Sep 21, 2011

Isn't Everyone Waiting for the Fed?

September 21, 2011

People on Wall Street tend to lose sight of the fact that they aren’t the center of the universe, only their own universe. I was reminded of this yesterday at a meeting when a Wall Streeter, obviously looking for the opinion of a “man-on-the-street”, asked someone what they thought the Fed might do in this week’s meeting. The man replied “why should I care what a bunch of bankers have to say?” And so, with that backdrop, those of us on the Street await the results of the Fed’s two day meeting today.

The Fed has signaled the likelihood they will begin Operation Twist, whereby they begin acquiring longer dated treasuries. The theoretical impact would be to lower longer-term rates, and presumably borrowing rates for consumers and small businesses. Expectations for the meeting are moderate, which gives the Fed ample opportunity to surprise the markets with a bold plan. In my view the biggest problem with relying upon the Fed is that their toolset isn’t suited to correcting our economy’s woes. What we need is logical action coming from DC combined with time and patience, none of which is in abundance right now.

The IMF and EU have issued warnings about nine banks that recently failed their stress tests. The IMF said the banks need to accelerate the increase of their capital buffers, and have estimated the credit risk to Europe at $410 billion.

Equity futures are flat this morning while APAC markets rose last night. The Shanghai was up 2.7%, Nikkei 0.2%, ASX 0.8%, and Kospi 1%. The Hang Seng fell 1%, and the Sensex declined 0.2%.

According to Bloomberg a new growth industry (OK, that was my interpretation) is emerging in the building of vaults for the storage of gold. With gold near all-time highs, the ownership of physical gold outside of central banks is at an all-time high. Companies that build vaults, and those that provide storage, are seeing a boom in demand. One man’s lemon is another’s lemonade.

MolyCorp (MCP), which has been a rocket ship since its IPO (see chart below), fell over 20% yesterday after receiving a downgrade from JP Morgan. The analyst’s concerns revolved around pricing pressures on certain elements such as cerium and lanthanum.

Alpha Natural Resources (ANR) is down roughly 15% this morning. The coal producer is citing weak demand from Asia as putting pressure on the quarter. Coal consumption is a coincident indicator of economic activity, and weakness or even a decline could indicate slower economic activity in the emerging markets.

A report from the IMF concluded that “American output is proving very disappointing in 2011 and isn’t expected to rise much in 2012.” The agency also cut its global growth output and predicted “severe” repercussions if policy makers fail to stem the debt turmoil that’s threatening to engulf Italy and Spain.

The Wall Street Journal has a report out today looking for flat-down US housing prices through 2015. The report expects prices to fall 2.5% this year and then rise by 1% each of the subsequent years.

Income inequality has been a much bandied about topic over the past few years. The chart below, courtesy of The Big Picture, is one way to look at this data. It shows how incomes for the 90th, 50th, and 10th percentile earners have changed since 1967. In 1967 the 90th percentile earned 9.4x the level of those in the 10th percentile, and 2.1x the median earner. In 2010 the 90th percentile earned 11.5x the level of the 10th percentile, and 2.8x the level of the median earner.

I’m waiting for the Fed, are you?

Have a great day


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