Today’s Fed Statement
Posted by Eddy Elfenbein on August 9th, 2011 at 3:06 pm

This is actually a surprising statement. The key is the new language: “The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”

In other words, the economy is going to be sluggish up to, at least, Election Day.

Here’s the whole thing:

Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity. Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions. More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.

Voting against the action were: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period.

There were three dissensions which is unusually high for a Fed meeting. Yields are soaring and the stock market has given back much of its gains.

Q2 Earnings Summary from Zacks
Posted by Eddy Elfenbein on August 9th, 2011 at 1:26 pm

Dirk Van Dijk breaks it down:

Almost done with earnings season, with 433 or 86.6% of S&P 500 second quarter results in. Total earnings growth low at 11.2%, but mostly due to one stock (BAC). Ex-Financials, growth is 20.9% year over year. Total revenue growth 12.15%, 12.73% ex-Financials. Median earnings surprise 3.13% and median sales surprise 2.06%. Remaining firms (67) expected to grow 8.9%, 5.4% growth expected excluding Financials.

If remaining firms all report in line, then 87.9% of earnings are now in. Final growth to be 10.95%, 18.80% ex-Financials. At start of earnings season 9.65% growth expected, 12.18% ex-Financials.

Earnings beats top misses by a 3.42 ratio, sales beats top misses by 2.81 ratio, 69.5% of all firms report positive earnings surprise, 72.1% beat on revenues.

Full-year total earnings for the S&P 500 jumps 45.6% in 2010, expected to rise 16.0% further in 2011. Growth to continue in 2012 with total net income expected to rise 11.5%. Financials major earnings driver in 2010. Excluding Financials, growth was 27.7% in 2010, and expected to be 18.8% in 2011 and 10.8% in 2012.

Total revenues for the S&P 500 rose 7.78% in 2010, expected to be up 6.72% in 2011, and 6.54% in 2012. Excluding Financials, revenues up 9.16% in 2010, expected to rise 11.14% in 2011 and 5.96% in 2012.

Annual Net Margins marching higher, from 5.88% in 2008 to 6.40% in 2009 to 8.65% for 2010, 9.34% expected for 2011 and 9.83% in 2012. Margin Expansion major source of earnings growth. Net margins ex-Financials 7.79% in 2008, 7.07% in 2009, 8.27% for 2010, 8.84% expected in 2011, and 9.25% in 2012.

Revisions ratio for full S&P 500 at 1.61 for 2011, at 1.41 for 2012, both bullish readings. Up from last week and driven by new increases, not old estimates falling out. Ratio of firms with rising-to-falling mean estimates at 1.44 for 2011, 1.30 for 2012 — bullish readings. Total revisions activity still climbing, but should peak soon.

The S&P 500 earned $546.5 billion in 2009, rising to $795.4 billion in 2010, expected to climb to $922.2 billion in 2011. In 2012, the 500 are collectively expected to earn $1.028 trillion.

S&P 500 earned $57.20 in 2009: $83.16 in 2010 and $96.47 in 2011 expected, bottom up. For 2012, $107.53 expected. Puts P/Es at 14.4x for 2010 and 12.4x for 2011 and 11.2x for 2012, very attractive relative to 10-year T-note rate of 2.56%. Top-down estimates: $96.26 for 2011 and $105.44 for 2012.

Greg Mankiw & Bill Poole Talk Fed
Posted by Eddy Elfenbein on August 9th, 2011 at 12:20 pm

Great News! A Very, Very Modest Bounce
Posted by Eddy Elfenbein on August 9th, 2011 at 11:21 am

Morning News: August 9, 2011
Posted by Eddy Elfenbein on August 9th, 2011 at 7:42 am

ECB Buys Up Spanish and Italian bonds, Yields Fall

FTSE Enters Bear Market Joining European Index Peers

Swiss Franc Surges to Record Highs on Slump Worries

China Again Faces Growth vs. Inflation Conundrum

South Korea Regulator Bans Short-selling for 3 Months

Gold Tops $1,770 in Biggest Three-day Rally Since 2008

Stocks Fall, Oil Sinks

A Wave of Worry Threatens to Build on Itself

Behind S.&P.’s Downgrade, a Committee That Acts in Private

Freddie Mac Swings to Loss, Seeks $1.5 Billion in Aid

Bank of America Shares Plummet Monday After Lawsuit, US Debt Downgrade

Dish Reports Quarterly Profit That Trails Estimates on Customer Losses

MGM Resorts Beats Estimates on Macau Boom

Tepco Suffers US $7.4 Billion Quarterly Loss

Brian Shannon: VWAP From 2009 Low – Chart & Comments

Todd Sullivan: “Davidson” on S&P 500

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The Market’s 6.66% Plunge: The Devil Is in the Details
Posted by Eddy Elfenbein on August 8th, 2011 at 10:21 pm

The stock market plunged again today and the numbers are mind-boggling. The S&P 500 lost 79.92 points to close at 1,119.46. That’s a loss of 6.66% which is the biggest one-day loss since 2008. It also eerily evokes the market’s March 2009 bottom of 666. Today clocks in as the 25th-worst one-day loss for the market since 1932 (that’s as far as my records go back). For the first time in 15 years, every single stock in the S&P 500 lost money today. If you’re scoring at home, that’s Bears 500, Bulls 0.

The S&P 500 first closed at this level on April 2, 1998 which was more than 13 years ago. As badly as the S&P 500 performed, the Nasdaq did even worse. That index lost 174.72 points today to close at 2,357.69. Down volume led Up volume by a ratio of 151-to-1. The $VIX jumped exactly 50% today—from 32 to 48. It’s tripled in a matter of days.

Once again, the cyclicals bore the brunt of the loss. I know I must sound like a broken record, but this is very important in understanding what’s going on. The Morgan Stanley Cyclical Index (^CYC) dropped 81.22 points today to close at 820.64. That’s a loss of 9.01%. Today was the 17th time in the last 18 sessions that the CYC has trailed the overall market. (Read that sentence again for full effect.)

What happened today is that cyclical stocks and small stocks (which tend to be disproportionately cyclical) did especially poorly. The larger stocks did better, meaning somewhat less terribly. The Dow, for example, “only” lost 634.76 points or 5.55%. That’s more than 1.1% better than the S&P 500. The Russell 2000 ($RUT), which is a small-cap index, lost 8.91% today. Only three months ago, that index was at an all-time high.

Among the S&P 500 Sectors today, the Financials did the worst, dropping 9.98%. Bank of America ($BAC) was down more than 20%. The bank faces many significant challenges, not the least of which is that they suck. After the Financials, the Energy Sector was the second-biggest loser with a loss of 8.27%. Then another cyclical group, Materials, lost 7.28%. The Industrials came in fourth-worst with a loss of 6.87%.

The top-performing group was, not surprisingly, Consumer Staples which lost 3.87%. Next was Healthcare which lost 5.25%. The Healthcare and Staples sectors often track each other. This makes sense since these are areas that will be least-impacted by an economic slowdown. Folks generally don’t cut back on their medical needs or food during a recession, at least not like they do with non-staples.

Here’s what’s happening: The S&P downgrade of the U.S. isn’t so much impacting Treasury yields. Those are as popular as ever. Instead, what we’re seeing is the impact on everything else. For example, the downgrade is leading investors to think that the government won’t rely as heavily on fiscal policy to get the economy moving again. That implies that there will be more monetary accommodation from the Federal Reserve which means low rates for a longer time.

As I’ve written before, buying gold is the equivalent of shorting real short-term T-bills. As a result, gold continues to soar. The element broke $1,700 today, and in after-hours trading, gold got as high as $1,723.40.

I’m at a loss to comment on the stocks on the Buy List. Except for Ford ($F), I like them all. At this price, Ford isn’t looking so bad either. There hasn’t been one single bit of information that’s come out in the last two weeks that could possible make anyone change their mind on any of the Buy List stocks. The earnings reports were very good, and a few stocks raised their full-year ranges.

This year highlights an important fact about investing: The stock market is not symmetrical and it’s subject to “fat tails.” I’ll explain that again but this time in English. The stock market has a tendency to rise slowly and fall back sharply. Bull markets are long and boring. Bear markets are quick and deadly. In fact, most of the debate about a bear market comes after the low. It moves so fast that folks don’t realize its over.

By “fat tails,” I mean that the market builds on its own momentum. People start selling because everyone else is selling. That, in turn, causes even more selling. As a result, these awful market days tend to pile on top of each other. Consider that the three worst days of the past year have come in the past week.

The lesson from this is that we don’t know when the market’s downward momentum will end. Since it builds on itself, it’s like it has become its own monster. The selling will stop, but I have no idea when. These bottoms are often a process. Sometime, like in 2009, it’s a sharp bounce off the bottom. But even that came a few months after the most dramatic news of September 2008.

In economics, there a division between the financial economy, which is the stuff we mostly talk about here (crazy traders in New York and London moving massive amounts of colored paper around) and the real economy (real people buying and producing real things). These two economies have a troubled relationship, and they don’t always move together. The problem is that problems in one can easily tip over into the other.

In 1987, the stock market tanked, but if you looked at broader economic data from that time, you’d hardly know anything went wrong. In 2000, the markets soared above and beyond anything that was happening in reality. What we’ve seen over the past few days is a panic of the financial economy. As of now, we haven’t seen conclusive evidence that the real economy is in recession. I don’t mean it won’t happen, but as of now, the solid evidence isn’t there. What we do have is bits and pieces that the economy is slowing down.

Until there’s more evidence that the economy is headed back in the basement, I continue to like stocks a lot. Bond yields are very low and stock valuations are cheap. This panic will pass.

The 10-Day View
Posted by Eddy Elfenbein on August 8th, 2011 at 1:57 pm

The market sinks even lower. The S&P 500 just broke below 1,150. The market is lower than where it was in July 1998. To put that in context, that was a few weeks before Google ($GOOG) was founded.

The Morgan Stanley Cyclical index (^CYC) is now down to 838. That’s an amazing loss. The $VIX has been as high as 41 today. That’s more than double where it was two weeks ago.

S&P downgraded both Fannie Mae and Freddie Mac. Also, Bank of America ($BAC) is getting hammered after news broke that AIG ($AIG) is going to sue them over the mortgage debacle.

The Summer of Discontent
Posted by Eddy Elfenbein on August 8th, 2011 at 10:59 am

The stock market continues to plunge. The S&P 500 has been as low as 1,154.10 this morning. That’s another 100 points below the close from last Tuesday’s awful market. That S&P 500 is currently down 3.65%.

Once again, it’s the cyclicals that are getting pounded the most. The Morgan Stanley Cyclical Index (^CYC) is currently at 852.97. That’s a stunning drop of close to 21% since July 21st. The CYC is trailing the market for the 17th time in the last 18 sessions.

The fact that this sell-off is being led by cyclicals tells me that it’s more due to economic concerns rather than concerns of the debt-ceiling debate. Although financials aren’t doing well, Treasuries continue to soar. That’s an odd thing to see after a downgrade. The Long-Term Bond ETF ($TLT) is up more than 9% since July 14 when S&P warned that it might down U.S. debt.

Gold just broke $1,700 and the $VIX is now over 40.

Here’s a look at the cyclical index divided by the S&P 500.

Morning News: August 8, 2011
Posted by Eddy Elfenbein on August 8th, 2011 at 6:37 am

ECB Buys Italian, Spanish Bonds in Strategy to Defuse Crisis

Global Finance Leaders Pledge Bold Action to Calm Markets

Japan in Ratings Cross-hairs as Debt in Focus

Britain, Other Eurozone Countries Face Ratings Cut: Jim Rogers

Nigeria to Inject $4.5B Into Nationalized Banks

Crude Oil Drops On US Downgrade; Nymex May Test $80/Barrel

Gross Praises S&P’s ‘Spine’ as Buffett, Miller Say Rating Company Erred

Moody’s Says U.S. Needs to Find More Deficit Cuts

Stock Index Futures Tumble on S&P Downgrade

VIX Term Structure Evolution Over Last Ten Days

Reinsurerer Hannover Re On Track For Full Year After Net Profit Rise

Foreclosure Woes Fuel Wider Loss at Fannie

Berkshire Makes $3.25B Bid for Transatlantic

A.I.G. to Sue Bank of America Over Mortgage Bonds

Epicurean Dealmaker: School for Scandal

Joshua Brown: Shots Fired: Peter Brandt Says Welcome to the Global Bear

Brokers With Hands on Their Faces

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RIP: AAA
Posted by Eddy Elfenbein on August 5th, 2011 at 9:28 pm

For the first time in history, the creditworthiness of the United States of America has been downgraded:

A cornerstone of the global financial system was shaken Friday when officials at ratings firm Standard & Poor’s said U.S. Treasury debt no longer deserved to be considered among the safest investments in the world.

S&P removed for the first time the triple-A rating the U.S. has held for 70 years, saying the budget deal recently brokered in Washington didn’t do enough to address the gloomy long-term picture for America’s finances. It downgraded U.S. debt to AA+, a score that ranks below Liechtenstein and on par with Belgium and New Zealand.

The unprecedented move came after several hours of high-stakes drama. It began in the morning, when word leaked that a downgrade was imminent and stocks tumbled sharply. Around 1:30 p.m., S&P officials notified the Treasury Department they planned to downgrade U.S. debt, and presented the government with their findings. But Treasury officials noticed a $2 trillion error in S&P’s math that delayed an announcement for several hours. S&P officials decided to move ahead anyway, and after 8 p.m. they made their downgrade official.

S&P said “the downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.” It also blamed the weakened “effectiveness, stability, and predictability” of U.S. policy making and political institutions at a time when challenges are mounting.

So we’re a bigger credit risk than Liechtenstein. Who knew? (Well, S&P I suppose…but still!)

This is mostly theatrics. Everyone knows the numbers of America’s finances; they’re no secret. The idea of downgrading the debt of a superpower is frankly, a bit silly.

Think of it this way: America’s creditworthiness is rated every minute of every day. That’s what the bond market is. Any ratings agency can issue a report and say what they want about our debt — that’s no big deal. What is a big deal is that investors around the world are willing to pay absurd amounts to lend to us.

Ultimately, that’s what a credit rating is all about. If creditors trust us, our credit standing is high. Look at interest rates, not at what a bunch of analysts say in New York.