Equities

Ouch

The Fed

The Fed may be forced to raise interest rates to fight the rise in commodities. Just like the Fed was forced to slash rates to save the banking system the Fed may be forced to raise rates to keep commodities in check. The Fed may go back and forth between saving the banking system and to squashing commodity inflation. Depending on the month the Fed may move to the area that is more troublesome. Sort of like a fire department with limited resources that is forced to put out too many fires at the same time. It will move to whichever fire is strongest at the moment. This is just my opinion. I have taken this view because of the move commodities have had ever since the Fed has cut rates. We will see what the Fed does tomorrow. What a tough job.

US Equities Year To Date

From Yahoo Finance. As of the close of trading on Monday June 16th 2008:

Dow = 12,269.08, YTD = -7.51%

S and P 500 = 1,360.14, YTD = -7.37%

Nasdaq = 2,474.78, YTD = -6.69%

Jim McKay

I was saddened to hear that Jim McKay died over the weekend. In the 70s and 80s I grew up watching him broadcast the TV show Wide World of Sports on Saturday afternoons. Wide World of Sports covered all types of sporting event including some of the most exotic events from all over the world. The program was very entertaining and his announcing abilities made the broadcast that much better. He was one of the great ones.

Thoughts To Myanmar and China

My thoughts go out to the people affected by the cyclone in Myanmar and the earthquake in China.

Some Analysis of The TED Spread

Someone asked me about what the Ted spread has been doing lately and if its movements had any impact on the stock market today. Here was my response:

"Today TED has come back down to 1.0 then bounced back to around 1.10. This level was the lowest it has been since March. In January and February its lows were at 0.83 and 0.79 before turning back up to above 2.0 on March 20th. As recently as April 23rd it was above 2.0. Also for reference on August 20th it spiked to 2.3 or so before falling back to 1.0 on August 24th.

The TED spread is the difference between the LIBOR and the 3 Month TBill. When the Fed cuts rates the 3 month TBill moves lower almost exactly the same amount. However LIBOR is determined by an average of what banks are willing to lend to each other at. If the Fed cuts rates theoretically the banks should be cutting the rates that they charge to each other. However due to persistent nervousness in the banking sector banks are charging a premium to other banks if another bank wants to borrow money. This has the Fed worried. Clearly some banks are being charged higher rates, but the question remains why? Since LIBOR is an average rate it is hard to know exactly where the problem lies.

My take is that the Fed watches this like a hawk and is concerned. Therefor it has been a piece of information that I follow closely. The Fed wants the spreads to drop to around 0.50 that is why they increased the treasury facilities - they are trying to funnel money into the problem. TED has been elevated for quite some time and that is also a component of this problem. In my view the TED spread has been very high since August and although a couple of times it made an attempt to normalize by going below one it never made it and soon after retreated back to above 1.0 before spiking twice to 2.0 or above.

Did it cause the market turmoil today? Not really if anything it may have helped the markets since the spread narrowed a little today and over the past week or so. That said it still is in elevated territory and remains a big problem for the Fed. If it makes its way below 1.0 and sticks and eventually makes its way to 0.50 that would mean things are better but until that time there is a persistent problem in these spreads."

This Week's Abelson Commentary

I love reading Abelson in Barron's every week. He is definitely tilted to the bearish side so you have to really analyze his arguments carefully. This week though I think he hit the nail on the head. The Employment report released yesterday used a rather large number for the birth / death factor that the Labor Department uses to calculate job losses for April. The birth / death adjustment seems to be a guess as to how many new businesses were formed (births) and how many businesses went out of business (deaths). According to Abelson's article this estimated number added about 200,000+ jobs to the payroll number. Had this number been zero the number of jobs lost to the economy would have approached 300,000. He astutely pointed out that the Labor Department estimated that finance jobs were created as well which does not blend well with the massive retrenchment occurring on Wall Street. Great stuff Mr. Abelson!