First Impressions

The Beverage of Choice
by Doug Ashburn

Today’s newsletter contains several stories using beverage euphemisms to describe yesterday’s move by the Federal Reserve to ease up slightly on its bond buying spree. A Barron’s article refers to it as “switching to Lite Beer.” Bloomberg referred to yesterday’s monster rally as having “found the elixir” that sent the market to new highs. I see it as adding more incendiary ingredients to an already dangerous cocktail of debt and malinvestment (albeit at a slightly slower pace).

And I refuse to drink the Kool-aid.

Quote of the Day

“Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee sees the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases.”

From Federal Open Market Committee Dec 18 Statement

Lead Stories

The Fed Switches to Lite Beer
Randall W. Forsyth – Barron’s
The job of the Federal Reserve — in the famous assessment of William McChesney Martin, who headed the central bank through the halcyon days for the U.S. economy of most of the 1950s and 1960s — was to take away the punch bowl when the party really got started.

***DA: I prefer the current policy because it is less filling.

***JB: It’s all snake oil (but it tastes great).

Fed Finds Elixir for Tapering QE as Markets Embrace Rate Outlook
Caroline Salas Gage and Steve Matthews – Bloomberg
For six months, the Federal Reserve has struggled to engineer a pullback of its bond-buying program without unhinging financial markets. Yesterday, the Fed did it.

***DA: Drink up; it is the holiday season.

For ETFs, Capital Gains Distributions Remain Few and Far Between
Robert Goldsborough – Morningstar
Tax efficiency is one of the hallmark benefits of exchange-traded funds.
Unlike traditional open-end mutual funds, which redeem shares for cash, requiring funds to sell securities and potentially realize capital gains, most ETFs continually dodge the capital gains tax bullet by redeeming securities in kind. This allows ETF providers to swap out low-cost-basis securities without having to realize as many capital gains.

***DA: That sounds like a good thing.

Asset-Backed Finance Wins Capital Reprieve From Basel Group
Ben Moshinsky and Alastair Marsh – Bloomberg
Global banking regulators scaled back plans to boost capital requirements for lenders holding asset-backed bonds after banks warned that an initial blueprint was too harsh and would have curtailed lending.

Bond Risk Falls to 2010 Low in Europe After Fed Plays Taper Hand
Katie Linsell – Bloomberg
The cost of insuring corporate bonds against losses fell to the lowest in almost four years in Europe after the Federal Reserve announced plans to reduce debt purchases while committing to near zero interest rates.

***DA: Have we officially won the war on default fear?

Japanese Bond Risk Falls to 2008 Low After Fed Taper Decision
Finbarr Flynn – Bloomberg
The cost of insuring bonds in Japan against non-payment fell to the lowest in more than five years after the Federal Reserve said it will start unwinding unprecedented stimulus, lowering Asia-Pacific bond risk.

***DA: Umm, excuse me – they did not say they would unwind stimulus, they said they would add 12 percent less stimulus. Big difference.

Central Banks

PBOC Adds Funds to Banks Amid Worst Cash Crunch Since June
Fion Li – Bloomberg
China added funds to selected banks today after the benchmark money-market rate jumped the most since a record cash crunch in June.
The People’s Bank of China conducted short-term liquidity operations recently and will continue to supply funds to qualified financial institutions in this way based on the situation, it said on its microblog.

QE, finitely
The Economist
JUST a few months ago it appeared Ben Bernanke would finish his eight-year term as chairman of the Federal Reserve without knowing whether his boldest and most controversial attempt to revive the economy was going to work.


Secret Currency Traders’ Club Devised Biggest Market’s Rates
Liam Vaughan, Gavin Finch and Bob Ivry – Bloomberg
It’s 20 minutes before 4 p.m. in London and currency traders’ screens are blinking red and green. Some dealers have as many as 50 chat rooms crowded onto four monitors arrayed in front of them like shields. Messages from salespeople and clients appear, get pushed up by new ones and vanish from view. Orders are barked through squawk boxes.

Indexes & Index Products

CBOE claims victory in legal battle with rival ISE
John McCrank – Reuters
CBOE Holdings Inc (CBOE.O), which runs the largest U.S. options exchange, said on Wednesday a judge had dismissed a challenge by rival International Securities Exchange against CBOE’s exclusive license to list options on certain key U.S. indexes.

An Interview With S&P Dow Jones Index Chief David Blitzer
Rick Ferri – Forbes
David M. Blitzer is managing director and chairman of the S&P Dow Jones Index Committee. He has the overall responsibility for index security selection as well as index analysis and management. A graduate of Cornell University with a B.S. in engineering, Dr. Blitzer received his M.A. in economics from the George Washington University and his Ph.D. in economics from Columbia University.

VIX falls with equities at new highs
Equity indexes surged to new highs on the back of yesterday’s Fed announcement, sending the CBOE Volatility Index sharply lower.


Gold stumbles to 6-month low after Fed stimulus trim
Jan Harvey – Reuters
Gold slid 2 percent on Thursday to its lowest since late June as the U.S. Federal Reserve took its first step away from the ultra-loose monetary policy that has helped drive bullion prices to record highs in recent years.

How to Keep Banks From Rigging Gold Prices
Rosa M. Abrantes-Metz – Bloomberg
Authorities around the world are gradually piecing together a shocking picture of how banks have manipulated benchmarks that influence the price of everything from mortgage loans to foreign currencies.
Another area deserves their scrutiny: gold and silver.


Boomers as Retail Clerks Shows Why Greenspan Saw Low Growth Era
David J. Lynch – Bloomberg
Greenspan had said for months that increases in government borrowing would drive up interest rates on bonds maturing in 10 years and beyond. Instead, rates declined. And Greenspan said he thought he knew why: The world’s growing, graying masses were rewriting the rules for both markets and economies.

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