The Reports are in...

Earlier this morning it was announced that the preliminary Q1 GDP growth rate was a sluggish 0.6%. The main reason the number was positive for this quarter was the build in inventories which count towards GDP this quarter but will be subtracted next quarter. This will most certainly lead to a negative number for Q2 amid a consumer slowdown caused by deflated housing prices. Nigel Gault, an economist at Global Insight sums up the report nicely:

"The economy just kept its head above water in the first quarter. Don't break out the champagne, though."


The Fed cut rates a quarter percentage point today which now puts the Fed funds rate (rate at which banks loan and lend to each other) at 2%. They also lowered the primary credit rate (rate at which banks borrow from the Fed) to 2.25%. Although there were two dissenting votes on the committee, this was pretty much expected. The Fed also mentioned that this would probably be the last cycle of rate cuts as most economists are predicting pauses in the future. Many people including myself argue that these cuts are unnecessary because monetary policy doesn't immediately impact the economy, but instead lags the current markets. This cut may not take effect until late 2009 and by then conditions could already be corrected. Inflation is still a major concern because it will entail higher consumer prices which will lower GDP growth. The Fed surely understands that the decisions they make have numerous ripple effects on the markets and the economy but sometimes it is hard to determine how large the effects will have.

So what does this mean? Uncertainty for one! It is very unclear where the economy is headed in the near future and it looks more likely to favor the downside. Things will become clearer with time as we see how the previous Fed cuts affect the economy.

Source: WSJ

Tradable Money Markets

WisdomTree just announced a series of TRADABLE "money market equivalents", funds seeking to perform similarly to money market funds available in a number of different countries, such as China, India, Brazil and Japan. In the case of the US and Euro Funds, they seek to return 1-month LIBOR, denominated in their respective currencies. Cool idea, especially if it catchs on...I mean who isn't tired of .4-.6% cash sweep rates at most online brokerages? That being said, the commission needed to enter or exit the ETF does defeat a good bit of the purpose of the US fund, as anyone with enough money to invest in a fund like this (meaning they'll make enough on the investment to cover both sides of the commission plus enough to make worth the time and effort) is already getting at least LIBOR on their cash account, if not more (think non-federal money market). Those with currency exposures I can understand, but I'm willing to bet "USY" is not the next "SPY".

WisdomTree Currency ETFs

Market Movements

What's happening in Today's Markets? According to First Trust Advisors, LP, money is flowing into the following areas:


What does this mean? The market is acting to correct recent mispricings. For example, the continued flow of capital into municipal bonds should bring yields down below those of treasuries, a gross mispricing that has been present for more than a month. The huge flow into high-yield corporates should narrow the spread between those bonds and Treasuries, which is the widest it's been in more than five years, implying huge rates of defaults, which simply aren't there. It also appears that some investors are beginning to bottom fish domestic equities, with domestic equities seeing a strong reversal from massive outflows to fairly strong inflows. This all coincides with the huge draw down in money market assets, as cash seeks risker investments including not only the aforementioned equities and fixed-income products, but clearly commodities as well.

CNBC Milliondollar Challenge

Registration is open for anyone to join. They have weekly winners and the overall winner so there are many opportunities to win! This year currencies can be traded which will no doubt make it harder for the little guy to do well, but it will provide opportunity since the currency markets are volatile. Anybody interested in teaming up with me for the competition just post a comment!

What is a recession?

With this week's GDP number there has been a lot of commentary on the current state of the economy. A recession can mean different things to different people. Whether it is 2 consecutive quarters of negative GDP growth, or just 2 quarters of negative GDP growth, or maybe the conditions that the average American consumer is facing. The National Bureau of Economic Research has the final say. Most macro economic classes teach the first definition mentioned above but as you can see from the last recession in 2002 the quarters of negative growth were separated by one with positive growth. Since there is no concrete definition why should we be arguing about the current economic conditions. Bottom line things are bad and whether it is a recession or slow growth it really doesn't matter because the Fed is taking action it feels is necessary to correct the housing/credit crisis.

This is a big week for the markets with the GDP number, a Fed meeting, Jobs reports and continued corporate earnings. Look for more analysis to come!

Congress: BUSTED!!

What's taking you so long!? On May 16, 2007, Rep. Brian Baird [D-WA] introduced a bill known as "H.R. 2341: Stop Trading on Congressional Knowledge Act". This act had been created to "To prohibit securities and commodities trading based on nonpublic information relating to Congress, and to require additional reporting by Members and employees of Congress of securities transaction, and for other purposes." ARE YOU SERIOUS!? YOU ARE OUR NATION'S DECISION MAKERS AND YOU'RE EVEN THINKING ABOUT LYING/CHEATING/STEALING? Why is this even an issue? While I recognize that lobbying presents an obvious conflict of interest, what Congress-person would be unintelligent/dishonorable enough to use Government information to trade their own account? Below is the document, via GovTrack:

H.R. 2341: Stop Trading on Congressional Knowledge Act

Rapper's Delight

And we thought they were just wasting their money...

Congratulations to each and every rapper/thug/gangster/etc who was enlightened enough to plan for a period of inflation, and act swiftly to protect him/herself against it. By purchasing precious metal "Grillz", these individuals effectively hedged themselves against a weakening dollar and have made their prosthetic wonders yield a double-digit return. Is it a mere coincidence that these "new money" superstars predicted the onset of inflation? I doubt it. I think they realized that with dozens of people making six-figures (or more) creating jingles that include such notable lyrics as

"Hey ma, what's up, lets slide, all right, all right
And we get it on tonight
You smoke, I smoke, I drink, me too, well good
Cause we gon get high tonight
Got drops, got Coups, got Trucks, got jeeps, all right
Cause we gon take a ride tonight"

our money supply is truly misplaced, with, simply put, too much money available.

So, to all those who were ahead of the curve, "Stay fly"



Thank you to K. Shah of Oliver Wyman for pointing out such a profound reality.

Wanted: Your Riskiest Assets

In response to the Bank of England's recently announced actions to improve liquidity, TraderDaily provides great incite:

"Fresh from preliminary lab testing, the Bank of England has unleashed a powerful new anti-subprime tool, the Special Liquidity Scheme. Here’s how it works: you bring in your mortgage-backed securities (or, as we understand it, any toxic anything you can find lying around), the bank puts them through a giant meat-grinder, and out comes a pile of shiny-new government bonds. This is for a limited time only, so hurry to your local BOE window with whatever you’ve got. Act now and they’ll also accept old shoes, oil drums, Russian nuclear waste, day-old bagels and the gum you scraped off the bottom of your shoe this morning. Bond supplies are capped at $100 billion, so, just like happy-meal toys, they won’t last."

And you thought Bear Stearns was a bailout?

Capital Gains Tax

Interesting graph from the Wall Street Journal showing capital gains realizations with different tax levels. This obviously shows that lower tax rates leads to greater revenue for the government which is the point of taxing in the first place. This is the "long term" capital gains tax which applies to any realization on an asset over a one year period. Any gain realized in under a year is taxed at rate you pay on the rest of your income.

It is almost a certainty that tax rates will increase with the Bush tax cuts about to expire in 2010, and it's really a shame, but if we get a candidate who is willing to be prudent with government spending then the tax rates may not have to go up as much. Although the capital gains tax has an impact on economic growth, the tax that really could stimulate the economy is the corporate income tax. John McCain advocates lowering it from 35% to 25% but this could just be pre-electoral talk.

Natural Gas Prices

U.S. natural gas prices has risen 93% since last August and there is some concern that prices might retreat over the summer. The interesting thing is that comparing U.S. prices with the rest of the world they are undervalued. Many analysts believe that this will drive prices higher in the future. However, Chesapeake's chief executive believes that production levels will also increase which will keep prices in the range they currently trade. I find this intriguing because they would definitely benefit from higher prices, yet he sounds pretty confident that his assumption of stable prices will hold.

LNG (liquefied natural gas) has made transportation of this energy source easier which could potentially lead to higher level of natural gas use as an energy source. Natural gas emits the least amount of carbon dioxide out of all hydrocarbons and many green initiatives will include increases in natural gas over crude oil and coal.

Source: WSJ