Month: August 2011

Markets are slowly pricing in additional quantitative easing from the Fed but rising inflationary pressures suggest the central bank may be constrained to implement further measures. Today’s CPI data is all the more important for equity markets expecting a ‘Bernanke Put’.

In line with the current ultra-loose monetary policy US inflation has seen an uptick in recent months. While never officially called ‘Quantitative Easing’ the Fed’s policy of asset purchases to lower interest rates was designed to provide a burst of inflation to stave off potentially damaging deflationary forces. In light of QE1 and QE2 the Fed looks to have succeeded in its mission. In May consumer prices rose 3.6% y/y, up sharply from the previous three months. The headline June CPI number actually declined by 0.2% but the drop is largely due to a decline in gasoline prices. In contrast core CPI increased 0.3%, driven by rising food costs. Yesterday’s rise in June PPI report suggests that producers are succeeding in passing on their increased costs to the US consumer who in turn is willing to pay higher prices.

While Fed Chairman Bernanke maintains the position that US inflation is transitory, the data suggests the risk of deflation is slowly disappearing. As shown by last week’s FOMC vote which had three dissenters against the pre-committed interest rate targeting Bernanke will face a difficult task convincing the FOMC another round of asset purchases is necessary given the rising prices in the US economy and the risk of inflation spiraling out of control. Yesterday Philadelphia Fed President Charles Plosser said the Fed may need to raise rates before mid-2013, in stark opposition to last week’s FOMC statement.

Those equity traders who are looking for the ‘Bernanke Put’ may also be disappointed. Comments yesterday by Dallas Fed President Richard Fisher describe the Fed is not the protectors of stock market traders and investors. This suggests the real economy will need to show slowing growth rates and equity markets will have further room for declines before the Fed would step in to support the markets. However, a repeat of Monday’s 6.6% decline in the S&P 500 could initiate QE3 regardless of the inflationary risks the Fed faces as Bernanke has said higher equity prices are one way the Fed measures the success of its QE efforts. Today’s July CPI data carries all the more importance.

Looking out towards the medium term, reduced expectations of additional US monetary policy may be a catalyst for the USD. While increasing interest rate expectations might be asking for too much given the Fed’s recent commitment to low rates until mid-2013, only the expectation of future monetary policy tightening would be needed to prove USD supportive. A similar view has been taken in the market regarding US fiscal credibility following the compromise between the President and Republicans to raise the debt ceiling, putting the US on a path to fiscal austerity. The prospects of a credible fiscal policy combined with an end to quantitative easing measures could be viewed as a turning point in the 13-month bearish USD trend versus the EUR.

Read more forex trading news on our forex blog.

Being contained by 1.4535 resistance, EURUSD pulled back from 1.4517, suggesting that a cycle top is being formed on 4-hour chart. Pullback to test 1.4325 key support would likely be seen later today, a breakdown below this level will confirm that cycle top, and indicate that the rise from 1.4055 has completed, then another fall towards 1.3900 could be seen to follow. On the upside, a break above 1.4535 resistance will signal resumption of the longer term uptrend from 1.3837, then next target would be at 1.4700-1.4800 area.

Daily Forex Forecast

The National Bank of Georgia decreased its benchmark refinancing interest rate by 25 basis points to 7.50% from 7.75%.  The Bank said (translated) the high rate of inflation (8.5% in July) was mainly driven by food price rises (6.7%), and it expects inflation to reduce in the coming months; towards target by the end of the current year.  The interest rate decrease was preventative in nature, in order to keep inflation around the target level in the medium term.  The Bank also noted the economic growth risks in the US and eurozone economies; commenting that it may ease pressure on commodity prices, but also impact on global growth risks.

Aug. 17 (Bloomberg) — Janwillem Acket, chief economist at Julius Baer Group Ltd., talks about the outlook for the Swiss franc and possible intervention from the Swiss National Bank. He speaks from Zurich with Francine Lacqua on Bloomberg Television’s “The Pulse.” (Source: Bloomberg)

Iceland’s Sedlabanki raised its seven-day collateral lending rate by 25 basis points to 4.50% from 4.25%.  The Bank also increased the deposit rate by 25 basis points to 3.50% and overnight lending rate to 5.50%.  The Bank said: “The interest rate increase is in accordance with recent MPC statements and reflects the fact that the inflation outlook for the coming two years has deteriorated still further since the Committee’s last meeting,” and noted “It is necessary to act now to contain inflation and reduce potential pressure on the krona”.

Yesterday was an epic, game-changing day for Google (GOOG:NASDAQ). It alters the landscape in the smartphone industry. In one expensive move, Google made its first foray into proprietary hardware territory. The move was another kick in the head for top competitor Research In Motion (RIMM:NASDAQ).

Google is now a hardware manufacturer. Never in the history of the company has it produced a product that consumers can actually hold in their hand.

At $12.5 billion, the purchase of Motorola Mobility (MMI:NYSE) is a drop in Google’s big cash bucket. Motorola produces high-quality phones and has a clean reputation with most consumers in the smartphone industry (not like RIMM). This will be a major leap for Google and a catalyst to propel it higher in the coming years.

MMI lacked a marketing catalyst and its brand was lost in the shuffle. That made it a prime candidate for Google to snap it up.

That, and this: Motorola Mobility’s 17,000 patents.

They are a sort of immunity to the lawsuits that happen so frequently in the smartphone industry. With the patents in its pocket, Google can focus on creating a “super phone” that integrates all the best features of its Android system with a sleek, functional, high-quality piece of hardware.

Apple is the only other company that does this. But unlike Apple, Google will still license its operating system to other phone manufacturers. That means increased partnerships with demand for new apps and functions. This could hurt Apple.

Apple doesn’t share well. It must have missed that lesson in kindergarten. The company lost a similar battle to Microsoft in the ’80s. Apple only offered its operating system on its own computers, while Bill Gates let anyone buy a copy. This sent Apple into a 12-year hole and made Microsoft one of the most profitable companies in history.

It may not be that bad this time around, but Apple has a serious, more powerful contender in Google (Android). It’s now both the top-selling mobile platform in the world and the largest aggregator of all types of information in the world. This gives Google an extreme edge.

Frankly, the other phone manufacturers don’t have anywhere to go, unless of course they want to run Windows Mobile, which is currently only 9% of the U.S. market. That wouldn’t be smart.

Google is the Microsoft of the new millennium, only smarter, more nimble and with a much larger potential reach. When Bill Gates was at the top of his game, he could only dream of the things that Google is now capable of.

I would be buying Google here.

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RIMM’s Smartphone Future

Everyone loves the underdog, but I doubt that this fight is going to end for RIMM like it does in the Rocky movies. Sadly, the Canadian phone manufacturers still has some beatings to take and won’t win this one. Some investors think that a company like Microsoft, Dell or Hewlett-Packard will come in and buy the company for their large subscriber base.

Of course, adding 77 million RIMM subscribers to your platform is a great way to achieve a critical mass of customers right away and RIMM does have unique security features that set it apart from Android or iPhone.

But a purchase of a company like RIMM has a downside. The company is losing serious market share to Apple and Android. Its phone and tablet design is dull and its operating system drab and outdated, which would mean some serious research and development time and costs for the acquirer. The worst part about RIMM is its application selection (app store) pales in comparison to Apple and Android.

Buying a RIMM phone is like buying a computer that no one makes software for.

To put it bluntly, RIMM needs to be bought by a company that is willing to bet it all and has little left to lose. Dell, HP and Microsoft all fit the bill. Yes, RIMM stock is relatively cheap, but many said Nokia was cheap when its shares were at $16. They fell below $5 recently.

If you are a risk taker, you can buy RIMM below $27, but I would keep it small and stick to the stock.

The one thing you don’t want to do is make the mistake that many investors did with MMI.

Who Bought MMI and Lost Yesterday?

You would think that just about everyone was a winner in MMI yesterday. Google is paying $40 in cash per share, more than MMI has ever traded for since coming public in late 2010. But there were losers…

Investors who bought out-of-the-money call options with a strike price of 40 or more lost ALL their money. Even options that expire all the way out till January 2013 are now practically worthless.

A good friend of mine used to say, “If you don’t know what you are doing, you’re gonna hurt yourself.” Unfortunately, for many this was a tough lesson to learn.

Most likely these call buyers were speculating on a takeover. The worst part is that they were right, but they picked the wrong option! Options can increase your chance of success in a trade and they can multiply your returns exponentially, but when used incorrectly, they can hurt you.

Written by Jared Levy for Taipan Publishing Group. Additional valuable content can be syndicated via our News RSS feed. Republish without charge. Required: Author attribution, links back to original content orwww.taipanpublishinggroup.com.

Aug. 17 (Bloomberg) — Steve Brice, chief investment strategist at Standard Chartered Bank in Singapore, talks about the outlook for the global economy, equity markets and commodity prices. Brice speaks with Rishaad Salamat on Bloomberg Television’s “On the Move Asia.” (Source: Bloomberg)

Apparel retailer Abercrombie & Fitch (ANF) reported fiscal second quarter earnings Wednesday that surged 64%. Profits rose to $32 million, or $0.35 per share from $19.5 million, or $0.22 per share, in last years second quarter, beating analyst expectations.

Aug. 17 (Bloomberg) — Jonathan Cavenagh, a currency strategist at Westpac Banking Corp., discusses the prospect of the Swiss National Bank pegging the franc to the euro. He talks from Singapore with Linzie Janis on Bloomberg Television’s “Countdown.”

Aug. 17 (Bloomberg) — Arnab Das, managing director of market research at Roubini Global Economics, talks about European Central Bank policy and the possibility of a joint euro-area bond. Das, talking with Francine Lacqua on Bloomberg Television’s “The Pulse,” also discusses the Swiss National Bank’s intervention in the franc.