's how its been doing:
click for larger chart
Leh_charteoddata

Not too shabby

Wednesday, June 29, 2005 | 01:09 PM | Permalink | Comments (3) | TrackBack (0)
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Trading Rule #1

Wednesday, June 29, 2005 | 06:15 AM

The first rule of trading is simply this:  When you make a mistake, when you buy or sell ANYTHING by accident, you immediately unwind the position.

Immediately.

There are no ifs or buts. There is no after the trade consideration. (There's no crying in baseball). Do not justify or attempt to rationalize the position. You reverse the trade the very second you discover it.

Why? Because you own something you never planned to. You did not do the due diligence, the research, the stop loss planning, the carful contemplation.

And, you no longer can. Now, you are an interested party, no longer objective. You have a vested interest, a stake in the outcome.


Here's a perfect example of what NOT TO DO:

Somebody's sure to notice this...
Tue Jun 28,10:42 AM ET
http://news.yahoo.com/s/nm/20050628/od_nm/taiwan_shares_dc

A Taiwan stock trader mistakenly bought T$7.9 billion ($251 million) worth of shares with a mis-stroke of her computer, meaning her company is looking at a paper loss of more than $12 million and she is looking for a new job.

The trader with Fubon Securities mis-keyed in a small order from Merrill Lynch Monday, creating confusion when many small firms inexplicably surged the 7 percent trading limit.

"Something like this is difficult to explain to superiors," a Fubon executive said Tuesday. Fubon said that the trader was unfamiliar with new computer systems and would be fired.

"There is a paper loss of more than T$400 million," said the executive.

"However, with a good outlook for stocks in the second half, there are no plans to sell the shares in the near term."  (emphasis added)


These idiots are fucked.

Wednesday, June 29, 2005 | 06:15 AM | Permalink | Comments (3) | TrackBack (2)
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Translating Greenspeak into Plain English

Wednesday, June 29, 2005 | 05:44 AM

Since we have a very special Fed meeting coming up this week, I thought I would give y'all a treat. Its the Peneboscot Princess, all by her lonesome:

 

The ‘90s were a fast and furious era of huge technological leaps and sweeping political change. These developments yielded more sophisticated investments across countless international borders. And along the way, these developments also mandated capital, which came in three flavors: productive, prophylactic and the kind used for “medicinal purposes only”. But little distinction was made among these varieties. All we know is that we got a boat load of dough and a mandate to spread it all over, like so much manure.

And that we did. Whether to jam the Asian Tigers or re-invent carry trades or ameliorate fall-out from the demise of the Soviet Union or to foster the dot.com frenzy, to expedite the explosion in the use of derivatives or to paperover any difficulty du jour, the FED was there, pump in hand, ready to keep us marinating in a bottomless pool of monetary brine.

Of course, this central bank promiscuity resulted in global excess of every imaginable kind, not the least of which was the stock market bubble which came to an end in 2000. There is no need to delve into any of the gory details.

But we will point out that Mr. and Mrs. America, though suffering 3rd degree burns over most of the portfolio, did become convinced in the existence of a free-lunch program. Therein lies the rub. Keep it in mind as we digress.

And as fate would have it, along came the recession of 2001. Dang it anyhow. You remember this part, right?

They began to slash rates like crazy. Here’s a quote to jar your memory … “Greater uncertainty, in part attributable to heightened geopolitical risks, is currently inhibiting spending, production and employment …”

See? They couldn’t then, just as they cannot now … admit that they had created a great, big mess and had not the wherewithal to either understand it or to even begin to remedy it. So the one-trick pony, the FOMC, under the guise of “heightened political risk” (Iraq), kept pushing on that string until they had FED funds at 1% by the summer of ’03.

So the grease was back in the system, this time with a vengeance. But the economy was not cooperating, no sir. Couldn’t get a pulse. But the stock market? Another story altogether. The S&P 500 (cash) traded at a low of 788.90 on March 12, 2003. The high was marked on March 7, 2005 at 1229.11. Not bad for government work.

Literally. But who was in the driver’s seat? Hedge funds were the first on the food chain to get the fertilizer from the banks/brokers that the FED was intent on doling out. And are the perfect pick when a reflation is needed. So it’s no wonder that trade has became insufferably one-way and maddeningly mechanical for so long as they set about the business of stock market bubble #2. Meanwhile, though some of the Moms and Pops who had visions of recouping, surely did get back into the swing of investing in stocks, the incredibly low rate scene was busy spawning yet another bubble, the one in housing, of course. The stories of the blistering pace of new and existing home sales, median price explosion and the relaxation of lending standards to the point of absurdity are legendary by now but alas, mesmerized anew by the latest get-rich-quick frenzy, all caution has been thrown to the wind.

Now we get to the conundrum part. Where to start, eh?

You can only slam and jam the S&P 500 so much until you get bored, right? So branching out into commodities speculation proved to be a noteworthy diversion for some of the more agile, highly-levered players. Example: On May 27, 2004, prompt Gasoline hit a then-record of $1.47. Example: Copper ticked at .90 on 11/24/03. By August of ’04 it was up around 1.22. Meanwhile, the S&P 500 made the “August ’04 low” on the thirteenth, demonstrating what we knew all along, that the loosey-goosey do-re-mi was being transferred from one asset class to another as the fast players were about the business of squeezing every last bit of opportunity from each venue they descended upon. In droves. Other commodities were likewise in the throes of extremes, one way or another, as they ran around ringin’ the register. Which is their raison d’etre, so more power to these guys. Okay, the commodities gig was the latest craze back then and of course, China, with 9.6% growth was indicted in the mix, make no mistake about it. The great soybean caper of ’04 comes to mind. Anyhow, they reflated us with all those rate cuts which they claimed were done to stave off run-of-the-mill deflation. But what they really meant to say was “we are soiling ourselves thinking about the possibility of debt deflation”. Indeed, things were getting a bit steamy in the speculative world. How steamy was it getting? A big, fat reminder of just how steamy those prices were, comin’ at you right now: ‘Twas during this period of heating commodities that the BLS lost the recipe
for the PPI.
Remember that caper? Yee-ha. They couldn’t let us see what we already knew. Alas, it was time to get us to simmer down. Here’s a verbatim example, spoken by Greenspan on June 8, 2004:

…. “Lastly, let me emphasize that recent financial indicators, including rapid growth of the money supply, underscore that the FOMC has provided ample liquidity to the financial system that will become increasingly unnecessary over time. The Committee is of the view, as you know, that monetary policy accommodation can be removed at a pace that is likely to be measured. That conclusion is based on our current best judgment of how economic and financial forces will evolve in the months and quarters ahead. Should that judgment prove misplaced, however, the FOMC is prepared to do what is required to fulfill our obligations to achieve the maintenance of price stability so as to ensure maximum sustainable economic growth.”

See? Vintage Greenspan. Couldn’t admit they had “reflated” us to the point where more bubbles were popping up all over the place. So what he did was to imply that the reflation gambit had worked so well that it is now time to start to reverse course. You gotta’ love the eternal charade, right?

So they were now about the business of jacking rates in order, they claimed, to get us back to “neutral”. The current round began in June of ’04. And all along this course, while the “I” word pops up in regular commentary as well as in those FOMC communiqués, the long-term outlook is always in one shape or another, benign. And on top of this deliberately misleading banter, the FED themselves has contributed even further to the origin of the conundrum by being relentlessly and painstakingly transparent, to the point where, 100% of the mystery having been removed, the Street has no fear of either inflation or a sudden FED move and as the result, feels foot-loose and fancy free to go further out the curve.

And the sheer magnitude of the staggeringly-leveraged fast players who have turned US government bond trading into what one veteran has termed “contact sport” (on days when they are not otherwise “wilding” in that market), has exacerbated the conundrum to the highest degree. Leave us not forget, too, the added joy of front-running by this set of players, of the “real money” accounts who are sporadically forced in to do various types of hedging. So one can see the beginnings of just how the long end of the curve began un-cooperating with the FED’s rate increases.

We also have to bring in the vendor-financing aspect of the conundrum. We’ll make this quick as it is really old hat. All the excess dough and free and easy credit have made us even more gluttonous than usual. And it’s a good thing, too. Who else is gonna’ buy those one billion white dress shirts that the world was said to have in inventories, owing to the excess capacity that was fueled by the monetary largesse of the ‘90s global expansion, eh? Okay. So we keep buying and blowing up our trade deficit. They get dollars which they then lend back to us so that this scam can keep going. You might know this trick as “foreign central bank participation in US Treasury auctions”. Indeed, between the central banks, those “offshore hedge funds” and the govvie dealers, it’s no wonder we aren’t inverted already …. FED rate hike this.

So as you can see, John Q. is not too prominent in the picture is he? Why not? He’s busy flipping Miami condos, that’s why. Indeed, the same free and easy credit which has the leveraged set gone ga-ga looking for new and innovative niches in which to coin profit (latest I guess are the CDOs), has John Q. now believing he is a real estate tycoon as he has just gotten a spot at the table where they’re serving today’s free lunch.

A colleague referred me to the current issue of TIME. Here’s a cut and paste to help make the easy-money/hog wild consumer point: “In 2004, U.S. homeowners took an estimated $139 billion out of the walls and floorboards through refinancings, compared with $26 billion in 2000, according to Freddie Mac. They put about 35% of that money into home improvements, spent 16% on consumer purchases, and used 26% to pay off debt (including credit cards for other consumer purchases), according to the Federal Reserve Board.”

And the banks/mortgage lenders are just as complicit in this disaster-in waiting. And why not? The more the curve disobeys, the more margin compression they feel, the zanier they get. Interest-only, no money down, no doc, no credit-check, no ability to sign your name? No problem. Just put your “X” on the dotted line. And here’s the keys. And as time goes on and this bubble gets even more outrageous, no need to even move in. Just flip it. It’s never gonna’ end. Right.

And Mr. Greenspan himself is complicit in fostering this egregious notion in that last evening, when asked if he thought there would be any change soon in the falling-yields saga, said “I would think not.”

And he continued:

"The pronounced decline in U.S. Treasury long-term interest rates over the past year, despite a 200-basis-point increase in our federal funds rate, is clearly without precedent … The yield on 10-year Treasury notes currently is at about 4 percent, 80 basis points less than its level of a year ago.''

No stuff, Sherlock.

Keep right on “conceiving of hypotheses that are mutually contradictory”. This writer agrees with you. The aberrational path which took us to this juncture with the curve in its current shape, does not necessarily signal that players are convinced we are headed for recession. How we got here is from deceptive jawboning, an ongoing strip-tease which comes to us in the form of FOMC communiqués, a continuous stream of easy money/gimmicks which keeps the US consumer at the trough and the foreign central banks committed to our debt market and the quantum expansion of the hedge fund industry which, well-oiled by the money machine, is perpetually in the business of figuring out how to wring even more out of the system by some very creative/exotic investment strategies. (Those guys control better than a $ trillion at last count.) It all adds up, doesn’t it?

Thus, we can comfortably say that we have been brought to the height of it beginning with a fib that got bigger and bigger. The housing bubble is the latest and possibly most dangerous result. (Also from the TIME article: “At the stock market's peak, 1% of investors controlled about 33.5% of stock wealth; the top 1% of home-equity holders have only 13% of housing wealth. In other words, a broad drop in home values, should it happen, would affect a far larger cross section of Americans than did the NASDAQ bust.”)

Conundrum this.

Next case.

Wednesday, June 29, 2005 | 05:44 AM | Permalink | Comments (8) | TrackBack (0)
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Time Warner continues its old ways

Tuesday, June 28, 2005 | 05:00 PM

As long as today is beat up on the content industry day, let's not forget the film studios:  Can anyone be surprised that Time Warner is accused of playing  games with the Director of the enormously successful LotR trilogy?

Peter Jackson, one of the film industry's most powerful and popular directors, is suing New Line Cinema, the subsidiary of Time Warner that financed and distributed his Oscar-winning "Lord of the Rings" film trilogy.

In his lawsuit, Mr. Jackson claimed that New Line committed fraud in its handling of the revenues generated by 2001's "The Fellowship of the Ring," and as a result, he was underpaid by millions.

The suit does not specify a damage award. But in an interview last week, his lawyers said that, after New Line applied its contract interpretation from "Fellowship" to the other two movies, Mr. Jackson was underpaid by as much as $100 million for the trilogy.

Lawsuits in Hollywood are as common as hobbits in Middle Earth. What makes Mr. Jackson's suit draw such widespread interest here, other than his clout in the industry and the amount at stake, is one specific allegation about New Line's behavior. The suit charges that the company used pre-emptive bidding (meaning a process closed to external parties) rather than open bidding for subsidiary rights to such things as "Lord of the Rings" books, DVD's and merchandise. Therefore, New Line received far less than market value for these rights, the suit says.




Lotr_nyt_moviechart

Graphic courtesy NYT

The "Rings" trilogy cost $281 million to make. Worldwide, it has grossed over $4 billion: exhibition, home video, soundtracks, merchandise and television. TWX' New Line netted more than $1 billion.

According to the NYT, escalators in Mr. Jackson's contract  (he was director, co-writer and co-producer of the trilogy) gave him about 20 percent of the gross after tax revenue realized by New Line.


Source:
The Lawsuit of the Rings
By ROSS JOHNSON
Published: June 27, 2005
http://www.nytimes.com/2005/06/27/business/media/27movie.html

Tuesday, June 28, 2005 | 05:00 PM | Permalink | Comments (0) | TrackBack (0)
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iAudio X5

Tuesday, June 28, 2005 | 04:15 PM

Let's round out Tuneful Tuesday with the latest in our series of way cool portable gadgets: Cowon's iAudio X5

Iaudio_x5


A full review is here

via NYT, Engadget

Tuesday, June 28, 2005 | 04:15 PM | Permalink | Comments (1) | TrackBack (2)
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Indy Radio

Tuesday, June 28, 2005 | 03:17 PM
in Music

Here's another way in which the labels and radio stations are ultimately threatened:

Indy_radio_1

Indy Radio is a "music discovery tool."

The goal, according to their FAQ, is to give indy musicians a great new way to promote their music, and to create a whole new way for people to discover music that they'll love.

Indy uses a collaborative filter, identifying fans with similar taste to yours to recommend music they like. It's basically the way people have always recommended music to their friends, the only difference is that Indy draws on the recommendations and taste of a whole lot more people. Indy uses the COllaborative Filtering Engine, although we are working on our own collaborative filtering engine to dramatically improve the scalability of Indy and related software we are working on right now.

Tuesday, June 28, 2005 | 03:17 PM | Permalink | Comments (0) | TrackBack (0)
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