Fed boosts rates in Greenspan's last meeting - Jan. 31, 2006

So, now we got it. Alan Greenspan has raised rates to 4.5% in his last meeting. CNN Money describes the current situation as follows:

Some economists argue that Bernanke will need to raise rates one more time to show that he is serious about fighting inflation. But others say the Fed has already nipped inflation in the bud and that further rate hikes could unnecessarily hurt the economy.

So, what do you believe? With the raising oil price I am not that confident about the inflation picture. But otherways the economy has prooved very resistent to the inflation pressures (which went for some years: 2004 oil and dollar depreciation, 2005 mainly oil, and all the time sinking unemployment, strong real estate and consumption and robust overall economic stance).

I would prefer to wait for the end of the rates raising cycle before opening up more offensive positions. Will the market also wait? We'll see.

Fed boosts rates in Greenspan's last meeting - Jan. 31, 2006

Charts of the Week - Unempoyment Claims; Inflation Measurements

The discussion about the sustainability of the US labor market has faded somewhat. Some time ago they could not stop talking about the jobless recovery and all the dangerous things implied by that. Now the focus changed to other issues: commodity prices and inflation, for example. In some ways this is reassuring observation: the market is looking again and again for sources of concern. As long as something appears to be on the right track, they loose interest...

But how does it look like on the "labor front" in the "meantime":



And the more complete picture:



The labor market sees (present time!) gradual improvements. All in all it is may be not that rapid, though the development is robust. There are new jobs, the unemployment rate decreases, and it will surely provide support to the further economic growth and consumption.

And how about the inflation?



The fearing is not over yet. Yes, I am not overly concerned about inflation peak and even less about uncontrolled development. The forces of technology, globalization and competition combined with the solid grip of the Fed will prevent it. However, the picture does not show yet much of easing. Or may be though: if that tendency in the core PPI is sustainable...

But I ask myself - what do the bond investors do with interst rates almost below the inflation rate? This irrationality - in my humble opinion - will either be paid with losses (raising interest rates in the long end) or they are though right, and the inflation comes down (probably together with the economy).

The first will may be provide a more difficult environment for the stock markets. There is a chance to see a rush out of bonds and - at least partly - into stocks. But a raising interst will then surely mean some throuble for the shares.

The second way is the smoother one, because I do not expect big problems with the stock markets even if the economy cools off. The valuation (and the valuation basis then - the interest rates) are and will (hopefully) still be favorable.

So, economy and labor go nice, and consumprion may be more robust than expected. The inflation is still a concern and will decide on the way how we move the way up - more calmly or more volatile. In my humble opinion.

PS (to whom it may concern): I appreciate exchange of thoughts and information between the blogs, though please link properly to Bourse Diary and do not use complete postings without permission and reference.

stocks bourse inflation empoyment

Investing with Leverage - Some Thoughts

Following the post “Lets Talk About Leverage” in the blog MillionDollarGoal, I would also like to share some thoughts on that issue. I consider the process of investing with leverage is actually well known (and if not, you should at least read the above mentioned post). The essence is probably best described like this: it is an investment through secured borrowing.

But first may be some more basics:

There are generally two ways to get leverage on investment: through buying on margin (or via the currently very popular knock-out products, futures etc., but its all more or less the same principle) or buying a stock option (warrant).

After all, it all can be derived from “borrowing money” but there are some important differences in the practice.

The first is limited through the margin (price), the second through a time-limit. One of this limitations must be given, other-ways I am a millionaire in just few years.

So, it is time or volatility that kills you.

In the first case the borrowed money is secured by the margin, hence if the underlying falls (or gains) to a certain level (the margin), the investment turns worthless (formal logic is - the whole investment with the borrowed money is executed and the borrowed sum is payed back to the borrower, whereas the rest remaining for you is zero). So you can not decide free on how long you can hold on the investment - you depend additionally on the market moves.

A stock option can be hold to the settlement date independently of the development of the underlying during this time period, but it is typically losing value with time progressing.

For example a leverage of 10 for the DOW is provided currently via buying on margin at 10% (ca. 9.640) and something like strike at 13.000 expiring Dec. 2007. I am quite sure the DOW will gain over time and will pass the 13.000, but will it not first go under 9.640 (which kills the first investment) or will it happen not until Dec. 2007 (which kills the second investment)?

The investment in leveraged products is not very “prudent”. A prudent investments I aways consider such with long time-horizon. As the leverage is provided (directly or indirectly) by borrowed money, there is interest to pay (besides the market risk). This is also the point on which Loi Tran from Investing Guide comments as follows:

“I would not use leverage such as buying on margin when investing in the stock market. The interest paid on the borrowed money eats into the returns and there is no guarantee that you'll make money. So when investing in the stock market, I'd only invest money that I can afford to lose.

Real Estate is a different and most people buying real estate use leverage.”

This comment includes the first points I’d like to stress:

The investment in the stock markets is risky enough still without the leverage effects. The investor should consider very carefully, if he/she can bear the additional risk. Though the sentence “So when investing in the stock market, I'd only invest money that I can afford to lose” is not fully correct. By selecting an appropriate relative investment capital and leverage I can have just the same overall exposure to the market risk and just loose the money “I can afford”.

The main effect of leveraged investment is clear: the percentage gain (or loss) of the invested capital is a multiple of the development of the underlying. But this way you can reduce by the same multiple the capital investment to achieve the same gain. This can free up liquidity. For example, you have a portfolio of $1.000 solidly invested with actually no intention to sell - to come what may... But suddenly you need $500 for something else. You can shift your investment into $500 on margin of 2 (50%) and $500 cash. The market may do what it wants, the next month you can go back to your solid investment at the value it would have, if you stayed in the market (subtracting small interest). Its like a credit card. And you have bridged a liquidity problem.

But there is the temptation to put irrationally much money on margin - that can ruin you of course. You have to be disciplined. You take over much risk (from the borrower), so you should have a very good sense of the risk priced in the market. In a word: you have to be good.


stocks bourse leverage risk

BlogginWallStreet

There is an interesting article on the BloggingWallstreet
on "Financial Myths" about the sensitivity of financial companies to the interest rates. I must admit that I was stopped to buy some financial stocks just out of the same concerns as described there. But I can follow the argumentation and I should think it over once again.

Worth a view in any case: BlogginWallStreet

Investing Guide: How risky is your portfolio?

On the Blog Investing Guide a tool from RiskGrades is presented, which helps investors to track the risk scope of their investments. The site requires free membership and sounds interesting. For example Loi Tran from Investing Guide states:

"You can enter your portfolio of stocks, bonds and mutual funds and look at the riskgrade of each individual holding as well as the riskgrade of the portfolio. Then you can see the benefits of diversification within your portfolio.

There are many useful tools on that website. There is a simulator that shows how much your portfolio could lose in adverse market conditions. You can also run your portfolio through events like stock market crashes to see how much it would have lost."

If you are interested you can read further here: Investing Guide: How risky is your portfolio?

Consolidation at the stock exchanges? - opinions, tendencies

The sharp corrections on the international stock exchanges in the last week were and are topic of many comments and financial columns. The German as well as foreign stock exchange observers show themselves so far confident or describe the situation at least with a "calm" rationality.

My impression is, that the facts alleged responsible for the weak performance are:

On the one hand, the company reports from the USA are partially disappointing and all in all seem to confirm the fear, the profit and economic development loses clearly dynamics.

On the other hand, in particular the oil price has risen again (particularly by the political tension around Iran) and is a further source of the uncertainty.

Naturally the interest rates policy offers some open questions and also a set of "open" interpretation possibilities as well. From the ECB (European Central Bank) there were some disconcerting voices in this week to increase rates because the economy gains pace (which is now not indicated fully by any analysis).
On the part of the Fed the problem is rather long-known: will the Fed possibly stall the US economic situation by further interest rates steps? The positive outlook of the beige Book did not provide many help at that point: a robust economic development could let the Fed go on with the rate hike to a level which would be too high in the case of economic cool off later on.

Thus - all in all - the usual crowd... The sharp drop of the stocks in Japan appears rather just as impulse for the whole consolidation wave (and in this manner it signals somewhat excessive speculation and gains that mounted over the last months).

The media comments are really ambiguous. I could note for me that both nervousness and the optimism rather stay in balance. The big rally in the large indexes had to stop logically at some point in time and this was also expected. When the correction sets now in, it cannot really surprise. Still it concerns more or less "shrinking (paper) profits" and not real (and many more painful) losses.

I guess, the investors will take some more profits, so that in the next time we'll rather see lower prices. On the part of commercial news I would be surprised, if we got greatly support - simply robust economic data do not have the potential to give clear impulses. The situation at the interest front will remain probably the same in the coming weeks. The political developments will possibly not disappear that suddenly. From a fundamental point of view, the markets appear to be not overvalued, and although speculation and profits accumulated over the last weeks and months, I can not see excessive allocation of capital into the stock markets (above all in the USA and Europe). Therefore in the case of an unfavorable development the losses might be limited. Rationally the market is a Hold. In the case of the Emerging Markets, the development was much too steep and the emotions probably much too euphoric. I already stated my reserved opinion in relation to exotic stock exchanges. The losses here threaten to be greater, if we have troubles.


stocks bourse consolidation prospectives

Forget Cheaper Oil in 2006?

Forget Cheaper Oil in 2006?

Only this: I am not so sure..

PS: But read the article - it's good to know. We'll see.

And something more: before you believe everything about the commodities story, read this nice article from BloggingWallstreet: My Take on Commodities

Don't Be Afraid of China

It has been always my point: the emerging economic power of China is good to the world and good to Western companies. The pressure for more productivity and the benefits of lower costs (with all capital and labor allocation benefits involved) will mean under the bottom line a surplus in standard of live, economic expansion etc. In this process there will be of course (relative) winners and losers. I suppose that investing in the globally operating companies will be a pretty sure bet to benefit of the progress driven by the globalization.

A good related article in the Business Week provides also insights on Chinese currency, trade and stock exchanges: Don't Be Afraid of China

Consumer price index rises 3.4 percent

Consumer price index rises 3.4 percent

Not that good! Albeit the core inflation rate remained relatively tame at 2.2% it is still providing cause for the FED to go on with tightening. Of course one should consider the time-lag of the monetary policy impact, though higher interest rates are generally not good news for the stock market. Fortunately the long term bond yields stay still relatively low. The danger is now, if slow down of corporate results (earnings, sales etc.) will be followed or even conicide with economic slow down (due to time lag of monetary policy and/or normal business cycle) providing both - uncertain outlook on economic and corporate development as well unfavorable liquidity situation.

More information at Business Week: Consumer price index rises 3.4 percent

Some more on that issue in BloggingWallstreet:

Trickle Down Inflation Theory

Overall I'd say that the data does not support the inflation lag theory. There's no historical evidence to suggest that inflation in the headline number, which includes volatile food and energy prices, leads to core inflation in the future. It's another economic myth we can all stop worrying about.

It's worth reading the whole posting.

An amasing story of the power of compound interst

There is a funny story about the Indians who once sold Manhattan in Personal Finance Advice Blog. I have first read about it in a book of Peter Linch. If you think the Indians have made a bad deal, you are not right. It is the amazing power of compound interest. Go read it and you'll see...

And if you think twice, you must see, it is even logical: Manhattan today is worth that much because people have created it - with the power of the incresing technology, productivity, economic growth. Its worth could actually not grow much faster than that...


interest Manhattan

Interest rates, interest rates, interest rates

George Soros: U.S. recession may occur in '07

If George Soros warns, one should listen at least. The danger comes from a too restrictive monetary policy in the USA. He sees a Fed discount rate rising to 4,75% this year, which could then strangle the economic situation in 2007.

The fact that the interest rates can have a significant negative effect on the stock markets and the economic situation was already written about. Therefore my earlier position was, despite of my principally optimistic view, nevertheless somewhat cautious considering the still ongoing cycle of interest rates increases. Until the Fed does not stop with tightening, one should act more carefully.

However, the long-term interest remains low. This provides favorable financing and re-financing possibilities and favourable valuation basis to the stock markets.


The other major economies and currencies such as Euro and Pound contribute to the global liquidity situation through relatively expansive (Euro) and probably neutral (Pound) policy. The both important Central Banks - ECB and The Bank of England - have made no restrictive move. Especially in Europe, a discount rate of 2.25% is very stimulative - if not for the economy directly (due to structural and mental (yes, mental) difficulties to grow faster) then for the financial markets.


Does the Yield Curve Matter?


Still, as far as I can see, the yield curve is not inverse. Development under observation. About the forecast quality of the yield curve, here an article of Business Week Online. Hopefully, Alan Greenspan is nevertheless right , with its reassuring words that the observations from the past are less reliable nowadays because of the globalization of the financial markets ...

All in all, the way of the stock markets an the economy will highly depend on the development on the bond markets. In the last sessions bond prices jumped up somewhat and that makes me somewhat more confident - I would fear high interests (long and short) more than cooling off of corporate earnings growth or of GDP.

stocks bourse interest

A whole new year before us ... Good luck to all of us...

First of all Happy New Year!

I wish much luck, success and health to all readers in 2006.

After more than tree-week break I come again to my bourse notes. During the holidays the stock markets could rise further. A lot of reviews and comments of the past year appeared - all in all it was a pleasing year for all those, who speculated on rising courses and a bull market - especially in Europe, where I am mainly invested, an the most other international markets. The US stocks could not provide substantial performance in the last 12 months (on dollar basis), but the year was all in all positive. And if you have a positive performance on your stocks, you should be happy, right?

How will it be now in 2006? We can be surprised…

Although the broad "market barometers" rose, this development did not exceed the growth of profits and other underlying fundamental data. Thus, the large indices remain at the valuation level as of one year ago and even better. I generally avoid to say the stocks movement is "fundamentally supported" (or “justified”), because the valuation after all is not (that) determinant. Nevertheless this is a "reassuring" fact.

However, much more important to me is the state of the interest rates particularly at the long end, which in this year – “unexpectedly” to most analysts – did not substantially change. Thus, the lack of investment opportunities for the world-wide liquidity (and large savings volumes - mainly from the Asiatic area, and also, from the moderately growing Western European industrial nations such as Germany) remain considerable and the basis for valuation of stocks favorable. The rate cycle in the USA had of course affected and absorbed the (over-) liquidity somewhat. In this environment the American indexes could not go far last year, and - once again "surprisingly" - the dollar was strong. Now they already talk about the close end of the interest rate hikes, and the stock market anticipates already such development with optimism. As long as rates remain low I would count on the continuing of the rally.

However - a whole new year is before us. In any case, I wish much success to everyone...


stocks bourse 2006