Economic/Market Highlights..12/16…”Follow the Money!!”
By Larry Doyle on December 17, 2008 at 7:00 AM in Current Affairs
Whether one is on Wall St. or Main St., in politics or in business, acting legally or illegally, if you truly want to get to the bottom of almost every issue, there is one simple rule, “follow the money”!!
Sometimes the path will be short and easy; sometimes it will be long and circuitous. During my 25+ yr. career in business, I have NEVER seen so many fascinating “paths” as I do today. Pack lightly and let’s “move out”!
The equity markets rallied today 4 to 5% on the heels of a cut in the Fed Funds rate of .75 to 1% leaving the FF rate in a range of 0 to .25%. The size and delivery of the move did catch the market by surprise and prompted the move up in equities. This move could have been prompted by a 19% drop in housing starts signifying that housing is still a long way from being out of the woods. I offer the following comments and analysis:
1. This move is an indication by the Fed that the economy has weakened considerably even since the last move in November.
2. The Fed indicated that they will leave the FF rate in this range for an extended period. I mean they are basically saying to the banking community , PLEASE take our money and go use it.
3. The Fed now has NO more monetary policy ammo in the quiver. A reader asked me earlier today to comment on the potential for a “quantitative easing” by the Fed. We addressed this possibility, without using that wording as a strong likelihood in our piece last Thursday (“It’s Easy to Find Fault…”).
The Fed will almost assuredly balloon its balance sheet by issuing debt (typically handled strictly by Treasury) for the purposes of purchasing mortgage assets, consumer finance assets, commercial mortgage assets, and who knows perhaps corporate credit assets as well. If consumers and corporations can’t or won’t further “leverage” themselves, then Uncle Sam will do it for them (but isn’t Uncle Sam’s money OUR money and that of future generations??).
4. This is great, right…??!! The equity markets rally 4-5%, government bonds of longer maturities drop 20 basis points (.2 %) …everything is good again, right??
5. I view this drop in the FF rate as primarily a move to quicken the healing of bank balance sheets, and yes that would be a good development.
6. Underneath the surface, though, what the Fed is doing is risking future inflation against the prospects of even further weakening in the economy. This is a very dangerous game. Our U.S. Dollar got hit hard today. We just had the biggest 5 day drop in the value of the U.S. dollar vs the Euro since the Euro was launched in 1999. The dollar also weakened considerably vs the Japanese yen.
7. While equities firmed, (for my money it was a short covering rally in the context of a bear market…on the month equities are now up 1-1.5%), we did not see much of a move in commodities today with the exception of gold. Gold was up another 2.5 to 3% while oil was down (this despite an expected cut in production tomorrow by OPEC of 2-3mm barrels a day).
If the markets today rallied because they thought the economy was turning, I think you would have seen this reflected in the prices of commodities and metals primarily moving up significantly.
8. Who’s the boogeyman in the room? Even though the Consumer Price Index dropped 1.7% for the month of November, the core rate (which excludes the very volatile food and energy components) was flat. That core rate indicates to me that we are not experiencing disinflation (a slower pace of inflation) or deflation (an outright drop in prices).
With the decline in the dollar, and gold moving higher I think there are real longer term inflationary concerns. People may say that the Fed can raise rates when they see that happening. Easier said than done. One of the greatest variables in inflation is the mere “expectation of inflation” which causes producers to increase prices. LET’S WATCH THIS CLOSELY!!
9. The Fed did comment that “it is tougher to to aid state and local governments.” While government bond rates and mortgage rates moved down, rates on municipal bonds actually moved up a touch.
There’s a fork in the road…let’s take it.
How Bernie “Madoff” with 50Billion!!
In reviewing investor’s statements and Bernie’s books, he maintained two sets of books. Bernie clearly lost money trading but who knows how much. He certainly did not actively trade options despite what he promoted. How do we know this?
Bernie’s supposed strategy was to buy large cap stocks and simultaneously “hedge” them by selling calls and buying puts. That strategy is consistent with running on a treadmill. You may work hard but there is a very strong likelihood you will end up right where you started and probably worn out in the process.
Investor statements showed monthly trading activity but no positions at the end of each month as Bernie supposedly closed out his positions by the end of each month. That is highly suspect in and of itself, but if Bernie were trading options vs these equity positions he would have been the largest options player BY FAR in the market and multiplied the volume of options traded by a large measure. Even if he traded these options in the “over the counter” market vs “on the exchange” his activity would have moved the market. It just did not happen.
This begs the question. If Bernie was not actively trading then he was not LOSING money in that activity. Where did the money go?? Obviously some went to repay investors looking for some redemptions. Some may have gone to run his operations at BMIS. Who knows how much went into his lifestyle. All that said, though, given the size of this scheme I have to believe that he was funneling it or directing it elsewhere. Did Bernie have outside interests that he was financing??
Follow the money!! We shall see. Stay tuned!
SEC chair Chris Cox admits that the SEC “had multiple failures” in its investigations of Madoff’s business, Read more in “SEC to Probe Its Ties to Madoff”…
http://online.wsj.com/article/SB122947343148212337.html?mod=testMod
Follow the money…………..!!
Personal Finance
For those looking for mortgage money with little to no down payment I read today how fixed rate mortgages are being offered by the U.S. Department of Agriculture. These mortgages are geared to people in more rural communities, but that seems to be a relative term. We are trying to be responsible here at NQ, so income verification and credit checks are part of this process.
Two consumer surveys indicated that consumers would purchase autos from companies that had declared bankruptcy. We concur. Guarantee the warranties and price the vehicles to sell and they’ll move!!
Time to Make Camp…..
Other stories in the near future will address the following:
1. stimulus package
2. reputation risk
3. any suggestions that you may have that you would want investigated…don’t be bashful.
LD
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