Federal Reserve Open Market Committee

Federal Reserve Open Market Committee

(FOMC) Releases "Minutes" from most recent meeting

Before you actually go through the headlines, this is my take on the data (if you are interested):

I read this as a positive development for both equities and the housing market (as the FOMC moves away from fighting inflation and toward maintaining liquid, orderly markets to ensure solid economic growth).

While Friday's strong employment report was not available at the time of their meeting-- the downward trend in job creation and the quality of the jobs being created leave a lot to be desired. Seasonal factors (Teachers returning from summer break to School and more conducive Weather toward construction) also likely contributed to the upward revisions from months prior.

The Fed has the complicated task of further shoring up the credit markets from additional volatility and prepare for the potential for additional debt-related crises (both the ABCP- Asset Backed Commercial Paper and Mortgage-Backed Securities markets are still on shaky footing), all the while labor markets remain extremely tight (4.7% unemployment) and food/ energy prices (mainly wheat and crude oil) continue to hover near record levels.

(In my opinion) The brightest spot of all is the Fed's confidence that inflation will remain in check, giving them the wiggle room they so desperately need to head off any potential shocks to the economy, allowing the free market's invisible hand to emerge and remind investors that there has been little damage to the strong economic underpinnings that has paved the way the for the 5 year Bull Market underway.

-C. Post

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Here are the headlines as they appeared on the Newswire (The Full Story follows):

( DJ ) 10/09 02:00PM *DJ FOMC: 'All' Fed Members Agreed To 50BP Sep Rate Cut

( DJ ) 10/09 02:00PM *DJ FOMC: Rate Cut Won't Affect 'Realistic' Pricing Of Risk

( DJ ) 10/09 02:00PM *DJ FOMC: Future Fed Actions Depend On Economic Outlook

( DJ ) 10/09 02:00PM *DJ FOMC: Econ Outlook Uncertain, Risks To Downside

( DJ ) 10/09 02:00PM *DJ FOMC: Fed Staff Cut '08 GDP, Core PCE Forecasts

( DJ ) 10/09 02:00PM *DJ FOMC: Staff Sees Above-Trend GDP Growth In '09

( DJ ) 10/09 02:00PM *DJ FOMC: 'A Little More Confident' On Sustained Inflation Drop

( DJ ) 10/09 02:00PM *DJ FOMC: Housing Remained 'Exceptionally Weak'

( DJ ) 10/09 02:00PM *DJ FOMC: Further Employment Slowdown 'Likely'

( DJ ) 10/09 02:00PM *DJ FOMC: Officials Skeptical About Original Aug Payroll Drop

( DJ ) 10/09 02:00PM *DJ FOMC: Inflation Risk If Dollar Keeps Falling 'Significantly'

DJ ) 10/09 02:00PM *DJ FOMC Minutes: Confident Of Sustained Core Inflation Drop

Stock Update

Apologies for the absence from posting new stocks or editorials since the summer, we shall be returning slowly to regular postings in the new format.

Short Term Stock Focus: AMEX China Index (CZH-A)

The CZH seems to be flashing some warning signs to investors after it went parabolic once again, this time straight off the August lows. Since 2004, bull moves in China have been steeper and steeper, with the last time approaching vertical.

Moves in Hong Kong have been complimentary until earlier in the week when the Hang Seng had the single largest reversal in 9 years—opening up 700 pts higher than giving back all of the gains, closing down 700 for the day—a 1400 pt swing!

The Asian markets may have gotten a little ahead of themselves lately. Many pundits are speculating that the USA is no longer the driving force behind the global economy. The Dollar has dropped to record lows against the Euro, US Credit Markets literally seized up in late summer through Mid-September (liquidity has returned though it will take more time to revive Mortgage-Backed Securities and other debt instruments) and the combination of interest rate cuts and a weakening economy has sparked new stagflation fears.

On the face of it, the pundits have a point—the US is in fact facing record food and energy prices while growth does seem to have abated. Across the Pacific, thinks seem swimmingly well in China as they continue their binge on oil, metals and other commodities while growth keeps on racking up.

The press has done a good job of reporting on goods manufactured in China that end up on our shores contaminated, though I don’t think this is a major story as it seems to be almost totally corrected.

Here are some of the negative points being ignored lately:

1. Since the Yuan is pegged to the dollar and China is a major holder of Treasury backed bonds, bills and notes—they will surely be extremely prone to any fundamental change in the macro economy. Since most commodities are priced in US Dollars, if the dollar continues to weaken they will too pay higher prices for crude oil, natural gas, coal, steel, cement, timber and everything else feeding the real estate/ construction boom in Asia.
2. Little known report came out a few weeks ago stating that last quarter inflation in China was 9.5% was simultaneously reporting monetary growth of 28%. Whether or not these numbers are legit is debatable, however if they are anything it is underreported. 9.5% wouldn’t pass the Federal Reserve, ECB or UK Exchequer’s inflation sniff test.
3. It is a command economy. Sounds rudimentary, but it’s true. Very difficult to tell what an actual cross-section of the economy looks like as the government is constantly tampering on both the supply and demand sides.
4. Chinese Banking system is quite far from transparent. In addition they have not faced any real tests as far as crises go and not knowing what reserves look like at some of their largest banks is reason for concern.
5. Chinese Stock Market is an entity that is both unpredictable and unrelenting. Government attempts to rein in speculation via margin rates, stamp taxes and just today banning simultaneous listings of IPO’s is a balancing act. On the one hand there is tremendous growth presently driving the market higher, on the other is some bubble-like evidence emerging. Between investors using numerology to pick stocks and multiple expansion approaching NASDAQ 2000 levels, Alan Greenspan doesn’t miss the chance much to discuss the “Bubble” forming abroad in the 7 speeches he gives a week.

While I am not inferring the China bull is dead or that it is in fact a bubble, one cannot ignore the increasing number of warning signs flashing to investors. I do believe the lion’s share of gains for the short term have been seen and the intermediate term does look tricky, especially as the government seems determined to keep the market from getting out of hand. I believe the recent IPO move discussed in number 5 is a good example of how they are attempting to control supply from coming to the market as these listings have prompted many to expect PE’s to jump on these companies from 25x to 50x earnings.

I also don’t readily accept the theory that we are no longer the engine of global growth. The US economy has enjoyed an exceptional stretch of growth since 2001-2002 and short term contractions are quite normal. In addition, US borne innovation, increases in productivity and supply chain management have largely made the China bull possible, not to mention the fact they continue to heavily consume our goods and machinery.

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