The Hall Market Report

Head On A Swivel – Financial Market Blog

The US Fed’s (we hope) “JIT” Stimulus Exit Strategy.

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As the unprecedented quantitative easing program was implemented, the Fed, like all wise market participants, has already considered the other side of the ‘trade’, that being when and how to ‘just in time’ reduce the adjusted monetary base. Just in time refers to successfully accomplishing the Fed’s dual mandate by starting to reduce the stimulus at the time that the economy is on a self-sustaining path of expansion, while inflation is still under control.  In a Wall Street Journal editorial (July 21, 2009) Fed Chairman Ben Bernanke stated that the Fed has spent significant time strategizing the accommodative policy exit.  In that article Bernanke indicated that given the current economic conditions tighter monetary policy is a ways away. However, they will have a plan in place with options available to drain reserves from the system, and they are watching the dashboard of economic indicators closely to decide when to turn off the money spigot. In further support of “getting it right” the US is not going it alone, as the G8 has asked the IMF to do the analytical work to help the governments prepare exit strategies to unwind the massive global-wide stimulus deployed to combat the recession. More recently (December 7, 2009) in a speech given at the Economic Club of Washington D.C.) discussing things on a more positive note as the financial system and the economic landscape continue to improve. There is no doubt achieving a successful exit will be most challenging.  Implementing a timely return to normal global monetary policy, from what have been some very unconventional policies, will be most difficult, as countries struggle with budget deficits, significant debt and the threat of both inflation and deflation.  For years to come policy makers will be faced with the extreme challenges of trying to calibrate practical and pragmatic exit solutions. Going forward, the overriding concern will be maintaining confidence and properly managing expectations as we now look to the horizon to determine what shape the recovery will take.

 Strategies as laid out in Chairman Bernanke’s WSJ Opt Ed (July 21, 2009)

First, the Federal Reserve could drain bank reserves and reduce the excess liquidity at other institutions by arranging large-scale reverse repurchase agreements with financial market participants, including banks, government-sponsored enterprises and other institutions. Reverse repurchase agreements involve the sale by the Fed of securities from its portfolio with an agreement to buy the securities back at a slightly higher price at a later date.

Second, the Treasury could sell bills and deposit the proceeds with the Federal Reserve. When purchasers pay for the securities, the Treasury’s account at the Federal Reserve rises and reserve balances decline.

Third, using the authority Congress gave us to pay interest on banks’ balances at the Fed, we can offer term deposits to banks—analogous to the certificates of deposit that banks offer their customers. Bank funds held in term deposits at the Fed would not be available for the federal funds market.

Fourth, if necessary, the Fed could reduce reserves by selling a portion of its holdings of long-term securities into the open market.

As always, it’s not the mechanics, its determining the timing of implementation  using best interpretations of the future economic landscape ( using the phrase“ best guess” just seems to grossly underestimate the effort that goes into these assessments).


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January 6, 2010 at 11:12 am

Factory Orders (above expectations, slack though!)- January 5, 2010

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Factory Orders came out today above expectations (1.1% versus .50%). Although the data is used for trading it tends to have a medium to low broad market impact as it includes revisions of the Durable Goods Orders report released a couple of weeks (little surprised) early and adds non-durable goods data (smaller ticket items).  Rising orders fires up the manufacturers but to see the full impact you need to look down stream to determine; 1) how much slack is there in the system (when does hiring kick in –see point 1 below), and how much is going to inventory built up versus consumer consumption). I believe that on the heels of the Durable Goods Orders the relevance of the report is found in the report when there are revisions to the durable goods, the direction of those revisions and how significant the changes are.

November’s report showed New orders for manufactured goods (up seven of the last eight months), Shipments increased (up five of the last six months), Unfilled orders decreased (down fourteen consecutive months), Inventories increased again (up two consecutive months).

Point 1 – Slack

 The Average Weekly Hours worked in both Canada and the US (see Charts) are at all or near all time lows. This means that companies with less than full time workers can absorb the slack in the system before needing to hire.

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January 6, 2010 at 11:08 am

Futures, Market & Close – Flat, Down and ?

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Futures were flat after yesterday’s big gains and markets opened down ahead of economic reports. Looking for 10:00am (eastern) release of Pending Home Sales (calling for -2.9%) and Factory Orders (o.50). Vehicle sales coming in throughout the day. Too much yesterday with disappointments today could add to the pullback.

remember that month over month comps may be tough to beat (things better recently) but year or year could blow through (things were bad in the back). Pick your trading vantage point.

stay tuned

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January 5, 2010 at 8:55 am

Economic Information + Sherriff Bernanke- January 4, 2010 (see “Head on a Swivel” for full report)

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Before we get in to the economic news a quick note: Sherriff Bernanke and his Posse are out in force this week with Bernanke, Kohn, Duke, Hoenig, Bullard, Rosengren all giving speeches or participating in panels.  A couple of key dates to watch is Bernanke on Jan 3 in Atlanta at the American Economic Association Annual Meeting and Bullard who is speaking in Shanghai to the Jiao Tong University forum on January 7 and the University of Finance and Economics on January 8.

 There were six significant US economic data points released last week and as usual the results were a mixed bag. However, the components considered most important carried the day with unemployment claims coming in at 432K (estimate 460K), Chicago PMI topping the 55.2 estimate at 60 consumer confidence within a sliver of its 53 estimate (52.9).  Even though the major items were equal to or better than expectations the US markets lost ground for the week. There were no major Canadian data points released last week; the Canadian market gained slightly.

 Major data points this week are the US ISM Manufacturing PMI which is estimated to come in at 54.2 (up from 53.6 the previous week) and the CDN Ivey PMI which is forecast less that the previous month. Tuesday sees pending home sales which is calling for a 2.9% drop m/m (this data is 35 days in arrear so we are looking at November sales). Thursday and Friday see the typical host of employment data on both sides of the border with both unemployment forecasts calling for a saw-off m/m (for data reporting purposes define “unemployed” – statistical sarcasm).

Canadian Economic News

 US Economic News

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January 3, 2010 at 1:28 pm

Real Estate – Anyone home? Anyone – Bueller???

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January 3, 2010 at 1:13 pm

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XRE – Capped RIET ETF – see article below

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January 1, 2010 at 12:47 pm

Posted in Sector Surgery

REITS – Really Exciting Interesting Times

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January 1, 2010 at 10:47 am

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