The Fed cuts 50 bps

Here is the press release.

CNBC when the cut happened.

THANKS BEN!!!

...and there goes the Greenback

Breakingviews Plug

Great article about the potential CME/NYMEX deal. Breakingviews is an excellent source that we are privileged to have. Try to log in everyday because they have so many short articles on current headlines plus it will create some traffic for our sponsor.

The Stimulus Debate

Brian Wesbury, Chief Economist at First Trust Advisors, testified before Congress today on the merits of the proposed fiscal stimulus package and his policy prescription. An excerpt of his testimony (you can view it in its entirety here):

...rebates will not change the long-term path of the US economy. Consumers make decisions about spending based on their long-term income expectations, not on their current income. A rebate will not change long-term spending habits. Moreover, no retailer or manufacturer is likely to build another outlet or manufacturing facility based on a temporary consumer-oriented stimulus. In other words, temporary stimulus does not create new jobs or investment.

The expected sunset of the 2003 tax cut in 2011 is becoming a real impediment to long-term investors...The stock market is especially at risk. If the 2003 tax cuts are allowed to expire, the real cost of capital for American corporations will rise by at least 1%. This, in turn, will result in a 20% drop in US equity valuations.

...it is important that current policy be designed with long-term economic activity in mind. I propose three policy changes that would boost investment, innovation and productivity in the years ahead and help offset the virtually certain shift in monetary policy toward a more restrictive stance.

1) Make permanent the Bush tax cuts of 2003.
2) Cut the corporate tax rate to 25%.
3) Index capital gains to inflation for taxation purposes.

State of the Union Address

Today was President George Bush's last State of the Union address and he brought up some very interesting issues here are just a few.

$15oB Stimulus Package:

He called for an immediate passage of the bill, but right now there is a possibility that Congress may add on small constraints and exceptions that will slow down the process of the intended fiscal policy.

Tax Cuts:

He claims that it is imperative to extend the tax cuts his administration put in place after they expire in 2010. After announcing his plans the entire republican delegation gave him a standing ovation (the first of many on the night) with the democratic delegation sitting in silence.

Surplus in 2012?:

The government has to take responsibility for its spending and he and his advisers have completed a plan calling for a surplus in 2012. I personally do not believe this will happen with a democratic Congress and a probably democratic President. Imports from less developed countries will continue to leave the U.S. with high budget deficits.



Here is the link to the video from the White House website (Click on video icon along right side).

http://www.whitehouse.gov/news/releases/2008/01/20080128-13.html

A Wonderful Opportunity

Brian Wesbury of First Trust Advisors essentially says in today's WSJ, "If things are so bad, why are they so good?" An excerpt:

Because all debt rests on a foundation of real economic activity, and the real economy is still resilient, the current red alert about a crashing house of cards looks like another false alarm. Warren Buffett, Wilbur Ross and Bank of America are buying, and there is still $1.1 trillion in corporate cash on the books. The bench of potential buyers on the sidelines is deep and strong. Dow 15,000 looks much more likely than Dow 10,000. Keep the faith and stay invested. It's a wonderful buying opportunity.

ALSO, I highly recommend using First Trust Advisors' free online financial and economic resources. Market commentary, economic calendars and forecasts, model portfolios, and much more is available from http://www.ftadvisors.com/.

The Cut

There is a lot of talk that the most recent fed cut was because of the sell off that was happening in the markets across the world. This might be the case but it was also an issue of the spread in the yields. If you look at the chart somewhere close to this post, you can see that the spread has closed up significantly. (People who buy longer term stuff need to be compensated for possible rise in rates thus the higher interest rate in longer term investments). This close to inverted curve indicates that traders are expecting are slowing of the economy. Great move by the fed in my opinion.

Chart taken from this great site.

The Fed 101, Part 2: Fed Funds Futures

After posting Part 1 of The Fed 101 I noticed that Justin Lahart of the WSJ wrote a nice piece about the fundamentals of the Fed's policy. His piece addresses what we went over in Part 1 in a Q&A format. I reccommend reading it if you want to be sure you've the fundamentals down (WSJ subscription required).

For Part 2, I want to focus on a more esoteric angle of the Fed and its relationship to financial markets and the economy. First among these topics will be "predicting" what the Fed will do at its FOMC meetings by using Fed Funds Futures (FFFs). Unlike a simple bond futures contract, where a contract represents a specified rate to be had on a specific day, the FFF contract is an average of the 'daily effective federal funds rate' during the month of the contract- the daily effective federal funds rate is a weighted average of all federal funds transactions during the month. The CBOT offers contracts ranging from the current month to 24 months out and each contracts has a nominal value of $5,000,000. To read FFF data from the CBOT you must understand that the effective federal funds rate is 100 minus the price of the contract. Hence, a current market price of 96.89 for a one-month contract expiring at the end of February means that the market currently forecasts an average Fed Funds Rate for February of 3.11 percent (100 – 96.89). Because the Fed Funds rate actually fluctuates a bit day-to-day (it isn't set, its a 'target' of the Fed policy we talked about in Part 1), you might attribute the .11 above the 3-handle to inherent volatility. This would be accurate enough to get an idea of what Fed policy might be, but truthfully a trader in the FFF market would call the .11 the "bias" or "hedging premium." The Federal Reserve Bank of St. Louis says that, "One possible explanation for the hedging premium is that large banks, which regularly finance a significant amount of their loan portfolios in the spot market for federal funds, also participate in the federal funds futures market. Such institutions may use the futures market to hedge against increases in the spot funds rate. If institutions that are hedging against a potential increase in the spot rate are dominant, there could be a premium built into the futures rates." But for most purposes, including that of the retail investor, knowing how to infer the likely fed funds rate from the FFF market is as simple as looking up the contract for a given month on the CBOT, finding the contract for the month you want to speculate about, and comparing the rate we're at now with the rate implied in the FFF market. Because we're at 3.50% right now, and the FFF market implies an average fed funds rate of 3.11% during the entire month of February, its relatively accurate to say that the market expects a 50bps cut at the January 30 meeting (because there is no subsequent scheduled meeting before the expiration of the Feb 08 FFF contract).

Now, I say its "relatively accurate" because there are some kinks you have to deal with if you want to really understand the probability of certain Fed policy (like when CNBC reports there is a 50% chance of a 50bps cut). I'll leave that part of the equation out for this post (you can read all about it here) and just recommend using the Federal Reserve Bank of Cleveland's regularly updated chart on meeting outcome probabilities.

Again, post any questions and I'll try to respond to them quickly.

Asset-Backed Securities Desks="Rogue Trader"=no change in stock price

Today Societe Generale reported that a "rogue trader" wiped out almost two years of pretax profit for their investment-banking unit, $7.2 billion. The firm stated that the "transactions that were built on the fraud were simple, positions linked to rising stock markets, but they were hidden through extremely sophisticated and varied techniques." Even with this huge loss their stock is down only 4.1%. If only citi, bac, mer, bsc, ubs...... and the gang had changed the name of their asset-backed securities desks with "rogue trader" maybe their stocks wouldn't be underperforming the markets by so much.

Tale of the Tape: Bernake 2007 v. Greenspan 2001

Commentary from Greg Ip at Real Time Economics on the similarities and differences between Bernanke's intermeeting 75bps cut this Tuesday and Alan Greenspan's policy response in the face of a deteriorating stock market and economy in 2001. An excerpt:

Cutting as it did a week before a meeting was “not real pretty,” observed Peter Hooper, chief economist at Deutsche Bank Securities, calling it a clear sign the Fed felt it had “some catching up to the markets” to do.

Hooper, of course, is a "good friend" of MII, having participated in the MII/MES Michigan Economic Forum in March of 2007. Perhaps the Forum was a spark in he and co-panelist Charles Evans' careers, as Evans moved on to become the President of the Federal Reserve Bank of Chicago...

Also, the link has a video from the always insightful David Wessel of the WSJ which is worth watching.

Cold Vaccine?

Source: WSJ

Does a U.S. slowdown trigger a global one? Some countries are more susceptible to the slowdown in American imports but others say they will be able to whether the storm because of large cash reserves. An excerpt...

In the late 1990s, several emerging markets ran out of foreign reserves and defaulted on debts. In the decade since, some have built huge war chests. Brazil sits on a cushion of $185 billion. Russia has stored some of the country's oil revenues in a fund valued at $160 billion. In all, emerging markets have an estimated $4.1 trillion in central-bank reserves.
"This time we have something of a vaccine when the U.S. sneezes," says Claudio X. Gonzalez, chairman of Kimberly-Clark de Mexico SA, referring to Mexico's estimated $7 billion on hand from oil-export revenues, a recent sale of toll roads, and other sources. "This extra money won't entirely free us from the effects of a U.S. slowdown, but it should help."

Creative Capitalism

With the wealth inequality gap growing in the United States, many social scientists are calling for some type of redistribution policy to help the poor population of this country. Bill Gates proposes "creative capitalism" as an avenue to help the struggling people while generating profits for everybody else. His objective is to create business that target the poor as customers. Gates defines poor as the lower third of the world population. His plan seems very logical on paper but will it work in reality. Many critics accuse Gates of being hypocritical since he made his fortunes through capitalism while neglecting all the inequality around him. The article also brings up the efficiency arguments of philanthropy claiming many dollars spent on aid and relief don't impact the people or the countries they intend to help.

Source:WSJ

Mr. Volatility and Mrs. Bear Market

There is a strong correlation between market volatility and a bear market, and with the nail-bitting whiplash that Wall Street has been experiencing lately, this relationship has become more apparent.

The VIX, or the CBOE Volatility Index, is the common measure of market fickleness. Since Tuesday, the VIX has redeemed its more appropriate moniker, the "fear index." The Dow fell more than 2% midday today, but then surged nearly 300 points (2.5%), causing the VIX to reach a high of 34.42. Even worse, when the markets opened on Tuesday following a worldwide plummet , the index spiked 37.57 before closing at 31.01

What does this all mean? Well, we haven't seen such a jump in the VIX since the last bear market in 2002. Simply put, when the index consistently breaks the 35 mark, then it's a hint that the bear is here and we have reached a market bottom. From what we've seen in the past two days of trading, it's well on its way.

The VIX in the past five days

The Fed 101: Part 1, What the Fed Does...

There is a lot of talk about what the Fed might do with the Fed Funds rate, so I thought a full explanation of the Fed's role might be in order. I'll start with an explanation of the Fed's basic objectives and operations (Part 1) and then will touch on more arcane topics like Fed Funds futures and "predicting" what the Fed will do (to come in Part 2).

The most basic objectives of the Fed, established by federal lesgislation, is to ensure both maximum employment and stable prices. Though originally established to be a "bank of last resort," the popularity and political implications of an exploitable Phillips Curve led to this more involved role for the Fed. In the most simple of terms, the Fed's job is to maintain a money supply level which isn't so high it causes inflation (or so low it causes deflation) while making sure that enough money is out there to ensure economic growth and full employment. But how does it do this?

The Fed has three basic tools for controlling the money supply in the economy. Because only two of the tools are ever used, we'll ignore the third (reserve requirement ratios). First, the Fed can set the "discount rate" which is simply the rate it charges all other banks who borrow from it. Why would other banks borrow from the Fed? Two obvious reasons: 1) They have to meet their reserve requirement levels to avoid paying a penalty fee, 2) They need extra bank reserves to loan out to prospective borrowers who will pay the banks more than the banks were charged to borrow from the Fed (profitable lending, "borrow short and lend long"). The second and the more talked about tool is referred to as the Fed's "open market operations (OMOs)." OMOs are essentially purchases or sales of securities, usually US treasury bonds, by the Fed. A purchase of bonds from the open market means that the Fed takes in bonds and sends out money to the seller. A sale of bonds means the Fed has taken money away from the market in exchange for bonds. The idea is that everyone who buys or sells bonds to the Fed has a bank account, and the Fed credits or debits that person's bank account depending on whether the OMO was a purchase or a sale. Thus, by buying or selling securities on the open market, the Fed ends up injecting or withdrawing bank reserves (what we call "high powered money") from the banking system (and the economy). With more (less) reserves, banks are more (less) able to loan to each other, individuals and businessess. More (less) lending means more (less) economic expansion, and by some measures, more (less) inflation.

Now, the key thing to understand is that the Fed targets the "Federal Funds" rate which is the rate at which banks are lending to each other in overnight transactions. Banks borrow from one another for the same reason they would borrow from the Fed (see above). Now, during August it became very apparent that a few banks had very bad (worthless) assets on their books which involved subprime mortgages. No bank wants to be the last one to loan to another bank before the borrowing bank fails (is unable to pay back the loan), so no lending was taking place between banks. From EC 101, if there is no lending, there is no supply of loanable funds, and if there is no supply of loanable funds, the interest rate increases. The interest rate, remember, is the Federal Funds rate (the rate at which banks lend to one another in overnight transactions). So to stop the Federal Funds rate from moving up any further, the Fed engaged in "defensive" OMOs by purchasing securities on the open market in exchange for money. This money was in the form of bank reserves which ended up at the bank of the sellers of the securities the Fed bought (the Fed credited the bank account of the sellers). As banks ended up with more and more of these reserves from the Fed they became more and more willing to lend to one another a fraction of the newly acquired reserves (fractional reserve banking). This pushed the Federal Funds rate back down (because of the increased supply of loanable funds) to where the Fed wanted it (the Federal Funds target rate).

I hope this makes it somewhat clearer what role the Fed plays and how it plays that role. Post any questions in the comments section and I'll try to get to them soon.

Next-
The Fed 101: Part 2, Fed Funds Futures and "Predicting" What the Fed Will Do

Dow to 15,000 by Jan 1, 2009?

Brian Wesbury at FirstTrust Advisors thinks so. An excerpt:

To determine fair value for stocks we use a capitalized profits approach, taking government figures on profits based on corporate tax filings and then discounting those profits with a 6% 10-year Treasury yield. We use a 6% 10-year yield because we believe bond yields are being held artificially low today by the Fed. By using a higher bond yield than necessary as a discount rate, we are taking a conservative stance. This model suggests that the market is undervalued by 25% today. With the economy picking up steam in 2008, our forecast is that the Dow moves up as well and our year-end 2008 forecast is 15,000, with the S&P 500 at 1625.
Once recession fears prove unfounded, US equities will soar. Those who maintain their appetite for risk will be richly rewarded sooner than they think.

(HT: Mark Perry)

At the same time, Wesbury was taken to task by Jim Cramer for his poor forecasting performance during the past few months on yesterday's Squawk on the Street.

Retail Soars

Many of the major retailers boomed today off the Fed's move. Institutional buyers came in a drove the prices higher. Are they in for the long haul? I don't know but what I do know is that this surge today presents itself with two options for our portfolio: 1) We start thinking about long term buying opportunities in the sector because the stocks are trading at discounts or 2) we short some of the stocks that popped today.

Let me know what everybody thinks. Here are some interesting stocks: Circuit City (Up 20%), Home Depot and Lowes (Up 10%), TJ Maxx (Up 4%) Nordstrom (Up 9%). I can't mention Circuit City and not say how much it sucks. Does anybody go there unless the closest Best Buy is in another state?

Interest Rates

Here is the front page article on CNBC about what happened in the markets today. In addition to the 75bps cut today they are expecting 50bps more next week at the regular scheduled FOMC meeting. Today in Econ 435 (I strongly recommend taking this class) we talked about interest rates are essentially prices determined by consumption. In this manner any sort of prediction model will not be accurate at all because the supply or demand could change at any time. You don't predict prices, the market makes them and same goes for interest rates.

Drop the herd mentality...

...in times like these. Those who made millions in the market bought on Black Tuesday and could stomach the decade of depression with the long-term profits they would reap in mind.

Don't have that kind of patience?

Those who bought on Black Monday would have picked up stocks at bargain-basement prices which went through the roof in just the next few years.

Global problems

Here is what we know:

US- facing a serious slowdown or an outright recession due to slumping consumer spending (not yet confirmed) on account of plummeting housing values, and reduced credit availability dating back to August's "credit crunch" (disputed). The market is signalling that it's too late for the Fed to help as it continues to fall in the midst of comments about "substantive" help coming from Bernanke & Co.

EU- facing a slowdown as the EURO strength is hitting exporters hard. The ECB holds the wild card here as it may be early enough to bring help to the markets and the economy, but this is the same ECB that has suggested a willingness to raise rates later this year in the face of growing economic threats.

GB- facing the same property bubble bursting that the US faced, but stuck with a central bank obstinate about fighting inflation that may or may not be a true threat. King's decision with rates is anyone's guess.

And now, warnings from China (via Yahoo! Finance)

"Property market price fluctuation possibly could increase credit risks facing the banking industry," said Jiang Dingzhi, vice chairman of the China Banking Regulatory Commission, said in a report on the agency's Web site.

If China faces economic strains from increased credit tightening in the banking industry, that is, if it faces economic strain of its own and not as a by-product of US problems, then this slowdown can truly be labeled global. It's going to be crucial to watch how this thing unwinds in China because a slowdown will have drastic implications for commodities (oil, gold, etc.).

Good News for SLB?

SLB was down almost 4% today and yet today was a great day for SLB in my opinion. First off they were upgraded to outperform by Credit Suisse plus their profit was up from last year. I haven't heard the conference call (http://biz.yahoo.com/cc/1/88051.html) yet but the most important thing for me is the volume which is depicted on the chart above. Look at all the green bars after it bottomed. I think that is institutional money coming in which means that they expect SLB to make a move.

Bob Pisani

Here is a post from Bob Pisani's blog Trader Talk on CNBC. Talks about the down day yesterday and all the factors that lead to it. I'm looking for a good article about the monoline insurers that explains the situation in a little more detail. Also in the article he mentions the Philadelphia Fed's statement which was the catalyst that sent JOYG down yesterday. Here is a link to an article.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=azswzsgeOVws

SLB Earnings

Although they missed estimates most people want to hear what the CEO says on the call. Last earnings announcement they beat estimates and profits rose, but the call was unimpressive so the stock went down 10%. Right now futures on the market are up but I think SLB will have a down day today unless the CEO reassures the strong future of SLB and it must be done convincingly.

Update: SLB is down 6% pre-market. Yikes!

Mad Money: Trump: 'We're in a Recession' - Mad Cap Recap - CNBC.com

Mad Money: Trump: 'We're in a Recession' - Mad Cap Recap - CNBC.com

Mr. Real Estate himself says we are already in a recession and we have not seen the worst of it yet. There are some strong statements made here and I think they are legitimate points but I don't want to count out Bernanke & Co. I'm not sure if this is true, but I would guess that Paul Volcker was not that well liked when he was fighting inflation during the 80's.

MOre Altria

I think we should be considering MO for our portfolio. It is the King of defensive stocks and pays a nice dividend of 3.8%. As you can see there are a lot of buy recommendations out there. Within the next month they should be announcing break up plans of PMI from PM U.S. which should send the price higher. Last year they spun off Kraft and shares are 20% from those levels. I see no difference here.

Bernanke, Bush Support Economic Stimulus Plan - Economy * US * News * Story - CNBC.com

Bernanke, Bush Support Economic Stimulus Plan - Economy * US * News * Story - CNBC.com

Here is a clip from Bernanke testimony to Congress today. I was watching live and the markets were slightly up when he started talking anf then at about 11:30 they were down 80 points. He talked about the implications that the potential stimulus would have on the economy. He stressed what I call the two T's: timing and temporary. If not implemented quickly the fiscal stimulus could have adverse effects on long term monetary policy making it counterproductive to growth. This is just a short term stimulus and failure to recognize will dampen any potential effects on the economy.

Joy Global

JOYG is getting drilled today but instead of getting nervous I think we should buy more. Looking at the chart shows the volatility in the stock but overall the trend is increasing. I anything under 57 is a steal. The article attached is from Zacks Research and they have a price target of $66. I admit we should have sold at 67 but right now it is cheap with a forward P/E of 13.7 and a PEG of 0.54

MUST SEE CNBC

Jim Cramer, Rick Santelli, Greg Ip... TV doesn't get any better than this.

If you watch 10 minutes of TV today, this is it.

Lollipop Economics

Excellent op-ed in yesterday's Washington Post from Robert Samuelson. An excerpt:

Superficially, the case for "stimulus" seems plausible. In December, the unemployment rate rose from 4.7 percent to 5 percent, a huge one-month increase. Jobs are not keeping pace with the growth of the labor force. Lawrence Summers, Treasury secretary in the Clinton administration, has proposed a $50 billion to $75 billion stimulus to be enacted in the next few months...

All this sounds sensible, but it stumbles on a stubborn dilemma. Folks, we have a $14 trillion economy. A one-time stimulus (rebates aren't permanent tax cuts, and grants to states would probably be temporary) of $75 billion or $100 billion is too small to do much. If the economy is in serious trouble, something much larger is needed. But if the outlook is not so dire, then a modest stimulus plan is mostly political symbolism.

I'm very much inclined to agree with Samuelson on this point, but its another part of his article that merits most attention:

The truth is that there's a touch of hysteria to much current economic commentary that is, as yet, unjustified by what's actually happened to the economy. Yes, the housing slump is vicious, but at its peak, housing was only 5.5 percent of the economy, and the present slump is still only the fourth-worst since World War II.

Whether a recession occurs -- a determination made by academic economists, usually after the fact -- probably won't affect most people. Economist Richard Berner of Morgan Stanley expects a "mild and short" recession, with peak unemployment of 5.6 or 5.7 percent in early 2009. According to economist David Wyss of Standard & Poor's, the average unemployment rate of the past 50 years is 5.6 percent. This would be a setback, but not a disaster.

Samuelson is calling attention to something we should all be cognizant of, and that is the fact that our recessions are becoming more and more like "blips" on the map than major detours. Professor Mark Perry includes an excellent visual of this phenomenon on his excellent Carpe Diem blog:


Bottom Line: Is the age of recession over as we know it? Of course not, but they are looking more and more like mean-reversion incidents than full blown economic contractions.

HT: Mark Perry

Steve Jobs...

...CNBC interview (My favorite part is when he asks if a Microsoft executive was "inebriated" for suggesting the Zune is gaining on the iPod). AAPL has been knocked down hard with the rest of the market, falling from just over $200 near the beggining of the year to today's close just below $160. I'm very bullish on AAPL at these prices. Growth is at a premium right now and AAPL has it. Sure, much of it is tied up in consumers and a trendy product line, and that might look shaky going forward, but its a long term growth story that is going to survive a US slowdown in early 2008.

Recession Election... 1992 all over again?

Good left-to-right analysis coming from Jared Bernstein and Steve Forbes on the prospects of a recession for the November election (click title for link to video).

On a side note, Amity Shlaes' (another panelist) book "The Forgotten Man" is highly recommended if you want a look at the Great Depression, the US economy and a new way to see the New Deal.

As far as our portfolio is concerned, what would a stimulus package mean? Would the market move? How and how much? Well, it of course depends on what the package looks like and how quickly it is delivered, but if you go back to the last time we had a similar "tax rebate" (2001) to stimulate the economy, you'll notice the stock market kept falling. It wasn't until October 2002 that the market bottomed out and we started the ascent. So I'm not overly optimistic that anything coming out of Congress, except a long-term solution like a corporate tax cut from 35% to 30%, would push the major indicies higher.

Regional economic outlook...

...as provided by the Fed's Beige Book. The Beige Book is a compilation of economic data and outlooks from each of the Federal Reserve's regional banks. This is a nice interactive graph put together by the WSJ.

The Education of Ben Bernanke

from the NY Times Magazine.

UPDATE: The WSJ's "Real Time Economics" provides time-pressed readers with some CliffsNotes for the rather lengthy article.

Is Goldman having any doubts?

Goldman Sachs, who recently forecasted a serious economic contraction for the US economy in Q2 and Q3 2008, may be tempering their pessimism a bit. Speaking about yesterday's retail report:

"Although the December retail sales report fell slightly short of consensus expectations, the official figures still show only a modest slowdown in consumer spending growth. On a year-on-year basis, sales still look significantly stronger than in March 2001, the start of the last recession. Since that recession did not include even a single quarter of contraction in real consumer spending, one might conclude that U.S. consumption is still very far from the outright contraction that we expect for the second and third quarter of 2007."

HT: Jimmy P.

ALSO: See previous post, "Retail sales better than you think"

Summers speaks to Congress...

...about a fiscal stimulus package. On the one hand, you have to respect Summers as an economist and as an informed/engaged participant in the debates about the current situation. He deserves to be listened to when it comes to economic policy and proposals.

On the other hand, I can't help but wonder if there is any political motivation driving the call for such a stimulus package. Summers, a former Secretary of the Treasury for Clinton, would certainly be a candidate for a post in any Democratic-White House, and his pushing of a plan similar to the ones supported by Hillary Clinton and Barack Obama surely will not go unnoticed by each campaign (perhaps, perhaps, its been co-orchestrated). Also, even if it is a politically motivated proposal, it does not mean that A) its an unwarranted proposal given the recent economic data or B) Summers is wrong about the positive effects such a package might have.

It's the Fed' fault...

...says Anna Schwartz. Econ majors are likely to recognize her name as being on the cover of "A Monetary History of the United States," alongside Milton Friedman. Schwartz is still highly revered in monetary policymaking circles, so this condemnation may be more important to the ivory tower economists than readers of this blog might think at first. I doubt it will ultimately impact anyone's (read, "Bernanke & CO.'s") decision about what to do, but it won't go unnoticed either. A quote:

"There never would have been a sub-prime mortgage crisis if the Fed had been alert."

HT: Greg Mankiw

OPEC vs. Bush

There was a broad sell off in energy stocks today because Bush wants OPEC to increase production for "American families" among other comments from the Saudi Oil Minister. This is probably a great entry point for a lot of energy stocks or maybe we should wait until Bush talks with the Saudi King and says something ridiculous.

P.S. I lost some money today so this might be a little biased but good article nonetheless.

SCOTUS decision may affect market

The Supreme Court, in one of the most important securities law rulings in years, decided Tuesday that fraud claims are not allowed against third parties that did not directly mislead investors but were business partners with those who did. The 5-3 ruling came in Stoneridge Investment Partners v. Scientific-Atlanta (06-43).

from the SCOTUSblog.

While the specifics of the case get a little complicated (think chain letter involving millions of dollars and accounting fraud), the takeaway is that investors and invesment vehicles may not sue corporations who are not directly involved in securities fraud (directly means making explicit statements about the investment and/or soliciting investors). This shuts the door on a number of lawsuits filed against banks and other corporations in the wake of the Enron scandal, and is generally going to be seen as a good sign in the business community. The debate continues as to whether the ruling adversely affects the little guy, however... For SCOTUS fans, try to predict which justices voted which way in the 5-3 decision (hint, Justice Breyer recused himself for reputedly having a financial conflict of interest).

Retail sales better than you think

Where is the consumer recession? Retail sales were down 0.4 percent in December, but there is a silver lining here, courtesy of JPMorgan economist Michael Feroli: "It appears that November sales borrowed some from December sales. For the two months taken together, core retail sales increased at a 5.25% annual pace, in line with the trend over the last two years."

From "Capital Commerce" by Jimmy Pethokoukis.

Do presidential candidates drive what they preach?

from the Detroit News.

HT: Mark Perry's excellent Carpe Diem blog

Exercpt from TDAmeritrade's "Individual Investor" Newsletter

Q. What are your concerns about this year's market?

A. I'm closely watching corporate earnings growth, especially to see whether profit margins are expanding. Corporations have enjoyed a big increase in margins as they've outsourced their labor to cheaper countries. Will that trend continue, or have companies already maximized their productivity? If those gains have been exhausted, then sales have to pick up in order for companies to have good earnings. But that may be difficult if economic growth slows. I'm also worried that the foreign capital invested in this country — and there is a lot of it — may start to flow out as economic growth slows. Foreign investors may also pull out because of the political uncertainties of this election year. Frankly, I'm less worried about the impact of U.S. investors on the market than about what foreign investors may do.

R-Word Index

This index put together by The Economist tracks how many times the word recession is used in the Washington Post and New York Times on a quarterly basis.

Michigan Primary Today

It's no secret the economy in Michigan is struggling and more than ever we need leaders who will help bring back prosperity to the state. Economic issues are coming to the forefront of this election and all the presidential candidates have different platforms for economic change. Go Vote!

Maria Bartiromo talks politics

2008 Election implications, emerging markets in the new year, and much more. Insight from multiple fund managers including both CalPERS and chief investment officer for Merill Lynch.

"The Black Swan"

Nice profile of Nassim Taleb, author of "The Black Swan" and "Fooled by Randomness," from the Chicago Tribune.

Insider Trading at I-banks or Coincidence?

Great investigate work from the WSJ. Bottom line: I-banks privy to information of a deal accumulated large positions of the target stock in the quarter before a deal closed almost twice as often as I-banks not working from the inside on a deal.

Which Came First: The US or ROW?

Article from Bloomberg this morning highlighting the concerns about a slowing economy in the US affecting growth in Germany: http://www.bloomberg.com/apps/news?pid=20601087&sid=ag2J_a2HHD6o&refer=home

What's important to consider is whether a sluggish US economy still can pull the entire ROW (rest of world) into a serious slowdown beside it. Of course, the US economy remains the largest in the world and must, by definition, affect the world's economy, but I'm not sure if there is a new paradigm where the international economy can stand on its own if we falter. A large part of my positive investment forecast, particularly regarding large, multinational companies, relies on strong growth abroad so this is an important issue to keep an eye on.

Its also going to be interesting to watch the interplay in the currency markets between the USD and the Euro if the ECB joins the Fed in its recession-proofing mood.

ALSO: See this post from Professor Mark Perry on global growth and US recessions: http://mjperry.blogspot.com/2008/01/globalization-makes-us-economy.html

Ben Stein wants rate cuts...

...as does Larry Kudlow, while Joe B. and Dan Laufenberg disagree.

Fed to talk to us more... WSJ

No new talk out of the Fed this week (of course, its only Monday) but WSJ's Greg Ip has this piece on new Fed policy regarding communication with the markets. An interesting excerpt:

"...Mr. Bernanke or Mr. Kohn are likely to address the economic outlook in public at least once between policy meetings as long as the economic outlook remains unsettled. The idea is to help the market identify the Fed's central view without relying solely on comments from lower-ranking members of the Federal Open Market Committee, the group of Fed governors and regional bank presidents that sets the target for short-term interest rates."

If recent history is any indication, however, there isn't any reason to think that more public appearances will do anything except add to the volatility - uncertainty - regarding what the FOMC might do.

Mortgage Crisis 101

Want to understand this "subprime" mess once and for all? Help is here, courtesy of Econbrowser.