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Five Things You Need to Know: What Have They Done?!, Why the Fed Doesn't Matter (Part Two), Fee Fi Fo Doh! for Financials, Denial Isn't a River in Egypt, Jagger in the 8th


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. What Have They Done?!

Yesterday afternoon the Federal Reserve Open Market Committee left the Fed Funds rate unchanged at 5.25%. What have they done?!

  • Let's cut to the chase. As much as Wall Street tries to make this stuff rocket science, it's far simpler.
  • The Fed, after months of claiming "data dependency" and "inflation vigilance," yesterday admitted that the U.S. economy cannot handle another rate hike... despite data that makes their "inflation fighting" posture a touch... uncomfortable.
  • Well, uncomfortable for us anyway, but that's obviously beside the point.
  • So, with 21 25 basis point rate cuts of breathing room now built in to the 5.25 % Fed Funds rate (21 x .25 = 5.25%) the Fed is signaling that they are now prepared to fight deflation... just as Ben Bernanke has always said they would be.
  • What have they done? They've set the stage for the coming series of 2007 rate cuts. Prepare now.

2. Why the Fed Doesn't Matter, Part Two

On Monday we outlined reasons why the Fed doesn't really matter right now. If yesterday's supposedly bullish daily double of a rate pause followed by loosening inflation language doesn't convince, let's revisit the liquidity match.

  • Right now markets are about risk aversion, not inflation. What we have is closer to stagflation, but in this case stagflation is simply the progression of how secular inflation slows - appearing as stagflation - before crossing over to secular deflation.
  • Or, to put it a simpler way, the markets right now are about slowing liquidity growth and the decreasing of time preferences that are resulting from the recognition of that slowing growth.
  • Let's look at the Central Bank scorecard:
  • 17 central banks reined in liquidity in June. Eleven tightened in July. And five have raised rates so far this month.
  • Although Indonesia (Thank You!) just cut rates by 50 basis points, and the Reserve Bank of Australia recently indicated a more "neutral stance," much of the rest of the world is far less "accommodative."
  • Bank of England? They're tightening.
  • Bank of Japan? Tightening.
  • European Central Bank? Tightening.
  • People's Bank of China? Anybody's guess - and ours is that with monetary growth recently slowing to 18.4% in July, down from 18.9% in June, is that they're in position to be tightening too... whether they like it or not.

3. Fee Fi Fo Doh! for Financials. (They just don't know it yet.)

Why are financials, especially the large banks, doing so well? This question will soon be moot.

  • Some say it's the revenue smoothing effect of a continuing progression and changeover to fee-based business models.
  • And remember all those outstanding derivatives contracts? They generate fees for somebody. In a paper asset-based economy, even one that may be transitioning from risk-seeking to risk aversion, somebody's gotta make money off the transition right?
  • Doh! Turns out a number of dirty little secrets for financials began appearing on the horizon this week.
  • The New York Times today reports on the proliferation of banks. Apparently, they're like rabbits. Some may even be opening new branches inside of existing branches for all we know!
  • "Big banks have been on a branch building binge in the last few years, trying to grab and hold onto customers. But this recent push may be nearing its final frontier," the Times said.
  • Meanwhile, a darker report was issued in Washington, one that has yet to make the front pages.
  • The report from the American Enterprise Institute, called "The Canary in the Coal Mine: What the Growth of Foreign Securities Markets and Foreign Financing Should Be Telling Congress and the SEC," notes the following ominous progression:
    "In global financial transactions, and in the withdrawal of U.S. companies from public ownership, U.S. financial markets are no longer seen as hospitable either to companies or financial transactions. Although capital continues to flow into the United States for wealth protection, foreign companies are avoiding the United States, and financing transactions are increasingly carried out in freer and more efficient markets abroad."
  • Protectionism can take many forms.
  • It can be overt, as in, we must pass legislation that "protects" domestic jobs, or farming subsidies and pricing.
  • Or it can be covert, even unintended, such as legislation passed to "protect" homeland security for example, and which ironically creates protectionist policies that slow the flow of capital into this country.

4. Denial Isn't a River in Egypt... it's a House for Sale in New York

Statistics show that the inventory of available houses in New York, New Jersey and Connecticut has soared, the New York Times reported.

  • According to the Times, Lynn and Frank Balducci put their 1951 Colonial home on the market in early May but have yet to get a single offer as of early August - even after they dropped their asking price to $539,000 from $589,000.
  • The Balduccis' agent, Peggy Chugkowski, with Prudential Douglas Elliman in Massapequa, said, "A year ago, this house would have sold within two weeks maximum, and they would have easily gotten close to $600,000," she said. "This really shows you what's going on right now. It's like the market just collapsed."
  • The Times notes, optimistically, that "collapsed may be a bit strong.."
  • Welcome to denial. It can't happen here, can it? Prices can't just keep going down, can they?
  • "In many cases, buyers and sellers have reached a wary stalemate," the Times article says.
  • Stalemate, not for much longer. When the rising prices of "Things We Need" meets the stalemate between buyers and sellers of "Things We Want," sellers of "Things We Want" lose.

5. Rolling Stones Enter Kentucky Derby!

In a shocking display of inappropriateness, the Rolling Stones have apparently entered the Kentucky Derby, according to the Associated Press.

  • The last time the Stones raced in Louisville was 1989.
  • That means the aging rockers will be coming in off a lengthy 17-year layoff despite the advice of veterinarians and physicians.
  • Entries for the Derby are as follows:
    1. Mick Jagger - 1-2
    2. Charlie Watts - 2-1
    3. Ron Wood - 3-1
    4. Keith Richards - 50-1
  • The big question for the Stones is the grueling one mile-a-quarter distance.
  • Tough enough for three-year-old colts, the distance of the Derby may prove formidable for the veteran rockers.
  • How to bet: $100 to win on Watts; $25 exacta box, Jagger - Watts.

Place your bets!

No positions in stocks mentioned.

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