Heinz...
Just checked, the link worked for me...
here's the text...
There has been no marked slowing in the money supply. I believe that, as you encounter the figures that follow, you'll see that the current U.S. inflationary activity should also not be expected to subside and time soon. This is, of course, excluding for what inflation there is currently in the prices of tradeable goods abroad.
I may leave the report a bit short this week as there are other items to which I must readily attend. Unless I do, I fear I may never complete what it is I've expected to provide here. That said, previous readers will recall the aberrations noted during the period surrounding the national tax deadline; but, otherwise, M2 continues to grow at a 5.5% annual rate with the transactional category, MZM, moving along at 6.7% -- still driving the economy along. I believe we will find shortly, though not too surprisingly, that recent estimates of economic growth have been understated. Repeating what I've stated in prior reports about period growth, the February-through-May stanza has M2 growing slightly above 6%. I should emphasize the periodic approach to determining trends and activity in the money aggregates, as well as the economy, because it is characteristic of the Federal Reserve to treat circumstances in just such a manner. Reviewing a few of the most noteworthy extents since the Spring of 1998 reveals a bit of this.
It's important to remember, too, that to cap growth is not the Fed's primary interest. At least not in the textbook sense. They are of course concerned about and attentive to growth in the economy, yet inflation is the primary target. I'm certain many may have read recent commentary that suggests inflation could continue even as the economy slows, which is possible. And, for this reason, many also worry that the Fed may go too far in pursuit of their prime policy objective -- price stability. But I don't believe we are currently in danger of even the slightest ruin.
It may have been in a report several weeks ago where I attempted to dispel notions of a Summer rally for the U.S. sharemarket. As a matter of fact, I was rather upset by reports that were spreading more hope than truth. Holding fast to what the monetary signals were, and are, I found those suggestions of galloping share prices entirely unbelievable. Selected issues? Yes, there are always those. But the inflationary background the market must now play before will either not permit the capital refueling with which the Street has grown so accustomed or be agitated to uncontrollable proportions.
There is ever the possibility that the Fed or the U.S. Treasury will endeavor to help matters along. And they are very near to doing so. Though not quite.
Regardless of what near-term indications proved useful this Spring, it's been July weakness that's called-out loudest ever since Winter. Be quite attentive to contrarian opportunities within the next few weeks, but let's never defer from planning and constructing as many investment contingencies as we are able.
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June 19th Week
Day Action Amount Term
Mon Add $2.0b 28-day
Tue NR
Wed Add $7.0b overnight
Thu Add $2.5b overnight
Add $2.0b 28-day
Fri None
June 26th Week
Day Action Amount Term
Mon Add $5.0b 3-day
Add $2.0b 28-day
Add $0.7b permanent
Tue Add $3.0b overnight
Wed Add $4.0b overnight
Thu Add $5.5b 6-day
Add $2.0b 28-day
Fri Add $5.0 3-day
NR = not recorded
Source: CBOT
Comments: Fed funds closed at nearly 6.75% on Thursday and were trading at 7 11/16% when the futures closed on Friday, which is nearly 75 basis points higher than the 7% when the Fed entered the market with $5.5 billion during their early morning intervention and nearly 125 bp above the target rate. Was the NY Trading Desk taken by surprise? Possible, but the worst "bust" or "miss" the Fed encountered in the run-up to Y2K was 250 bp. And, that, under more harried conditions. By the way, the average and median misses during that run-up were amazingly acceptable.
Late note: Fed funds closed at 7 1/16% on Monday.
It is possible that the Fed looked upon this past weekend's demand as something that should not be permitted to shake them from their current funding routine. Too, that such pressure should arrive needn't be puzzling. Consumer demand is getting along very well, despite what fears are being broadcast by a few analysts.
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Temporary operations by the Trading Desk have averaged less than $15 billion in every two-week maintenance period since the Spring of 1997, but for two instances. A single occasion in the Spring of 1997 and throughout the CDC ( Century Date Change ) initiative last Fall. No, it does not appear that either credit or demand for credit are easing. Without considering what difficulties float often presents, the Fed appears to have attempted good restraint this past weekend. As well they should. Please see the brief comparison in the table of figures that follows.
Temporary Reserves Funding
Avg of Two-Week Maintenance Periods
1997 $ 9 billion
1998 $ 6 billion
1999 $15 billion
Current $17 billion
Source: U.S. Federal Reserve
The figures in he table above do not suggest tight policy conduct. The current 17 billion-dollar average is more indicative of real interest rates that remain too low, and a demand still being generated by the current monetary policy posture.
For those not familiar with the term, a maintenance period is the two-week reference by which reserves funding is conducted. More on maintenance periods at the Federal Reserve, just by applying the words to the search engine.
As I mentioned in one prior writing, it's not the intention of this report to criticize the Federal Reserve. Better, I think, to proceed on the evidence than to, week-after-week, offer what amounts to no more than sour grapes. Not a very attractive demeanor.
Regardless of the aforementioned, I don't mind having a go at the Treasury now and then.
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The FDIC Speaks-Up, Again
Assets on banks' balance sheets represented by both long-term as well as volatile short-term deposits is rising, while the share of core-deposits -- which tend to be more stable -- are declining. Both are indications of increased exposure to higher interest rates, the FDIC said.
"This is an example of how changing conditions in financial markets can have a significant impact on banks' earnings," Tanoue said. As a result, Ms. Tanoue was reported saying she saw "several yellow lights flashing caution."
Commercial borrowers account for approximately 60% of all credit outstanding. Viewers of this report might recall a graphic displaying the accelerated pace of commercial and industrial loan activity. Current real interest rates and the availability of money and credit have made it possible. Though, in recent weeks, growth in C&I lending has slimmed somewhat. I'll review other categories of bank credit later this week.
Total noncurrent loans rose modestly to $34.6 billion in the first quarter from $33.0 billion in the fourth quarter, with loan-loss reserves up to $59.9 billion from $58.8 billion, showing banks are attempting to prepare for trouble ahead.
The number of insured banks fell by 62 in the quarter, with 118 banks absorbed by merger, one bank failure, and 56 new charters. The number of "problem list" banks grew to 72 in the first quarter from 66 in the fourth quarter. This is the largest number of problem banks since mid-1997, the FDIC said.
I have to wonder how some investors justify trading multiples in the high teens for certain of our regional banks.
Debt and Share Support
Moody's economist John Lonski tells us in a recent report that, according to the Federal Reserve's Flow of Funds data, the net issuance of US corporate equity posted a $43.3 billion annualized pace in 2000's first quarter. In sharp contrast, equity buybacks exceeded gross equity issuance in each of the 22 quarters ended March 2000 at an average annualized rate of $138.1 billion.
Unless the funding of stock buybacks subtracts too much from a company's financial flexibility, stock buybacks should enhance equity valuation. In terms of a 4-quarter moving average, net equity buybacks most recently peaked at an unprecedented 3.4% of GDP for the span ended June 1999 and have since descended to the 1.3% of GDP for the year-ended March 2000.
Since June 1999, the 4-quarter moving average of net stock buybacks has been trending lower relative to GDP. Not since 1990-1994 have net equity buybacks descended relative to GDP. When net stock buybacks grew relative to GDP during the six years ended 1989, the S&P 500 recorded an average yearly increase of 13.5%. When net equity buybacks then fell relative to GDP during the five years ended 1994, the average annual increase of the S&P 500 dipped to 5.4%. Over the next five years, stock buybacks trended higher relative to GDP and the average annual increase of the S&P 500 jumped up to 26.2%. Interestingly, the latest slide by equity buybacks relative to GDP has been joined by a weaker showing for the S&P 500 stock price index. The S&P 500 would not have advanced at an average annualized rate of 26.2% during the 5 years ended 1999 if average annual net equity buybacks had not reached 1.8% of GDP for the 5 years ended September 1999. During the 5 years ending with 1999, net equity buybacks averaged $143.7 billion per year.
The Yuan Renminbi, Again
Chinese Premier Zhu Rongji was quoted by Hong Kong's Chinese-language Ming Pao daily as saying during a meeting with Hong Kong tycoons last week that the IMF has asked China to allow the yuan to float in the fourth quarter of this year or the first quarter of next year.
The newspaper said the issue would be one of the key items to be discussed at the summer seaside resort of Beidaihe soon where members of the Chinese top leadership meet to discuss major policies. It was during the 1999 Beidaihe retreat that reports surfaced of attempts to retire Zhu from his current position. Shi Guangsheng, foreign trade and economic cooperation minister, told reporters after a meeting with visiting Hong Kong financial secretary Donald Tsang in Beijing that he hasn't heard about the reports.
Knowing that in early in 1998 a number of the mandarins at Zhongnanhai were actively seeking Mr. Tsang Yam Kuen's resignation, I find it difficult to imagine he's been hosted in Peking for other than the strictest reasons. I'll have more to say about Mr. Tsang and the Hong Kong Monetary Authority's Joseph Yam in an upcoming report. Time permitting.
See you next week.
piraz.com
Best Regards,
John |
