Options Jerry: " Has Alan G done enough?". No, according to this article from Bloomberg.
I tend to agree. What the Alan G, Clinton/Dems and Co want us to do essentially is borrow more to keep the economy going. The point is that this GIANT , WORLD-WIDE, ECONOMIC HEARTBURN/INDIGESTION,
IS, repeat, IS due to too much borrowing and inability to pay the debt. It is one giant credit card bill.
Kudlow suggests at the end of the article the real way out of this: cut taxes.Give folks real money, not borrowed money.
This is why ASND ditched last week when it reported better earnings until we found out that was because folks bought from ASND with money loaned to them by ASND. What will happen when these same folks tell ASND:” we can't pay you back?”
It ain't over Jerry. Sitting on the sidelines again, 97% cash, with a small position in NN,
TA
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bloomberg.com
Was Fed Easing for Real? Show Me the Money
By Lawrence Kudlow
(Lawrence Kudlow was chief economist at the Office of Management & Budget during President Ronald Reagan's first term. He's now chief economist at American Skandia Life Assurance Corp. The opinions expressed here are his own and don't represent the judgment of Bloomberg LP or Bloomberg News.)
Has the Fed really eased? After two small reductions in the official federal funds rate, and much Wall Street ballyhoo about Federal Reserve easing, a close look at commodity price indicators, bond market spreads and bank reserve measures suggests that the central bank may not have eased at all. There is little evidence that Federal Reserve Chairman Alan Greenspan and Company have added measurably to the supply of high-powered dollar liquidity or reversed the growth-slowing trend of deflation.
First the commodity signs. The gold price has been slipping of late, falling back to $292 after briefly rising above $300. The CRB index continues to hover just above the 200 level, unchanged from a month ago and 16 percent below its year ago mark. The oil-heavy Goldman Sachs index is 30 percent under last year's level. And the farm-heavy Dow Jones futures index has deflated 16 percent over the past 12 months.
Now, if the Fed were truly injecting a sizable volume of new cash into the banking system, then sensitive commodity prices would rise. But it's not happening. Instead, the two quarter- point drops in the funds rate from 5.50 percent to 5 percent seem to be merely a belated move to follow market rates down. Perhaps the Fed has become slightly less restrictive. Weak commodity price signals, however, imply that the Fed remains behind the liquidity curve, not ahead of it.
Bank Reserves Down
This is confirmed by the recent data on bank reserves and Reserve bank credit. If the Fed decides to increase the supply of high-powered dollars, then the open marketdesk steps up its purchases of Treasury securities (usually bills, but sometimes notes and bonds) from dealer banks and brokerage firms and pays with newly created bank reserves. These reserve additions are duly reported in the weekly banking statistics published every Thursday night by the Fed.
However, since the Fed's Sept. 29 announcement to cut the funds rate, the level of non-borrowed reserves has declined from $44.4 billion to $43.7 billion. What's more, the latest two-week settlement period level for non-borrowed reserves is $1.1 billion below the average level for the month of September and 3.1 percent below the same period a year ago.
The most encompassing statement of bank reserve changes is contained in the Fed's weekly balance sheet, known as Reserve bank credit. For the week ended Oct. 21, the $490.9 billion level of Fed credit (primarily consisting of net purchases of Treasury securities and loans to member banks) is $5.5 billion less than the $496.4 billion level recorded during the week ended Sept. 30, when the first funds rate cut occurred.
On a yearly basis, Reserve bank credit continues to rise by roughly $35 billion, a rate of increase that has not changed much over the past two years.
Sending Dollars Abroad
Changes in Reserve bank credit are the principal source of the monetary base, compiled each week by the Federal Reserve Bank of St. Louis. At first blush the base's yearly growth rate of 7 percent seems high, sufficiently so to prompt Fed monetarists William Poole and Jerry Jordan to call for a higher Fed funds rate and tighter policy last summer. However, a recent article by Washington economist and former Treasury official Bruce Bartlett shows that
reported monetary base growth is sending a false signal. That's because the largest swing factor in the base, currency in circulation, is being rapidly exported to foreign countries.
According to Fed estimates of these dollar exports, foreign holdings of dollars as a share of currency in circulation have risen from 40 percent during the 1980s to 55 percent by 1997. With the recent currency devaluation crisis in Asia, Latin America, Russia and elsewhere, global dollarization has undoubtedly increased markedly in the past year. For domestic monetary policy run by the Fed, this means that the money supply circulating inside the U.S. is much smaller, and therefore policy is much tighter, than the reported data would support. For example, after adjusting for the greenback outflow to foreign countries the revised growth rate of the base is only 3.2 percent, instead of 7 percent monetary base growth over the past year.
Broader money aggregates such as M2 are relatively less affected, because currency comprises a smaller share of their total. However, the M2 supply is largely determined by shifts in the demand for money, depending on decisions by individuals and businesses to spend and invest. The only money measure directly under Fed control is the monetary base, whose primary source is the bank reserve policy of the central bank.
Demand Up, Supply Down
In work pioneered many years ago by supply-siders Arthur Laffer and Victor Canto, the best reading of monetary policy can be gained only by comparing growth rates of the monetary base (money supplied by the Fed) and a broader aggregate such as M2 (money demanded by the market). Adjusting for the effects of world dollarization, recent trends show 3 percent base growth and 7 percent M2 growth.
This means that money demanded far exceeds money supplied, a view confirmed by the deflationary slump of gold and commodity prices. In other words, Fed policy remains very tight. Put differently, both at home and abroad, available dollar liquidity is excessively scarce. This helps to explain why bond market ''quality spreads'' have deteriorated so much. The difference between high-risk ''junk'' bond rates and gilt-edged 10-year Treasury note rates has doubled from roughly 300 basis points (3 percentage points) about 600 basis points during the past year.
Since the first Fed rate cut, this spread has widened, though it has narrowed slightly since the second Fed rate cut. What's important here is that the widening of this spread over the past year signals market worries about credit quality and future profits. The market is telling us that the risk of recession is substantial, and the liquidity squeeze and resulting credit crunch is serious.
Remember, commercial banks provide only 30 percent of the credit to today's economy. Much more important are mutual funds and pension funds which, operating through capital markets (including stock offerings, corporate bonds and various asset- based bonds for mortgage, auto and credit card finance), provide over 50 percent of the nation's credit supply. If a severe liquidity squeeze causes capital markets to become dysfunctional, where lenders are totally risk averse, then the current economic slowdown (1 percent to 2 percent growth) could easily deteriorate into recession.
Bond Spread Widen
On a global scale, the shortage of dollar liquidity has led to a massive widening of the spread between emerging market bond yields and the 10-year Treasury note. From about 500 basis points a year ago, this spread has grown to nearly 1200 basis points, though it has eased a bit during the past two weeks. This yawning differential confirms the recessionary forces that are dominant among developing economies.
Any way you look at it, the fact remains that U.S. Fed policy is much too tight. Policy-makers should recognize that commodity and financial market price indicators contain far more information about monetary ease or restraint than the federal funds interest rate. Only price indicators accurately gauge liquidity supply and demand. The price rule message: to avoid recession at home and satisfy the thirst for dollars abroad, the Fed must pump out a substantial increase in high-powered dollar liquidity.
The longer the monetary department waits, the longer people will postpone spending and investing decisions until expectations are satisfied that prices and interest rates have truly bottomed. This is why the Fed should promptly undertake a big easing move that substantially raises monetary base growth to about 10 percent, a move that would put some life back into commodity prices and relieve the credit crunch. Probably this would imply a 3.50 percent to 4.00 percent fed funds rate.
But the key point is not the funds rate. Rather, it is avoiding deflationary recession at home and an even worse crisis overseas.
Congress could have lent a hand by cutting tax-rates across-the-
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board; this would have quickly revived sagging animal spirits by
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promoting new risk-taking.Failing this, the only policy card left is
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money. We need much more of it.
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JUBAK'S MSN
moneycentral.msn.com
On Oct. 19, Ascend Communications (ASND) closed at $47.875, a startling 35% gain from the stock's $35.375 price on Oct 6. A half-hour after the close, the company reported third-quarter earnings of 32 cents a share, a penny over Wall Street estimates. The stock sank in after-hours trading and then opened at $43 a share -- down 10% -- the next morning. During the day shares fell as low as $41.125, before recovering to finish down $4.94 a share for the day.
It's wild -- but it's exactly what you should expect from a worried, uncertain market. In times like these, investors pay close attention to details of a company's earnings report that barely rate a glance in raging bull or bear markets. Earnings per share temporarily have less power to move a stock's price than such numbers as sales growth. Beyond that, investors start to worry about how a company is achieving its goals. And the market's typically short attention span gets even shorter -- thinking about the fourth quarter now qualifies as long-term strategizing. Studying the seemingly perverse reaction of the market to corporate earnings reports can actually show us exactly what this market prizes and fears.
I believe that by its reaction to recent earnings announcements, the market is saying four things:
1. Forget about the third quarter -- it's the fourth quarter that counts now.
2. Earnings are nice -- but show me sales growth that's strong enough to keep earnings growing in the future.
3. Concrete bad news is actually a relief.
4. This isn't the time to raise doubts about fourth-quarter results.
Am I making it sound like the market is almost exclusively focused on the short term -- the next quarter, in this case? I've believed for some time that the fourth quarter of 1998 is a pivotal period. Those who believe that this great bull market is still intact have argued that the negligible earnings growth in the second and third quarters is a pause. Growth will resume in the fourth quarter. That's been the mantra of technology investors in the personal-computer industry and bullish Wall Street strategists. If earnings growth in the fourth quarter comes in below 3%, their case becomes markedly weaker.
Watching the market's reaction to this quarter's earnings has just strengthened my belief that the fourth quarter is critical. It's make or break time. If earnings bounce back, I think many investors will believe that we've been through the correction that everyone said was necessary and now we can get back to business. Getting back to business, of course, means a return to a market priced at 25 times trailing earnings or better, and that returns 25% or better annually.
A third consecutive quarter of earnings growth of 3% or less will make more investors believe that the string is broken.
Surprise III!
Ascend's earnings surprise
Charts
Ascend's year
To understand just how important the fourth quarter is, look at what happened to Ascend's stock after the company raised doubts about its fourth-quarter story.
On Oct. 19, after the market closed, Ascend announced earnings of 32 cents a share, a penny above Wall Street projections. The next morning, the stock tanked, falling as much as $6.75 a share to $41.125 before finishing the day at $42.94. Volume was extraordinarily heavy: more than 25 million shares traded, well above the 6.8 million daily average during the last three months.
Why the big volume and why the big drop in price for a stock that had beaten estimates? First analysts, and then investors, got nervous when they looked at how Ascend had managed a 37% increase in sales in a tough market for telecommunications and network gear companies. In its conference call with analysts, Ascend said that it extended loans to customers and will take charges against fourth-quarter earnings to cover such financing costs. In this quarter, the company wrote off one $8.7 million loan to an unnamed customer.
Now, there's nothing wrong about lending customers money to buy your product -- it's called credit, and most of us have got a wallet full of plastic that lets us buy now and pay later. There's also nothing wrong with writing down such a loan if the customer can't pay. I'd much rather that a company keeps its books this way than pretend that the loan will be paid back someday.
But the practice raises questions about exactly how strong Ascend's business would have been in the third quarter if they hadn't offered these loans to customers. Did the company "buy" business in order to make its numbers for the quarter? Ascend says no. And in the conference call, CFO Michael Ashby said that the loans wouldn't be an issue going forward.
But the news still raises doubts about Ascend's performance in the all-important fourth quarter of the year. Let's see. Worry about earnings. Possible negative surprise. In the fourth quarter. Frankly, I can't think of a combination that this market likes less, and fairly or unfairly the stock got punished.
Anything else would be surprising, actually. Considering the stakes. |
