Market Week

FTP Test

2008-01-22T11:48:00.001-06:00

test

The Bear Scare...

2008-01-22T10:17:00.000-06:00

Since the beginning of the year the S & P 500 is off badly, almost 10%. With the losses early in the day today, many US and international indexes are on the verge of a bear market as defined by being down 20% from their highs. While volatility is a part of investing in the stock market, we have not seen this type of volatility in quite some time.

What is really going on here, and is this an opportunity to get into the market or a signal to get out?

If you look at the market over the past year, though, you see the damage is somewhat limited to a few sectors. Over the past 52 weeks, the S & P is down slightly over 7%. But, the sectors that have really contributed the most to this move are consumer discretionary and financials, down 25% and 31% respectively. This is due, in part, to what we believe is the beginning of a consumer recession.

We have mentioned in client meetings and several research pieces that the consumers’ willingness and ability to leverage their balance sheet was going to be limited because of moderating housing prices. That will affect both lenders and retailers.

Should I get out?

When markets are trading off of emotion it is not a good time to make wholesale changes to your investment strategy.

When things moderate and they will, take a look at your goals, expectations, and your risk tolerance. Do these things match up with your asset allocation? If you are investing for a goal 20 years out this is just a blip. If you goal is shorter and more certain, your investments should be as well.

We had been anticipating a return of market volatility for some time and had prepared by holding a cash balances in client accounts and we are now taking advantage of discounted prices. At this moment we are not back to investing to 100%.

So we believe this is an opportunity within select stocks and sectors if you have held cash anticipating a decline.

Longer-term Central bank action such as the Federal Reserve lowing interest rates can serve as a cushion to declining economic activity, but cannot stave it off altogether.

Be a tough consumer...

2007-11-03T06:54:00.000-05:00

Overall I estimate that will all taxes considered, you need to earn about $2 for every dollar you spend.

I suggest you spend it wisely...

Mideast Arab Petro States Peg to Dollar at Risk

2007-11-01T06:32:00.000-05:00

A cut in the fed funds rate didn't help one bit.

If our oil rich friends abandon the US$, we could be in for a Dollar Crisis.

Not a position of strength for the most prosperous nation on the face of the earth.

Beware!

Fed release a day late...but not a dollar short

2007-11-01T06:25:00.000-05:00

because if I was a dollar short, the Fed would just print money and make up the difference!

Press Release

Release Date: October 31, 2007
For immediate release

The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/2 percent.

Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance. However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction. Today’s action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.

Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Donald L. Kohn; Randall S. Kroszner;
Frederic S. Mishkin; William Poole; Eric S. Rosengren; and Kevin M. Warsh. Voting against was Thomas M. Hoenig, who preferred no change in the federal funds rate at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 5 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Richmond, Atlanta, Chicago, St. Louis, and San Francisco.

Water Shortage

2007-10-27T05:01:00.000-05:00

WEST PALM BEACH, Fla. (AP) - An epic drought in Georgia threatens the water supply for millions. Florida doesn't have nearly enough water for its expected population boom. The Great Lakes are shrinking. Upstate New York's reservoirs have dropped to record lows. And in the West, the Sierra Nevada snowpack is melting faster each year.

Across America, the picture is critically clear - the nation's freshwater supplies can no longer quench its thirst.

The government projects that at least 36 states will face water shortages within five years because of a combination of rising temperatures, drought, population growth, urban sprawl, waste and excess.

"Is it a crisis? If we don't do some decent water planning, it could be," said Jack Hoffbuhr, executive director of the Denver-based American Water Works Association.

Water managers will need to take bold steps to keep taps flowing, including conservation, recycling, desalination and stricter controls on development.

"We've hit a remarkable moment," said Barry Nelson, a senior policy analyst with the Natural Resources Defense Council. "The last century was the century of water engineering. The next century is going to have to be the century of water efficiency."

The price tag for ensuring a reliable water supply could be staggering. Experts estimate that just upgrading pipes to handle new supplies could cost the nation $300 billion over 30 years.

"Unfortunately, there's just not going to be any more cheap water," said Randy Brown, Pompano Beach's utilities director.

It's not just America's problem - it's global.

Australia is in the midst of a 30-year dry spell, and population growth in urban centers of sub-Saharan Africa is straining resources. Asia has 60 percent of the world's population, but only about 30 percent of its freshwater.

The Intergovernmental Panel on Climate Change, a United Nations network of scientists, said this year that by 2050 up to 2 billion people worldwide could be facing major water shortages.

The U.S. used more than 148 trillion gallons of water in 2000, the latest figures available from the U.S. Geological Survey. That includes residential, commercial, agriculture, manufacturing and every other use - almost 500,000 gallons per person.

Coastal states like Florida and California face a water crisis not only from increased demand, but also from rising temperatures that are causing glaciers to melt and sea levels to rise. Higher temperatures mean more water lost to evaporation. And rising seas could push saltwater into underground sources of freshwater.

Florida represents perhaps the nation's greatest water irony. A hundred years ago, the state's biggest problem was it had too much water. But decades of dikes, dams and water diversions have turned swamps into cities.

Little land is left to store water during wet seasons, and so much of the landscape has been paved over that water can no longer penetrate the ground in some places to recharge aquifers. As a result, the state is forced to flush millions of gallons of excess into the ocean to prevent flooding.

Also, the state dumps hundreds of billions of gallons a year of treated wastewater into the Atlantic through pipes - water that could otherwise be used for irrigation.

Florida's environmental chief, Michael Sole, is seeking legislative action to get municipalities to reuse the wastewater.

"As these communities grow, instead of developing new water with new treatment systems, why not better manage the commodity they already have and produce an environmental benefit at the same time?" Sole said.

Florida leads the nation in water reuse by reclaiming some 240 billion gallons annually, but it is not nearly enough, Sole said.

Floridians use about 2.4 trillion gallons of water a year. The state projects that by 2025, the population will have increased 34 percent from about 18 million to more than 24 million people, pushing annual demand for water to nearly 3.3 trillion gallons.

More than half of the state's expected population boom is projected in a three-county area that includes Miami, Fort Lauderdale and Palm Beach, where water use is already about 1.5 trillion gallons a year.

"We just passed a crossroads. The chief water sources are basically gone," said John Mulliken, director of water supply for the South Florida Water Management District. "We really are at a critical moment in Florida history."

In addition to recycling and conservation, technology holds promise.

There are more than 1,000 desalination plants in the U.S., many in the Sunbelt, where baby boomers are retiring at a dizzying rate.

The Tampa Bay Seawater Desalination Plant is producing about 25 million gallons a day of fresh drinking water, about 10 percent of that area's demand. The $158 million facility is North America's largest plant of its kind. Miami-Dade County is working with the city of Hialeah to build a reverse osmosis plant to remove salt from water in deep brackish wells. Smaller such plants are in operation across the state.

Californians use nearly 23 trillion gallons of water a year, much of it coming from Sierra Nevada snowmelt. But climate change is producing less snowpack and causing it to melt prematurely, jeopardizing future supplies.

Experts also say the Colorado River, which provides freshwater to seven Western states, will probably provide less water in coming years as global warming shrinks its flow.

California, like many other states, is pushing conservation as the cheapest alternative, looking to increase its supply of treated wastewater for irrigation and studying desalination, which the state hopes could eventually provide 20 percent of its freshwater.

"The need to reduce water waste and inefficiency is greater now than ever before," said Benjamin Grumbles, assistant administrator for water at the Environmental Protection Agency. "Water efficiency is the wave of the future."

The Weekly Wrap

2007-10-26T19:05:00.003-05:00

Weekly Wrap

Trading in erratic fashion, the major averages finished the week higher, as relatively upbeat earnings for the third quarter overshadowed ongoing concerns about credit-related problems and the overall economy.

Stocks rose on Monday, after last week's sharp sell-off, with bargain hunters picking up shares on the cheap, particularly in hard-hit areas such as homebuilders, banks, and retailers. Stronger than expected earnings from Dow component Merck & Co. (MRK) also helped fuel a recovery in the Dow Jones Industrials and the broader market.

With upbeat earnings from Apple (AAPL) and blue chip companies DuPont (DD) and American Express (AXP), stocks rallied to close higher on Tuesday. The market struggled early in the session on fresh concerns about the consumer outlook, after discount retailer Target Corp. (TGT) lowered its October same store sales guidance and Wal-Mart Stores (WMT) cut its capital spending forecast for the year. However, led by enthusiasm for technology companies, stocks managed to end the session higher.

On Wednesday, the market plunged due to more disappointing news on the housing front and a sharp third quarter loss posted by banking industry bellwether Merrill Lynch (MER), before rebounding late in the day.

With the housing market still in a sharp downturn, the National Association of Realtors reported that existing home sales fell 8% in September to a low 5.04 million annual rate and median home price slipped 4.2% from a year ago. Expectations were for a 5.25 million annual rate.

On the earnings front, Merrill Lynch reported a $2.3 billion loss in the third quarter and said it was taking a larger than expected write-down of $7.9 billion on its collateralized debt obligations and U.S. subprime mortgages.

In other corporate news, Amazon.com (AMZN) reported higher earnings and revenue, but still failed to impress investors, who were concerned about shrinking margins. They pushed shares nearly 14% lower on the news. Dow component Boeing Co. (BA), meanwhile, surprised investors when it reported stronger than expected results and raised its outlook for the year.

Despite a late-day rally, the market edged slightly lower on Thursday as reports on new home sales and durable goods orders, as well as a batch of mixed earnings, weighed on investor sentiment.

The Commerce Department reported new home sales rose 4.8% in September from the August level. However, the latest figure showed an increased only because the last month's level of sales was revised sharply lower to a 735,000 annual rate from an originally reported 795,000.

Meanwhile, it was reported that durable goods orders fell 1.7% in September, after a 5.2% decline in August, raising concerns about business spending.

Finishing the week on a strong note, stocks traded higher on Friday as investors found solace from strong earnings from Microsoft (MSFT) and an optimistic outlook from Countrywide Financial (CFC), which sent its stock 32% higher.

Microsoft for its part recorded a 23% increase in third quarter earnings, boosted by strong sales of Windows, Office, and the new Halo 3 video game. Shares of the software giant climbed more than 9% on the news and provided support for the overall market.

Hurt by escalating mortgage defaults and recent credit market problems, Countrywide reported a $1.2 billion loss in the quarter. However, the nation's largest mortgage lender said it would turn a profit in the fourth quarter despite continued weakness in the housing market and elevated credit costs in near term. The outlook was reassuring for investors and prompted a short-covering rally in the stock.

--Richard Jahnke, Briefing.com

Index	Started Week	Ended Week	Change	% Change	YTD
DJIA	13522.02	13806.70	284.68	2.1 %	10.8 %
Nasdaq	2725.16	2804.19	79.03	2.9 %	16.1 %
S&P 500	1500.63	1535.28	34.65	2.3 %	8.2 %
Russell 2000	798.79	821.39	22.60	2.8 %	4.3 %

Insight: Saudi Arabia may hold key to oil and dollar link

2007-10-25T06:31:00.001-05:00

By Adam Robinson and Edward Morse of Lehman Brothers

Published: October 24 2007 17:52 | Last updated: October 24 2007 17:52

After a generation on the sidelines, the US dollar has re-emerged as a central issue in the pricing of oil. Since the credit crunch in August, when the dollar has gone down, oil has gone up, by an average ratio of more than 5 to 1. Since August 21, the greenback has declined 4 per cent versus the euro; West Texas Intermediate crude, the global oil benchmark, meanwhile, is up 25 per cent.

Why are commodities traders fixated on the dollar? Like other oil market puzzles, the answer may lie in Saudi Arabia.

With a booming economy and inflation ticking higher, some speculators worry that Riyadh will de-peg its currency from the dollar. And they see such a step as having the effect of re-pricing oil in euros and yen.

That’s because if Saudi Arabia de-pegs and does nothing else, it will be sitting on two rapidly depreciating assets: $20,000bn in oil reserves and $800bn in US dollar reserves.

But if it were to diversify its currency reserves or oil pricing regime, then it is almost certain that the dollar would weaken. As a result, oil prices in dollar terms would have to jump to keep oil demand growth from Asia in check. For speculators with this mindset, oil at almost any price looks cheap, especially when the market is pricing in another dollar-weakening Fed cut this month.

Speculators do have it right that the US and Saudi business cycles are increasingly out of sync, and that it will become more difficult for Riyadh to maintain its currency peg to the dollar without exacerbating inflation. Inflation has crept higher, from 2.3 per cent in 2006 to an annualised 3.8 per cent this July.

But betting on a break in the peg may be premature. Inflation remains modest in comparison to Saudi Arabia’s neighbours, most of which have inflation in the vicinity of 10 per cent. Additionally, the components driving the jump in inflation – food and rents – are unlikely to be significantly affected by a shift in exchange rate regime, the former driven by global agricultural demand and the latter by the influx of foreign workers into the country.

Finally, Saudi Arabia will not want to jeopardise its FDI inflows (Like China, Saudi Arabia’s peg to a weak dollar makes it a cheap investment destination versus other emerging markets whose currencies have already appreciated). As a result, we expect any break with the currency peg would likely be measured and managed, with a relatively insignificant impact on the dollar.

While the Saudis may break their dollar peg as the US Fed eases monetary policy, they are unlikely to re-price oil in other currencies and break their “dollar alliance” with Washington.

Dating back to the aftermath of the oil crisis of 1973, the US negotiated the original alliance with the Saudis to assure petrodollar recycling. As oil prices have risen this decade, economists including ourselves have argued that the re-investing of oil export revenues into the US by Saudi Arabia and its neighbours has contributed to keeping interest rates low and equity valuations high. Often referred to as the “central banker” of oil, the Kingdom has proven on multiple occasions that it is focused on protecting a buoyant outlook for the global economy, as much to assure itself of a buyer as to preserve its political alliance with the United States. That usually means supplying enough oil to the market and holding spare capacity for use in the event of a disruption. Today, however, given mushrooming dollar reserves and the weakening US economy, it also means that Saudi Arabia must hold off on reserve diversification or doing anything that would initiate an attack on the dollar.

As risks to the Saudi economy increase, however, the Kingdom is not likely to stand idle. We don’t doubt that Riyadh’s increased leverage in Washington due to higher oil prices and a declining dollar will be put to at least subtle use. It is difficult to imagine exactly how that leverage over Washington will manifest itself, but it may include higher technology weapons at greater discounts or higher consideration of Riyadh’s concerns in other areas, including regional security. Thus, while we may actually never witness the Kingdom using its enhanced leverage, the fact that speculators perceive it to exist may push up the price of oil.

Adam Robinson is an energy research analyst at Lehman Brothers. This piece was co-authored by Edward Morse, chief energy economist.

The Citgo sign is your destination for....

2007-10-24T09:50:00.000-05:00

Please click down through, if you value freedom of speech you will not be disappointed.

Maybe Merrill Lynch (NYSE:MER) was too bullish on America...

2007-10-24T09:45:00.000-05:00

We have been wondering who the bagholder is on this entire subprime deal, well wonder no more...

Another day a lower US$

2007-10-22T10:59:00.000-05:00

This story on the fed will do anything to "protect" the economy is related to this story about the weakness in the US$.

Beware!

Weekly Market Wrap from Briefing.com

2007-09-24T04:26:00.000-05:00

Weekly Wrap

Despite their sluggish start, the major averages finished the week higher thanks to the Federal Reserve's decision to lower interest rates to help shield the economy from the housing slowdown and turmoil in the financial markets.

U.S. stocks began the week lower, led by declines in the financial sector, as growing problems at Britain's Northern Rock exacerbated fears that problems in the credit market are spreading. According to a report last Friday, the Bank of England had provided emergency funding to the beleaguered mortgage lender, which prompted a rush of customers to withdraw their deposits.

Stocks bounced back strongly on Tuesday, however, after the FOMC lowered its key fed funds rate by 50 basis points to 4.75% in a unanimous decision to help boost economic growth and allay growing fears about a possible recession. The Fed also cut its discount rate by the same amount to 5.25%.

August PPI, meanwhile, fell 1.4% on a large decline in oil prices. Core-PPI rose a modest 0.2%. The overall drop was larger than expected, but the core was in line with expectations. The data did not have much market impact, though, given the focus on the Fed's policy announcement.

Also lending some support to the market was a better than expected report from Lehman Brothers (LEH) - the first investment bank to report third quarter results and to provide a look into the extent of the damage from the fallout in the subprime mortgage market and credit tightening.

Stocks, which were still gleaming from the Fed's policy move, extended their rally on Wednesday. Interest rate-sensitive areas such as housing and financials were some of the biggest gainers, despite a lackluster report from Morgan Stanley (MS). The investment bank reported quarterly earnings well below analysts' estimate, as significant trading losses in quant strategies and fixed income sales and trading weighed on overall results.

Meanwhile, a muted reading on consumer prices also supported the market's gain, and offset poor data on New Home Starts and Building Permits, which fell to their lowest level in 12 years in August.

Ending two days of gains, stocks reversed course on Thursday due partly to higher oil prices and a mixed batch of earnings reports.

Goldman Sachs (GS) exceeded expectations with broad-based revenue strength, while Bear Stearns (BSC) reported a significant miss due to challenges in the credit markets. FedEx Corp. (FDX) posted better than expected results, but provided a bleak outlook for the full year due to a tepid economic environment.

A rise in oil prices to more than $83 per barrel kindled concerns about inflationary pressures and also contributed to the market's pullback.

Strong earnings from software maker Oracle Corp. (ORCL) and footwear company Nike (NKE) after the close Thursday provided the market some support going into Friday and helped further the week's gains. The earnings reports were seen as an encouraging sign that many companies are still doing well, despite the recent problems in the financial markets and a more challenging consumer environment.

--Richard Jahnke, Briefing.com

Index	Started Week	Ended Week	Change	% Change	YTD
DJIA	13442.52	13820.19	377.67	2.8 %	10.9 %
Nasdaq	2602.18	2671.22	69.04	2.7 %	10.6 %
S&P 500	1484.25	1525.75	41.50	2.8 %	7.6 %
Russell 2000	783.49	813.11	29.62	3.8 %	3.2 %

If my credibility was on the line, I'd engage in some CYA too!

2007-09-21T10:07:00.001-05:00

Fears of dollar collapse as Saudis take fright

2007-09-20T10:56:00.000-05:00

By Ambrose Evans-Pritchard, International Business Editor

Last Updated: 8:39am BST 20/09/2007

Saudi Arabia has refused to cut interest rates in lockstep with the US Federal Reserve for the first time, signalling that the oil-rich Gulf kingdom is preparing to break the dollar currency peg in a move that risks setting off a stampede out of the dollar across the Middle East.

Tower of Babel???

2007-09-20T05:08:00.000-05:00

The interesting thing about the scripture reference to the tower of Babel is that history repeats itself.

In investing, often when management builds a "monument" to itself it represents a peak in the business. The decline might be slow and twisting. Maybe only gross margins peak, but you can see it time and again.

Another interesting fact is that when you look to history, completion of "the worlds tallest building" also happens to correspond, in general, to crests in the economic cycle.

Not a market call now that this thing is going up, but....

I was flat wrong...

2007-09-19T11:29:00.000-05:00

I was flat wrong on fed funds and I will admit it.

We should have taken our medicene yesterday and gotten some excesses washed out of the system, but we choose the easy way out. The next three months will tell if we really are in big trouble and needed a 50 bps shot in the arm.

Inflationary pressures remain a problem, chief among them the value of the dollar in the FX market.

Gold and oil are telling us that the US$ isn't worth the paper it is printed on. Gold is pointed towards $800 and oil $100.

Yee-Haa (read: sarcasm!)

Going on the record about Fed Funds Rate Cut

2007-09-17T05:39:00.001-05:00

I am going on the record right now, Sept 17, 2007 @ 6:40am EDT.

55% chance of no cut in Fed Funds but a cut in the discount rate.

This is based on the movement in gold, oil and weakness in the dollar (all related). The markets don't think we in the USA are going to take our medicine, that we are just going to print money to try to monetize yet another problem. The problem with lowering rates and printing money is competitive pressures from other central banks that are still raising interest rates or leaving them flat.

40% chance of a 25 bps cut in Fed Funds and the stock market sells off, "buy the rumor sell the news."

5% chance of a split vote by the FOMC and a 50 bps cut in Fed Funds, then we know for sure they think it is a crisis that could tip us over into a deflationary depression.

What a financial crisis looks like: PANIC

2007-09-17T05:34:00.000-05:00

These people are waiting to pull their money out of Northern Rock. Fraction reserve banking relies on confidence, which in a panic disappears like a puff of smoke.

Two links to education yourself on past crisis:

1907 Crisis

1837 Panic

Weekly Wrap

2007-09-15T20:39:00.000-05:00

Weekly Wrap

The stock market spent most of this past week talking about what will happen next week. That didn't prevent a more upbeat underlying tone from developing. The indices showed good resilience all week and the only day the S&P was down was on Monday, and then by just two points.

The top focus remains the Fed policy meeting on Tuesday. There remains much debate as to whether the Fed will cut the fed funds rate by 1/4% or by 1/2%. This is despite the fact that recent statements from Fed officials have tended to stress economic strengths and reflect no sign of panic. There is a distinct possibility that the statement and Fed action could disappoint the stock market.

That is, at least in theory. It is also noteworthy that the stock market has tended to move higher after recent policy statements, even when they were disappointing. The stock market rise this week may be based as much on the belief that the risks of the Wall Street liquidity problems turning into a full-blown credit crunch are diminishing over time.

It was a light week for corporate news. Intel raised its current quarter revenue guidance on Monday. Surprisingly, that had little broad impact even though worldwide demand for semiconductors is obviously a good economic sign. Then on Tuesday, McDonald's announced strong August sales. Big Macs had more impact than chips as that news helped fuel a 20 point gain in the S&P 500 index.

McDonald's gave the market another boost when it announced after the close on Wednesday that it was increasing its dividend by 50%. That, along with a dividend increase from Microsoft, helped the S&P gain 12 points on Thursday.

Without news from McDonald's, the market was flat on Monday, Wednesday, and Friday. On Friday the only economic reports of note were released. August retail sales were up 0.3%. That was a bit less than the expected 0.5% increase, but the July gain was revised upward from 0.3% to 0.5%. August industrial production was reported up 0.2%. This was a tad less then an expected 0.3% increase, but July on this time series was also revised higher, from +0.3% to +0.5%. These two releases reflect sluggish economic growth, but not recession.

Other key news this week was that OPEC raised their production ceiling by 500,000 barrels a day. That didn't help keep oil prices down, as oil closed at $79.10 a barrel after briefly breaching $80.

The 10-year note yield rose from 4.37% last week to close this week at 4.46%.

It was a good week for the stock market. Sentiment seemed to improve. Whether these gains are sustainable,however, depends on the reaction to the Fed statement Tuesday. A very volatile market reaction is very possible.

Index	Started Week	Ended Week	Change	% Change	YTD
DJIA	13113.38	13442.52	329.14	2.5 %	7.9 %
Nasdaq	2565.7	2602.18	36.48	1.4 %	7.7 %
S&P 500	1453.55	1484.25	30.70	2.1 %	4.6 %
Russell 2000	775.78	783.49	7.71	1.0 %	-0.5 %

Bernanke Spurns Greenspan's Quick Fix, Seeking Data

2007-09-14T04:47:00.001-05:00

Bernanke Spurns Greenspan's Quick Fix, Seeking Data (Update1)

By Craig Torres

Sept. 13 (Bloomberg) -- Alan Greenspan trusted his instincts. Ben Bernanke trusts the MAQS.

For the past several days, the MAQS -- a group of analysts in the Federal Reserve's Macroeconomic and Quantitative Studies unit -- have run a series of what-if scenarios on the U.S. economy that will play a critical role in next week's interest- rate decision.

The simulations will supplement the forecast handed to policy makers at the start of their Sept. 18 meeting and may determine the size of the rate cut almost universally predicted by Wall Street economists.

Bernanke has championed the team's work since becoming Fed chairman in 2006 because he wants to sift through models, projections and anecdotes before coming to conclusions. His approach contrasts with that of predecessor Alan Greenspan, who relied more on his own reading of conditions -- and as a result probably would have cut rates to insure against a recession long before the Sept. 18 Federal Open Market Committee gathering.

``Greenspan emphasized that, in response to a low- probability but high-cost outcome, the Fed should move aggressively,'' said Mickey Levy, chief economist at Bank of America Corp. in New York. ``This Fed under Bernanke is more disciplined.''

The FOMC will next week lower the overnight lending rate between banks to 5 percent from 5.25 percent, according to the median forecast of economists surveyed by Bloomberg News. The reduction would be Bernanke's first and may be followed by at least two more before year-end, federal funds futures suggest.

Greenspan said Bernanke is doing ``an excellent job,'' according to excerpts from a CBS interview scheduled to air on the 60 Minutes program Sept. 16, a day before the publication of the former chairman's book, ``The Age of Turbulence.'' He added that he had ``no notion'' of the threat subprime lending posed to the overall economy ``until very late in 2005 and 2006,'' according to excerpts e-mailed by CBS today.

Subprime Reverberations

Calls for lower borrowing costs have been mounting since early August as the collapse of the subprime-mortgage market suddenly raised the cost of credit for companies and consumers. Pressure on Bernanke increased even more after a Labor Department report on Sept. 7 showed employers got rid of workers last month for the first time in four years.

Rather than resort to an emergency cut in the federal funds rate, Bernanke, 53, has waited for more data and a careful study of all the scenarios now under preparation by the staff.

The MAQS are in charge of the quantitative model of the U.S. economy known as FRB/US or ``Ferbus.'' By adjusting for such things as higher financing rates for American companies or a sharp decline in home prices, the team provides policy makers a glimpse of possible outcomes.

Staff Playbook

The scenarios -- known at the Fed as ``alt sims'' or alternative simulations -- are especially important at next week's meeting because the vote will likely be cast on the dangers that the forecast is better or worse than reported, former Fed officials said.

``The FOMC will start by looking at the standard calculation'' of how changes in home prices and credit spreads affect the outlook for employment and inflation, said Douglas Elmendorf, an assistant director of the Federal Reserve Board's research and statistics division from 2004 to 2007.

Policy makers will then ask, ```Where do we see the risks arrayed around the baseline?''' said Elmendorf, now a senior fellow at the Brookings Institution in Washington. ``Alternative simulations are quite important, particularly because of the Fed's announced interest in risk management.''

The methodical approach has some pining for the good old rapid-response days of Greenspan, who called six emergency rate meetings between 1992 and 2001. Five of those resulted in reductions as he sought to head off recession or ease gridlock in capital markets.

`Slow to Acknowledge'

Under Bernanke, ``the Federal Reserve has been very slow to acknowledge what is one of the biggest busts in U.S. housing history,'' said Allen Sinai, president of Decision Economics Inc. in New York. ``They've never even called it a recession.''

The distinction between Bernanke and Greenspan, 81, has roots in their different resumes and competing views about managing risk and uncertainty. Greenspan was a business economist before he became Fed chairman in 1987 -- one of his offices was on Wall Street -- and he read the economy like an income statement. His decisions were often based on close readings of disparate data, and his methods defied quantification. Greenspan's memoirs of his years at the Fed will be released on Sept. 17, the eve of the rate decision.

Bernanke, a former head of the economics department at Princeton University, has spent most of his career in academia. His analysis is based on models, and he has greater confidence in forecasts and statistical methods.

Snap Judgments

Over time, Greenspan's ``confidence in making snap judgments on less convincing evidence increased,'' said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York. ``Bernanke has a more balanced approach to decision making, which means you combine business-economist skills with anecdotes, high-frequency indicators, with models and simulation exercises.''

Both approaches have risks. Greenspan cited uncertainty as ``the defining characteristic'' of the monetary policy landscape in an August 2003 speech. ``Only a limited number of risks can be quantified with any confidence,'' he said.

The speech was critical of models, and elevated the role of judgment. He invoked theories of Frank Knight, a University of Chicago economist from 1927 to 1955, to explain his ideas of risk management.

Knight distinguished between risk and uncertainty: Risk is quantifiable, uncertainty is random. Managers ``would try to turn those uncertainties into knowable costs,'' said Ross Emmett, a professor at James Madison College at Michigan State who has edited a collection of Knight's essays. ``They would purchase insurance.''

Greenspan's Preference

Greenspan's preference for insurance was most visible in the third rate cut of 1998, and the aggressive easing from 2001 to 2003 to offset a ``minor'' probability of deflation.

Both those moves have been reassessed by Fed officials and private economists, who acknowledge that the rate cuts were too aggressive. To use Greenspan's framework, the Fed ``overpaid'' for insurance against risks that turned out to be less severe.

``We did use the fed funds rate, and that may have been a mistake,'' former Fed Vice Chairman Alice Rivlin, who voted for the 1998 rate cuts, said in an interview last month. Referring to the Bernanke Fed, she added: ``It might have been smarter to try what they are trying.''

The third cut of 1998 took the federal funds rate to 4.75 percent in a quarter when the economy grew at a 6.2 percent annual rate, according to revised data. In 1999, the Nasdaq Composite Index surged 86 percent, only to lose 39 percent the following year, and another 21 percent in 2001.

Bernanke's Vote

Bernanke, as a Fed governor, voted to keep the federal funds rate below consumer-price inflation for three years from 2002 to 2004. The result was a different bubble -- housing -- fueled by the biggest mortgage binge on record. Americans borrowed $2.8 trillion in home loans between 2004 and 2006.

``It was the Fed's own lax monetary policy that permitted the problem to arise,'' said Anna Schwartz, co-author of the 1963 book ``A Monetary History of the United States, 1867-1963'' with Nobel laureate Milton Friedman. ``The responsibility is right at the door of the Federal Reserve.''

Statistical modelers such as Bernanke have their own icon to draw on: the 18th century British mathematician and Presbyterian minister Thomas Bayes. Unlike Knight's apostles, Bayesians are more likely to quantify uncertainty by deriving probabilities. There is also a role for constant updating with new information to hone a forecast. Bayesian theory is used in hurricane tracking, for example.

Speeches suggest that members of the current FOMC are aware of the danger of overpaying for insurance again.

``Conditions can change quickly for better or for worse, especially in financial markets, so it's hard right now to speak with a great deal of confidence about future economic developments,'' San Francisco Fed President Janet Yellen said Sept. 10.

``A good example is the aftermath of the Russian debt default in 1998,'' she said. ``Many forecasters predicted a sharp economic slowdown as a result, but instead, growth turned out to be robust.''

To contact the reporter on this story: Craig Torres in Washington at Ctorres3@bloomberg.net

Ease Money-Market Crisis by Letting Banks Go Bust: Mark Gilbert

2007-09-13T11:48:00.000-05:00

Ease Money-Market Crisis by Letting Banks Go Bust: Mark Gilbert

By Mark Gilbert

Sept. 13 (Bloomberg) -- Call it deja-vu all over again.

``A further important cause for alarm was the danger that the troubles, if not solved, would be transmitted through a domino effect to the many other secondary banks which, with much vulnerable short-term borrowing and many assets tied up in the increasingly troubled property industry, were themselves showing signs of being at risk in the harsher new economic environment.''

Sounds like an apt, if somewhat wordy, description of the current money-market crisis prompted by the collapse of the U.S. subprime mortgage market, doesn't it?

Instead, the passage is lifted from ``The Secondary Banking Crisis, 1973-75'' by Margaret Reid. The book describes how the collapse of a U.K. mortgage lender called Cedar Holdings triggered a crisis of confidence in the banking system, requiring a Bank of England bailout.

Many of the similarities between today's financial environment and the one prevailing more than three decades ago are striking -- except for the part where the central bank rides to the rescue by strong-arming a posse into action.

Banking is essentially a confidence trick. Depositors have to be confident they can draw freely from their accounts. Retailers have to be confident swiping a rectangle of plastic in exchange for goods and services will produce a balance transfer in their favor.

And the banks themselves have to be confident they and their peers have sufficient assets to meet their liabilities.

Party's Over

For now, that confidence has evaporated as hedge funds and structured investment vehicles and conduits -- spawned while the credit-market party was hopping -- come knocking at the door for handouts because the music has stopped. And thus, the banking community wants the central banks to soothe its hangover and refill the punchbowl by cutting official interest rates.

It's far from certain that lower central-bank rates would unfreeze the money markets. Moreover, central bankers are probably willing to sacrifice smaller lenders so the pain is enough to make financiers more cautious about future investments, provided there's no threat to general stability.

The U.S. Federal Reserve and the European Central Bank have held special auctions to grease the wheels of commerce with extra cash. They have succeeded in driving the overnight rate for dollars down to about 5.18 percent from as high as 5.96 percent and its euro counterpart to 4.15 percent from 4.69 percent. Three-month rates, though, are stuck at a seven-year high of 5.7 percent for dollars and a six-year high of 4.82 percent for euros.

Difference of Opinion

The Bank of England, by contrast, has been adamant that it won't rescue the money markets by accepting low-grade collateral, or by offering three-month cash. Indeed, the Fed and the ECB were rebuked yesterday, albeit obliquely, by U.K. central bank Governor Mervyn King for bailing out commercial banks.

``The provision of such liquidity support undermines the efficient pricing of risk by providing ex post insurance for risky behavior,'' King said in a copy of testimony he plans to deliver to the U.K. Parliament's Treasury Committee on Sept. 20. ``That encourages excessive risk-taking, and sows the seeds of a future financial crisis.''

Victoria Mortgage Funding Ltd., a U.K. company that lent about 300 million pounds ($609 million) in subprime mortgages to British borrowers, was placed into administration earlier this week, the U.K. equivalent of Chapter 11. Victoria couldn't secure enough funding to stay in business.

That's what should befall financial institutions that ignore the risk of a funding deficit and ``have borrowed short to lend long,'' as King put it in his testimony. A central bank chief, though, would never be allowed to voice that axiom.

No Lifeboat

King sounds determined to take advantage of the current contagion to try to extinguish the notion of a ``Greenspan put'' or ``Bernanke put,'' the idea that central banks will always ride to the rescue.

The U.K. central-bank chief said helping commercial banks salvage their ``risky or reckless lending'' is especially dangerous because it ``encourages the view that as long as a bank takes the same sort of risks that other banks are taking then it is more likely that their liquidity problems will be insured ex post by the central bank.''

The ECB has already blinked, by keeping monetary policy on hold last week. Traders and investors are betting the Fed will also blanch, with futures and options prices suggesting almost a 90 percent chance of a U.S. rate cut next week.

Memory Bank

The Bank of England's approach may be informed by its experience in underwriting the salvage operation that kept the U.K. financial system afloat more than 30 years ago. In her 1982 book on the crisis, Reid cites an unidentified commercial banker suggesting the big institutions did too much.

``If we had from the outset allowed two or three of the least respected names to collapse in a flurry of publicity with losses to their depositors, it would have served them right and would have acted like a quick piece of surgery on the City, cutting out the canker and enabling the rest of us to continue the more easily with our normal business,'' the banker said.

The correct number of banks to fail when a credit bubble bursts is not zero. If the best way to avoid the mispricing of risk in future is to sacrifice some of the less-prudent lenders on the altar of liquidity, then let the culling commence. That is especially the case if it erases the perception that central banks will always act as lenders of last resort, even to institutions that don't deserve to survive.

To contact the writer of this column: Mark Gilbert in London at magilbert@bloomberg.net

Total effects of credit crisis still unseen

2007-09-13T06:02:00.000-05:00

Reuters
ECB, Paulson see growth threat
Thursday September 13, 6:09 am ET
By Mike Peacock LONDON (Reuters) - A global credit crisis has increased the threat to growth, the European Central Bank said on Thursday, as G7 governments asked for a report on the genesis of the turmoil for next month's meeting of finance chiefs.

Treasury Secretary Henry Paulson said the U.S. economy would be hurt by the upheaval but the overall outlook remained benign.

"There will be a penalty but the backdrop of the strength of the economy, the corporations, the institutions, is such that we are resilient," Paulson told the Times newspaper.

The ECB's monthly bulletin said global economic activity remained robust, supported mainly by buoyant emerging economies.

But it added: "While the global repercussions of the U.S. economic slowdown have so far been limited, it remains to be seen whether the recent financial market turmoil will lead to a lasting reappraisal of global financial market risks and a loss in confidence with possible implications for the real economy."

Slash Insurance Costs

2007-09-11T14:24:00.000-05:00

Slash Insurance Costs

by Cheryl Allebrand
Monday, September 10, 2007provided by

Barring costly mistakes, simply shopping around, getting the right amount of coverage and implementing a few strategies can save you hundreds or even thousands of dollars.

Kimberly Lankford, author of "The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need," reveals concrete steps you can take to cut insurance costs...

Dr. Ben's Speech today in Berlin on Global Imbalances

2007-09-11T14:22:00.000-05:00

In memory of 9/11

2007-09-11T10:31:00.000-05:00

Our fathers' God to Thee,
Author of Liberty,
To thee we sing,
Long may our land be bright
With Freedom's holy light,
Protect us by thy might
Great God, our King.