Fed Funds Rate

After todays rapid rise in Stock prices it is important to look at that this really means. The Federal Funds Rate is the interest rate that depository institutions lends immediately available funds (balances on deposit with the Federal Reserve Bank)to another depository institution overnight.

The Discount Window
In many respects the Discount window is an outdated function of the Fed, having long been replaced by the Open MarketThe Discount window functions as a safety valve in relieving pressures in reserve markets; in circumstances where extensions of credit can help relieve liquidity strains in the banking system, the window also helps to assure the basic stability of financial markets more generally.

Recently a number of large financial institutions, including, CitiGroup (the largest institution in terms of assets in the United States), BoA and Wachovia have all paid visits to the Discount Window. This represents a shift in the way Banks think and operate, for years most banks avoided the Discount Window, there was a stigma that this form of borrowing was reserved for distressed banks only, but that feeling is slowly beginning to change.

Little Bank takes Big Bank

Reverse Re-construction or vendor financing

What happens when a nation's trade deficit runs at levels upward of 6% of GDP: investor confidence ebbs, capital investments are scarce, credit markets plummet, and the central bank is forced to counterbalance deflation by raising interest rates, all this while the currency is weaker then a sand castle - deep recession.

When that nation is the USA, these things don't happen, or at least they haven't yet; but how much longer will Asia keep up this predatory lending practice? As of June 30, 2007 the Japanese government owned just over $800b, and China owned around 680b worth of US government backed securities or Treasury bonds. Basically the US Treasury sends over IOUs and they send us money.

This affects us all: since mid 2004 the Federal Reserve has raised the federal funds rate from 1% to 5.25% and, in-theory, this should have caused a sell-off of long dated Treasury’s. However thanks to central banks around the world this didn't happen.

In short, why would a poorer nation lend to richer one? Simple: send cheap money to the richer nation and they will send it right back in the form of Lexus’, Samsung flat screen TVs, LG washing machines, and any number of [defective?] Chinese products

Tomorrow we will discuss how US borrowing affect mortgage prices. For now buy Doral Financial

Same Old Song

Stocks fall, while oil rises. It seems like the stock is beginning to mirror the housing market: buy NOW, prices are low. This is a buyers’ market. From the opening bell stock prices headed down, not far into the red, but just outside of the black. Most of this can be blamed on Fed anxiety; every market expert is speculating on what the Federal Reserve will do in their Board Meeting tomorrow. For the casual investor - WHO CARES - the only thing that matters now is looking at P/E ratios and trying to find some last minute bargains.

The market is betting on a rate cut from the Fed when the central bank meets Tuesday; but investors are not completely sure what it will do and what it will say in its accompanying economic statement. Furthermore, with the major brokerages' third-quarter results yet to be released, investors are uncertain about how badly the summer's stock downturn, souring home loans, and credit squeeze will hit the banking industry.

Making matters worse, the mortgage crisis seem to be spreading across the Pond. Northern Rock PLC, Britain's fifth-largest mortgage lender, saw its stock plunge and customers withdrew billions of dollars after it issued a profit warning after hours on Friday and drew from emergency funds held in reserve by the Bank of England. That gave U.S. investors an added impetus to pare their stock holdings, particularly in the financial sector. The good news for us is that financials almost always bounce back; like car manufacturers and airlines.

60 Minutes
The former Federal Reserve Boss Alan Greenspan did his first interview, since leaving as the Chairman of the Fed, on 60 Minutes and he warned of a possible recession. The couples with job cuts from First Franklin and Merrill have investors jumpy.

The good news is that while looking at the bigger picture one will discover that the job rate is steady, and this may help contain the credit crisis to the "sub prime" market. However, be careful when asking your credit card company for a limit increase, and check for new terms as well. The lenders of last resort will begin to tighten their belts' as well.

Fed up with the Bull-ish

Its now the end of our week, and a lot has happened, but it seems like everyone is already looking forward to next week’s Fed Board Meeting. Today, the Fed is not our concern; some people spend so much trying to predict what Mr. Ben S. Bernanke and his cohorts on that sit on the [Federal Reserve] Board of Governors will do, that they forget about the here and now. At Landes, we are doing the exact opposite: we have examined a few sectors have are providing you with some sound advice, for both the domestic and international markets.
First, while there has been a slight recovery in the financial sector, look for value buys on the engineering side. Companies that make “stuff”. The engineering sector is very diverse and is made up of companies that are frequently household names such as, Rolls Royce, ABB, Siemens, and L&T. One of the big reasons that these companies will continue to do well is the fact that in America and globally is because governments are constantly investing in infrastructural upgrades; in the USA it there is an attempt to make everything more green, while in nations with experiencing rapid GDP growth nations such as India and China, they are simply trying to lay the foundations of the World’s next Industrial Revolution. On the small-cap side: Kirloskar Brothers, Honda Siel Power, and Aban Loyd Chiles have all seen sharp gains over the past few months. While on the Big Board: Cummins India, Bharat Electronics, Alfa Laval, Bharat Forge, Thermax, Crompton Greaves, BHEL, Siemens, ABB, Kirloskar Oil Engines and Alstom Projects, have all doubled within one year’s time.

Countrywide

Buy Countrywide (CFC), the Nation’s largest independent mortgage firm. There was never a question of when CW would get bailed out, but merely who would provide the financing to bail them out. Over the past few weeks Countrywide has trimmed its workforce, sold off a 2 billion dollar stake to Bank of America, which (by the way plans to raise ATM fees to the absurd amount of $3) and borrowed over $11,000,000,000. Additionally, in the month of August, less than 4% of new loans originated by Countrywide fell into the Sub Prime category. These efforts combined with low rates still make this a buyer’s market and CW should be able to bounce back, but remember this is a long-term pick. For bond investors, it is important to realize that Countrywide debt carries a Bb2 rating, making it a “junk bond”. With high risk comes higher reward.

Strong Buys
On the other side of the real estate market take a look at Tarragon Corp. (TARR), which has been up since it announced plans to sell a Florida rental property to General Electric Capital. The buzz is that there are more sales to follow. Get in now, the stock in only about $3 and will rise to over $6 by the end of the year. Also a good strong buy is Euro Tech Holdings; everyone likes having fresh water. Last for the week is the big G again, Google. The reason is Google is boost ad revenue and the P/E margins are off the chart. If you can afford it, buy it.

Happy Investing, and have a good weekend.

Don't Quant On It

Goldman Sachs Group Inc.'s Global Alpha Hedge Fund took an unheard of hit in the month of August - 22.5 percent! The Fund made numerous poor decisions, with stocks, bonds, and currency investments; many rooted in shaky economic theory… at best. Alpha Fund has lost more than one-third of its market capitalization value this year alone. After word of this drop in value, investors informed the Fund that they wanted to pull out 1.6b in cash, totaling 20% of the Fund’s current liquid assets. This is what should have been expected, if any public company lost 1/3 of its value in 9 months, there would be a massive sell-off.
Alpha uses numerous mathematical models to evaluate potential trades, this strategy is known as Quantitative Investing. "We still hold our fundamental investment beliefs that sound economic investment principles couples with a disciplined quantitative approach can provide strong uncorrelated returns over time," Goldman Sachs Inc. said in an unsigned report that discussed on the funds drop.
While Quantitative Investing does take into consideration market trends, and prevents active managers from entering into a trendy market too late, it also attempts to find patterns and predict the Market’s next move; essentially stripping away the human bias. When you remove an active manager from the fast paced, hands on, boot in the trenches, 20 hour work day side of his job, its like removing his soul, emasculating him of his very essence. Just ask Martha Stewart.
In the world of Private Placement and Alternative Investments, accredited (especially high net worth) inventors are looking for long term wealth management and sustained growth. So when you have a math wizard who is able to apply a theoretical formula ONLY, you loose something. At what point did their formula fail to realize that they were hemorrhaging capital? Why were there no "stop limits" in place? These answers are simple: when a manager relies heavily on formulae he becomes much less nimble and tends to trade within a predefined set of parameters. For traders who are more hands on, it is the opposite; we are often examining sectors, and working 20 hour days. I feel sorry for the investors here, but not the managers. Financial markets are dynamic, never static and a hedge fund manager must be the same. Many have tried, most have failed: you simply can not stop the Market from moving, and when it moves you have to move with it. Quant Managers are not “active manager” they are more like conveyor belt puppets.
At Landes we have a philosophy: be like water; no matter the obstruction, remain fluid enough so that we may just flow around it, and not miss a beat. The current will trade up to the Ocean.

Happy Investing,

Fund Manager, Landes Capital Management

Crude and Unusual Punishment

Oil Futures Spike Again
The price of a barrel of oil rose today to just above $80 per barrel, for the first time in history. Crude oil for October delivery rose $1.68, or 2.2 percent, to settle at $79.91 a barrel at 2:54 p.m. on the New York Mercantile Exchange, a record close. Futures also touched the highest intraday price since trading began in 1983. The previous record of $78.77 was reached on Aug. 1.

This after the ever cleaver, OPEC announced yesterday that they planned to open up the wells and pump out an additional 500,000 barrels per day. While this 500,000 barrel per day increase sounds nice, the US Dept of Energy expects this number to fall well short of the increased seasonal demand. So while OPEC made a friendly gesture in reality all they did was shift the supply curve a few places to the left. U.S. oil inventories fell a greater-than-expected 7.01 million barrels to 322.6 million last week, the Energy Department said today.

Still Depressed: OPEC is not to blame [completely] for the jump is oil futures; point the finger at Mother Nature. There are two tropical depressions in the Gulf and inventories took a big hit.

Other prices of interest:
1. Light, sweet crude for October delivery rose $1.68 to settle at a record $79.91 on the New York Mercantile Exchange after rising as high as $80.18 earlier. October gasoline rose 3.49 cents to settle at $2.016 a gallon.

2. Nymex heating oil futures rose 3.64 cents to settle at $2.2191 a gallon, while natural gas futures jumped 50.4 cents to settle at $6.438 per 1,000 cubic feet. Natural gas prices typically react strongly to news of tropical weather due to the concentration of gas infrastructure in the Gulf.

3. Natural gas for October delivery rose 50.4 cents, or 8.5 percent, to $6.438 per million British thermal units in New York, the highest close since Aug. 17.

4. Heating oil for October delivery rose 3.64 cents, or 1.7 percent, to close at a record $2.2191 a gallon in New York. Futures touched $2.2224 a gallon, the highest intraday price since trading began in 1978.

5. In London, October Brent crude gained $1.30 to settle at $77.68 a barrel on the ICE Futures Exchange.

All in all, today was a good day for oil companies, so if you are heavily weighted in energy and oil companies you will see short term gains. I would look at companies in the Northeast, because of the discounts they receive on heating oil. Additionally, companies in states like WY and MA have been doing very well with Nature Gas exploration.

Tips: Ultra Petroleum Inc. (UPL); Avalon Oil and Gas; and SAP. Don't forget, everyone needs software.

Pay Less at the Pump?

OPEC Speaks
Even though the United States does not get the majority of its crude oil from the Middle East (only about 15% comes from Saudi Arabia), The USA does receive more than 50% of its crude oil imports from OPEC. With imports that high, its not hard to see why the US oil market is still has an indurate link to the OPEC cartel. It just a fact of life. The USA's largest crude importers are Canada and Mexico (both whom are non-OPEC countries), but they are followed closely by Venezuela and Saudi Arabia. Logistically, this makes sense, it is easier to ship form Canada then it is from Kuwait.

However, good news from from the sandy pond region today; Kuwait's Oil Minister, acting Spokesman for OPEC, announced today that OPEC would increase crude production by 500,000 barrels per day. This should ease oil futures and loosen up prices in about 30 days.

Another falsehood that many American's believe is that OPEC is made up of only Middle Eastern countries, this simply is not true. The countries that comprise OPEC: Algeria, Angola, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, The United Arab Emirates, and Venezuela.