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Pastimes : Clown-Free Zone... sorry, no clowns allowed -- Ignore unavailable to you. Want to Upgrade?

To: patron_anejo_por_favor who wrote (312457)	9/21/2005 9:25:48 AM
From: MythMan	Read Replies (2) \| Respond to of 436258

A CFZ'er write this? >>Fed Faces a Post-Katrina Conundrum: Slowdown in Growth, Rise in Inflation September 21, 2005; Page C1 How do you solve a problem like Hurricane Katrina? The Fed is humming that tune as it faces the resulting supply shock: a slowdown in growth (at least in the short term) and rise in inflation (maybe for a good, long while). Historically, central banks struggle when such shocks hit. This time, it's worse, because at the same time Alan Greenspan must also face the music of the bullish stock market he has helped create. Fortunately for him, it won't be his problem much longer, since he's getting ready to hang up his spreadsheets. The Fed yesterday raised short-term rates a quarter point for the 11th time in a row, to 3.75%. Some economists had hoped and (incorrectly) predicted the Fed would pause to see how Katrina's effects played out. But when the Fed acted, it was clear that policy makers remain more concerned about inflation. They still paid homage to its beloved "core" inflation measure, trilling that it has been "relatively low." The core measure excludes food and energy prices because they are prone to swings that are, typically, outsized and temporary. But the core is increasingly outmoded as energy prices have undergone a sustained and sharp rise. "I think the Fed has started to think of [energy prices] as more of a core development," says Lehman economist Ethan Harris. It's about time. But the Fed isn't just combating inflation. Though it doesn't say so directly, it's also fighting the insatiable risk appetite that it spawned by the shock of easy money it used to get us out of the post-9/11 malaise. As strategist Christopher Wood of Hong Kong-based brokerage firm CLSA put it before the Fed raised, "The arguments for a post-Katrina 'compassionate' pause have been undermined by investors' almost obscene willingness to bet on the Greenspan put" -- that the chairman will always lower rates to save the day. Insensate investors think worry is for the little people, so the Fed has no choice but to keep raising rates. In the wake of Katrina, stocks have actually bumped up a little closer to where they started the year. That's despite investors having little idea how consumers will react. The few clues aren't good. In August, housing starts fell in regions unaffected directly by the hurricane, including the Northeast and the Midwest. High gasoline prices doubtless will bite. Retailers' stock prices are down. Consumer confidence has plunged. Investors like to think of these messages as either meaningless or temporary. Are they? The narrowing difference between short-term rates and long-term rates is taking its toll on the financial sector, which thrives by making longer-term loans with cheaper short-term borrowed cash. Commerce Bancorp, Fifth Third and other banks have warned that their earnings may disappoint. In a small but significant development, Annaly, a mortgage real-estate investment trust, chopped its dividend by 64% on Thursday and the stock cratered. A stormy earnings season awaits. An example of investors ravenous appetites for risk presented itself last week. Montpelier Re, a small reinsurer, has been one of the hardest hit by Katrina. Its losses are estimated to have wiped out as much as 46% of its book value -- "a greater loss than Fitch had expected from a single event," the rating company said in explaining a continued negative credit watch on the outfit. And that means ... buy! Late last week, investors bought $600 million of stock Montpelier offered to offset the losses. What could insurance investors be thinking? They think they've learned from past disasters -- that they always result in higher prices and the usual bad-news selloff is a Pavlovian buying bell. So this time, there was no selloff. The property and casualty insurance sector has been the third-best-performing sector since the end of August, adjusting for market value, according to Banc of America strategist Tom McManus. But if shaky insurance companies can raise capital easily because investors think they will soon be able to charge higher prices, there will be more well-capitalized insurance companies out there competing for business. That means prices might not go up as much, and some insurers will surely suffer. Investors have learned the first part of that syllogism, but somehow haven't grasped its conclusion. Now it is up to the Fed to do the thinking for them. Write to Jesse Eisinger at longandshort@wsj.com<<