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business newsDecoding the Wall Street Journal: The Federal Reserve Edition
By
Brian Sozzi
Jan 23, 2012 5:05 pm
Fed officials gather this week to decide what to do with interest rates and discuss where the economy is headed. Here, some terms and ideas you'll need to understand beforehand.
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Editor's note: This newsletter originally appeared on Decoding The Wall Street Journal, a new website based on a book co-authored by former CNBC anchor Nicole Lapin and former Wall Street analyst Brian Sozzi. Like the book, this newsletter aims to unlock hidden financial clues embedded in world news.
Money & Investing: “Fed Forecasts Could Awaken Treasurys”
Headline decoding: Federal Reserve could say something that rattles Treasury market. What’s a Treasury market?
Treasurys, as they are more commonly called (sound smart: government debt that is sold to fund the functions of our government), are confusing to grasp. Honestly, we feel that patrons of the Wall Street Journal are only aware that when Treasurys rise in value their yield goes down (percentage rate shown in the paper) and vice versa. Nothing is wrong with having that well-worn fundamental tidbit in the back pocket. However, what makes Treasurys so difficult is that the obvious tends to be only a fraction of the playbook. For example…
Low interest rates: Demand for “notes” dissipates, the yield goes higher, and mortgage rates will creep up. Investors are opting to sell Treasurys and buy stocks which usually increase in value when there is a little inflation in the economy and interest rates are low. Furthermore, inflation eats into the benefits of holding a government security that has a fixed return.
Quantitative easing is a monkey wrench: "QE," as the nerds say, is a process in which the Federal Reserve buys debt (mortgage debt and government debt), giving money to banks, in turn which are supposed to lend it to consumers (they often purchase stocks, sending their prices higher). If this process is happening, like it is currently, the government is essentially removing the supply of paper from a market, raising prices, and lowering yields. The reason for doing this musical chairs with numbers in a computer: the Federal Reserve wants to spark economic growth through the buying of homes, cars, etc.
Now that we have set the groundwork, let’s dissect this Monday morning story. The Fed meets this week to discuss interest rates and a whole bunch of other fun topics (we will be tweeting live as the Fed Chairman holds his afternoon press conference…so tune in for decoding action!). Obviously investors in T-notes will be listening with extra special attention; Treasury prices have been on a big run up and yields are very low. If the Fed once again thinks extra low (sound smart: accommodative) rates are warranted until mid-2013, then yields will continue to be under wraps. If by chance the Fed hints at raising rates before mid-2013, yields could increase and prices decrease. We continue to think the Fed will not utter anything regarding a shift in its “policy stance.”
Decodable Moments
This is a special week, decoders. The Federal Reserve’s high-ranking officials gather in Washington, DC, on Tuesday and Wednesday to decide what to do with interest rates (raise or lower) and talk a little on where it thinks our economy is headed (toilet or greener pastures). There are actually many more details to a typical Fed meet and greet session, but we would like to keep things accessible and not get sucked into Wall Street code. Come Wednesday’s financial news extravaganza, you are likely to see the following terms that without us pointing them out beforehand, would seem comparable to reading a foreign language…backward and wearing a blindfold.
We always stumble upon quotes in the Wall Street Journal from an individual that is an expert in a particular financial field. These are the people in the trenches daily buying stocks, currencies, or options to make money, or not lose money, for their clients. Readers of the paper, in our opinion, never really drill down on the quotes of financial experts because their language is very specific to their jobs. Hence, it’s hard to relate to experts. That’s where we come in, deciding to decode the thoughts of the movers and shakers in our exclusive to Sleuth members guest writer series that will be showcased throughout the week. Not only will you finally learn what the experts in the paper are talking about, but will be better able to profit from their words of wisdom…which will appear in here of course!
Ed Ponsi: Barchetta Capital
“With all of the financial turmoil currently swirling around Europe, it’s no wonder that many analysts believe the currency used by 17 European countries, the euro, will fall in value. Greece is on the verge of default, according to the ratings agencies, and Portugal and Ireland may be close behind. Many of the biggest banks and most popular analysts are calling for the euro to fall to parity with the U.S. dollar.”
The Expert Decoded:
Money & Investing: “Fed Forecasts Could Awaken Treasurys”
Headline decoding: Federal Reserve could say something that rattles Treasury market. What’s a Treasury market?
Treasurys, as they are more commonly called (sound smart: government debt that is sold to fund the functions of our government), are confusing to grasp. Honestly, we feel that patrons of the Wall Street Journal are only aware that when Treasurys rise in value their yield goes down (percentage rate shown in the paper) and vice versa. Nothing is wrong with having that well-worn fundamental tidbit in the back pocket. However, what makes Treasurys so difficult is that the obvious tends to be only a fraction of the playbook. For example…
Low interest rates: Demand for “notes” dissipates, the yield goes higher, and mortgage rates will creep up. Investors are opting to sell Treasurys and buy stocks which usually increase in value when there is a little inflation in the economy and interest rates are low. Furthermore, inflation eats into the benefits of holding a government security that has a fixed return.
Quantitative easing is a monkey wrench: "QE," as the nerds say, is a process in which the Federal Reserve buys debt (mortgage debt and government debt), giving money to banks, in turn which are supposed to lend it to consumers (they often purchase stocks, sending their prices higher). If this process is happening, like it is currently, the government is essentially removing the supply of paper from a market, raising prices, and lowering yields. The reason for doing this musical chairs with numbers in a computer: the Federal Reserve wants to spark economic growth through the buying of homes, cars, etc.
Now that we have set the groundwork, let’s dissect this Monday morning story. The Fed meets this week to discuss interest rates and a whole bunch of other fun topics (we will be tweeting live as the Fed Chairman holds his afternoon press conference…so tune in for decoding action!). Obviously investors in T-notes will be listening with extra special attention; Treasury prices have been on a big run up and yields are very low. If the Fed once again thinks extra low (sound smart: accommodative) rates are warranted until mid-2013, then yields will continue to be under wraps. If by chance the Fed hints at raising rates before mid-2013, yields could increase and prices decrease. We continue to think the Fed will not utter anything regarding a shift in its “policy stance.”
Decodable Moments
- Treasurys in a slumber: Yields are either low or high for a sustained period. Means investors have come to a conclusion on the economy and are not budging, for the time being.
- Long era of cheap money: Interest rates at 0% to 0.25% have been intact since December 2008. Being super cheap to borrow for three years…is a “long era of cheap money.”
- Eurozone crisis fatigue: A stock or bond market does not react (go up or down) to events emanating from 17 countries in Europe.
- Central Bank’s policy-making arm: Central Bank is, again, the classier way of saying something else, in this case Federal Reserve. The “arm” that makes policy are the voting members, such as the Chairman.
- Fed psychology: This ain’t taught in a college undergraduate class! Fed psychology is how the agency thinks as laid out in its post policy decision comments.
- Head of fixed-income: Person that is cut a check for being the big cheese on making calls (buy or sell decisions) on bonds of the government or of companies. Fixed-income securities offer consistent interest payments.
This is a special week, decoders. The Federal Reserve’s high-ranking officials gather in Washington, DC, on Tuesday and Wednesday to decide what to do with interest rates (raise or lower) and talk a little on where it thinks our economy is headed (toilet or greener pastures). There are actually many more details to a typical Fed meet and greet session, but we would like to keep things accessible and not get sucked into Wall Street code. Come Wednesday’s financial news extravaganza, you are likely to see the following terms that without us pointing them out beforehand, would seem comparable to reading a foreign language…backward and wearing a blindfold.
1. Hawk: What do hawks do? They circle their prey and then attack. Federal Reserve “hawks” are members of the club that lean toward higher interest rates after circling any number of economic data points.
2. Dove: Don’t these birds just look cuddly and cute? Same goes for Federal Reserve "doves," or those members that favor low interest rates in order to stimulate the economy.
3. Fed funds rate: Sexy way of saying “interest rate controlled by the Federal Reserve.”
4.Summary of Economic Projections (sound smart: SEP): Numbers compiled behind the scenes that reflect members trying to predict the future of the economy and inflation.
5. Size of the Fed’s balance sheet: Like a small business, the Federal Reserve (aka: the Fed) has a balance sheet. Unlike most small businesses, the Fed’s balance sheet holds all sorts of assets (mortgages, government debt) and trillions of dollars’ worth.
6. Quantitative easing: The financial buzzword of 2011. Navigate the coffee station at work by uttering: “QE is the Fed’s maneuver to buy debt and help the economy along.”
7. Tightening of policy: Act of taking interesting rates higher or stopping that QE thing.
8. Market confusion: What unfolds when investors and traders are divided about the Fed’s future intent; its confusing language does not help this at all.
9. Uncharted waters: Gosh we hate this term. Nevertheless, in terms of the Fed, means that it has never before done something like hold a press conference or release detailed economic projections.
10. FOMC: The Fed and its voting members.
11. Fed’s dual mandate: The Fed is the top dog in making sure inflation doesn’t run rampant and people are not hanging out on the unemployment rolls for a while.
Decoding the Experts: Up Close and Personal2. Dove: Don’t these birds just look cuddly and cute? Same goes for Federal Reserve "doves," or those members that favor low interest rates in order to stimulate the economy.
3. Fed funds rate: Sexy way of saying “interest rate controlled by the Federal Reserve.”
4.Summary of Economic Projections (sound smart: SEP): Numbers compiled behind the scenes that reflect members trying to predict the future of the economy and inflation.
5. Size of the Fed’s balance sheet: Like a small business, the Federal Reserve (aka: the Fed) has a balance sheet. Unlike most small businesses, the Fed’s balance sheet holds all sorts of assets (mortgages, government debt) and trillions of dollars’ worth.
6. Quantitative easing: The financial buzzword of 2011. Navigate the coffee station at work by uttering: “QE is the Fed’s maneuver to buy debt and help the economy along.”
7. Tightening of policy: Act of taking interesting rates higher or stopping that QE thing.
8. Market confusion: What unfolds when investors and traders are divided about the Fed’s future intent; its confusing language does not help this at all.
9. Uncharted waters: Gosh we hate this term. Nevertheless, in terms of the Fed, means that it has never before done something like hold a press conference or release detailed economic projections.
10. FOMC: The Fed and its voting members.
11. Fed’s dual mandate: The Fed is the top dog in making sure inflation doesn’t run rampant and people are not hanging out on the unemployment rolls for a while.
We always stumble upon quotes in the Wall Street Journal from an individual that is an expert in a particular financial field. These are the people in the trenches daily buying stocks, currencies, or options to make money, or not lose money, for their clients. Readers of the paper, in our opinion, never really drill down on the quotes of financial experts because their language is very specific to their jobs. Hence, it’s hard to relate to experts. That’s where we come in, deciding to decode the thoughts of the movers and shakers in our exclusive to Sleuth members guest writer series that will be showcased throughout the week. Not only will you finally learn what the experts in the paper are talking about, but will be better able to profit from their words of wisdom…which will appear in here of course!
Ed Ponsi: Barchetta Capital
“With all of the financial turmoil currently swirling around Europe, it’s no wonder that many analysts believe the currency used by 17 European countries, the euro, will fall in value. Greece is on the verge of default, according to the ratings agencies, and Portugal and Ireland may be close behind. Many of the biggest banks and most popular analysts are calling for the euro to fall to parity with the U.S. dollar.”
The Expert Decoded:
- Financial turmoil: Unless otherwise stated, will be referencing the European Union’s periphery countries (along the water!) troubles in trying to grow their economies and meet debt obligations. There was financial turmoil in 2008 here at home when Lehman Brothers folded.
- Currency falling in value: When an economy is weak, the currency will often be weak; who would want to own a piece of paper losing value because a country is losing value? Not many people.
- Greece is on the verge of default: The country may be unable to pay its creditors, or people that believed in the country at one point in time.
- Ratings agencies: S&P, Moody’s, and Fitch that rate a company’s or a country’s debt to help investors determine if they are sound investments (sound smart when drunk: these agencies are so after-the-fact in their analysis).
- Euro in parity to dollar: Complicated topic, so just remember it would be our currency equaling the euro in value.
No positions in stocks mentioned.
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