There are a few developments that gladden the heart of nearly every business executive. Rising retail sales. Rising real incomes. Sustained job growth and household formation. And lower interest rates from the Fed.
U.S. business executives, investors, and typical citizens alike may have to wait awhile for a constructive dynamic to emerge regarding the first four, but there may be some good news regarding interest rates. We're headed back down to 1.5% - - or perhaps even lower - - regarding the Federal Funds rate, so says economist David H. Wang.
Further, Wang believes an interest easing is up ahead, even though that stance would seem to fly in the face of the Dow's recent rise/signs of life, and a July U.S. consumer price statistic of 0.8%, that indicated that inflation rose at its fastest pace in 17 years.
"The July inflation number was high, but the core inflation gain of 0.3% means the U.S. Federal Reserve has some breathing room on inflation, some leeway to cut interest rates, and they're going to need it," Wang said. Wang sees the Federal Funds rate, currently at 2%, falling to 1.5% by January 2009. Bearish on U.S. stocks, economy through early 2009
As one might sense, Wang is not bullish on the U.S. stock market or U.S. economy over the next six to nine months. Here's why: "First, the U.S. housing market has not reached a bottom. We're not even close," Wang said. "People are watching the U.S. median home price [currently about $206,500], when what they need to scrutinize is inventory levels. We're still at nine-month and ten-month inventories levels in most regions, and a healthy market has only a three-four month inventory level. So don't look for any economic stimulus from the housing sector."
Oh man, the news coming from the Fed seems to get worse and worse. On a day when financials like Citigroup (NYSE: C) continue to weaken -- Merrill Lynch (NYSE: MER) reduced Citi's outlook -- Fed head Ben Bernanke sends the market indication that we are not yet near the end of the mortgage debacle, and he is looking for a "vigorous response" to address it.
According to an AP article, Bernanke, in an address to a banking group, stated that the mortgage crisis was not done, and that more relief would be necessary for homeowners who simply are unable to balance their books. This isn't what anyone on Wall Street wanted to hear, and certainly not what an individual investor like myself was looking for, either; I have ample financial exposure in the form of MFA Mortgage (NYSE: MFA) and Newcastle Investment Corp. (NYSE: NCT).
Further, Bernanke made a suggestion that bankers would obviously find tough to implement -- he said that a reduction in loan principal might be an appropriate way to relieve a struggling owner of real estate. Hmmm, that might not go over too well, especially with the crowd that isn't happy with government intervention -- now Bernanke is calling for lenders to be more lenient? But, what should one expect? This is the Fed, after all, and it's the institution's job to promote some economic homeostasis in times of need. Bernanke believes more foreclosures are coming, and he wants to get ideas out there that will save as much home equity as possible. He brings up a good point, implying that lenders will benefit from loan-principal reductions simply because the rate of foreclosures would, in theory, decline as a result of such a tactic.
The U.S. Federal Reserve's effort, in coordination with the European Central Bank and three other central banks, to add liquidity by special and traditional means represents a prudent step to maintain properly functioning credit markets, economists and analysts told BloggingStocks on Wednesday.
Further, the move is the largest coordinated international monetary policy action taken since the world's major central banks provided liquidity to ensure proper market function following the September 11, 2001, terrorist attack on the United States.
The Fed announced Wednesday that it would inject up to $40 billion in reserves into money markets via a new, temporary program called a "term-auction facility." The emergency funds would be made available to banks next week via auction process -- $20 billion each -- on December 17 and December 20. The Fed also said it is setting up lines of credit with the European Central Bank and the Swiss Central Bank that could be used for additional resources.
There are days when the U.S. Federal Reserve probably feels like it's part of a well-researched, coordinated public policy effort to both keep the U.S. economy growing at an acceptable rate with low inflation, and serve as an engine for global growth. Then there are days like today, when the Fed undoubtedly feels like it's out there on its own, like that well-known bald eagle -- a solitary guardian amid ever-present risks and dangers.
The Fed meets December 11 to decide whether to continue to ease monetary policy. The consensus among economists and Wall Street analysts is that the Fed will lower key short-term interest rates by a quarter-percentage point to 4.5%, with some analysts predicting a half-percentage point cut by the Fed.
In an effort to stimulate domestic demand amid a U.S. economy slowed by subprime mortgage defaults, the Fed has twice lowered key interest rates this year, cutting the Fed funds rate -- the rate banks charge each other -- to 4.50%, and the discount rate -- the rate the Fed charges banks for short-term loans -- to 5.00%.
San Francisco Federal Reserve Bank President Janet Yellen is on the wires again, becoming the latest Fed governor to note that the U.S.'s economic slowdown is bigger than she expected, Bloomberg News reported Tuesday.
Last week Fed Chairman Ben Bernanke and Vice Chairman Donald Kohn also noted that credit market woes fed by subprime mortgage and related asset defaults tipped the scales toward 'the downside risks to growth.'
Yellen said recent data on retail sales and consumer spending were not that encouraging, Bloomberg News reported.
Could an ongoing shift in economic fundamentals drive a dollar rally in 2008? It's possible, currency analysts say, if the U.S. economy also follows-through with modest economic growth in 2008.
"I am confident that the dollar will have a significant rally next year, especially against the euro and the pound,'' Stephen Jen, the London-based head of currency research at Morgan Stanley told Bloomberg News on Monday. Jen expects the U.S. currency to strengthen to $1.35 against the euro by December 2008. "The deficits are shrinking fast.''
The dollar traded at $1.461 against the euro, at $2.0640 against the British pound, and at 110.46 yen against the Japanese yen Monday afternoon.
In almost all economic environments, the U.S. Federal Reserve is taciturn regarding its likely next monetary policy decisions.
But of late the Fed has deviated and taken a specificity-is-better route, with Federal Reserve Governor Randall Kroszner stating before a Manhattan group that another rate cut would probably provide few additional stimulative benefits for the U.S. economy.
The Fed has cut benchmark interest rates twice, starting in September. The Fed Funds rate, the rate banks charge each other, now stands at 4.50%, and the discount rate, the rate the Fed charges banks for short-term loans, is at 5.00%.
In his IIF remarks, Kroszner added that he expected the housing recession to worsen, with weaker home sales, but that longer-term, he expects the U.S. economy to return to a sustainable growth rate after a difficult few months.
Fed Analysis: Kroszner's remarks were candid, if not the good news on interest rates Wall Street likes to hear from the Fed. Kroszner's candor indicates that The Fed is looking past October's 0.5% decline in Industrial Production and related, recent soft economic data, toward what the Fed believes will be an accelerating U.S. economy in Q1, stimulated by the Fed's September and October interest rate cuts. Nevertheless, the stand-pat Fed stance is likely to draw criticism in investor and economic circles if additional Q4 data reveals a barely-growing U.S. economy.
Stock futures started the day on a positive note, turning sharply higher in reaction to a wider-than-expected decline in August's producer price index (PPI) number. Despite thin volume during the morning hours, the major indices hovered in the black, awaiting the 2:15 interest-rate decision from Ben Bernanke and the Federal Open Market Committee.
Pleasantly surprising even the doves among us, the rate-setting board made an aggressive rate cut of 50 basis points to 4.75%. And ... they were off. Nearly all market sectors closed in positive territory, led by strong gains from the housing and financial-services groups (areas that have been most adversely affected by the recent credit crunch and subprime woes).
By the time the closing bell sounded, the Dow Jones Industrial Average (DJIA) had gained 336 points - the blue-chip index's biggest single-day jump in almost half a decade. With 29 of its 30 components closing above break-even - Boeing (NYSE: BA) was the lone exception - the Dow settled at 13,739.4, closing above the 13,700 level for the first time since July 25.
Elsewhere, the S&P 500 Index (SPX) tacked on 43 points, or 2.9%, to 1,519.78. Today marked the index's first close above the psychologically significant 1,500 threshold since July 25. And tech stocks weren't left out of the fun ... the Nasdaq Composite (COMP) rallied 70 points, or 2.7%, to 2,651.7, taking out the 2,650 mark for the first time since July 23. All three of the major market averages ended the session at their intraday highs.
The Bear Stearns Companies Inc. (NYSE: BSC)'s option prices decrease after the Federal Open Market Committee lowers rates; BSC earnings per share (EPS) come out on September 20:
BSC is expected to report 3Q EPS of $1.78 on September 20, according to Thomson First Call. BSC was recently up $3.22 to $118.47. The FOMC lowered the Fed Funds rate by .50 to 4.75%. BSC September 120 straddle was priced at $7.30. BSC October option implied volatility of 49 was below a level 58 from two hours ago and below its 7-week average of 57 according to Track Data, suggesting decreasing price risk.
Morgan Stanley (NYSE: MS) volatility decreases after FOMC Lowers rates:
MS EPS comes out on September 19. MS is expected to report 3Q EPS of $1.53, according to Thomson First Call. MS was recently up $3.68 to $68.58. The FOMC lowered the Fed Funds rate by .50 to 4.75%. MS September 70 straddle was priced at $3.05. MS October option implied volatility of 35 was below a level of 38 from two hours ago and near its 7-week average of 38 according to Track Data, suggesting decreasing risk.
GS EPS comes out September 20. GS is expected to report 3Q EPS of $4.35, according to Thomson First Call. GS was recently up $11.75 to $199.35. The FOMC lowered the Fed Funds rate by .50 to 4.75%. GS September 200 straddle was priced at $8.40. GS October option implied volatility of 33 was below a level of 39 from two hours ago and below its 26-week average of 35 according to Track Data, suggesting larger risk.
Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.
The Fed's decision Friday morning to lower the discount rate -- the rate at which the Fed makes direct loans to banks -- by 50 basis points to 5.75% is being viewed, at least initially in financial and policy circles, as a prudent step to address a liquidity crunch.
Further, Wall Street's initial reaction was positive, with the Dow up about 200 points to about 13,047 in the first hour of trading.
For the most part, analysts agreed that the Fed, by using the discount rate, has provided essential liquidity, while not violating the doctrine of moral hazard, i.e. create a monetary stance that encourages reckless, irrational lending.
Further, the Fed's move Friday also maintains the Fed's option of cutting, raising or maintaining the federal funds rate - the rate at which private institutions lend to other depository institutions overnight. The target for the federal funds rate remains 5.25%. Even so, many economists expect the Fed to cut that rate at the Fed's next meeting on Sept. 18.
As expected, the Federal Reserve Board is leaving rates unchanged following their meeting today. The federal funds rate will remain 5.25% until next month's meeting. While many analysts believe this lack of change will continue through the end of the year, some are saying that one more increase will take place in the next few months.
Unfortunately, Ben Bernanke gave no interesting snippets in the press release announcing the results of the Fed meeting, so we'll just have to wait for the juicy stuff I suppose.
There are a few developments that gladden the heart of nearly every business executive. Rising retail sales. Rising real incomes. Sustained job growth and household formation. And lower interest rates from the Fed.
Oh man, the news coming from the Fed seems to get worse and worse. On a day when financials like 
There are days when the 
Could an ongoing shift in economic fundamentals drive a dollar rally in 2008? It's possible, currency analysts say, if the U.S. economy also follows-through with modest economic growth in 2008.
Stock futures started the day on a positive note, turning sharply higher in reaction to a 
The Bear Stearns Companies Inc.
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