|
PureBytes Links
Trading Reference Links
|
Fed Hike: An interesting viewpoint from the Bloomberg site:
Gwenn
Markets May Know Something Fed Doesn't: Caroline Baum (Repeat)
8/23/99 18:22
Markets May Know Something Fed Doesn't: Caroline Baum (Repeat)
(Corrects typographical error in 20th paragraph.)
New York, Aug. 23 (Bloomberg) -- If the Beltway Boys and
Girls can get enough mileage out of George W. Bush's cocaine
thing for two Sunday morning talk-show cycles, then I can ask my
readers to endure yet one more column on the Federal Reserve.
Everyone from Wall Street to Main Street to Old County Road
knows that the Fed is going to raise interest rates tomorrow.
They are also under the impression that it will be the last
intrusion from the Fed for the rest of the year.
If not, how else can one explain the recent rally in stocks
and bonds when banks' bedrock cost of funds -- the overnight
federal funds rate -- is expected to climb? The Dow Jones
Industrial Average set an all-time high today, bringing the year-
to-date gains to 23 percent.
The finality assumed by the markets is somewhat curious,
considering that the Fed doesn't know itself about what it will
do. The Fed was leaning towards tightening for the better part of
two years before it lowered interest rates three times last fall.
What's more, it's not clear what the Fed is hoping to
accomplish. Does the Fed want to slow domestic demand? Raise the
unemployment rate? Pose an impediment to a blazing stock market?
Anchor long-term interest rates at 6 percent?
And what is the Fed using as a policy guide? Labor costs?
Raw materials prices? The foreign exchange value of the dollar?
The consumer price index?
Fed chairman Alan Greenspan has telegraphed mixed messages
recently, vacillating between New-Era productivity prophet and
chronic worrier about the scarcity of labor. His new mantra,
``When we can be preemptive, we should be,'' leaves a lot of room
for interpretation.
Two-Handed Economist
In fact, listening to Greenspan is a lot like listening to
Prozac. One never knows which personality will be in evidence.
Let me be the first to admit that I have no idea whether the
Fed will raise interest rates after tomorrow or not. Nor do I
pretend to have any foresight about the timing of any such move.
Without an understanding of the Fed's goals -- other than to
preempt an acceleration in inflation -- it's hard to predict how
much or how often.
Given all the concern about and preparation for year-end in
an attempt to avert the Year 2000 computer glitch, the Fed would
probably prefer to raise rates now and stand pat during the
fourth-quarter, rather than aggravate liquidity concerns.
Recognizing the importance of a liquidity lifeline, the Fed
has established a special facility for lending to banks from Oct.
1, 1999 to April 7, 2000, at an interest rate 150 basis points
above the targeted federal funds rate.
Of course, there is already a special liquidity facility for
lending to banks at 50 basis points below the current targeted
funds rate of 5 percent, called the discount window. With visits
to the window carrying a certain stigma -- a possible sign of a
bank having trouble funding itself -- ``the Fed is covering all
bases,'' says Ward McCarthy, economist and managing director at
Stone & McCarthy Research Associates in Princeton, N.J. ``The Fed
is taking extraordinary measures for what is perceived to be an
extraordinary circumstance.''
Flying Blind
But back to our main narrative. Without a policy guide or
policy rule, Greenspan is essentially ``flying by the seat of his
pants,'' according to the Wall Street Journal's July 29 Review
and Outlook. The Journal's editorial board worries that without
any registered flight plan, Mr. Greenspan's successor may be less
successful at seat-of-the-pants steerage.
Why am I boring you with everything I don't know? Because
there is something I do know. If the Fed's goal is to slow
economic growth from 4 percent to 2.5-3 percent -- and that's
still a big if -- then it's going to take more than the 25 basis
points in June and the expected 25 basis points tomorrow.
``The idea that 50 basis points is going to make any
difference to this economy is a pipe dream,'' says a London hedge
fund manager.
Welcome to Harry Hope's saloon.
Taut as a Drum
Because Greenspan has been so fuzzy on this issue of what he
is trying to achieve (except be preemptive when he can), it's
tough to predict a course of action.
``The Fed is not real confident that the economy can
continue to do what it's been doing without inflationary
ramifications,'' McCarthy says. ``You can't preclude them
tightening again before year-end, even with Y2K, if domestic
demand doesn't slow and the labor market gets any tighter.''
On that score, the labor market is about as tight as it can
get. At 281,250, the four-week moving average of initial
unemployment claims stands at a 26-year low, a sign of
``increased hoarding of employees,'' according to John Youngdahl,
economist at Goldman, Sachs & Co.
In fact, every measure of labor utilization is flashing a
warning sign: from jobless claims to consumers' perceptions of
job availability to broad measures of labor under-utilization,
according to Youngdahl.
Of course, if too many people working doesn't cause
inflation, then the labor market indicators are inadequate.
That's one reason why any forecast for what the Fed will do
six weeks or six months today is ridiculous.
Number Bingo
After seeing its model fail for so many years, ``Even the
Fed even admits they're in monitoring mode,'' offers Dave
Seiders, chief economist at the National Association of Home
Builders.
Policy-makers' reaction to the April consumer price index
was telling. After months of only good inflation news, a 0.7
percent increase in the CPI caused Fed rhetoric to reverse
course. New York Fed President William McDonough took one look at
the number and said there was a ``low chance'' that the increase
was a ``one time event.''
The 0.7 percent increase in the April CPI was followed by
back-to-back unchanged readings in May and June, a feat that
occurred last in 1962.
``We have price stability now,'' McDonough declared after
the release of the May CPI. ``Companies can't get away with
raising prices.''
The Fed is only as confident as the last inflation report.
If the next two CPI reports show an increase of 0.3 percent, as
did July's, and it can't be explained away by Labor Department
chatmeister Pat Jackman, the Fed will raise interest rates again,
Y2K or not. Period. End story.
--Caroline Baum in the New York newsroom (212) 893-3369/lwFrom ???@??? Tue Aug 24 08:15:07 1999
Return-Path: <owner-realtraders@xxxxxxxxxxxx>
Received: from ml.nw.verio.net (ml.nw.verio.net [204.202.220.47])
by purebytes.com (8.8.7/8.8.7) with ESMTP id CAA01361
for <neal@xxxxxxxxxxxxx>; Tue, 24 Aug 1999 02:14:39 -0700
Received: (from majordom@xxxxxxxxx)
by ml.nw.verio.net (970819888) id BAA18025
for realtraders-sendemout; Tue, 24 Aug 1999 01:06:16 -0700 (PDT)
Received: from mail1.nwnet.net (mail1.nwnet.net [192.220.251.8])
by ml.nw.verio.net (970819888) with ESMTP id BAA18021
for <realtraders@xxxxxxxxxxxxxxx>; Tue, 24 Aug 1999 01:06:13 -0700 (PDT)
Received: from esrelay002.caissedesdepots.fr (esrelay002.caissedesdepots.fr [158.156.156.29])
by mail1.nwnet.net (970819888) with ESMTP id BAA05978
for <realtraders@xxxxxxxxxxxx>; Tue, 24 Aug 1999 01:06:00 -0700 (PDT)
Received: from esmailfed2.serv.cdc.fr (esmailfed2 [158.156.1.207])
by esrelay002.caissedesdepots.fr (8.8.8/8.8.8) with ESMTP id KAA07154
for <realtraders@xxxxxxxxxxxx>; Tue, 24 Aug 1999 10:01:09 +0200 (MET DST)
Received: from cmi.cdc.fr (localhost [127.0.0.1])
by esmailfed2.serv.cdc.fr (8.8.8/8.8.8) with SMTP id KAA07329
for <realtraders@xxxxxxxxxxxx>; Tue, 24 Aug 1999 10:06:57 +0200 (MET DST)
Posted-Date: Tue, 24 Aug 1999 10:06:57 +0200 (MET DST)
Received: from eiche by cmi.cdc.fr (SMI-8.6/SMI-SVR4)
id KAA13946; Tue, 24 Aug 1999 10:05:00 +0200
Received: from ncc183 by eiche (SMI-8.6/SMI-SVR4)
id KAA21589; Tue, 24 Aug 1999 10:04:59 +0200
Received: by localhost with Microsoft MAPI; Tue, 24 Aug 1999 10:03:05 +0100
Message-ID: <01BEEE17.DBC7DE80.ggautier@xxxxxxxxxxx>
From: Gwenael Gautier <ggautier@xxxxxxxxxxx>
Reply-To: "ggautier@xxxxxxxxxxx" <ggautier@xxxxxxxxxxx>
To: Real Traders <realtraders@xxxxxxxxxxxx>
Subject: AW: OPTION: estimation of volatility
Date: Tue, 24 Aug 1999 10:03:04 +0100
Organization: cdc
X-Mailer: Microsoft Internet E-Mail/MAPI - 8.0.0.4211
MIME-Version: 1.0
Content-Type: multipart/mixed; boundary="MimeMultipartBoundary"
Sender: owner-realtraders@xxxxxxxxxxxx
Precedence: bulk
Status:
Upon checking, 5 year Vol is at about 27%. If you bought or can buy 10 yr
(which is difficult to buy in the first place) at 28%, it looks like a good
deal to me.
Cheers,
Gwenn
| -----Ursprungliche Nachricht-----
| Von: Stephane Rodigari [SMTP:stephane.rodigari@xxxxxxxxxx]
| Gesendet am: Monday, August 23, 1999 10:56 PM
| An: Real Traders
| Betreff: OPTION: estimation of volatility
|
| For those who tried to help me here are the details of the OTC option:
| Calls on the SMI index, strike 7900, expiration Jan 2009, implied
| volatility around 28%, European style
|
| Best Regards,
|
| Richard
|