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Five Things You Need to Know: 36%?, Inflation-Fighting Tactic No. 137, Rich to Get Richer!, Ford in the Road, Rowling Indicted in Harry Potter Murder Plot


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. 36%?

Fed Funds Futures are currently pricing in about a 36% chance for a 25 basis point Fed Funds rate hike next week to 5.5%.

  • First off, what are Fed Funds Futures, and what does it mean that they are "pricing in" the probabilities of the next FOMC rate decision?
  • Fed Funds Futures are listed on the Chicago board of Trade (CBOT).
  • The owner of a fed funds futures contract is obliged to take delivery of the interest paid on a principal amount of $5 million overnight fed funds held for 30 days.
  • How well does the Federal Funds Futures rate predict the future Federal Funds rate? That is what the Cleveland Fed set out to answer in a paper titled, incredibly enough, "How well does the Federal Funds Futures rate predict the future Federal Funds rate?"
  • The paper found that, "Contrary to popular belief, federal funds futures rates do not tell us precisely where the market thinks federal funds rates will be in the future. On average, futures rates overpredict future fed funds rates, and, depending on whether fed funds rates are falling or rising, the futures rate may consistently overestimate or underestimate the future fed funds rates."
  • Be that as it may, the (mere) 36% pricing for a FOMC rate hike is a first for this cycle, Merrill's David Rosenberg noted this morning.
  • Rosenberg says you have to go back to January 1994 to find the last time the Fed tightened with the futures pricing in such low odds a week before the meeting.
  • Of course, by January 1994 then-Fed Chairman Alan Greenspan was well ensconced in his leadership role and didn't face the same inflation-fighting credibility issues Chairman Bernanke faces.
  • Our bet is the Fed has no choice but to hike again.

2. Note to Fed: Central Bank Inflation-Fighting Tactic No. 137

But wait a minute, you think the only way the U.S. Federal Reserve can fight inflation is to raise short-term interest rates? Ho ho. Think again, Mr. Wheelbarrow Wallet.

  • Banks in Zimbabwe were swamped by customers yesterday after the central bank announced that three zeros were being taken off the Zimbabwe dollar to counter the 1,200% inflation rate, the highest in the world, according to The Telegraph (UK).
  • The devaluation sparked confusion among savers who quickly raced to deposit millions of banknotes, believing that they had to "legalize" their hoards of cash within the day.
  • The Reserve Bank of Zimbabwe also devalued the currency by 60 per cent and made it illegal to hold more than £22 in cash.
  • Gideon Gono, the governor of the Reserve Bank, announced the changes in a televised address on Monday.
  • "This is just one monetary mechanism to help commerce and everyday life more convenient," Mr Gono said.
  • "We have to go to the Reserve Bank this minute as we have to explain that we had all this money on us, [around £220] to pay wages on Friday," a businessman in the capital Harare told The Telegraph.
  • Of course, he was using the term "money" in the loosest possible sense of the word... literally.

3. Rich to Get Richer!

Goldman Sachs (GS) is expanding its private banking services to focus on the world's wealthiest people, according to the International Herald Tribune.

  • Goldman Sachs, long known for its prowess at making money for its own balance sheet, now plans to offer that money-making savvy to very rich individuals worldwide, and has been quietly beefing up its private wealth management operations outside the United States, the IHT reported.
  • Sweet! How much does a guy like me need to "qualify" for this ultra-exclusive private banking prowess?
  • Goldman is focusing on investors with more than $12.7 million in assets to invest.
  • Oh.
  • Also, the bank is focusing primarily on regions in Europe, the Middle East, Africa and Asia because people are growing wealthier at a much faster clip outside the U.S. than within it.
  • According to a Merrill Lynch/ Cap Gemini study there are 8.7 million millionaires worldwide, and about 85,400 individuals with net financial assets worth more than $30 million.
  • The percentage of millionaires grew by double digits in South Africa, India, South Korea and Russia in 2005, the survey said. In North America it grew at a paltry 6.9 percent.
  • Why the expansion? Simple, private banking revenues are smoother and far more predictable than Investment Banking and trading revenues.

New Private Client Group Slogan:

4. Warning: A Ford in the Road

Ford (F) is launching a strategic review of its ailing brands, the Wall Street Journal says this morning, hoping to potentially sell some assets or develop broader alliances with other companies.

  • Speaking of Goldman Sachs, Ford has hired Kenneth Leet, a former investment banker at Goldman, to spearhead efforts on an assessment and evaluation of Ford's struggling brands.
  • According to the Journal, Mr. Leet's team will consider whether Ford should sell some underperforming brands or pursue alliances with other global auto makers.
  • Like General Motors, Ford has suffered from high health care costs and poor recent sales for many of its vehicles in the U.S.
  • Overall, Ford lost $123 million in the second quarter.
  • Ford shares closed yesterday at $6.58 from about $11 a year ago, slashing the the company's market cap to $12.4 billion.
  • While Mr. Leet has a difficult job ahead of him, there are a number of struggling Ford brands and vehicles that immediately stand out to us as... problematic.
  • Below we look at a couple of Ford's more troubled vehicle brands and what may have gone wrong.

1. The Ford Jalopy XL
The Jalopy XL was designed to take advantage of a surge in consumer tastes for retro-looking vehicles that hearkened back to a simpler era. The result? Not good.

2. The Ford Freeloader SUV
The Freeloader was actually a pretty good idea... in a way. Recognizing that spiking gas prices were threatening the company's core SUV sales, Ford engineered an SUV that could run totally without gas... because it came without an engine. Unfortunately, without an engine, in order to go anywhere the vehicle required towing.

3. The Ford Installment Agreement 365
The Installment Agreement 365 looked sharp on paper... because it was just paper. It wasn't even a car. It was just an installment loan that credit-hungry consumers could take down without actually having the hassle of a car. The terms of the installment agreement, $365 for 60-months at 2.5% interest, were ok, but the brand was doomed due to poor resale value as consumers noticed they didn't actually own anything to re-sell.

5. Author Rowlings Indicted in Plot to Kill Harry Potter

Two of America's top authors, John Irving and Stephen King, made a plea to J.K. Rowling on Tuesday not to kill the fictional boy wizard Harry Potter in the final book of the series, Reuters reported.

  • Rowling, well into the process of writing the final book in the popular Harry Potter series, says she has not yet decided upon the fate of the title character.
  • Meanwhile, American authors John Irving and Stephen King have both made public pleas to spare the popular wizard.
  • Rowling noted that Irving has killed off many more characters than she had, yet remains free.
  • Why is this in the news?
  • The lines between fiction and reality have now totally blurred beyond recognition and distinction.
  • I am Batman.
No positions in stocks mentioned.

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