FCC to NFL: Let’s talk about those game blackouts

Fresh off a news-packed week that sent the indexes higher, stocks pulled back in today’s trading, partly in reaction to a disappointing housing report and statements from China’s finance minister that indicated more aggressive stimulus wasn’t forthcoming. Tech shares were generally weak, with Alibaba’s shares (BABA) dropping 4.26% today after its initial public offering last Friday.

The Dow fell 107 points, with 25 of its 30 components losing ground; the S&P 500 Index lost 16; and the Nasdaq dropped 52. Decliners led advancers by nearly five to one on the NYSE and just under four to one on the Nasdaq. The prices of Treasuries strengthened. Gold futures rose $1.30 to close at $1,217.90 an ounce, and the price of crude oil lost 78 cents to settle at $90.87 a barrel.

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The Fed: Raising rates as economic maintenance, not tightening

Manley on the Street: The Fed: Raising rates as economic maintenance, not tightening“First, do no harm.” —Hippocratic Oath

There is a story about the early days of the Christian Brothers’ winery, when the order first decided to try advertising its products. Being properly obedient, the brothers wrote to the Vatican for permission to do this. No answer was forthcoming for some time. When it did arrive, the directive was curiously cryptic: “You may advertise your products, so long as the advertising is without effect.”

I think the story is quite apropos for the Federal Reserve’s (Fed’s) position on short-term interest rates: It will raise them but only if higher interest rates have no impact at the beginning.

I think it is very important for equity investors to understand that tapering does not equal tightening. I don’t even think that raising interest rates equals tightening if the pace of the increase is slower than the increase in the interest rate that participants are willing to pay for money in an improving economy. In other words, if, in an improving economy, borrowers see improved prospects for the return on their investments, they will pay more for that money. In a deteriorating economy, they should see bleaker prospects and, in consequence, not be willing to pay as much as they had before. Continue reading

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Restaurant menus go on a diet

Quadruple witching and Alibaba’s IPO led to a day of heavy trading, and the markets closed mixed. The Dow reached a new high by gaining 13 points, with 18 of its 30 components advancing; the S&P 500 Index lost 0.96; and the Nasdaq fell 13, dragged lower by Yahoo. Decliners led advancers by more than three to two on the NYSE and by almost two to one on the Nasdaq. The prices of Treasuries strengthened. Gold futures dropped $10.30 to close at $1,216.60 an ounce, and the price of crude oil slipped $0.33 to settle at $91.65 a barrel.

For the week, the Dow added 1.7%, the S&P 500 Index gained 1.2%, and the Nasdaq edged higher 0.2%.

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New record highs and a peek under the sea

The major indexes continued their upward momentum following the Federal Reserve’s commitment to low interest rates yesterday, with the Dow and S&P 500 Index closing at new record highs. The Dow added 109 points, the S&P 500 Index rose 9, and the Nasdaq gained 31. Twenty-six of the Dow’s 30 components were higher, led by DuPont’s (DD) 2.8% gain after it became the subject of breakup talk yesterday. Advancers led decliners by three to two on both the NYSE and the Nasdaq. Treasury prices fell, and gold futures declined $9.00 to $1,226.90 per ounce. Crude oil futures slipped $1.35 to $93.07 per barrel.

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The Fed: Treasuries and mortgages (excerpt)

With the Federal Reserve (Fed) winding down its asset purchase program of treasuries and mortgage-backed securities, investors are wondering how this might affect those two markets. Here to answer are two guests with Wells Capital Management: Michael Bray and Chris Kauffman, both portfolio managers who invest in the treasury and mortgage markets. They lend insight in this excerpt of On the Trading DeskSM from Tuesday, September 16, 2014.

Listen to the full program.

Michael Bray

Michael Bray

Let’s answer the lead question before digging into more detail. With the bond program set to end what sort of effects might we expect, Michael?
Michael Bray:
We feel the information has been pretty complete from the Federal Reserve about the purchase program. That said, the market’s pretty efficiently priced. So we wouldn’t expect any kind of a big treasury rate move just because the program ends. They’ve been very transparent about when and how it would end. They’ve bought a lot of securities. And the real re-pricing took place when Bernanke mentioned tapering back in 2013. The market re-priced by 100 basis points, so we think that was the change in treasury rates and it should be fully priced.

And Chris, what about the mortgage market?
Chris Kauffman:
The big question in the mortgage sector is when will the Fed begin to curtail the reinvestment of principle and interest (P&I) from the balance sheet holdings of mortgages and treasuries? Right now they’re spending about $20 billion a month in P&I over and above their QE3 purchases, which has now totaled about $550 billion since the beginning of QE3. A decision to reduce the reinvestment and ultimately end it is going to put pressure on mortgage spreads, we think.

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European Central Bank to headline at Oktoberfest?

The European Central Bank’s (ECB) first tender of its targeted long-term refinancing operation (TLTRO) was a bit below forecast. In June, the ECB announced that it was going to provide cheap funding to banks that expand lending to the non-housing related private sector. The terms are quite generous: four years of financing at 10 basis points over the prevailing main refinancing rate. In the first of eight TLTROs, 255 banks borrowed a total of 82.6 billion euros at 0.15%.

The ECB is estimating that banks will borrow a total of 400 billion euros over the course of the eight operations. The bulk of the interest will likely be in the December operation, which is the first one after the ECB releases the results of its asset quality review as part of its new role as regulator of the major eurozone banks. The ECB will share the results of its asset quality review with the banks in late October and then with the public shortly thereafter, which will likely wave the green, yellow, or red flag for bank lending.

Oktoberfest, the great German festival that runs from September 20 to October 5 this year, is a time of music, merriment, and allegedly some other activities that involve fermented beverages. The ECB meeting on October 2 will be in Naples, Italy, but there may be some beer steins clinking together as the ECB also releases details about an asset purchase program it revealed at its last meeting. With 400 billion euros in stimulus from the TLTRO and probably 300 billion euros in asset purchases, the ECB’s balance sheet will expand from about 2 trillion to 2.7 trillion euros. That should provide a big dose of stimulus to eurozone economic activity.

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Fed still has “considerable time”

The major indexes flatlined most of the session in anticipation of the Federal Reserve’s September meeting announcement and ended slightly higher on the day. The Dow gained 24 points, the S&P 500 added 2, and the Nasdaq rose 9. Seventeen of the Dow’s 30 components rose, led by DuPont (DD), as an activist investor, Trian, called for the breakup of the chemical company. Advancers narrowly edged decliners on the NYSE and beat by four to three on the Nasdaq. Treasury prices fell, while gold futures slipped 80 cents an ounce to $1,235.90. Crude oil prices edged 46 cents lower to $94.42 per barrel.

The Federal Reserve’s September policy meeting ended with little surprise from the Fed. The bond-buying program was reduced another $10 billion, down to just $15 billion per month, and is expected to conclude after its October meeting. The closely-watched-by-economists “considerable time” language remained within its statement. Economists speculated that its removal could move up the Fed’s timetable to early spring to start raising rates. The federal funds rate has been kept near zero since December 2008. Here is Dr. Brian Jacobsen’s assessment of the Fed meeting.

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The Wall Drug of Fed meetings

Thanks to a great marketing campaign, with billboards that say, “500 miles to Wall Drug,” a small mall in South Dakota is a major tourist attraction. It’s fun to go there, but I don’t know if it’s worth the drive, or the hype. The Federal Open Market Committee (FOMC) meets in a building that’s a mere 1,554 miles to Wall Drug. The September FOMC meeting has completed and not much has changed. At least at Wall Drug you get free ice water and 5 cent coffee. The FOMC gave us less than that. It wasn’t worth the media hysteria.

The FOMC announced it will wrap up its asset purchase program in October. The economy is expanding at a moderate pace, but the Fed still sees a lot of room for improvement. Richard Fisher and Charles Plosser both dissented from the policy statement, as they don’t like the Fed’s forward guidance. Ever since September 2012, the Fed has used the phrase “considerable time” to describe the time between when it stops its asset purchases and when it starts increasing interest rates, and it kept this language in the current statement. Fisher and Plosser apparently think the language implies the Fed should wait longer than they’d like before raising rates. Well, they may as well get their objections in now since they won’t vote in 2015 when it comes time to raising rates.

The phrase “considerable time” must be read within the context of the Summary of Economic Projections. The Fed’s projections are consistent with the Fed increasing its target range for the federal funds by 0.25 percentage points at the June 2015 meeting and then increasing that range in 25 basis point increments into 2016 when it will likely pause, or slow, the pace of rate increases.

This is all very speculative, of course, since it depends on how the economy evolves relative to what the Fed officials expect. That’s why I think the Fed’s guidance doesn’t have to be purely date-driven or data-driven. The phrase “considerable time” is perfect in its ambiguity.

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The graying of television

The Federal Open Market Committee doesn’t release its policy statement until tomorrow, but that doesn’t mean it couldn’t move markets today. Stocks opened slightly lower this morning, but after a report from The Wall Street Journal said that the FOMC may keep the words “considerable period” in its statement, the markets turned sharply higher.

The Dow gained 100 points, with 29 of its 30 components advancing; the S&P 500 Index rose 14; and the Nasdaq was up 33. Advancers led decliners by nine to five on the NYSE and by six to five on the Nasdaq. The prices of Treasuries strengthened. Gold futures added $1.60 to close at $1,236.70 an ounce, and the price of crude oil climbed $1.96 to settle at $94.88 a barrel.

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The Fed: Treasuries and mortgages (podcast)

With the Federal Reserve winding down its asset purchase program of Treasuries and mortgage-backed securities, investors are wondering how this might affect those two markets. Here to lend understanding are two portfolio managers with Wells Capital Management: Michael Bray, CFA and Chris Kauffman, CFA.

Listen to the podcast.

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