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Five Things You Need to Know: C-c-c-consumer C-c-c-confidence, India's Hike, The Fed Doesn't Matter, Echo Echo Bubble Bubble, Non Sequitur


What you need to know (and what it means)!


Minyanville's Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. C-c-c-consumer C-c-c-confidence

After a quiet day yesterday on the data front, today we get Consumer Confidence, Existing Home Sales and the Richmond Fed Manufacturing Index. Let's look at Consumer Confidence for a moment.

  • The Consumer Confidence Survey is based on a representative sample of 5,000 U.S. households and their assessment of current conditions and their outlook for the next six months.
  • Consumers are also asked their outlook on the labor market and their income expectations.
  • The consensus expectations for July are for 104.1. Hmmm, dicey.
  • Last month consumer confidence came in at 105.7, a slight increase over May.
  • This time, however, as consumers we've all had a chance to hit the roads for vacation, pay more for gas, see our brokerage statements reflect the May decline, hear about our cousin's layoff and prepare for all out global war and potential nuclear annihilation.

2. India's Hike

India's central bank raised its benchmark interest rate to 6%, a four-year high.

  • Governor Yaga Venugopal Reddy increased the Reserve Bank of India's reverse repurchase rate by a quarter percentage point to 6 percent, the bank said in a statement in Mumbai.
  • It was the third time since April the Reserve Bank has raised rates.
  • The decision was widely expected and the Bombay Sensex Index finished up 1.96% to 10,415.61.
  • The primary mechanism by which the Reserve Bank adjusts liquidity is the overnight borrowing rate.
  • Like all central banks, the Reserve Bank of India has been fighting record-high fuel costs and increasing prices at the producer level.
  • Moreover, the political pressures due to recent price increases allowed by the government have been building.
  • India's Communist parties last week staged protests across the country, saying the government hasn't done enough to curb inflation.
  • Seventeen central banks raised borrowing costs in June, according to Bloomberg.
  • And at least eight besides India have increased rates in July.

3. The Fed Doesn't Matter

Ok, so 17 central banks tightened liquidity in June, and nine (so far) have tightened up in July. Still, for most people, the only thing that matters is what our central bank here in the U.S. will (or won't) do. They're missing the point.

  • Let's talk about the carry trade. The mechanics of the carry trade are pretty simple. Basically, it involves borrowing cheap money and investing it in something higher yielding.
  • The Financial Times this morning recommends using the Swiss franc for your carry trade pleasures, but that is a different story.
  • Instead, what caught our eye in the FT story is the comment that the Bank of Japan has been "the driving force behind world liquidity this year."
  • Indeed, that liquidity, the fuel to the yen carry trade, with short-term rates below 1%, has been taken away.
  • With Japan, the world's largest creditor nation, raising rates and putting upward pressure on the yen, the carry trade in yen is being forced somewhere else. That's the point of the FT article.
  • It's also why the Fed doesn't matter as much as everyone thinks. They're just one piece in a very large puzzle.

4. Echo Echo Bubble Bubble

The LA Times over the weekend wondered if the Internet bubble is about to burst.... again!

  • In the first three months of this year, venture investors funded 761 deals worth about $5.6 billion, according to the article.
  • That's a 12% increase from last year and the most since Q1 2002.
  • The sector seeing the largest gain? Media and entertainment.
  • The $254.9 million invested in blogging and online social networks in the first half of the year already exceeds such spending for all of 2005, according to Dow Jones VentureOne, the article notes.
  • Of course, venture capitalists say they're being more responsible this time.
  • "Alan Patricof, who provided early funding for America Online, Office Depot Inc. and Apple Computer Inc., said the investment community probably won't reach the late-1990s level of irrational exuberance."
  • And other investors argue that there won't be another dot-com implosion, that the investment boom in online media companies is part of the natural ebb and flow of venture capital.
  • Meanwhile, Minyanville Professor Scott Reamer observed that "When observers think that the last several years of extreme volatility and bubble/crash cycles is "part of the natural ebb and flow"…you can bet it certainly isn't."

5. The Non Sequitur

Minyanville Presents: The Non Sequitur


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