Tuesday, August 17, 2010

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SgtWs

Tuesday, August 17, 2010

Post by SgtWs »

Tuesday, Half-Time Update
Interesting perspective on last week's action by the Fed that I wanted to share.......The overall impact summary is in the last paragraph.....

The Uncertain FOMC, August 17, 2010
Bob Eisenbeis is Cumberland’s Chief Monetary Economist. Prior to joining Cumberland Advisors he was the Executive Vice President and Director of Research at the Federal Reserve Bank of Atlanta. Bob is presently a member of the U.S. Shadow Financial Regulatory Committee and the Financial Economist Roundtable. His bio is found at www.cumber.com. He may be reached at Bob.Eisenbeis@cumber.com.

The stock market's decline and the resurgence in bond prices since the FOMC's last meeting and the announcement that the FOMC would reinvest proceeds from maturing mortgage-backed securities by expanding its Treasury portfolio should have surprised no one. What we are seeing is the difference between certainty and uncertainty.

By deciding to maintain its portfolio at the current level, the FOMC stopped the slow contraction of liquidity, which had been the first of a series of steps towards an exit strategy. Now that has stopped, we are back to the drawing board in terms of what the FOMC will do and when it will do it. This is not a resumption of quantitative easing, as some have suggested. Stopping a contraction is not the same as expanding the FOMC's portfolio. What this means is that implementation of the FOMC's exit strategy has been pushed down the road and that the "extended period of time" has just been extended even more. That is, the existing liquidity in the system and the potential it represents will remain, and the demand for Treasuries has just gone up, especially in the 2- to 10-year categories where the Fed investments will be concentrated. All of this implies certainty for bond markets in that the generous stock of liquidity will continue to exist, Treasury demand will be strong, and interest rates will be low, with little risk that rates will go up, well into next year or beyond.

At the same time, the FOMC indicated that it had overestimated even the apparent modest strength of the near-term real economy it had noted in June, and thus had pared back its forecasts for real GDP growth, employment, and inflation through the end of the year. While this might imply a further increase in the downside risks to the economy and might call for some significant additional monetary stimulus, the FOMC chose only to hold its portfolio at the current level. This decision puzzled equity markets. We all understand that the FOMC doesn't have a policy dial that it can move one click at a time with predictable and measurable effects on output and employment. But if downside risks have increased then, given the lags in monetary policy, which surely have become very long indeed during this crisis, why not take quick and decisive action now? The likely answer is that the FOMC itself is uncertain as to what the appropriate course of action should be or what impact use of its alternative tools will have. For example, will buying Treasuries have the same impact as buying an equivalent amount of mortgage-backed securities? What is the relationship between quantities purchased and stimulus realized? How quickly will a pick up in quantitative easing have an impact on the economy? Put in economist terms, the FOMC doesn’t know what the impact multipliers of its alternative policy tools are or when those impacts will be felt. Moreover, there is no history to rely upon to answer these questions. All of this translates into uncertainty for equity markets as well, hence the drop in the market and flight to Treasuries.

What this means for investors is that there will be buying opportunities, of course, especially for those very profitable companies whose shares are now underpriced. It also suggests that the volatility we have experienced will continue until the economy strengthens and/or we get more decisive policies on both the fiscal and monetary sides. What we mean by decisive fiscal policy, however, is not more misguided attempts to spend our way out of this recession, but more clear and articulated strategies for dealing with the deficit, for tax policy, for reducing healthcare costs, and for containing regulatory burdens, which are all problems that are currently deterring small businesses from expanding and hiring.


Copyright 2010, Cumberland Advisors. All rights reserved.


Yesterday was a wash overall so today I am again just watching and waiting. I've got a few things I wanted to share, so I will be trying to update my posting throughout the day.

Let’s start with Milton Friedman, recipient of the 1976 Nobel Memorial Prize for economic science, was a senior research fellow at the Hoover Institution from 1977 to 2006. He passed away on Nov. 16, 2006. He was also the twentieth century’s most prominent advocate of free markets, able persuade and win any argument when it came to the benefits of free capitalism and free markets. This clip has been around forever, but is still entertaining to watch.

I strongly urge you to watch this clip………. On Capitalism…..Come on, entertain me!

[youtube]RWsx1X8PV_A[/youtube]

Second, if the investigation into the Flash Crash interest you, I think you will like this short article by Barry Ritholtz:

Why Are Exchanges For-Profits?

Posted By Barry Ritholtz On August 15, 2010

Call it the revenge of Dick Grasso:
Since May 17, 1792, when the Buttonwood Agreement was signed by 24 stock brokers outside of 68 Wall Street (under a buttonwood tree), the NYSE has been a non-profit, run for the greater benefit of the public companies that trade there.

Following the brouhaha over NYSE Dick Grasso’s pay — New York State law at the time prohibited excess compensation for executives at non-profits — that changed. In 2006, the NYSE and ArcaEx merge, creating NYSE Arca — forming the publicly owned, for-profit NYSE Group. They later merge with Euronext.

Why is this significant?

As a for profit entity, the exchange is concerned with maximizing profitability. Hence, selling co-located servers for
high frequency traders becomes a new revenue source. Allowing flash traders to see order flow of the public — also for a fee — is permitted, consequence be damned.

The SEC investigation of the so-called Flash Crash will be out next month, and these HFT are likely to be blamed, at least in part, for the disruptions.

Jim McTague in Barron’s [1] reports:
“A final report on the Flash Crash by the staffs of the Securities and Exchange Commission and the Commodities Futures Trading Commission, due in September, will reveal that when the market went into an apparent death spiral around 2:30 p.m., virtually every professional trader immediately high-tailed it for the hills, an SEC staffer indicated in a public meeting last week. As a result, panicked retail investors were left on their own, struggling to liquidate their positions to save the profits they had amassed from the beginning of the year.

With the pros gone, so was liquidity—the ability to convert equity into cash. Bids on stocks that the pros—hedge funds, institutions, and high-frequency traders—had posted earlier disappeared with the big boys. The market suddenly had no depth. The dam had burst, and the reservoir was empty. All that was left, the SEC staffer suggested, were “stub quotes,” bid and ask prices ridiculously outside the usual trading range of a stock. The prices get posted to satisfy an essentially pointless regulation.”

Anyone care to hazard any guesses about the following?

• What was the cause of the crash?
• How much are the exchanges themselves to blame?
• What proposed solutions will the SEC suggest ? What might they insist upon?
• What will HFT look like in the future? Will it be modified slightly, dramatically curtailed, or banned outright?

Other Articles I found Interesting:

If Private Sector Is Hiring, Why Is Jobs Market So Bad?

Poor New Yorkers Twice As Likely To Get Bed Bugs, Democrats Are Six Times As Likely

The Lighter Side - If you are ever in need of a good laugh, just go to FailBlog

I saw this joke and thought it was cute: CDC Medical Alert

The Centers for Disease Control and Prevention have issued a medical alert about a highly contagious, potentially dangerous virus that is transmitted orally, by hand, and even electronically. This virus is called Weekly Overload Recreational Killer (WORK). If you receive WORK from your boss, any of your colleagues or anyone else via any means whatsoever - DO NOT TOUCH IT!!! This virus will wipe out your private life entirely. If you should come into contact with WORK you should immediately leave the premises.

Take two good friends to the nearest liquor store and purchase one or both of the antidotes - Work Isolating Neutralizer Extract (WINE) and Bothersome Employer Elimination Rebooter (BEER). Take the antidote repeatedly until WORK has been completely eliminated from your system.

You should immediately forward this medical alert to five friends. If you do not have five friends, you have already been infected and WORK is, sadly, controlling your life. Get help immediately.
Last edited by SgtWs on Tue Aug 17, 2010 10:11 am, edited 1 time in total.

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TSPking
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Post by TSPking »

Do you have a link available to the entire Friedman interview?
TSPking

It's a gift...and a curse ~ Adrian Monk

SgtWs

It is a UTube Link......

Post by SgtWs »

It is showing up at home, but if there is a filter, it doesn't seem to be showing......

http://www.youtube.com/watch?v=RWsx1X8PV_A

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