Archive for September, 2014

• “Wild in the Streets”
  Eddy Elfenbein, September 17th, 2014 at 9:26 pm

  The voting age in tomorrow’s referendum in Scotland is just 16. Personally, I think the voting age should be constantly readjusted to one day younger than myself.

  In any event, this mandates that I post the trailer to 1968’s “Wild in the Streets,” one of the grooviest and most fantabulous movies ever made. Yes, this movie really happened. It has real stars and everything. It happened and we let it happen.

• The 10-Year Yield Today
  Eddy Elfenbein, September 17th, 2014 at 3:03 pm

  If you squint your eyes tight and look really hard, you might be able to make out when the FOMC statement came out.

  

  Btw, I’m pretty sure the time axis is an hour behind.

• The Feds New Dots
  Eddy Elfenbein, September 17th, 2014 at 2:55 pm

  Here’s a look at the Fed’s latest projections for interest rates. These are referred to as the dots since we get to see where all 17 FOMC members are.

  

  It’s interesting how the Fed goes from certainty in the near-term to wide dispersion, then back to certainty. I’m most puzzled by 2016 since the FOMC members seem so widely dispersed. It also seems quite high. If I were on the FOMC (I’m not, btw), I would probably be at 2% to 2.25% for 2016. That’s closer to where the futures market is.

• The Fed Tapers Again
  Eddy Elfenbein, September 17th, 2014 at 2:16 pm

  The FOMC just released their latest policy statement. Actually, two statements. One is the regular policy statement; the other was a “statement on policy normalization principles and plans.” More on that in a bit.

  The central bank said it will taper its bond purchases yet again. No surprise there. Starting in October, the Fed will buy $15 billion in bonds. This timeframe strongly suggests that they’ll be done with QE at the next meeting, which is in late October.

  The Committee decided to keep the words “considerable time” to describe the period between the end of QE and the first rate hike. There had been some speculation that those words might be changed. Chairwoman Janet Yellen has previously said six months, which was probably a rookie error on her part.

  They also kept the phrase, “there remains significant underutilization of labor resources” which seems quite dovish. Overall, it’s a pretty straightforward statement. They slightly changed their wording on inflation: “Inflation has been running below the Committee’s longer-run objective.” Last time, they said inflation had “moved somewhat closer to” their long-run objective.

  Now let’s turn to the “Policy Normalization Principles and Plans.” This is what the Fed has to say:

  The Committee will determine the timing and pace of policy normalization–meaning steps to raise the federal funds rate and other short-term interest rates to more normal levels and to reduce the Federal Reserve’s securities holdings–so as to promote its statutory mandate of maximum employment and price stability.

  When economic conditions and the economic outlook warrant a less accommodative monetary policy, the Committee will raise its target range for the federal funds rate.

  During normalization, the Federal Reserve intends to move the federal funds rate into the target range set by the FOMC primarily by adjusting the interest rate it pays on excess reserve balances.

  During normalization, the Federal Reserve intends to use an overnight reverse repurchase agreement facility and other supplementary tools as needed to help control the federal funds rate. The Committee will use an overnight reverse repurchase agreement facility only to the extent necessary and will phase it out when it is no longer needed to help control the federal funds rate.

  The Committee intends to reduce the Federal Reserve’s securities holdings in a gradual and predictable manner primarily by ceasing to reinvest repayments of principal on securities held in the SOMA.

  The Committee expects to cease or commence phasing out reinvestments after it begins increasing the target range for the federal funds rate; the timing will depend on how economic and financial conditions and the economic outlook evolve.

  The Committee currently does not anticipate selling agency mortgage-backed securities as part of the normalization process, although limited sales might be warranted in the longer run to reduce or eliminate residual holdings. The timing and pace of any sales would be communicated to the public in advance.

  The Committee intends that the Federal Reserve will, in the longer run, hold no more securities than necessary to implement monetary policy efficiently and effectively, and that it will hold primarily Treasury securities, thereby minimizing the effect of Federal Reserve holdings on the allocation of credit across sectors of the economy.

  The Committee is prepared to adjust the details of its approach to policy normalization in light of economic and financial developments.

• Inflation Drops in August
  Eddy Elfenbein, September 17th, 2014 at 10:35 am

  Today is Fed Day. We’ll find out at 2 pm what the FOMC has decided. Janet Yellen will also host a post-meeting press conference. Today, it’s all about the language.

  We got a surprising inflation report this morning. The government reported that consumer prices fell 0.2% last month. Economists were expecting no change.

  Don’t think this was due to lower gasoline prices. If we look at the “core rate.” which excludes food and energy prices, then consumer prices were flat last month. Expectations were for an increase of 0.2%.

  This is the lowest seasonally-adjusted core CPI in more than four years.

  The S&P 500 still hasn’t topped its high from March 2000 when we adjust for inflation (with dividends, it has). Adjusting for the latest CPI data, the S&P 500 would have to make it to 2,126.48 to make a new all-time inflation-adjusted high. That’s about another 6.3% from where we are now.

  Interestingly, the S&P 500’s all-time inflation-adjusted high isn’t from March 24, 2000, which had been the peak in nominal terms. The S&P 500 closed that day at 1,527.46. Rather, the inflation-adjusted peak came the previous day, on March 23, when the index closed at 1,527.35. That small one-day increase in stock prices was actually less than inflation.

• Morning News: September 17, 2014
  Eddy Elfenbein, September 17th, 2014 at 6:53 am

  China Central Bank Injects $81 Billion Into Major Banks to Support Economy

  Eurozone Inflation Stabilized in August

  Bank Remains Split on Interest Rates as Scottish Referendum Clouds Future

  Yellen Rate Raises Seen as Slow in Survey as Inflation Muted

  Janet Yellen vs. the Inflation Zombies

  Alibaba Buyers Say IPO Too Cheap to Miss Even With Risks

  Sony Predicts Increased Losses Due to Struggling Mobile Business

  Adobe Revenue Misses on Disappointing Digital Media Sales

  Sears Cash Burn Has Suppliers Growing Leery of Lampert

  Trian Partners Delivers Letter and White Paper Summary to DuPont Board

  U.S. Consumer Bureau Sues Corinthian, Alleging Predatory Lending

  Zara Owner Inditex Sees Profits Dip But Sales Rise

  Sky Deutschland Advises Minority Shareholders to Reject BSkyB Takeover Offer

  Cullen Roche: The Worst Call of the Last 5 Years

  Edward Harrison: Country By Country Macro Update, September 2014

  Be sure to follow me on Twitter.

• Microsoft Raises Dividend By 11%
  Eddy Elfenbein, September 16th, 2014 at 7:40 pm

  In Friday’s CWS Market Review, I wrote:

  Be on the lookout for a dividend increase soon from Microsoft ($MSFT). The software giant isn’t normally thought of as a dividend stock, but they’ve been working to change that. In the last four years, Microsoft has increased its dividend by 115%. The quarterly payout is currently 28 cents per share. I think MSFT will raise it to 31 cents per share.

  I was right. After the bell, Microsoft ($MSFT) raised their quarterly dividend to 31 cents per share. That’s an increase of 10.7%. Over the last five years, MSFT has raised its dividend by 138%. The new dividend works out to $1.24 for the year. Going by today’s close and the new dividend, Microsoft now yields 2.65%.

• Time is Running out for “Considerable Time”
  Eddy Elfenbein, September 16th, 2014 at 1:15 pm

  The Federal Reserve began its two-day meeting today. The real news will come tomorrow afternoon when we find out what they decided. I think we can expect another taper decision. The next meeting, which is in late October, should be the final taper decision, and then QE will be done for.

  The Fed will also update its projections and include forecasts for 2017. But what a lot of people are watching for is the inclusion of the Fed’s “considerable time” language. This has been the phrase the Fed has used to describe the time period between the end of QE and the first rate increase. This is from the July statement:

  The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.

  For now, it looks like the language will stay, but I’m curious how much longer it will last. I’m guessing they’re debating that right now. I like to look at the futures market, and the latest prices suggest that rates will rise next June. But remember, that’s just one increase. Assuming inflation stays at 2% (year-over-year is currently 1.99655%), that means that real short-term rates are expected to stay negative for another 2.5 years.

  Slowly, things are getting back to normal. Very slowly.

• Russell 2000 Hits Underperformance Low
  Eddy Elfenbein, September 16th, 2014 at 12:24 pm

  Small-caps continue to lag. The ratio of the Russell 2000 divided by the S&P 500 is at a 21-month low today.

  

• The Stealth Bear
  Eddy Elfenbein, September 16th, 2014 at 12:19 pm

  When we look at “the stock market,” we’re usually talking about an index of stocks. Sometimes that isn’t the entire picture. Bloomberg notes that nearly half of the stocks in the Nasdaq are 20% or more off their high, which is the usual definition of a bear market.

  About 47 percent of stocks in the Nasdaq Composite (CCMP) Index are down at least 20 percent from their peak in the last 12 months while more than 40 percent have fallen that much in the Russell 2000 Index and the Bloomberg IPO Index. That contrasts with the Standard & Poor’s 500 Index (SPX), which has closed at new highs 33 times in 2014 and where less than 6 percent of companies are in bear markets, data compiled by Bloomberg show.

  This is a direct result of the flagging performance of small-cap stocks.