Andy Sutton's Extemporania

Weekly Commentaries and Occasional Observations

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Tags: Fed

Another? So Soon?

by TwoCentsEditor

Published on: 09/11/2008

Categories: Current Events, Financial Markets

Tags: Fannie, Fed, Freddie, inflation, Lehman, Paulson, stocks, Washington Mutual

Comments: No Comments

I joked last weekend with a friend before my weekly radio show about starting a pool to try to guess when the next big bank/brokerage firm would need a bailout. The wager was sealed before the ink on the Fannie/Freddie stories was even dry.

Little did we know at the time that our sidebar gentleman’s wager might come into play just a week later. Here we are, heading into another weekend, and the rhetoric about the Fed/Treasury now stepping into to bail out Lehman brothers is reaching fever pitch. In case anyone hasn’t noticed, their stock (NYSE:LEH) is down over 90% in the last year, and a whopping 70% in the past two weeks as their situation continues to deteriorate.

A required bailout of Lehman would bring the total bailouts for major firms this year to 4. Rumors on the street have it that Washington Mutual is next in line after Lehman. They’d better get one of those gadgets they use at the cold cut counter at the grocery store where you take a paper ticket then wait for them to call your number. I have a feeling these firms are about to start dropping like flies. Soon FDIC and PBGC will be at the Fed/Treasury begging bowl with hat in hand.

Disclosure: Short XLF

Bailout is nothing but a pile-on

by TwoCentsEditor

Published on: 09/08/2008

Categories: Current Events, Economics, Financial Markets

Tags: Fannie, Fed, Freddie, inflation, stocks

Comments: No Comments

While media pundits’ cheers resonated the world over and global stock indexes soared on the news that Uncle Sam finally stepped in and nationalized Fannie and Freddie, many sane individuals are left shaking their heads. True we have known for some time that this would happen. It had to. The pain of the purging of decades of overconsumption must be prevented at all costs during this political season. This is now two major bailouts for the US government in the last 6 months and NOBODY Is asking the most important question: Where is the money coming from? Clearly the Federal deficit is going to soar over this. Not to mention the hundreds of billions the Fed has thrown down the rathole to keep the banking system liquid.

This not just a bailout, but a pile-on. At the end of the day, the US taxpayer is on the hook for this bill. The only question is how the bill will be paid – through inflation, taxes, or a combination thereof. Grab your wallets folks, this is only getting started. Next in line – FDIC, SIPC, and PBGC in no particular order.

I covered this issue in depth last night on ‘Beat the Street’. Listen to the broadcast here:

Beat the Street – 09/07/2008

More jawboning and bottom-calling

by TwoCentsEditor

Published on: 08/26/2008

Categories: Current Events, Economics, Foreign Exchange Markets

Tags: dollar, Fed, housing, Monetary Policy, stocks

Comments: 4 Comments

The minutes from the last FOMC meeting indicated the Fed’s next move in interest rates will be higher. I can see it now: the dirty dozen sitting at their big table, with all their fingers and toes crossed as they made perhaps the most ridiculous utterance of all time. There is no way the Fed is going higher on rates anytime soon. If anything, they are likely to be forced to go even LOWER than the 2.0% current Fed funds rate. Reasons include an economy that is now almost entirely dependent on cheap money, an ongoing financial crisis, and the biggest reason of all – the housing market. The statement on raising rates was made entirely as an excuse to keep the staged rally in the Dollar going a bit longer. Remember, the mainstream press announced the upcoming rally back in April. We’re just following their playbook here.

In other news, housing bulls are excited that new home sales picked up just a tad this past month. This news came as prices fell at a record pace. Makes sense guys. However, mortgage rates really aren’t cooperating at this point, with 30 year money going in the mid 6% range for prime borrowers. This ties directly into the Fed’s course of action. They must keep the spread between borrowing costs and lending costs as high as possible in order to try to save banks. However, if mortgage rates are too high, then defaults and foreclosures will get worse. If the PPT buys the long end of the yield curve to bring down mortgage (bond) rates, they kill the banks by cutting the interest rate spreads – UNLESS they go lower on the short-term rates to try to maintain the spread. No my Dear Watson, the Fed is not raising rates anytime soon.

Treasury Deficit blows out to Record

by TwoCentsEditor

Published on: 08/13/2008

Categories: Current Events, Economics

Tags: deficit, Economics, Fed, stocks, Treasury

Comments: No Comments

The June deficit for the US Treasury pushed to near $103 Billion in June alone as the government sent out rebate checks to taxpayers. I am hoping that now everyone will see the folly in these giveaways. The tab for that will now have to be borrowed or monetized by the Treasury/Fed and will result in an increased burden for our children moving forward. Tax ‘rebates’ from an insolvent Treasury are only another way to forego future consumption in favor of current consumption. Because it is today what matters; not tomorrow.

Now imagine what the deficit will look like when the Treasury starts buying Fannie/Freddie debt and has to bailout FDIC (which is coming). The monthly deficit might be $200 Billion. Or maybe $500 Billion. Is there any limit to the amount of money these people think they can borrow and spend? Or more importantly, is there any point at which Americans will wake up from their collective slumber and start demanding some sort of accountability from our elected officials? We always talk about wanting the best for our children. Yet we’ll allow our government to bury our kids and grandkids under a mountain of debt without nary a whimper of protest.

The Do-Nothing Fed

by TwoCentsEditor

Published on: 08/05/2008

Categories: Current Events, Economics

Tags: bernanke, dollar, Fed, stocks

Comments: 4 Comments

Inflation is running at multi-decade highs and today the Fed chose to do nothing; a clear demonstration of their inability to control neither the economy nor the financial system moving forward. Their (un)official position continues to be to print enough money to bail any major institution that requires it and let the chips fall where they may.

One would have expected asset markets to react accordingly, yet gold sold off, the Dollar rallied, oil continued its recent slide, and the stock markets headed for the moon. Counterintuitive moves have been the fare of the past few months, and that has caused many believers to become wary of the fundamentals. While Big Ben and his pals would love for you to believe that they are the Keeper of Bubbles and the Masters of the Universe, they are nothing of the sort. Once again, prevention is the name of their game and the prescription for prevention on their part is patience on ours.

Fed lending facilities become 'permanent'

by TwoCentsEditor

Published on: 07/30/2008

Categories: Current Events, Economics, Financial Markets

Tags: Centsible Investor, Fed, oil, stocks

Comments: 4 Comments

When the Fed came up with its alphabet soup of mini bailouts for Wall Street banks back at the beginning of the year, these programs were touted as being temporary measures to stave off the credit crisis and followed the Fed’s flawed belief that the crisis would be short-lived. Today, those programs were extended (again). We told our readers that these programs would become permanent in time and they are doing exactly that. This means the inflation created by them is now baked into the cake.

In market news, stocks have been in rally mode since our last issue of the Centsible Investor was released just as we forecasted: “Our view right now is that the major indexes will see a brief rally over the next few weeks…” Become a subscriber to find out what happens next! In just 8 months, this fast-growing publication has had a stellar track record of picking tops and bottoms even though that is not it’s primary objective. Find more information visit the link below:

http://www.suttonfinance.net/newsletter.php

While all this has been going on, we have watched oil prices continue to fall; although not as precipitously as previously observed. The odd thing is the logic going on here. Follow along for a second.

1) OIl prices are going down – the main reason given is worries about economic growth.

2) Stock markets are using this ‘news’ to rally.

3) Stock prices are generally forward indicators of the state of corporate earnings.

4) If the economy is slowing, we would expect earnings to decrease so why all the excitement on Wall Street?

Keep your eye on the ball folks; things are about to get very interesting; as if they haven’t been already.

Complacency rules on banking crisis

by TwoCentsEditor

Published on: 07/14/2008

Categories: Current Events, Foreign Exchange Markets

Tags: bailout, dollar, Fed, inflation, stocks

Comments: 1 Comment

This is no longer just a credit crisis. This is now a full-blown financial crisis with the second largest banking failure in US history occurring over the weekend. There is a good deal of concern from regulators and market watchers alike about a cascade of banking failures. Yet, listening to many stories on television and other media outlets, consumer are being told not to worry. Keep spending; your money is safe. Is it though?

I would say to inquiring minds that the actual dollars are safe. They can be created from nothing at almost no cost. Thanks to the advent of electronic banking, they can be created by a few keystrokes on a computer terminal. What isn’t safe though is the value of those Dollars. In fact, the value of your Dollars was under attack well before the first adjustable rate mortgage was even written. Remember that every bailout and bank rescue just necessitates the creation of more Dollars; without corresponding economic growth. This is a recipe for inflation. The sins of 2006 are just now being felt by consumers. What about when we get to 2007 and 2008? If you intend to protect your wealth, you’d better stay tuned, read the commentaries on our site that discussed preservation of wealth and ACT. Some of these strategies were published two years ago and you can see the results of the strategies so far. It is not too late.

A see-saw day ends up

by TwoCentsEditor

Published on: 07/10/2008

Categories: Current Events, Financial Markets, Technical Analysis

Tags: bernanke, Dow Jones, Fed, oil, stocks

Comments: 3 Comments

Today’s action featured the DJIA up over 100 points, then down in negative territory, and finally finishing up around 81 points. Financials, particularly Fannie Mae and Freddie Mac are under mounting pressure as the true state of their affairs becomes more widely known. Oil was in stealth mode today, surging nearly $6/barrel as Iranian tensions and the end of the Nigerian cease-fire created more nervousness in the trading pits. So much for the end of the commodity bull market.

Looking forward, if the major indices are going to muster any kind of a rally, they’d better get started soon. Earnings will start trickling out and the news is not looking good despite a solid attempt to window-dress the results by the mainstream financial press. Lower earnings make current P/E’s high, and warrant further correction (lower prices). The economic stimulus checks have been hitting Main Street for nearly 2 months now with the last scheduled to be sent within a few weeks. Once the brief jump in spending numbers wanes, there is not a lot of good news for US markets looking forward.

The Post-Fed Wrap up

by TwoCentsEditor

Published on: 06/26/2008

Categories: Current Events, Economics, Foreign Exchange Markets

Tags: Fed, inflation, Monetary Policy

Comments: No Comments

The Fed did as predicted yesterday and stood pat on interest rates, claiming they are worried about inflation? This is an utter joke since they and they alone are the ones that create inflation. They have this power, because they control the money supply, which in turn controls the direction of overall price levels. It is that simple.

The currency markets are not buying the Fed’s line as the Dollar Index sold off more than a half percent yesterday after the decision and is down nearly that much again already this morning as of this writing. The currency markets knew what was going to happen yesterday for some time, hence the sideways action in the Dollar. The next few weeks will be important to see where we go next. The cards are lined up for a lower Dollar and the Fed/Treasury would love that, but they can’t come right out and say it. So expect the verbal campaign to continue, but little in the way of action.

Taking a 'Coffee Break'

by TwoCentsEditor

Published on: 06/24/2008

Categories: Appearances, Current Events, Economics, Financial Markets

Tags: contraryinvestorscafe.com, dollar, Fed, inflation

Comments: No Comments

I will be interviewed tomorrow for the next edition of contraryinvestorscafe.com’s weekly audio series ‘Coffee Break’. We will be discssing strategies that may be used by investors during times of market volatility, especially given the fact that the more ‘safe’ investments are riddled with negative real yields. I will post back here with a link as soon as one is available. I would strongly recommend to anyone interested in these topics to listen to those weekly interviews. I’ve included a link to their site on the blog’s toolbar as well. My Two Cents will be entering into a strategic partnership with CIC very shortly. More details to follow as that gets closer.

Today’s market action was mostly quiet after some morning fireworks as the markets prepare for the release of all-important (sarcasm mine) FOMC statement tomorrow at 2:15 PM. I’m going out on a limb here and will say they do nothing rate-wise, but they’ll talk tough on inflation. That will cause the Dollar to bounce briefly. Let’s see how it plays out!

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