Fed futures are rather cloudy

For the time being, I'll hold off from offering any more forecasts of Federal Reserve interest rate action until it becomes more clear what principles and criteria the Fed is being guided by. Before the middle of August everything was clear, but now the Fed has headed off into uncharted territory and left us with no guidance as to how they will respond to developments in the real economy and financial markets.

Meanwhile, the good news is that despite ongoing weakness in the housing sector, not only is non-residential construction spending continuing to rise, but overall construction spending (including housing) continues to rise. And consumer income and spending continues to rise as well.

I predict that six months from now (March or April) the Fed will be defending itself against accusations that it overreated in August and September. Although pumping liquidity into the financial system was the right thing to do, the lowering of the discount rate back in August was simply not necessary and merely exacerbated the panic mentality.

I suspect that the economy will have picked up enough steam in September that the Fed will not feel obligated to cut rates any further at the october FOMC meeting. Ditto in October and November.

-- Jack Krupansky

Planning my October trip back east

I had been attending a meeting back in Washington, D.C. each year and I was expecting to build a trip around it to visit NJ and NY as well, but I just heard this past week that there are no plans for this meeting this year, so my plans for a trip in October are now all up in the air. I had even budgeted for this trip and the cash is actually sitting in my account.

I had budgeted what I thought would be generous for a one-week (six days plus two travel days) trip, but I checked hotel rates in NY and DC and was blown away. Although I am sure I can find some bargains, the "going rate" for a semi-decent hotel in NYC is in the $275 to $425 range and the $200 to $300 range in DC. Airfare is still fairly decent, on the order of $358 from Seattle to Newark. Even if I trim the trip down to four days with one night in Atlantic City, I would still be 30% over my original budget. Unbelievable. Sure, I can do some work and find some better deals, but travel should not be this much work.

Since I don't have that meeting in DC, I will probably only go to New York City, with a side trip to New Jersey. OTOH, this month will be very busy at work, so I have good excuses to skip the trip altogether.

Greyhound is offering $99 one-way anwhere in the U.S. with 14-day advance purchase. Plus $4 to get the ticket by mail. It is only a 3-day trip, each way, from Seattle to New York City, but it does eliminate the hassles at the airport.

I may punt on this east coast trip and simply do a San Francisco trip in November. That trip is only 20 hours each way and $112 round-trip on Greyhound. Of course, hotels in San Francisco are quite expensive.

I may bite the bullet and try Priceline for air travel, but I hesitate since you simply cannot control or predict what kind of odd travel times or conections you might get stuck with. I used to swear by Priceline for hotels, but they seem to have tightened up so that the benefit is not as great. But given prices these days, I may just have to live with it.

-- Jack Krupansky

Cheap home mortgages continue to be readily available

Oddly, mortgage rates have risen, albeit modestly, in the two weeks since the Fed rate cut. This confirms my long-held view that mortgage rates a priced more due to supply and demand and the amount of liquidity in the pockets of investors than the actual Fed interest rate. The Fed rate cut probably also caused inflation expectations to rise which in turn caused longer-term Treasury yields to rise which in turn put a little upwards pressure on mortgage rates.

Despite all the talk of a credit crunch, people with good credit and a documented income can still get reasonable size mortgages (under $417,000) at quite cheap rates. The latest weekly mortgage survey from Freddie Mac shows the average rate offered for 30-year fixed-rate home mortgage is 6.42% (up from 6.34% last week) and the average for the 15-year fixed-rate home mortgage is 6.09% (up from 5.98% last week.) These are still truly great rates.

Sure, people with lousy credit or without documented income or money for a deposit are on shaky ground, but that's the way it should be anyway. Jumbo mortgages for expensive homes (above $417,000) may be somewhat more problematic, but still available depending on local conditions.

So much for being able to depend on the media for information about finance and the economy.

-- Jack Krupansky

Euro finally seems to be on a roll

The euro has finally seemed to have gained a little traction, driving the December futures contract up to $1.4293 on Friday from $1.4102 a week ago, a gain of 1.91 cents to follow up the gain of 1.95 cents a week earlier.

Where the euro goes from here is up in the air since we no longer have a solid consensus on what the Fed will do with interest rates, where the overall U.S. economy is headed, or how deep-pocketed the speculators are who are pushing up the euro.

As far as where speculators think the euro may be headed, euro futures out at March 2009 were only at $1.4311 on Friday, so there isn't exactly a lot of "slam dunk" enthusiasm for betting on an ongoing upwards trend, so far.

-- Jack Krupansky

PayPal money market fund yield falls to 5.10% as of 9/29/2007

Despite the chatter about the so-called "credit crunch" and "subprime crisis" and the potential risk of even money market funds, money market funds are still an extremely safe place to park cash.

The good news is that a number of money market fund yields are higher as their existing short-term commercial paper matures and rolls over into new commercial paper that is getting a higher yield since supposedly nobody wants any of this commercial paper, or so the story goes.

Note: In theory, money market fund and CD rates should go down after the Fed lowers its target rate, but not necessarily immediately nor in lockstep with the Fed. Even as the Fed lowers its rate the yield on short-term commercial paper could stay high or even rise further, helping to keep money market fund yields relatively high.

It is too soon to tell, but so far there has been no dramatic impact to money market fund yields as a result of the Fed rate cut, but the impact will take weeks if not months to play out as the fund poltfolios incrementally mature and roll over into lower-yield assets. Note, for example, that money market funds invest in a lot of CDs whose yield is fixed for the term of the CD regardless of what the Fed does. Finally, entities with less than very high credit ratings will continue to have to offer significantly above average yields to attract capital and money market funds are an important source of short-term capital for such entities.

Note: Some of the data here may have been collected before the Fed rate cut went into effect. The weekly T-bill auction occurred before the Fed rate change anncouncement. Let's see where rates are in two or three weeks.

Here are some recent money market mutual fund yields as of Saturday, September 29, 2007:

• iMoneyNet average taxable money market fund 7-day yield fell from 4.68% to 4.54%
• GMAC Bank Money Market account rate remains at 4.78% or APY of 4.90% (only $500 minimum for that rate)  -- Note: This is an FDIC-insured bank deposit account, not a money market fund 
• Vanguard Prime Money Market Fund (VMMXX) 7-day yield fell from 5.09% to 5.06%
• Vanguard Federal Money Market Fund (VMFXX) 7-day yield fell from 4.94% to 4.92%
• AARP Money Market Fund 7-day yield fell from 5.07% to 4.97%
• TIAA-CREF Money Market (TIRXX) 7-day yield fell from 4.99% to 4.79%
• PayPal Money Market Fund 7-day yield fell from 5.21% to 5.10%
• ShareBuilder money market fund (BDMXX) 7-day yield fell from 4.59% to 4.51%
• Fidelity Money Market Fund (SPRXX) 7-day yield fell from 5.15% to 5.12% ($25,000 minimum)
• Fidelity Cash Reserves money market fund (FDRXX) 7-day yield fell from 5.09% to 5.05%
• Fidelity Prime Reserves money market fund (FPRXX) 7-day yield fell from 4.59% to 4.56%
• Fidelity Municipal Money Market fund (FTEXX) 7-day yield rose from 3.39% to 3.42% or tax equivalent yield of 5.26% (up from 5.22%) for the 35% marginal tax bracket and 4.75% (up from 4.71%) for the 28% marginal tax bracket -- this is a very decent yield for "core cash" in a checking-style account
• Fidelity Tax-Free Money Market fund (FMOXX) 7-day yield rose from 3.36% to 3.40% or tax equivalent yield of 5.23% (up from 5.17%) for the 35% marginal tax bracket and 4.72% (up from 4.67%) for the 28% marginal tax bracket
• 4-week (1-month) T-bill investment rate fell from 4.01% to 3.33%
• 13-week (3-month) T-bill investment rate fell from 4.16% to 3.92%
• 26-week (6-month) T-bill investment rate fell from 4.29% to 4.15%
• Treasury I Bond composite earnings rate (semiannual compounded annually) for new I Bonds is 3.74% (down from 4.52%), with a fixed rate of 1.30% (down from 1.40%) and a semiannual inflation rate of 1.21% (down from 1.55%) -- updated May 1, 2007, next semiannual update on November 1, 2007
• ING Electric Orange checking account is at 3.50% APY for balances under $50,000 (FDIC insured)
• ING Orange CD 6-month APY is at 4.90%
• ING Orange CD 12-month APY is at 4.90%
• Bankrate.com highest 6-month CD APY fell from 5.55% to 5.41% (Countrywide Bank with $10,000 minimum)
• Bankrate.com highest 12-month CD APY fell from 5.65% to 5.50% (Countrywide Bank with $10,000 minimum)

Did you notice that I didn't list Netbank? That is because they were "closed" yesterday:

On September 28, 2007, NetBank, Alpharetta, GA was closed by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation (FDIC) was named Receiver. All insured depositors are now customers of ING Direct Bank, member FDIC. No advance notice is given to the public when a financial institution is closed.

The FDIC has assembled useful information regarding your relationship with this institution. Besides a checking account, you may have Certificates of Deposit, a business checking account, a Social Security direct deposit, and other relationships with the institution. The FDIC has compiled  information which should answer many of your questions.

Please select the link below to read more about this event:

FDIC Bank Closing Information for NetBank

Continue to NetBank.com

Oops. I wonder how many NetBank customers don't even know about this yet. If you had money in an FDIC-insured account and below the limit for FDIC you are safe. I do not know whether ING is required to maintain the interest rate on CDs that are "acquired" in such a situation. I suspect that they will, but I do not know for sure.

Note: APY yield is worth somewhat less than the same 7-day yield. See my discussion and table for Comparing 7-day yield and APY.

Right now, Fidelity Cash Reserves (FDRXX) is my preferred parking place for the bulk of my cash. I do appreciate the higher yield I have been getting these past few weeks, which is probably due to higher yields on commercial paper. I know that I can get a better yield elsewhere, but the convenience, decent yield, and relative safety of Fidelity make this a very attracive parking place.

I am tempted to go after those juicy CD rates that are still available, but regretfully my financial and employment situation is not solid enough for me to reduce the liquidity of my rainy day fund.

DISCLAIMER: I am not an investment adviser, so my opinions and the data presented here should not be considered as advice for where to invest your money. You should examine this and other available data before deciding how to invest your money. And, seriously, past returns should not be construed as a guarantee or even an indication of future returns.

-- Jack Krupansky

ECRI Weekly Leading Index indicator rises modestly and suggests a stable albeit lackluster outlook

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) rose modestly (+0.27% vs. -0.08% last week) and the six-month smoothed growth rate rose moderately (from +0.5% to +1.0), remaining very modestly above the flat line, suggesting that the economy will be somewhat lackluster but stable in the months ahead, neither booming nor busting.

A WLI growth rate of zero (0.0) would indicate an economy that is likely to run at a steady growth rate, neither accelerating nor decelerating. A WLI fluctuating in a range from +1.5% to -1.5% would seem to forecast a relatively stable "Goldilocks" economy.

If I were looking at this one indicator alone, I would say that the Fed is succeeding at its goal of moderating the economy to a sustainable growth rate.

I will offer the caveat that the Weekly Leading Index and its smoothed growth rate do not tell us how strong the economy will be six or nine months from now, but do tell us whether whether weakness or strength is more likely a few months from now. It works best to tell us whether a "gathering storm" might be lurking just around the corner, but presently indicates relatively "clear weather" for the next few months, even if the interval is occasionally punctuated with financial market "gyrations."

-- Jack Krupansky

Fed cut finally pushes the euro above $1.40

Trading of the euro had been hinting of maybe making a run for $1.40 over the past few months, but the big Fed rate cut on Tuesday finally was enough to overcome technical resistance and encourage traders and speculators to pile on, driving the December futures contract up to $1.4102 on Friday from $1.3907 a week ago, a gain of 1.95 cents.

Where the euro goes from here is up in the air since we no longer have a solid consensus on what the Fed will do with interest rates, where the overall U.S. economy is headed, or how deep-pocketed the speculators are who pushed the euro up to $1.41.

As far as where speculators think the euro may be header, euro futures out at March 2009 were only at $1.4135 on Friday, so there isn't exactly a lot of "slam dunk" enthusiasm for betting on an ongoing upwards trend, so far. And that is evidence that at least some people are not convinced that a slew of fed rate cuts are really coming. It could also be a safe haven bid for the dollar as long as there is heightened global market volatility. So much for the theory that the dollar is "weak."

-- Jack Krupansky

The Fed will...

After the "surprise" Fed rate cut of 50 basis points on Tuesday, all bets are now off as to what the Fed will be doing with their target rate over the next six months. Since Fed officials have not yet talked publicly at length and in detail about their "thinking" on Tuesday, we simply do not know their intentions. And to be sure, it depends on how the economy and financial markets and credit play out over the coming weeks and months.

Although it is possible that Fed officials actually intended to surprise people, I strongly suspect they were simply influenced by the last minute conversations with business leaders that occurred in the final days leading up to the FOMC meeting. I even noted last week that these conversations could likely bias the decision. I strongly suspect that executives and bankers expressed a dramatic degree of alarm and concern that circumstances stood a very real prospect of deteriorating very rapidly in the coming weeks and months. Not so much that this was the central outlook, but that the uncertainty over the outlook was simply too great. In other words, business and banking leaders probably expressed concern that there were simply way too many question marks hanging over everybody's heads and that it is way too difficult to make confident decisions in such an environment. The decision to go with a half-point cut was probably derived from the same thinking: People were struggling under too heavy a burden and an aggressive move was the only way to quantitatively and qualitatively buoy sagging spirits. This is my suspicion, but I do strongly suspect that those final expressions of "sentiment" tipped the balance and in fact made the decision a slam dunk that was in fact unanimous.

I do believe that the Fed made the wrong decision on a technical basis, but "animal spirits" are always a key concern even if not expressed in the technical equations. So, in some sense I do support the Fed's actions, but I sure do hope that they reverse their move ASAP. As things stand now, the Fed has completely destroyed its inflation-fighting credibility. I do suspect that the Fed will seek to re-establish their credibility on that front next year, but it will be a tough row to hoe given that even when faced with a "mini" crisis, the Fed blinked.

-- Jack Krupansky

PayPal money market fund yield rises to 5.21% as of 9/22/2007

Despite the chatter about the so-called "credit crunch" and "subprime crisis" and the potential risk of even money market funds, money market funds are still an extremely safe place to park cash.

The good news is that a number of money market fund yields are higher as their existing short-term commercial paper matures and rolls over into new commercial paper that is getting a higher yield since supposedly nobody wants any of this commercial paper, or so the story goes.

Note: In theory, money market fund and CD rates should go down after the Fed lowers its target rate, but not necessarily immediately nor in lockstep with the Fed. Even as the Fed lowers its rate the yield on short-term commercial paper could stay high or even rise further, helping to keep money market fund yields relatively high.

It is too soon to tell, but so far there has been no dramatic impact to money market fund yields as a result of the Fed rate cut, but the impact will take weeks if not months to play out as the fund poltfolios incrementally mature and roll over into lower-yield assets. Note, for example, that money market funds invest in a lot of CDs whose yield is fixed for the term of the CD regardless of what the Fed does. Finally, entities with less than very high credit ratings will continue to have to offer significantly above average yields to attract capital and money market funds are an important source of short-term capital for such entities.

Note: Some of the data here may have been collected before the Fed rate cut went into effect. The weekly T-bill auction occurred before the Fed rate change anncouncement. Let's see where rates are in two or three weeks.

Here are some recent money market mutual fund yields as of Saturday, September 22, 2007:

• iMoneyNet average taxable money market fund 7-day yield fell from 4.69% to 4.68%
• GMAC Bank Money Market account rate fell from 5.16% to 4.78% or APY of 4.90% (only $500 minimum for that rate) -- Note: This is an FDIC-insured bank deposit account, not a money market fund
• Vanguard Prime Money Market Fund (VMMXX) 7-day yield rose from 5.05% to 5.09%
• Vanguard Federal Money Market Fund (VMFXX) 7-day yield fell from 4.95% to 4.94%
• AARP Money Market Fund 7-day yield remains at 5.07%
• TIAA-CREF Money Market (TIRXX) 7-day yield fell from 5.13% to 4.99%
• PayPal Money Market Fund 7-day yield rose from 5.20% to 5.21% -- Still the #1 top yield on the iMoneyNet Prime Retail Money Market Fund list for a third week
• ShareBuilder money market fund (BDMXX) 7-day yield fell from 4.59% to 4.58%
• Fidelity Money Market Fund (SPRXX) 7-day yield rose from 5.13% to 5.15% ($25,000 minimum)
• Fidelity Cash Reserves money market fund (FDRXX) 7-day yield remains at 5.09%
• Fidelity Prime Reserves money market fund (FPRXX) 7-day yield rose from 4.58% to 4.59%
• Fidelity Municipal Money Market fund (FTEXX) 7-day yield fell from 3.44% to 3.39% or tax equivalent yield of 5.22% (down from 5.29%) for the 35% marginal tax bracket and 4.71% (down from 4.78%) for the 28% marginal tax bracket -- this is a very decent yield for "core cash" in a checking-style account
• Fidelity Tax-Free Money Market fund (FMOXX) 7-day yield fell from 3.41% to 3.36% or tax equivalent yield of 5.17% (down from 5.25%) for the 35% marginal tax bracket and 4.67% (down from 4.74%) for the 28% marginal tax bracket
• 4-week (1-month) T-bill investment rate fell from 4.08% to 4.01%
• 13-week (3-month) T-bill investment rate rose from 3.90% to 4.16%
• 26-week (6-month) T-bill investment rate rose from 4.17% to 4.29%
• Treasury I Bond composite earnings rate (semiannual compounded annually) for new I Bonds is 3.74% (down from 4.52%), with a fixed rate of 1.30% (down from 1.40%) and a semiannual inflation rate of 1.21% (down from 1.55%) -- updated May 1, 2007, next semiannual update on November 1, 2007
• NetBank 6-month CD APY remains at 5.40%
• NetBank 1-year CD APY remains at 5.30%
• Bankrate.com highest 6-month CD APY fell from 5.70% to 5.55% (Countrywide Bank at 5.55% (unchanged), $10,000 minimum, with IndyMac Bank (down from 5.70%) and Netbank at #2 and #3 at 5.40%, $1,000 and $5,000 minimums respectively)
• Bankrate.com highest 12-month CD APY remains at 5.65% (Countrywide Bank, $10,000 minimum, with Corus Bank #2 at 5.42%, $10,000 minimum)

Note: APY yield is worth somewhat less than the same 7-day yield. See my discussion and table for Comparing 7-day yield and APY.

Right now, Fidelity Cash Reserves (FDRXX) is my preferred parking place for the bulk of my cash. I do appreciate the higher yield I have been getting these past few weeks, which is probably due to higher yields on commercial paper. I know that I can get a better yield elsewhere, but the convenience, decent yield, and relative safety of Fidelity make this a very attracive parking place.

I am tempted to go after those juicy CD rates that are still available, but regretfully my financial and employment situation is not solid enough for me to reduce the liquidity of my rainy day fund.

DISCLAIMER: I am not an investment adviser, so my opinions and the data presented here should not be considered as advice for where to invest your money. You should examine this and other available data before deciding how to invest your money. And, seriously, past returns should not be construed as a guarantee or even an indication of future returns.

-- Jack Krupansky

ECRI Weekly Leading Index indicator down slightly but suggests a stable albeit lackluster outlook

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) fell slightly (-0.14% vs. +0.15% last week) but the six-month smoothed growth rate rose slightly (from +0.3% to +0.4), remaining slightly above the flat line, suggesting that the economy will be somewhat lackluster but stable in the months ahead, neither booming nor busting.

A WLI growth rate of zero (0.0) would indicate an economy that is likely to run at a steady growth rate, neither accelerating nor decelerating. A WLI fluctuating in a range from +1.5% to -1.5% would seem to forecast a relatively stable "Goldilocks" economy.

If I were looking at this one indicator alone, I would say that the Fed is succeeding at its goal of moderating the economy to a sustainable growth rate.

I will offer the caveat that the Weekly Leading Index and its smoothed growth rate do not tell us how strong the economy will be six or nine months from now, but do tell us whether whether weakness or strength is more likely a few months from now. It works best to tell us whether a "gathering storm" might be lurking just around the corner, but presently indicates relatively "clear weather" for the next few months, even if the interval is occasionally punctuated with financial market "gyrations."

-- Jack Krupansky

How will the stock market react if the Fed doesn't cut rates on Tuesday

An article in USA TODAY by Adam Shell and Matt Krantz entitled "Stocks' fate hangs on Bernanke's move" discusses how the stock market may react depending on what the Fed decides on Tuesday. They also include the unpopular scenario of the Fed leaving rates unchanged:

•If there is no cut:

This is the most bearish potential outcome of all the scenarios, as investors will not only be greatly disappointed but might conclude the Fed is not being nearly aggressive enough to avoid a more serious economic and financial event.

"It's the most forecasted rate cut in history. If they don't cut, expect a 500-point drop in minutes," warns Gary Kaltbaum, president of Kaltbaum & Associates. Kaltbaum thinks the Fed is way behind where it should be in the rate-cutting cycle, noting that the fed funds rate is more than three-quarters of a percentage point above the yield on the 10-year Treasury note. He thinks the Fed should drop rates "a full point."

The Dow could test the lows hit in August.

And if the sell-off in mid-July — when fears of the credit crunch first surfaced — is a guide, investors shouldn't expect there to be many havens if cuts don't happen. All 10 of the market sectors have lost ground since the July 19 market peak, Stovall says.

I have no doubt that the stock market would give a very severe negative knee-jerk reaction if and when the Fed goes public with my forecast action of no change in rates, but that would be mostly the reaction of traders and short-term speculators and loud-mouthed commentators. It would take several days to a week for true investors to respond, and two weeks later the reaction to the decision will be ancient history.

At a minimum, a no-change decision would give us the most interesting response.

-- Jack Krupansky

Monetary policy conundrum facing Bernanke

A Bloomberg article by Rich Miller entitled "Greenspan's Miscues Haunt Bernanke as Fed Weighs Cut" gives a fair summary of the risks to the economy whichever way the Fed acts on Tuesday. The article also refers to the need for the Fed to continue its vigilence on the inflation front, quoting Marvin Goodfriend, former senior vice president at the Richmond Fed from 1993 to 2005 and now a professor at Carnegie Mellon University in Pittsburgh as saying "Rate cuts are not free. You pay a price.''

The article is good in the sense that it focuses on reporting a number of different points of view without taking an editorial stand on what the Fed should do.

-- Jack Krupansky

Beware of conventional market wisdom on monetary policy

A Reuters article by Ros Krasny entitled "Fed set to cut interest rates" accurately lays out the conventional market wisdom for how the Federal Reserve has responded to crises in the past and how that implies things will play out in the current situation. That is all well and good, but there actually isn't any reason to believe that the Fed will in fact follow such a historical script.

I would never suggest that we discount all of conventional wisdom, but we do need to account for evolution in the affairs of men. The goal of studying history is not to slavishly attempt to repeat it, but to learn from it. Besides, as Mark Twain put it, "History doesn't repeat, it rhymes."

Some people are claiming that if the Fed doesn't deliver what the market expects, stocks will "swoon." That may well be true in the very short-term, but the eventual path of stocks will be driven more by the real economy and the outlook for the real economy (as well as corporate profits.)

It will be interesting to hear what the Fed has to say on Tuesday, how the markets initially react, how the real economy plays out in the coming weeks and months, and how the markets react to how the real economy plays out.

Who knows, maybe the Fed will in fact follow the historical script, but the collection of people now at the Fed seem unlikely to do so, despite the impassioned lobbying of Wall Street "professionals."

-- Jack Krupansky

VIX continues to indicate the market crisis is over but a lot of people worry it might get worse

The CBOE Implied Market Volatility Index (VIX) continues to strongly suggest that the recent financial "crisis" really is over, but that quite a few people are still worried that the "crisis" will resume at any moment, even if the Fed does cut rates.

The VIX "fear gauge" fell modestly to 24.92 from 26.23, which is still somewhat elevated but certainly not to "crisis" proportions.

The fact that VIX still hasn't pulled back under 20 strongly suggests that people are not confident that even Fed rate cuts will prevent the economy from sliding into recession.

It may take a few more days or a week or two for VIX to retreat safely back under 20. We may have to wait for the Fed to meet on September 18th, and then give the market another week to settle down.

-- Jack Krupansky

Euro finally inches cautiously above its trading range

The virtual unanimity on the view that the Fed will be cutting interest rates on Tuesday caused a modest decline in the dollar and a modest rise in the euro which finally dragged the euro modestly above its $1.33 to $1.38 trading range this past week. September futures for the euro closed at $1.3875 on Friday, 1.02 cents above the prior Friday close of $1.3773.

It will be interesting to see where the euro and dollar end up two weeks after the Fed does whatever it is going to do on Tuesday. I strongly suspect that the euro moved up over the past six months in anticipation of Fed rates cuts, so I suspect that traders and speculators may in fact do the old "buy the rumor and sell the news" reversal once the Fed does its thing. In other words, the run-up of the euro and the run-down of the dollar may in fact be near an end and could reverse within the next couple of weeks.

The December contract (which many traders will be shifting to as September winds down) rose to $1.3907 on Friday.

There are plenty of traders and speculators who would like to see the euro break $1.40, but whether there is really a net demand for the euro at these levels remains to be seen. For now, traders and speculators are waiting patiently to see whether the Fed will really cut the fed funds target rate significantly, which should in theory "weaken" the dollar.

Euro futures out at December 2008 were only at $1.3941 on Friday (compared to $1.3831 the previous Friday), so there isn't exactly a lot of "slam dunk" enthusiasm for betting on a $1.40 euro, so far. And that is evidence that some people are not convinced that a slew of fed rate cuts are really coming. It could also be a safe haven bid for the dollar as long as there is heightened global market volatility. So much for the theory that the dollar is "weak."

-- Jack Krupansky

Cheap home mortgages continue to be readily available

Despite all the talk of a credit crunch, people with good credit and a documented income can still get reasonable size mortgages (under $417,000) at quite cheap rates. The latest weekly mortgage survey from Freddie Mac shows the average rate offered for 30-year fixed-rate home mortgage is 6.31% (down from 6.46% last week) and the average for the 15-year fixed-rate home mortgage is 5.97% (down from 6.15% last week.) These are truly great rates, and lower than a year ago.

Sure, people with lousy credit or without documented income or money for a deposit are on shaky ground, but that's the way it should be anyway. Jumbo mortgages for expensive homes (above $417,000) may be somewhat more problematic, but still available depending on local conditions.

So much for being able to depend on the media for information about finance and the economy.

-- Jack Krupansky

PayPal money market fund yield eases to 5.20% as of 9/15/2007

Despite the chatter about the so-called "credit crunch" and "subprime crisis" and the potential risk of even money market funds, money market funds are still an extremely safe place to park cash.

The good news is that a number of money market fund yields are higher as their existing short-term commercial paper matures and rolls over into new commercial paper that is getting a higher yield since supposedly nobody wants any of this commercial paper, or so the story goes.

Note: In theory, money market fund and CD rates should go down after the Fed lowers its target rate, but not necessarily immediately nor in lockstep with the Fed. Even as the Fed lowers its rate the yield on short-term commercial paper could stay high or even rise further, helping to keep money market fund yields relatively high.

Here are some recent money market mutual fund yields as of Saturday, September 8, 2007:

• iMoneyNet average taxable money market fund 7-day yield fell from 4.71% to 4.69%
• GMAC Bank Money Market account rate remains at 5.16% or APY of 5.30% (only $500 minimum for that rate)  -- Note: This is an FDIC-insured bank deposit account, not a money market fund 
• Vanguard Prime Money Market Fund (VMMXX) 7-day yield fell from 5.09% to 5.05%
• Vanguard Federal Money Market Fund (VMFXX) 7-day yield fell from 5.02% to 4.95%
• AARP Money Market Fund 7-day yield fell from 5.11% to 5.07%
• TIAA-CREF Money Market (TIRXX) 7-day yield rose from 5.08% to 5.13%
• PayPal Money Market Fund 7-day yield fell from 5.23% to 5.20% -- Still the #1 top yield on the iMoneyNet Prime Retail Money Market Fund list for a second week 
• ShareBuilder money market fund (BDMXX) 7-day yield rose from 4.57% to 4.59%
• Fidelity Money Market Fund (SPRXX) 7-day yield fell from 5.15% to 5.13% ($25,000 minimum)
• Fidelity Cash Reserves money market fund (FDRXX) 7-day yield fell from 5.11% to 5.09%
• Fidelity Prime Reserves money market fund (FPRXX) 7-day yield fell from 4.60% to 4.58%
• Fidelity Municipal Money Market fund (FTEXX) 7-day yield fell from 3.56% to 3.44% or tax equivalent yield of 5.29% (down from 5.48%) for the 35% marginal tax bracket and 4.78% (down from 4.94%) for the 28% marginal tax bracket -- this is a very decent yield for "core cash" in a checking-style account
• Fidelity Tax-Free Money Market fund (FMOXX) 7-day yield fell from 3.52% to 3.41% or tax equivalent yield of 5.25% (down from 5.42%) for the 35% marginal tax bracket and 4.74% (down from 4.98%) for the 28% marginal tax bracket
• 4-week (1-month) T-bill investment rate fell from 4.37% to 4.08%
• 13-week (3-month) T-bill investment rate fell from 4.47% to 3.90%
• 26-week (6-month) T-bill investment rate fell from 4.55% to 4.17%
• Treasury I Bond composite earnings rate (semiannual compounded annually) for new I Bonds is 3.74% (down from 4.52%), with a fixed rate of 1.30% (down from 1.40%) and a semiannual inflation rate of 1.21% (down from 1.55%) -- updated May 1, 2007, next semiannual update on November 1, 2007
• NetBank 6-month CD APY remains at 5.40%
• NetBank 1-year CD APY fell from 5.35% to 5.30%
• Bankrate.com highest 6-month CD APY remains at 5.70% (IndyMac Bank, $5,000 minimum, with Countrywide Bank #2 at 5.55%, $10,000 minimum)
• Bankrate.com highest 12-month CD APY remains at 5.65% (Countrywide Bank, $10,000 minimum, with IndyMac Bank #2 at 5.45%, $5,000 minimum)

Note: APY yield is worth somewhat less than the same 7-day yield. See my discussion and table for Comparing 7-day yield and APY.

Right now, Fidelity Cash Reserves (FDRXX) is my preferred parking place for the bulk of my cash. I do appreciate the higher yield I have been getting these past few weeks, which is probably due to higher yields on commercial paper. I know that I can get a better yield elsewhere, but the convenience, decent yield, and relative safety of Fidelity make this a very attracive parking place.

DISCLAIMER: I am not an investment adviser, so my opinions and the data presented here should not be considered as advice for where to invest your money. You should examine this and other available data before deciding how to invest your money. And, seriously, past returns should not be construed as a guarantee or even an indication of future returns.

-- Jack Krupansky

Fed funds futures for the coming year

Usually, in normal times, the fed funds futures market is a good indicator of what the Fed will do over the next month or two, but we are not in normal times right now and currently there is such a dramatic dislocation between what a lot of people fear or hope for on the one hand and what the calmer Fed is actually likely to do. So, I do report the fed funds futures here, but for now I do so with the caveat that they are completely out of whack. Yes, they do reflect what people hope and fear, but they are not predicting likely Fed activity.

In a lot of cases they are either speculative bets seeking to make a quick buck if the Fed does happen to cut rates, or actually legitimate hedges by holders of fixed income assets who are really buying insurance in case the Fed does happen to cut rates, but do not necessarily represent a core belief that the Fed really will cuts rates.

As of Friday, Fed funds futures contracts indicate the following probabilities for changes in the Fed funds target rate at upcoming FOMC meetings:

• September 18, 2007: 100% chance of a cut and 58% chance of a second cut -- flip a coin, but leaning towards a second cut
• October 30/31, 2007: 100% chance of two cuts and 26% chance of a third cut
• December 11, 2007: 100% chance of three cuts and 82% chance of a third cut -- third cut is likely 
• January 2008: 100% chance of three cuts and 22% chance of a fourth cut
• March 2008: 100% chance of three cuts and 68% chance of a fourth cut -- flip a coin, but leaning towards a fourth cut
• May 2008: 100% chance of three cuts and 92% chance of a fourth cut -- fourth cut is likely 
• June 2008: 100% chance of four cuts and 10% chance of a fifth cut
• August 2008: 100% chance of four cuts and 14% chance of a fifth cut

So, the futures are telling us that a cut is a "slam dunk" before at September meeting and that a second cut at the meeting is somewhat likely, but I would urge caution in depending on these numbers since: a) the Fed has given no indication that it is leaning towards such a cut, b) a number of Fed officials have talked down the prospects of a rate cut in the near-term, and c) bets placed in the "heat" of a crisis are frequently unwound in the weeks following the crisis.

Note: Studies have shown that the fed funds futures market only has a high degree of forecast reliability about 30 to 45 days out (high out to 30 days, only modest reliability out to 60), so those probabilities beyond September are shaky at best and could easily change very dramatically.

And to repeat one thing that bears repeating: the economy is much stronger than many people on Wall Street are claiming it is. "Forecasts" of the economic impact of the so-called subprime crisis are way out of proportion to the likely impact, and that is even before election politics pushes the administration and Congress to offer a substantial safety net for struggling homeowners. There is simply no economic need for a fed rate cut either now or in the near future.

-- Jack Krupansky

On Tuesday the Fed will...

On Tuesday the Fed FOMC will...

Exactly. What will the Fed do?

[Spoiler: The Fed will leave the Fed funds target rate unchanged.]

Despite the virtual unanimity of Wall Street "professionals", economists, commentators, the media, et al, that a Fed rate cut of either a quarter or half point is a "slam dunk", there actually is no evidence that a cut is a true slam dunk. It is a slam dunk in the sense that WMDs were a slam dunk before we went into Iraq: everybody believed that it was true, but nobody had any substantial, robust hard evidence to back up their belief.

To be sure, recent Fed speeches have clearly indicated that the door is open and that the Fed will do whatever it has to do to protect the real economy from the effects of turmoil on the financial markets, and several Fed officials seem to be leaning in the direction of a cut, but that still does not amount to a true slam dunk case for a rate cut.

Yes, the economy is somewhat weaker, but not to the degree that a recession is imminent.

People like to draw parallels to past crises, notably 1998, and suggest that the Fed will stay true to form and cut rates aggressively, but this ignores the simple fact that people in and near the Fed widely view that Fed action in 1998 as overly-aggressive and having led to the boom and bust in 1999 and 2000. Yes, by all means draw attention to parallels with 1998, but this time could well be a historic "do-over" where the Fed decides to not make the mistake that they feel they made in 1998 and holds back from cutting rates aggressively. That is not to say that the Fed might not give the markets a symbolic cut, but does argue strongly against a series of aggressive rate cuts being a slam dunk.

The recent Fed speeches were all over the map, with comments ranging from a worry of significant more downside due to housing and mortgage issues, to an insistence that it is not the job of the Fed to bail out investors (on Wall Street) who made very bad investment decisions. The number of speeches and the range of speeches appears to have been intended to assure everybody that the Fed is alert to deeply looking at all aspects of the problem and won't make up its collective mind until the committee actually meets on Tuesday.

My own reading is that the Fed is mindful of the fragility of public confidence (even for tough Wall Street bankers and traders) and is bending over backwards to speak as if comforting rate cuts were on the way, all the while they are simply stringing people along even though they privately know how they would want to vote if the FOMC meeting were held today.

As far as I can tell, the Fed is still quite concerned about inflationary pressures and would be very loathe to undo all of their progress over the past couple of years simply to "give the financial markets what they want." As one Fed official said last Monday, setting monetary policy is not (should not be) a popularity contest.

One piece of the puzzle that we in the public, on Wall Street, and in the media do not have access to at this point are the private discussions that Fed officials are having with business leaders in the final week leading up to the FOMC meeting. This informal "data" will be the most timeliest with regards to the economic outlook for the coming months and could well be the deciding factor as to any change in monetary policy on Tuesday. If a majority of the voting members of the FOMC are hearing in private from a majority of business leaders that the economy is in big trouble and that these business leaders are in the process of pulling back on spending, then a rate cut will become a true slam dunk. But if the general sense is that there will be some weakness but the economy will pull through anyway then maintaining the fed funds target rate steady albeit with "heightened vigilance" will become the slam dunk.

I am a pragmatist and my goal here is not to lobby for what I want or figure out what the Fed "should" do or what Wall Street wants, but to judge as best I can what the Fed is likely to do.

After having considered all of the information available to me, today and over the past nine years, I have to say that: 1) yes, the Fed might cut rates on Tuesday, but 2) the Fed is more likely to hold its fire and keep rates paused while it engages in "heightened vigilance".

I would say that there is really only a 40% chance that the Fed will cut rates at all, and maybe only a 25% chance that the Fed will cut the fed funds target rate by a half-point.

I would say that there is still a 75% chance that the Fed will remain paused. And even then they will likely continue to use language that suggests that a cut is imminent if they sense that the economy is about to fall apart.

In short, my call is that there is a 40% to 75% chance that the Fed will leave the fed funds target rate unchanged on Tuesday and that most likely the Fed will in fact leave the fed funds target rate unchanged on Tuesday.

I also continue to believe that despite ongoing weakness in the housing sector, there is enough deep strength in the rest of the economy to keep the overall economy cruising along at an annualized real GDP growth rate in the 2.00% to 3.25% range over the next twelve months, albeit with a significant level of volatility. There will not be a recession, nor will there be two consecutive quarters averaging less than 2.25% annualized real GDP growth.

Hence, it is also my call that the Fed will leave the fed funds target rate unchanged for the remainder of the year and likely all of next year.

-- Jack Krupansky

ECRI Weekly Leading Index indicator up slightly but suggests a stable albeit lackluster outlook

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) rose slightly (+0.12% vs. +0.92% last week) but the six-month smoothed growth rate fell moderately (from +0.6% to +0.1), remaining slightly above the flat line, suggesting that the economy will be somewhat lackluster but stable in the months ahead, neither booming nor busting.

A WLI growth rate of zero (0.0) would indicate an economy that is likely to run at a steady growth rate, neither accelerating nor decelerating. A WLI fluctuating in a range from +1.5% to -1.5% would seem to forecast a relatively stable "Goldilocks" economy.

If I were looking at this one indicator alone, I would say that the Fed is succeeding at its goal of moderating the economy to a sustainable growth rate.

I will offer the caveat that the Weekly Leading Index and its smoothed growth rate do not tell us how strong the economy will be six or nine months from now, but do tell us whether whether weakness or strength is more likely a few months from now. It works best to tell us whether a "gathering storm" might be lurking just around the corner, but presently indicates relatively "clear weather" for the next few months, even if the interval is occasionally punctuated with financial market "gyrations."

-- Jack Krupansky

Confusion over the Fed

Make no mistake, the Fed is now ready as it always has been ready to cut interest rates if the economy really needs it. That's the catch is that there is a deep disagreement over what the economy needs and even a disagreement over the short-term outlook for the economy. We need to be clear that there is a huge distinction between what the Fed is prepared to do in a hypothetical sense from the perspective of Wall Street and what the Fed is likely to do in any particular situation when judged from the Fed's perspective.

So, when Bernanke and other Fed officials sincerely and genuinely tell as that they are prepared to do whatever it takes to protect the economy, we should be very careful not to blindly conclude that this means that the Fed will necessarily take any particular action in the near-term.

There are a few Fed official speeches scheduled this week. We don't know precisely what these officials will say about the economic outlook or monetary policy, but if they say anything at all about policy, it is likely that they will say that they are prepared to do whatever it takes to protect the economy. The problem will be that any number of traders and commentators on Wall Street are likely to interpret such words as a commitment to cutting the fed funds target rate at the September 18th FOMC meeting even though the Fed may have the opposite perspective.

About the only thing we can hope for is that at least a few financial journalists will act responsibly enough to highlight the disparity between the expectations that the Fed will be setting and the expectations of "the street."

Whether Wall Street honestly believes that there will be a rate cut or they are simply lobbying for a cut is unclear.

It will be quite a battle of the wills playing out over the next few weeks.

-- Jack Krupansky

Bloomberg's John Berry: Fed May Cut to 5 Percent Without Promising More

Bloomberg columnist John Berry is a veteran Fed watcher, previously with the Washington Post, who is one of the most respected authorities on interpreting the words and actions of the Fed. His latest weekly column is entitled "Fed May Cut to 5 Percent Without Promising More" which argues that the Fed may cut the Fed funds target rate by a single quarter-point at their upcoming meeting, but is very unlikely to follow that with any additional cuts.

His title superficially makes it sound as if he agrees that a quarter-point cut is likely, but once you read through his column you can sense that the emphasis is on the word "May." Even his lead paragraph starts out hedged by "If":

If Federal Reserve officials cut their 5.25 percent target for the overnight lending rate when they meet on Sept. 18, it will be by only a quarter-percentage point with no promise of more to come.

He is also confirming that he does not concur with the almost universal outlook on Wall Street that a string of at least three rate cuts is slam dunk baked in the cake.

He also pours cold water on the Wall Street demands for both an inter-meeting cut and a larger half-point cut at the upcoming FOMC meeting:

Officials have already disappointed many market participants by refusing to cut the target in response to turmoil in financial markets. And they will surely disappoint those hoping for a half-point cut at the next meeting of the Federal Open Market Committee.

Although he is open to the possibility of a Fed rate cut at the upcoming FOMC meeting, his phrasing betrays his skepticism:

While the Fed might decide on a rate reduction as a bit of insurance against having growth weaken too much, there's no sign of serious problems in the economy outside of housing.

(My highlighting.)

I would agree that it is possible that the Fed could go for an "insurance" cut, but I would also strongly suggest that this Fed under Bernanke doesn't imagine for one moment that a quarter-point of "insurance" is an enticing strategy in the current scenario.

He emphasizes that the Fed really does believe that the economy has enough strength to survive the current market turmoil without the need for lower interest rates:

New information can still influence the meeting's outcome because the impact of the financial market dislocations on the economy remains so uncertain. But right now there's no worry among Fed officials that the economy is about to fall out of bed, or that some major financial institution is going belly up.

(My highlighting.)

After summarizing the latest Fed Beige Book, he concludes that:

None of that suggests there is any emergency that requires an immediate Fed response.

He does lean towards the possibility that given the uncertainty of the economic outlook going forward, the Fed might want a little insurance:

So what the FOMC does on Sept. 18 probably comes down to a matter of risk management. If the data and the anecdotes continue to depict a pretty healthy economy, the unusual degree of uncertainty about the outlook might lead officials to decide the best decision is a 25 basis point cut just in case the impact of the financial turmoil turns out to be greater than they expect.

I do not concur that the Fed would seek comfort in a "just in case" cut, but Mr. Berry is alerting us to one possible scenario rather than insisting that it is a slam dunk.

I would also note that I haven't heard any Fed officials taking a "just in case" or "insurance cut" stance in recent speeches. My personal belief is that this Fed under Bernanke will opt to focus on substantive and meaningful and necessary actions that affect the real health of the real economy rather than focusing on appearances and trying to make Wall Street traders and and commentators "feel good."

-- Jack Krupansky

Cheap home mortgages continue to be readily available

Despite all the talk of a credit crunch, people with good credit and a documented income can still get reasonable size mortgages (under $417,000) at quite cheap rates. The latest weekly mortgage survey from Freddie Mac shows the average rate offered for 30-year fixed-rate home mortgage is 6.46% (up from 6.45% last week) and the average for the 15-year fixed-rate home mortgage is 6.15% (up from 6.12% last week.) These are truly great rates. Sure, people with lousy credit or without documented income or money for a deposit are on shaky ground, but that's the way it should be anyway. Jumbo mortgages for expensive homes (above $417,000) are may be somewhat more problematic, but still available depending on local conditions.

So much for being able to depend on the media for information about finance and the economy.

-- Jack Krupansky

Repricing risk

Although a Fed rate cut might seem like a "slam dunk" to reverse uncertainty about the economic outlook, one of the strongest reasons for the Fed not to cut its rate is that it would interfere with the process of repricing risk that is currently underway. The single largest cause of the current "mortgage mess" and other financial excesses is that risk was heavily discounted so that virtually all asset classes and categories were priced as if the risk were negligible or even nonexistant. We are now in the middle of reversing that process, which takes time, so that the rate of return of any asset or asset category will more closely approximate the risk of that asset. Even risky subprime mortgages can be priced to both adequately reflect risk and to provide an adequate return for investors, but that repricing or "haircut" does not happen overnight and not all investors have the skills and experience to do that repricing.

There are precisely two things that really need to happen to stabilize financial markets: 1) continue the repricing process until a relatively stable equilibrium is reached, and 2) avoid improper infusions of liquidity that interfere with that repricing process.

There are really four main forms of liquidity that are relevant to the current situation:

1. Liquidity in the banking system that permits transactions to be processed efficiently and economically.
2. Capital to loan to creditworthy borrowers who are financing legitimate real-world needs.
3. The flow of capital to reprice risk so that buyers of assets feel that they are acquiring sufficient liquid value that they will have little downside risk should they decide to sell.
4. Speculative capital to fund high-risk, high-profit speculative opportunities, such as hedge funds and private equity.

The Fed has done a great job of assuring liquidity in the banking system.

There appears to be a reasonable amount of capital available for financing legitimate real-world needs for creditworthy borrowers.

The risk prepricing process appears to be well underway, although it may be a number of weeks or even months before we see asset prices truly reflect even a rough approximation of true risk. The main ingredients here are sufficiently dramatic "haircuts" and increased transparency and flow of information.

The sticking point is the availability of speculative capital. On the one hand there are signs of a "crunch" or "freeze", but I believe that is mostly not a lack of capital (the pension funds accumulate tons of it every payday), but simply a "pause" as the risk repricing process stumbles along.

The key point is that the flow of speculative capital that distorts risk pricing would only increase if the Fed cuts their rate, and that would interfere with the risk repricing process. Speculative capital is needed in a growing economy, but an excess of speculative capital can be a distinct negative for even a healthy economy.

Yes, a Fed rate cut would also trigger a flow of more capital at a lower price to loan to creditworthy borrowers for non-speculative real-world needs, but I believe that would happen anyway as a side effect of the repricing of risk. One of the problems we are working through right now is a "risk backlash" where both high-risk and low-risk assets are being slammed independent of actual true risk. That backlash will incrementally fade over the coming weeks and months so that high-risk assets retain a high-risk label and lower-risk assets  revert to appropriate lower-risk labels.

The real bottom line is that only the markets can properly determine risk pricing. The Fed should not intervene to force risk pricing, but simply assure that the banking system has sufficient liquidity to handle transactions which do have proper risk pricing.

-- Jack Krupansky

Resuscitating the middle class

I do not agree with everything in an editorial in The New York Times entitled "The Employment Tea Leaves", but I do agree with their assertion of the need to "help the increasingly squeezed middle class."

I agree when The Times says that:

Democrats, or some Republicans with a change of heart, must articulate — and Americans must demand — a program for ensuring that the middle class gets a bigger share of the economy's spoils than it has received during the Bush era, when gains have largely been funneled to the richest Americans.

To have a fairer and more inclusive economy, workers need true mobility, which requires health care reform. And they need to see a reversal in the country's ever-deepening inequality, which could come about through more progressive income taxes, better public education and more help for workers whose jobs are displaced by globalization.

In fact, now that I think about it, a middle class income tax reduction would make a lot of sense.

And the hedge fund managers and private equity fund managers who have done so much structural harm to the economy in recent years (e.g., excessive speculation in commodities and subprime mortgage securities and causing a mispricing of risk) need some "incentive" to focus on delivering long-term benefits to the economy (true investment) rather than focusing so much of their attention on sleazy short-term profit "skimming" schemes. Don't raise the taxes on every dollar of their "profit", but definitely hit them very hard on short-term profits that have been doing more harm than good to the long-term health of the economy.

The economy does not need a Fed interest rate cut or cheaper credit, but rather it is in dire need of a variety of reforms to resuscitate what used to be known as "The Middle Class."

-- Jack Krupansky

Fed still likely to stay on track with target rate at 5.25% for the rest of 2007 and probably well into 2008

Despite all of the "turmoil" in the financial markets and a credit crunch is some credit markets, the Fed will likely continue on its current path (including sporadic liquidity injections into the banking system) and stay on track to keep the fed funds target rate paused at 5.25% for the rest of the year and probably well into 2008.

Despite the fact that fed funds futures prices "indicate" a 100% certainty of a rate cut at the upcoming FOMC meeting (and even before the meeting) and more cuts to come and virtual unanimity among commentaters on Wall Street in favor of cuts, there has also been a fair amount of commentary from Fed officials that "hint" strongly that not only is a rate cut not a foregone conclusion, but that cutting the fed funds target rate would be a bad idea to deal with financial market turmoil. The latest cold water on rate cuts comes from Charles Plosser, President of the Federal Reserve Bank of Philadelphia who says that "Providing liquidity does not necessarily require a more fundamental change in the direction of monetary policy as implemented by a change in the fed funds rate target." That comes from an article on Bloomberg.com on Saturday by Anthony Massucci and Vivien Lou Chen entitled "Plosser Says Rate Cut Not Always Needed to Keep Markets Stable." Another Bloomber article by Scott Lanman on Thursday entitled "Four Fed Bank Presidents Decline to Endorse Rate Cut" tells us that "Four regional Federal Reserve bank presidents declined to endorse a cut in the benchmark interest rate this month... Kansas City Fed President Thomas Hoenig and Dennis Lockhart of the Atlanta Fed said they hadn't seen sure signs of a housing spillover into the broader economy. St. Louis Fed President William Poole and the Dallas Fed's Richard Fisher said the effects of the turmoil so far are unclear." An article on Reuters by Ros Krasny entitled "Fed's Fisher: September rate cut not a done deal" quotes Dallas Fed President Richard Fisher as saying that "Market expectations come and go. The Fed's job is to get the economy right." An article in The Wall Street Journal by Sudeep Reddy entitled "Fed Sees Limited Housing Fallout" quotes Atlanta Fed President Dennis Lockhart as saying that "So far, I have not seen hard or soft data that provide conclusive signs that housing problems are spilling over into the broad economy." Finally, an article from Associated Press by Rachel Beck entitled "Likelihood of Fed Rate Cut Less Clear" informs us that "Anyone hoping that Federal Reserve policymakers will reduce the overnight bank borrowing rate when they meet on Sept. 18, should not ignore the positive signs the economy is giving."

Usually, in normal times, the fed funds futures market is a good indicator of what the Fed will do over the next month or two, but we are not in normal times right now and currently there is such a dramatic dislocation between what a lot of people fear or hope for on the one hand and what the calmer Fed is actually likely to do. So, I do report the fed funds futures here, but for now I do so with the caveat that they are completely out of whack. Yes, they do reflect what people hope and fear, but they are not predicting likely Fed activity.

In a lot of cases they are either speculative bets seeking to make a quick buck if the Fed does happen to cut rates, or actually legitimate hedges by holders of fixed income assets who are really buying insurance in case the Fed does happen to cut rates, but do not necessarily represent a core belief that the Fed really will cuts rates.

As of Friday, Fed funds futures contracts indicate the following probabilities for changes in the Fed funds target rate at upcoming FOMC meetings:

• Before the September 18, 2007 meeting: 100% chance of a cut and 24% chance of a second cut
• September 18, 2007: 100% chance of a cut and 76% chance of a second cut -- second cut is likely 
• October 30/31, 2007: 100% chance of two cuts and 70% chance of a third cut -- third cut is likely
• December 11, 2007: 100% chance of three cuts and 48% chance of a fourth cut -- flip a coin, but leaning away from a fourth cut
• January 2008: 100% chance of four cuts and 16% chance of a fifth cut
• March 2008: 100% chance of four cuts and 60% chance of a fifth cut -- flip a coin, but leaning towards a fifth cut
• May 2008: 100% chance of four cuts and 68% chance of a fifth cut -- fifth cut is likely
• June 2008: 100% chance of four cuts and 78% chance of a fifth cut
• August 2008: 100% chance of four cuts and 76% chance of a fifth cut

So, the futures are telling us that a cut is a "slam dunk" before the September meeting and that a second cut at the meeting is very likely, but I would urge caution in depending on these numbers since: a) the Fed has given no indication that it is leaning towards such a cut, b) a number of Fed officials have talked down the prospects of a rate cut in the near-term, and c) bets placed in the "heat" of a crisis are frequently unwound in the weeks following the crisis.

Note: Studies have shown that the fed funds futures market only has a high degree of forecast reliability about 30 to 45 days out (high out to 30 days, only modest reliability out to 60), so those probabilities beyond September are shaky at best and could easily change very dramatically.

What we saw these past five weeks was a simple knee-jerk reaction to a very real, but brief crisis. Wait a few weeks and the picture will change again.

And to repeat one thing that bears repeating: the economy is much stronger than many people on Wall Street are claiming it is. "Forecasts" of the economic impact of the so-called subprime crisis are way out of proportion to the likely impact, and that is even before election politics pushes the administration and Congress to offer a substantial safety net for struggling homeowners. There is simply no economic need for a fed rate cut either now or in the near future.

-- Jack Krupansky

Employment is not as bad as media coverage has suggested

Although the monthly employment report on Friday was in fact weak, it was nowhere near as bad as a lot of media coverage suggested. First, you should never judge a trend using only the latest data point. Second, "-4,000" is not a big number. As the report itself noted, "payroll employment was essentially unchanged" and "the unemployment rate remained at 4.6 percent." Payroll employment in August was 138.087 million as compared with 138.041 million in July, for a decline of -0.003%. That is a very tiny difference. The proper headline is that employment was "flat." A gain or loss of 40,000 is still a change of only 0.03%. Even a gain or loss of 100,000 is still a change of less than 0.1%. We are down in the noise level here.

The other standard comparison is year over year. A year ago payroll employment was at 136.438 million. So, August payroll employment was 1.599 million higher than a year ago. What's to complain about here?

Another factor to keep in mind is that this was not a report for the entire month of August. The payroll survey is for the pay period that includes the 12th of the month, so this report tells us nothing about employment in the last two weeks of the month. In other words, this is not "the most timeliest of data" of the sort that the Fed will use to decide what action to take at the FOMC meeting on September 18th.

The weekly jobless claims reports for the past four weeks provide more timely data and show a 4-week moving average of 325,750 initial claims which is is well below the 400,000 threshold typically used to judge that employment is probably declining. A year ago the 4-week moving average of initial claims was 316,500. These two numbers are essentially in the same ballpark. There is nothing here to suggest that there is any significant downwards pressure on overall payroll employment. To be sure, employment is not "booming", but neither is it "busting."

Possibly even most importantly, the latest Fed Beige Book which covers the period up through August 26th informs us that "Nearly every District reported at least modest increases in employment during the recent survey period." Please note that the Beige Book is not the Fed's view on the economy, but summarizes what the Fed is actually hearing from its many business contacts in the twelve Fed districts across the country.

To be sure, not everything on the employment front is rosy. For example, temporary help services has been trending downwards every month in 2007. But on balance, there is no overwhelming evidence of any pervasive weakness in overall employment.

Finally, the monthly employment report relies heavily on estimates and will be revised in each of the next two months anyway as more complete data becomes available. The revisions, up or down, could easily be much larger than the initial -4,000 number.

In short, if you are looking for ammunition to heavily justify a Fed  rate cut, you are not going to find it on the employment front, at least not yet.

-- Jack Krupansky

VIX indicates the market crisis is over but a lot of people worry it might get worse

The CBOE Implied Market Volatility Index (VIX) continues to strongly suggest that the recent financial "crisis" really is over, but that quite a few people are still worried that the "crisis" will resume at any moment.

The VIX "fear gauge" popped up to 26.97 on Friday after the weak employment report, but closed the week at 26.23, which is still somewhat elevated but certainly not to "crisis" proportions.

It may take a few more days or a week or two for VIX to retreat safely back under 20. We may have to wait for the Fed to meet on September 18th, and then give the market another week to settle down.

-- Jack Krupansky

Euro still unable to break out of its trading range

The euro remained trapped in its $1.33 to $1.38 trading range this past week. September futures for the euro closed at $1.3773 on Friday, 1.26 cents above the prior Friday close of 1.3647. The weak employment report on Friday gave the euro a boost (up even above $1.38 at one point), but even that was not enough for the euro to break out of its trading range.

There are plenty of traders and speculators who would like to see the euro break $1.40, but whether there is really a net demand for the euro at these levels remains to be seen. For now, traders and specualtors are waiting patiently to see whether the Fed really will cut the fed funds target rate, which should in theory "weaken" the dollar.

Euro futures out at December 2008 were only at $1.3831 on Friday (compared to $1.3730 the previous Friday), so there isn't exactly a lot of "slam dunk" enthusiasm for betting on a $1.40 euro, so far. And that is evidence that some people are not convinced that fed rate cuts are really coming. It could also be a safe haven bid for the dollar as long as there is heightened global market volatility. So much for the theory that the dollar is "weak."

-- Jack Krupansky

PayPal money market fund yield leaps to 5.23% as of 9/8/2007

Despite the chatter about the so-called "credit crunch" and "subprime crisis" and the potential risk of even money market funds, money market funds are still an extremely safe place to park cash.

The good news is that a number of money market fund yields are higher as their existing short-term commercial paper matures and rolls over into new commercial paper that is getting a higher yield since supposedly nobodya wants any of this commercial paper, or so the story goes.

Here are some recent money market mutual fund yields as of Saturday, September 8, 2007:

• iMoneyNet average taxable money market fund 7-day yield rose from 4.52% to 4.71%
• GMAC Bank Money Market account rate remains at 5.16% or APY of 5.30% (only $500 minimum for that rate)  -- Note: This is an FDIC-insured bank deposit account, not a money market fund 
• Vanguard Prime Money Market Fund (VMMXX) 7-day yield fell from 5.11% to 5.09%
• Vanguard Federal Money Market Fund (VMFXX) 7-day yield fell from 5.03% to 5.02%
• AARP Money Market Fund 7-day yield rose from 5.08% to 5.11%
• TIAA-CREF Money Market (TIRXX) 7-day yield rose from 5.04% to 5.08%
• PayPal Money Market Fund 7-day yield leaped from 5.04% to 5.23% -- Making it the #1 top yield on the iMoneyNet Prime Retail Money Market Fund list
• ShareBuilder money market fund (BDMXX) 7-day yield fell from 4.83% to 4.57%
• Fidelity Money Market Fund (SPRXX) 7-day yield rose from 5.12% to 5.15% ($25,000 minimum)
• Fidelity Cash Reserves money market fund (FDRXX) 7-day yield rose from 5.08% to 5.11%
• Fidelity Prime Reserves money market fund (FPRXX) 7-day yield rose from 4.55% to 4.60%
• Fidelity Municipal Money Market fund (FTEXX) 7-day yield remains at 3.56% or tax equivalent yield of 5.48% for the 35% marginal tax bracket and 4.94% for the 28% marginal tax bracket -- this is a very decent yield for "core cash" in a checking-style account
• Fidelity Tax-Free Money Market fund (FMOXX) 7-day yield remains at 3.52% or tax equivalent yield of 5.42% for the 35% marginal tax bracket and 4.89% for the 28% marginal tax bracket
• 4-week (1-month) T-bill investment rate fell from 4.70% to 4.37%
• 13-week (3-month) T-bill investment rate fell from 4.73% to 4.47%
• 26-week (6-month) T-bill investment rate fell from 4.78% to 4.55%
• Treasury I Bond composite earnings rate (semiannual compounded annually) for new I Bonds is 3.74% (down from 4.52%), with a fixed rate of 1.30% (down from 1.40%) and a semiannual inflation rate of 1.21% (down from 1.55%) -- updated May 1, 2007, next semiannual update on November 1, 2007
• NetBank 6-month CD APY remains at 5.40%
• NetBank 1-year CD APY fell from 5.40% to 5.35%
• Bankrate.com highest 6-month CD APY remains at 5.70% (IndyMac Bank, $5,000 minimum, with Countrywide Bank #2 at 5.55%, $10,000 minimum)
• Bankrate.com highest 12-month CD APY remains at 5.65% (Countrywide Bank, $10,000 minimum)

Note: APY yield is worth somewhat less than the same 7-day yield. See my discussion and table for Comparing 7-day yield and APY.

Update: Still no confirmation on the apparent shortfall of the PayPal dividend for July. The dividend for August is even more whacky: 5.59% annualized simple return. Even if I average the July and August dividends, I get 5.20%. Hey, I can't complain about those kind of rates, but I have no idea why the final dividend is so out of line with the 7-day yields reported every week over the past month.

Right now, Fidelity Cash Reserves (FDRXX) is my preferred parking place for the bulk of my cash. I do appreciate the higher yield I have been getting these past few weeks, which is probably due to higher yields on commercial paper. I know that I can get a better yield elsewhere, but the convenience, decent yield, and relative safety of Fidelity make this a very attracive parking place.

DISCLAIMER: I am not an investment adviser, so my opinions and the data presented here should not be considered as advice for where to invest your money. You should examine this and other available data before deciding how to invest your money. And, seriously, past returns should not be construed as a guarantee or even an indication of future returns.

-- Jack Krupansky

ECRI Weekly Leading Index indicator up moderately sharply and continues to point to a relatively healthy economy in the months ahead

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) rose moderately sharply (+0.86% vs. -0.36% last week) but the six-month smoothed growth rate fell moderately sharply (from +1.3% to +0.6%), remaining modestly above the flat line, suggesting that the economy continues to have at least a modest amount of steam, neither booming nor busting.

A WLI growth rate of zero (0.0) would indicate an economy that is likely to run at a steady growth rate, neither accelerating nor decelerating. A WLI fluctuating in a range from +1.5% to -1.5% would seem to forecast a relatively stable "Goldilocks" economy.

If I were looking at this one indicator alone, I would say that the Fed is succeeding at its goal of moderating the economy to a sustainable growth rate.

I will offer the caveat that the Weekly Leading Index and its smoothed growth rate do not tell us how strong the economy will be six or nine months from now, but do tell us whether whether weakness or strength is more likely a few months from now. It works best to tell us whether a "gathering storm" might be lurking just around the corner, but presently indicates "clear weather" for the next few months, even if the interval is occasionally punctuated with financial market "gyrations."

-- Jack Krupansky

Fed Beige book on Wednesday will be the top short-term economic indicator

When I posted recently about the Fed keeping an eye on the economy and the importance they will place on "information gleaned from our business and banking contacts around the country" I neglected to mention that this "gleaned" information will be released on Wednesday in the form of the Fed Beige book.

It isn't your typical economic report since it has no numbers but is strictly a subjective view of the state of the economy in the twelve Fed districts as well as the overall state of the economy (aggregated from those twelve reports) at the present time, about ten days ago. Nonetheless, it will probably be the single best source of information on the overall state of the economy as of about ten days ago.

Note that the Beige book does not represent the economic views of the Fed itself, but is simply a summary of external views that the Fed has collected. As the Fed web site puts it: "This document summarizes comments received from business and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials."

This report essentially represents the overall state of the economy that the Fed will use at its upcoming FOMC meeting. Sure, there will be a dozen or more incremental economic reports available to the Fed as well, but don't expect a radical shift in the economy or the economic outlook from ten days ago.

-- Jack Krupansky

Fed keeping an eye on the economy

Despite all the chatter about the financial market turmoil and so-called credit crunch, the Fed will be keeping a watchful eye on the real economy to determine whether a rate cut may be necessary at the next two FOMC meetings. At this stage there are no economic signposts pointing to recession. The real economy is probably still poking along somewhere in the 2.25% to 2.75% annualized real GDP growth range, neither booming nor busting. Despite the chatter, a Fed rate cut is unlikely and will remain unlikely. There would have to be some significant deterioration in the real economy for that to change.

One difficulty for both the Fed and market participants is that even most economic reports that come out over the next couple of weeks are still backwards looking and reflect conditions and expectations before the "crisis" in the middle of August. For example, the monthly employment report due out on Friday is nominally for August but actually covers the period only up through the second week of August, so it will not give us any insight into employment trends since the "crisis."

We do have weekly unemployment insurance claims reports, but even the latest report shows initial claims at 334,000 and a 4-week moving average of 324,500, well under the 400,000 level that is normally indicative of a contracting economy.

Weekly mortgage applications are down somewhat but still at a reasonable level considering all the angst about the housing market.

In his speech on Friday, Bernanke told us that "we will pay particularly close attention to the timeliest indicators, as well as information gleaned from our business and banking contacts around the country." Ultimately, it is the Fed's business and banking contacts in the twelve Federal Reserve districts around the country who will have veto authority over whether the Fed hears that the economy is either holding up "okay" or or showing serious signs of crumbling.

Not everyone on Wall Street swarms back to work the day after Labor Day. The first couple of weeks in Spetember are a great vacation time when the Summer crowds have dwindled. So, don't expect Wall Street to kick into high gear until after the middle of the month. In fact, this particular month, don't expect Wall Street to settle down until a full week after the Fed FOMC meeting on September 18, 2007. 

-- Jack Krupansky

Cheap home mortgages continue to be readily available

Despite all the talk of a credit crunch, people with good credit and a documented income can still get reasonable size mortgages (under $417,000) at quite cheap rates. The latest weekly mortgage survey from Freddie Mac shows the average rate offered for 30-year fixed-rate home mortgage is 6.45% (down from 6.52% last week) and the average for the 15-year fixed-rate home mortgage is 6.12% (down from 6.18% last week.) These are truly great rates. Sure, people with lousy credit or without documented income or money for a deposit are on shaky ground, but that's the way it should be anyway. Jumbo mortgages for expensive homes (above $417,000) are a little more problematic, but still available depending on local conditions.

So much for being able to depend on the media for information about finance and the economy. 

-- Jack Krupansky

One worst case scenario for how the mortgage mess is playing out

I continue to be very skeptical of a lot of the worst case scenarios being put forward for how the mortgage mess will likely play out at the national level. Nonetheless it makes sense to look at the specifics of some of these worst case scenario and see what we can learn. There is an article in The New York Times by Nelson Schwartz entitled "Can the Mortgage Crisis Swallow a Town?" which does give us a fair sense of how the mortgage mess is playing out in one worst case scenario. The bad news is that it is fairly bad. The good news is that this one example is rather atypical. The other good news is that the article does show how there is a growing groundswell to help a fair number of these homeowners get out from under their onerous mortgages and start fresh without the need for bankruptcy or foreclosure.

Sure, the number of homeowners faced with possible foreclosure could well rise significantly over the next six months, but the number of lenders and aid groups willing to help homeowners restructure away from foreclosure is likely to rise as well.

I do not deny that there is a mortgage mess that is likely to get somewhat worse, but there doesn't appear to be any justification for not believing that most homeowners and most communities will actually do somewhat better than the doomsayers are insisting as a foregone conclusion.

And, all of this is well before the politicians have even started to step into the fray.

-- Jack Krupansky