Hedge Fund Blogs From HedgeCo.Net

Hawkish Fed Comments From Warsh, Bullard, Plosser Why? Terrible Economic Numbers, Chicago PMI, MBA Mortgage Applications

U.S.$ weakness of late has spurred a cacophony of comments around the world for a new reserve currency. Now the Fed is attempting to fight back. Over the last few days a number of Fed governors have made hawkish statements to bolster the U.S.$ (the fact that these comments were offered before, during and after the G20 summit is not a coincidence)…..

Fed’s Warsh says Fed may need to roll back policies sooner – DJ

Fed’s Warsh says last few months show continued improvement in economic performance – Reuters

Fed’s Bullard says Fed should consider rules governing quantitative easing policies with rates near zero – Reuters

Fed’s Plosser says policy shift may need to be aggressive – Reuters.com
Reuters.com reports the Federal Reserve will have to act quickly, and “perhaps aggressively” when the time comes to pull back its extraordinary support for markets in order to avoid stoking inflation, the president of the Federal Reserve Bank of Philadelphia said.

“The Fed will need courage,” Charles Plosser said in remarks prepared for delivery at Lafayette College in Easton, Pennsylvania. “I believe we will need to act well before unemployment rates and other measures of resource utilization have returned to acceptable levels.”

The Federal Reserve cut interest rates to near zero percent last December and put in place an unprecedented array of emergency support programs as it battled the deepest recession since the Great Depression. That has worried some market participants that inflation will result. “Just as the Fed has taken aggressive steps in flooding the financial markets with liquidity during this crisis to reduce the possibility of a second Great Depression, it will also have to take the necessary steps to prevent a second Great Inflation,” Plosser said. “We recognize the costs that significantly higher inflation and the ensuing loss of credibility will impose on the economy if we fail to act promptly, and perhaps aggressively, when the time comes to do so,” he said.

However, economic reality still suggests the need for aggressive stimulus…..

September Chicago PMI 46.1 vs 52.0 consensus, August 50.0

ECONX Chicago PMI Halts Expansion – Briefing.com
The expansion in the manufacturing sector hit a major speed bump as the Chicago PMI declined 3.9 points to 46.1 in September, well below the consensus expectation of 52.0. The drop below 50 signals a contraction in manufacturing. A negative feedback loop seems to have reentered the manufacturing sector…

The drop in PMI was mostly due to a severe cutback in both new orders and order backlogs as new orders declined 6.2 points to 46.3 and order backlogs declined 9.1 points to 36.7. It seems that manufacturers had bought into the economic recovery scenario and decided to ramp up production in August. At the same time as production revved up, the contraction in new orders had ended and most firms expected growth to continue into the future. The increased production was used to work off the backlog along with the new orders that arrived. Unfortunately, at the same time as production ramped up, consumer demand in September seems to have stalled and along with it the recovery effort. Wholesalers and retailers did not need any new goods and orders dropped precipitously. Production in September tumbled.

As long as consumer demand continues to stumble, the recovery effort cannot be sustained. Instead of multiple months of expansion, we may see these PMI indices becoming highly volatile as production meets a fluctuating order schedule.

There was one positive sign from the data. While inventories are still contracting, the rate of contraction slowed. Eventually inventory levels will shrink enough to force manufacturers into production just to restock the shelves. Unfortunately, the consumer will dictate when this will happen. Other components of the index showed problems in manufacturing including: The prices firms paid expanded for the second consecutive month as the index rose to 51.3 from 50.0. The contraction in employment held steady as the index increased only 0.1 to 38.8. Supplier deliveries reentered a contraction phase as the index declined to 49.3 from 54.6.

MBA Mortgage Applications -2.8% vs +12.8% Prior
…And the struggle between reality & the desire to support the U.S.$ has the Fed speaking out of both sides of it’s mouth….

Fed’s Lockhart says worst is likely ahead for commercial real estate – DJ
Says return to robust bank lending unlikely in near term

…The take away? We must not let the short-term strength in the U.S.$ alter our investment strategy. This strength was purely cosmetic and created for the G20 summit. The stagflation trade is alive and well (Please see the Sept. 7th post for details). This trade will gain strength as poor economic numbers continue to evolve during a time when prices manufacturers pay for goods continues to increase (see the bold text above).
The asset of choice for this environment is Gold. We don’t know all the answers but we are eminently comfortable owning gold. Gold is the only international monetary asset with globally declining supply and rising demand. How smart do you have to be to join us?

Companies of Interest

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Periodically I will post the EPS news or other relevant coverage of companies we find interesting. This is not a recommendation to purchase or sell the shares. The purpose of these posts is to give you, the reader, an idea of what companies our research department deems worthy of review.
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C Citigroup: China wants Citigroup to expand – WSJ (4.70 )

WSJ reports a top banking regulator in China said Citigroup’s local operations “absolutely” should expand in the country, suggesting the U.S. government’s big stake in the bank isn’t troubling Chinese regulators. Citigroup’s China unit was “very prudent and careful” amid the global financial crisis and now should be “expanding, absolutely,”

Yan Qingmin, director of the Shanghai branch of the China Banking Regulatory Commission and one of the top regulators for foreign banks in the country, told The Wall Street Journal in an interview. Showing an unusual willingness by a regulator to comment on an individual company, Mr. Yan offered a glimpse into how China views the recent overhaul of the U.S. financial system and said Citigroup should take advantage of growth in the Chinese economy and expand in the world’s most populous nation. He signaled a view that despite the shock of seeing an “aircraft carrier” of the U.S. financial industry fall into the government’s arms, Washington’s support for Citigroup was the correct decision and that the result has done little to alter how Chinese policy makers regard the financial-services giant.


About Bret Rosenthal

Interpreting the news that moves markets. Principal of RCM, LLC, and founding partner of the Fortune's Favor Family of Funds
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