Wednesday, May 31, 2006


FOMC Minutes Move Markets

Bloomberg covers the Fed news. "The dollar rose against the yen and euro after minutes from the Federal Reserve's policy-setting meeting on May 10 showed the central bank may still raise interest rates next month. The dollar climbed to 112.54 yen at 4:02 p.m. in New York, from 112.16 yen late yesterday. It set an eight-month low of 109 yen on May 17. The U.S. currency advanced to $1.2817 per euro from $1.2870 yesterday, and reached a one-year low of $1.2972 per euro this month."

"'The fact that the 50-basis-point increase was on the table at all detracts from the argument that they were leaning toward a pause,' said Naomi Fink, senior currency strategist with BNP Paribas SA."

"Traders also bid up the dollar earlier after a report showed Chicago-area manufacturing rose in May. The National Association of Purchasing Management-Chicago said its regional index climbed to 61.5 this month from 57.2 in April, compared with the 56 reading that was the median forecast of economists surveyed by Bloomberg News. A reading greater than 50 signals expansion."

"Investors on Wednesday continued fleeing emerging markets amid fears that rising U.S. interest rates could lead to a global economic slowdown, market analysts said."

"'An inflation-curbing interest rate hike in the United States could reduce investments, causing an economic slowdown in the United States and as a consequence elsewhere in the world,' said Adauto Lima, an economist of the West LB investment bank. 'Amid these uncertainties, investors seek safer havens for their money.'"

"To calm down the market, the Brazilian government resorted to foreign exchange swaps, Finance Minister Guido Mantega told a congressional commission on Wednesday. 'We took the move to stop panic taking over the market at a delicate moment,' Mantega told the members of the lower house commission."

"Wednesday's swap auction was the second held by the central bank in as many days in an attempt to reduce market volatility. The Brazilian real has fallen almost 12 percent against the dollar since May 5 when the current wave of uncertainties began."

"'I continue thinking this is an adjustment of liquidity,' said Guilherme da Nobrega, economist at the Itau brokerage in Sao Paulo. 'Markets were drunk on liquidity and share prices were rising too fast.'"

"US crude futures ended sharply lower after the United States said it would open talks with Iran, if Tehran suspended its nuclear enrichment. Expectations that the Organization of Petroleum Exporting Countries would leave output unchanged while US gasoline inventories continue to rise also pushed oil prices down, traders said."

"Crude for July delivery settled 74 US cents lower at $US71.29 a barrel on the New York Mercantile Exchange."

"Gold futures fell Wednesday to close with a loss of nearly $12 for the day as well as the month of May, marking a reversal from a three-session climb. Gold for August delivery closed at $649 an ounce on the New York Mercantile Exchange, its lowest level since May 24."

"It ended down $11.50 for the day and down $11.90 for the month despite adding a total of $16.40, or 2.5%, in the past three trading sessions. The move marked the first monthly loss since February, when the price of the front-month contract fell 2%."

"'Gold's failure to find significant upside traction yesterday suggests more consolidation is on the agenda, with $635-$675 set to provide the near-term trading range [and] with interim support pegged $640,' James Moore, an analyst at, said."

"Contributing to pressure Wednesday, Gold Fields Ltd. CEO Ian Cockerill said gold might well give up another $100 before resuming its eventual course past its former historic highs of $850, according to Jon Nadler, an investment-products analyst at bullion dealers And 'not helping matters either were recent gold-sales levels as recorded by the Rand Refinery, whose spokesman estimated about a 20% drop in bullion sales to India,' said Nadler."

"All in all, 'when two of the largest names in the business publicly come out with sobering statements about current gold prices and the reluctance of buyers to pay what they perceive are unsustainable (for the short term) values, the market has little choice but to err on the side of caution and give up some of its premium,' he said."

"Still, Cockerill said Wednesday that gold prices could hit $1,000 an ounce over the next few years, in part because of heavy investment demand from oil producers with excess cash, according to a Reuters report. He was clarifying comments he made Tuesday to a strategy presentation, when he said prices could fall to around $500 an ounce, the report said."

"July platinum slumped $44.60, or 3.5%, to end at $1,246.80 an ounce after a three-week low of $1,235.20, but it was still up 7.2% from the end of April.
June palladium shed $8.20 to end at $347.25 an ounce, closing almost $30 below the end of April level."

"July silver dropped 62.5 cents, or 4.7%, to close at $12.455 an ounce, ending at its lowest level since May 24 after finishing Tuesday at a one-week high above $13. The contract had closed at $13.63 on April 28, so its down 8.6% for May."

Its now pretty clear that "Bernankeism" involves two things:

1) Keep the market guessing


2) Using unconventional, informal means of releasing conflicting data.

Between this, the leaked memo last week, and the off-the-cuff remarks to Maria Bartiromo at the press corps dinner, we're starting to see a pattern.

Where Greenspan was the master of the long-winded sentence which had barely any meaning. Bernanke is becoming the master of rumor, contradictory evidence and informal sources.

For what its worth, I still think the FOMC won't raise rates in June. The BoJ isn't done decreasing liquidity, and the downstream effects on the US economy are still unknown. Raising rates now is high risk. And we all know Bernanke doesn't mind a little inflation...
Lets face it, Bernake is not the one pulling the strings...nor was Greenspan. Yes they have thier say, but these guys are basically just spokespersons...that is their #1 most important job. Greenspan had it down...Bernake is clearly struggling with it. One mispoken word can wreak havok.
Anybody check out the Feds minutes today? They seriously considered rasing the rate in May by .50 bps. Somebody mentioned in here that they would do that and I responded there was no way, that it would cave the stock market. I'm very surprised to find out that they even considered it....although ultimately i'm sure the reason they stuck with .25bps was because of the affect on the stock market the former would have.
jdog --

*if* they actually considered it.

My take is that Bernanke will continue to pay lip-service to being tough on inflation (to prevent a run on the dollar) and continue to pursue his 'targeted inflation' policy.

I don't remember past Fed presidents revealing 'notes' about what was considered and not considered. This all seems very intentional, like Bernanke is trying to keep the market guessing while actually pursuing the philosophy he's preached for years -- which is maintaining a high level of liquidity and avoiding deflation at all costs.
A lot of smoke and screens here. No matter how much rumors he creates, the fundamentals remain the same. For all that the numbers suggest, 25 points in June is a given, in my opinion. August may see the first pause.

However, between now and September, something big might happen what can rock the markets. The market is very tricky and some hedge fund might blow up and cause cascading implosions.
May 31, 2006

Is It Tableware or a Leading Indicator?

JUST a few years ago, you could still walk into the Michael C. Fina store on Fifth Avenue and get a good deal on some flatware. Past the three-carat diamond rings in the front counter, down the stairs and into the wedding registry area, you would have found the Italian-made line of Barocco flatware — two forks, two spoons and a knife — selling for less than $200.

That same five-piece set now costs $260, thanks to an explosion in the price of silver over the last year. "The flatware world," said Jeffrey Fina, a vice president at the store and a grandson of Michael C., "has taken a very big hit."

The same thing has happened to the gold and platinum rings on the store's ground floor. With gold prices rising almost 50 percent over the last year, this summer's brides and grooms are looking at a much more expensive wedding than last summer's.

But to a cadre of economists who use the price of gold as their crystal ball, those brides and grooms should not be the main object of our sympathy. The United States economy should be.

The boom in gold and silver, these economists say, is a sign that this country is finally going to pay for years of easy money, mounting debt, cheap Asian imports and trillion-dollar budget deficits. Welcome to your new job, Henry Paulson.

GOLD and silver have provided a reality check for profligate governments as far back as ancient Rome. Starting with the little-loved emperor Nero, Roman rulers began to use less and less metallic content in their coins so they could mint more money, as Peter L. Bernstein, the longtime Wall Street consultant, wrote in his book "The Power of Gold" (Wiley, 2000).

When the Roman people figured out what was going on, the value of the coins began dropping rapidly. In one 44-year period, prices of everyday Roman items rose by a factor of 20. Only when the emperor Constantine issued a nearly pure new coin called the solidus did inflation come under control.

Ever since, gold — and, to a lesser extent, silver — has been a refuge for investors worried about a country's economic policy. Other than adornment, in fact, this is one of gold's only uses. A government can issue all the currency it wants, thereby driving down the value of the money already in circulation, but it can't conjure gold out of thin air.

"We have gold," Herbert Hoover wrote, "because we cannot trust governments."

Pure gold is currently selling for $653 a troy ounce, less than the peak of $729 it hit earlier this month, but still more than at any other point in more than 25 years. Back then, Bette Midler typified people's economic fears, Mr. Bernstein notes, when she demanded that her $600,000 payment for a European tour be made in South African gold coins rather than the rapidly shriveling United States dollar.

Today's gold mania has certainly not reached the same level, but it's easy to see some parallels. On eBay , 9,500 gold bars and other pieces of bullion changed hands in a recent two-week period — or one every two minutes — a 27 percent increase over the previous two weeks.

An increase in the value of gold is really the same thing as a decrease in the value of a dollar, relative to the oldest, most solid benchmark of all. And there are plenty of reasons dollars should be losing value. Americans have been sending billions of them overseas to buy other countries' products, causing the world to be awash in dollars. The federal government has been spending much more money than it takes in, and the Federal Reserve pumped the economy full of cash a few years ago to avoid a deep recession.

There are legitimate reasons, in other words, to wonder if the gold surge is the start of the crisis that economists have long feared. "The gold value of the dollar appears to be going into free fall," two investment strategists recently wrote on The Wall Street Journal's editorial page, long a home for gold worriers. "What we are facing is a money crisis: an alarming outbreak of inflation and all its consequences."

So I called Mr. Bernstein, the gold historian who has been advising investors since the 1950's, to see what he made of all this. The first thing he mentioned was an indicator he had invented 20 years ago called the Grim Index. It tracks the price of gold (the "G") relative to the price of other raw industrial materials (the "r.i.m."), like copper.

When gold is moving with those other materials, it's a sign that basic economic dynamics are at work. Prices rise when the world's economy is growing rapidly, and they fall when there is more supply of the commodities than demand for them.

But when gold prices spike and prices for other materials do not, Mr. Bernstein says, it means that investors are treating gold as a place to store their money in advance of a crisis. This is precisely what happened in the late 1970's.

In the last few years, however, the prices of gold and the other commodities have gone up sharply. Computer makers are using copper, airplane manufacturers are buying more aluminum and the rise of India — the world's most gold-crazy country — is increasing the demand for jewelry.

And because commodity prices actually fell from the late 1980's to 2002, the recent surge has in part been making up for lost ground. The price of gold still hasn't risen as much, in percentage terms, as the price of milk over the last 20 years.

Like Mr. Bernstein, most economists are reluctant to read too much into gold's big rally. "If you simply look at a graph of the price of gold, it sure looks like the world is going down the tube," he said. "But if you look at it this other way, it gives you entirely another feeling."

There is no question that the trade deficit and budget deficit are real problems, as Mr. Bernstein acknowledges. "All the necessary conditions for a mess are there," he said. The mess itself, however, doesn't seem to have arrived.
CALPERS adding commodities

Now you KNOW it's time to run like hell!
Forbes: In at the Top

Public pensions are rushing into real estate the way they rushed into tech in the late 1990s. Maybe it's a good time to get out.
When the tech boom went bust A few years ago, New Jersey's public pension fund was among the hardest hit in the country, suffering a loss in its tech-laden portfolio of nearly one-third of its value, or $30 billion. Now the State Investment Council has another great idea: In January it decided to jump into--this can't be a surprise--real estate.

The California State Teachers' Retirement System is trying to increase its real estate holdings from 4.6% to 6% of its portfolio. That has forced it to look to more exotic fare than in the past, including a joint venture that invests in medical offices and student housing.

Yep, if CALPERS is getting into it, you know the smart money is already gone. They were huge backers of brain-dead dot coms and this article about them jumping into RE was written in July 2005 -- CALPERS' timing couldn't be worse!
are commodities at all-time highs? nope, they are far from it. if you read the article, he says that it's not a good time to pile in, but they're shifting their assests long-term. if gold were at $2500, then they'd be piling in. gold is still below even it's nominal record.

but hey, the only thing that will convince the commodity bears is price. the bears never say the bull market coming, it's ludicrous for them to call it now.
john, what have all-time highs got to do with anything?'s all-time high was around $120. Now it trades for less than $40. Does that make AMZN a buy? If it suddenly ran up to $80 would I have to dismiss the idea that it was in a bubble just because $80 is less than $120?
you don't buy amazon because while stocks were soaring between 1980 and 2000, commodities were falling. you buy commodities because they fell for 20 years and now will have a near 20 year bull market that began a few years ago. you don't buy stocks because they're going to fall for almost 2 decades.

it's a typical boom and bust cycle. commodities go up for about 17 years, then fall. stocks go up for about 17 years, then fall. we're only a few years into the commodities bull. when CALPERS is buying in at POG $2,500, then they're buying at the top. that's definately not now.
Spot on about CalPers. There is a twin 54-story luxury condo project in Sacramento that looked like it was dead in the water. Developer had the buyers but could not find an equity partner (gee wonder why....) Last month CalPers steps in and provided the $$ and the project is apparantly full steam ahead.
CALPERS was jumping out of real estate, not into it. you misread.

"Public pension funds might do well to follow the lead of California's pension fund Calpers, the nation's largest public fund and often in the investing vanguard. As less savvy funds rush in, Calpers has lately sold about $7 billion in expensive real estate and taken profits.

"We think the timing is right" to sell, says Brad W. Pacheco, a Calpers spokesman. "We have a property on the block right now and plan to continue selling."
CALPERS getting out of real estate?

Reuters: ANALYSIS-Realty funds flock to India, bubble looms (May 8, 2006)

"There is hell of a lot more capital available than good transactions," David Ellington, trustee at the San Francisco Employees' Retirement System, said during his visit to India. "That is going to heat up the market."

California Public Employees' Retirement System (CalPERS) ploughed $100 million into an Indian realty fund last month, while American International Group (AIG.N: Quote, Profile, Research) has launched a real estate investment division in India.

Jones Lang LaSalle, Calpers to buy Centerpoint

Calpers has a "big appetite" for commercial and industrial real estate, Mr. Cammert said, one that Centerpoint's sizeable holdings could help satiate

And I got a kick out of this one, from 2000:

In addition, CalPERS' alternative investment portfolio includes a $500 million direct investment in Enron, the leading energy services provider to property owners.
what does India have to do with the US? anyways, it's only $100 million, it's a $200 billion dollar fund. I don't care about enron. they are sellers, for the most part, of real estate.

this new guy is a commodities guy, he knows what he's doing.
did I mention they SOLD $7 billion in real estate? $100 million is nothing, and even if they put $3 billion in, they've still more than cut in half their real estate portion of their portfolio.

they are net sellers.
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