Finance at First Light

Sunrise over New York CityGood morning! Here’s what you need to know.

The Federal Reserve will announce its latest interest rate decision at 2:15 ET. Most economists expect no change, and believe the Fed will keep its word about using proceeds from principal payments on its agency mortgage-backed securities and agency debt to buy Treasuries. Pimco’s Richard Clarida told Bloomberg, “The Fed’s rhetoric will get the markets ready for the real possibility of expanding their balance sheet at a later meeting this year.”

That may be one reason that the price of Treasuries is still rising, and two-year yields are near record lows. BNP Paribas Securities Japan analyst Tomohisa Fujiki told Bloomberg from Tokyo, “Our call is for investors to buy. The economic picture will be more sluggish. Unemployment will go higher.”

The oil market seems to agree. The price of oil slipped to near $74 per barrel in Asia last night. It’s been near $75 for months, however, so the move is not dramatic. The oil market faces its own unique set of circumstances apart from the general economy, however, namely that supply appears to be peaking just as China and other parts of the world are set to send demand skyrocketing. Ritterbusch and Associates wrote in a report, “An unusually bearish fundamental oil landscape will make it more difficult for petroleum to share in additional sprees of economic optimism.”

Michael Klare at the Asia Times reminded everybody that China is calling the shots in the global energy market. He claims that “Washington is already watching — with anxiety.” Why? Because “energy is tied to so many aspects of the global economy, and because doubts are growing about the future availability of oil and other vital fuels, the decisions China makes regarding its energy portfolio will have far-reaching consequences. As the leading player in the global energy market, China will significantly determine not only the prices we will be paying for critical fuels but also the type of energy systems we will come to rely on.”

China also happens to be flexing its military muscles around Asia these days, with a particular eye on the China Seas. For a full report on that, please subscribe to The Kelly Letter and read last Sunday’s article, “China’s Rising Aggression,” described by subscriber and hedge fund manager Charlie Michaels as “notable.”

Tell your unemployed friends the good news that the recession is over! The National Bureau of Economic Research (NBER) declared that the Great Recession began in December 2007 and ended in June 2009. At 18 months, however, it was the longest recession since the end of World War II. It may be over, but the New York Times reported that “nonfarm payrolls are still down 329,000 from their level at the recession’s official end 15 months ago, and the slow growth in recent months means that the unemployed still have a long slog ahead.” At least your unemployed friends aren’t alone. NBER president, James Poterba, said, “Of the last three recoveries, this one is having slower employment growth after the downturn. That is in contrast to earlier recessions when employment tended to come back more quickly.”

Details on the stimulus program offer a clue as to what’s gone wrong. The Boston Globe editorialized that the Obama administration may be into this stimulus “for a trillion bucks but citing the five people at the Malden Housing Authority that didn’t get laid off because of the $3 million lead paint removal program, does not an effective national sales pitch make.” At a live CNBC town hall meeting covered by Politico, a chief financial officer with two children approaching college age, said she was afraid her “new reality” would leave her struggling to keep food on the table. “I’ve been told that I voted for a man who was going to change things for the middle class, . . .and I’m waiting sir, I don’t feel it yet,” she said. The president replied, “Times are tough for everybody right now. I understand your frustration.”

Trouble in the housing market is what started the mess. While the Federal Reserve and some government economists keep telling us that housing prices have stabilized, the evidence suggests otherwise. Keith Jurow says the problem is shadow inventory. He wrote at Real Estate Channel that there’s “a total of roughly 6.97 million residences that are almost certainly going to be thrown onto the resale market as distressed properties at some point in the not-too-distant future. This massive number of homes will put enormous downward pressure on sale prices. To believe that prices are firming now is to completely ignore this shadow inventory.”

Gold futures closed at another all-time high yesterday: $1280.80 per ounce. Intraday, they got all the way up to $1285.20. MarketWatch relayed part of a note written by GoldCore analysts: “More long-term market participants are nervous about the faltering economic recovery and the likely need for a new round of monetary and quantitative easing. The Federal Reserve is likely to discuss and may signal a further round of quantitative easing at the FOMC meeting.” They believe that such a signal would send gold higher than $1300 per ounce. Donald Luskin wrote at SmartMoney that the rise in gold’s price is a good thing because it means we’re getting some inflation instead of deflation, which is much worse because “if you are in debt, then you are really dead in a deflation. The value of everything falls except the debt you have to repay.” James Surowiecki at the New Yorker agrees that a little inflation is just what America needs: “If people believe that prices are going to rise in the future, they may be less cautious about spending in the present, since money that isn’t put to work will lose value. And, because inflation erodes the real value of debts, people’s debt burdens would shrink.”

Speaking of debt, you know how consumers are supposedly getting rid of it in a coast-to-coast virtuous deleveraging? That’s bunk, according to the Federal Reserve as reported in the Wall Street Journal’s Real Time Economics blog: “The sharp decline in US household debt over the past couple years has conjured up images of people across the country tightening their belts in order to pay down their mortgages and credit-card balances. A closer look, though, suggests a different picture: Some are defaulting, while the rest aren’t making much of a dent in their debts at all. . . . in the absence of defaults, they would have achieved an annualized decline of only 0.08%.”

Below is Dan Fitzpatrick with Jim Cramer on MadMoney, discussing charts of the current market and how they’re informative — but not predictive.

Have a great day!

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  1. Paul G
    Posted September 22, 2010 at 1:48 am | Permalink

    I’m putting “Finance at First Light” on my must read list for first thing in the morning. It is much better than the typical list of links that can take forever to work though. Your approach captures the important stuff in a reasonable amount of time. I also enjoyed the video with Dan Fitzpatrick. Thank you very much.

    • Posted September 22, 2010 at 9:22 am | Permalink

      My pleasure, Paul. That’s my intent with this series: to provide immediate value without the need to click through for the whole story. My goal is for a printout of the article to stand alone without the content at the end of the links. For those who want more, the links are there.

      Thank you for confirming that this approach is useful.

  2. Posted September 22, 2010 at 1:31 am | Permalink

    There is a short term 1-2 yr supply glut for oil and natural gas.

    However, the picks and shovels companies are intriguing and the best way to play this because while E&P companies, especially many small ones, are still drilling and not really profitable, it is the pipeline, storage (I have one LNG storage company in particular I like as a turnaround where they are planning to add a lot of extra LNG capacity and a bi-directional pipeline so producers can move the nat gas back and forth) that can still be very profitable in this environment.
    Also, because of the underinvestment going on in some of the sector as some projects, like many in the Canadian Oilsands, are not economical at these prices, it guarantees much higher prices in a few yrs… Your thoughts?

    • Posted September 22, 2010 at 9:20 am | Permalink

      I’m predisposed to agreeing with anybody sharing my name, but happen to agree with you on the evidence in this case. In The Kelly Letter, we’ve been exploring ways to profit from the coming energy chaos, including buying Transocean (RIG) near its lows last summer when everybody told us we were nuts for taking on the uncertainty of its liabilities in the BP (BP) Gulf leak catastrophe. So far, so good on that one.

      Regarding natural gas, we’ve been very patient with the commodity itself and producers, but have some good targets we’re watching with bated breath.

  3. Jim T
    Posted September 21, 2010 at 11:18 pm | Permalink

    “Trouble in the housing market is what started the mess.”

    Not true.

    What started the mess was a deregulated banking industry full of greed and complicated “financial instruments.” People pushing invisible numbers and dollars around. Their toy was the housing market, among others.

    • Posted September 22, 2010 at 9:16 am | Permalink

      That’s true, Jim, but among the “toys” chosen by the deregulated financial industry, housing was the one that collapsed and kicked off the Great Recession.

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