Market Talk

- The multi-year deal pay-cable movie channel Epix and Netflix (NFLX) agreed to is “a major move for Netflix, and undoubtedly a nice cash infusion for Epix, which has struggled to get carriage deals from traditional cable operators,” MediaMemo blogger Peter Kafka says. “This deal may make Netflix more competitive with cable, but it’s not designed to threaten Hollywood’s DVD business.”

- Demand Media filing a $125M IPO at a reported $1.5B valuation shows making it in the online content business is a “long march to the big time,” Kara Swisher writes. “Hence, the IPO, which will give it both cash and stock to use to grow itself, either organically or via acquisition, all while keeping the costs of content creation lower and lower via innovative technology.”

- Small business optimism sharply declines for second straight month. “Businesses and households are losing confidence and are adjusting their spending and investing plans accordingly,” Ryan Avent says. “A chill has settled on expectations around the country. It will take credible policy steps to change the tune.”

- Former Hewlett-Packard (HPQ) CEO Mark Hurd’s severance package, which could be worth as much as $30M, is “appalling,” writes Nell Minow, shareholder activist and editor of The Corporate Library blog. “While most CEO contracts exempt poor performance as a reason for ‘termination for cause,’ there is no reason to permit a departure following an ethics violation to be characterized as a resignation — when the result is a $50 million payout that would otherwise stay in the corporate bank account.”

- Now that Mark Hurd is no longer H-Ps’ CEO, a “dirty little secret” has been revealed about H-P’s business model. “H-P is a sprawling, ungainly conglomerate of tech companies that have only tangential connections to each other and that generate the most tepid of synergies,” writes Kevin Kelleher at AOL’s Daily Finance blog.

- This won’t get the attention of the Hurd departure, but TechCrunch reports the man who designed the Palm Pre has left H-P for greener pastures. Peter Skillman’s exit is the latest in a string of departures from the recently acquired smartphone maker.

- Productivity unexpectedly posted its first quarterly drop in 18 months as output growth slowed and labor costs rose. “If you were looking for one more reason to wonder about the already shaky prospects for a recovery in the labor market, today’s report on second-quarter worker productivity is just the ticket,” James Picerno writes at The Capital Spectator.

- Don’t get too anxious about Google (GOOG) and Verizon’s (VZ) joint proposal: the net neutrality situation still hasn’t changed much, Stacey Higginbotham says at GigaOm. “The good news is nothing about this compromise has any teeth without the FCC deciding to make it part of its official rules on network neutrality.”

- Rail traffic rose 4.1% last month compared to July 2009, but was still 15% lower than in July 2008, Calculated Risk reports, citing data from the Association of American Railroads. “Rail traffic collapsed in November 2008, and now, a year into the recovery, traffic has only recovered part way,” Calculated Risk adds.

- Former Sen. Ted Stevens, along with eight others, die in a plane crash in Alaska.

The Fed delivered something of its own “August surprise” today, saying it plans to redeploy money from its maturing assets into the Treasury market, an attempt at holding interest rates down that many are calling “QE Lite.” But as far as surprises go, it was underwhelming. If this is the best the Fed has left, well, it’s not a very reassuring sign.

Oh, the market responded. Stocks were down sharply in the morning, with the DJIA down as much as 146 at one point. That was on a bevy of bad news that came out, including downgrades to Intel over concerns that the PC market is about take a spill, a worrisome report about slowing Chinese imports (plays into the demand picture,) and yet another in a string of depressing reports on the state of the small-business sector from the NFIB.

The Dow was still down about 100 points when the Fed statement hit the Tape. Stocks staring whittling away the losses, with the Dow even poking its head into positive territory for a quick peak before falling back. The Dow finished down 55 (0.5%) to 10644, the S&P 500 fell 7 (0.6%) to 1121, and the Nasdaq Comp dropped 29 (1.2%) to 2277 on that Intel news.

The Fed surprised the Street with news that it would redeploy cash from maturing assets, a move some called “QE Lite.” Treasurys rallied, with the 10-year yield falling to 2.77%, its lowest since April 2009. The dollar came under pressure, too, falling near the 85 level against the yen, which appears to be something of a line in the sand.

But questions over the effectiveness of such a move capped the rally. Like we said yesterday, the Fed’s already unloaded the revolver, the automatic, the Tommy Gun, the bazooka and the Howitzer. Today’s move, which many described as symbolic, may best be described as a wet firecracker.

“The Fed’s decision to start reinvesting the proceeds from its maturing agency and mortgage-backed securities (MBS) holdings into Treasury securities is a largely symbolic gesture, designed to reassure the markets rather than boost the economy,” Capital Economics wrote. But how reassured will the market be, and for how long, is the Fed doesn’t, or can’t, boost the economy?

You're not the only one worrying, buddy.

Reaction in the blogosphere is relatively neutral toward the Fed’s move to prevent its huge balance sheet from shrinking. The central bank says it will reinvest proceeds from expiring MBS into long-term Treasurys, which should help keep mortgage rates low.

It’s a move that garnered a somewhat positive reaction in the stock market, as the Dow finished down only 54, well-off its session lows. But many market watchers believe the Fed could’ve done more this time around to propel the economy:

The Reformed Broker’s Josh Brown: “So the Fed Groundhog came out of his hole at 2:15 pm ET today, sniffed the air, took a glance at the data and decided that there will be six more months of kitchen-sink policy,” Brown quips. “Note how badly [the Fed] wanted to use the ‘D’ word (deflation) but how deftly they restrained themselves.”

University of Oregon economics professor Mark Thoma: “It’s something, and it indicates more awareness of the struggles the economy is having than some recent commentaries from FOMC members would suggest. But more aggressive action — an actual expansion of the balance sheet — is needed. In my view, the risks are asymmetric. That is, the potential costs of failing to expand the balance sheet to give the economy more help are much greater than the costs of expanding the balance sheet and then finding out the economy is doing better than expected.”

Economist’s Free Exchange blogger Ryan Avent: “The long and short of it is that the Fed has take the minimum possible non-contractionary action. I am struggling to understand it. Perhaps the Fed is wary of doing too much at once. Perhaps it is interested in demonstrating that it is aware of the economic risks but not yet convinced that further action is warranted. For now, though, it seems as though the Fed has acknowledged risks but refused to do anything substantive about them.”

Reuters blogger Felix Salmon: “The bigger picture, however, is one of the Fed largely having run out of ammunition. Most of what it’s doing now is symbolic: the real national response, as Mohamed El-Erian says, needs to come from the government rather than the central bank, and needs to be structural rather than monetary in nature. Given today’s decision, though, we can at least assume that any moves from the White House to try to bolster the national economy will be met with the strong support of Ben Bernanke.”

The Fed kept rates at zero, as expected, and it trimmed its economic assessment, as expected, but it also gave the stock market what it wanted: the central bank said it will turn over its maturing MBS and agency debt into Treasurys. Stocks are rallying on the move, but so are Treasurys. The DJIA is down only 19 right now, but the 10-year yield has plunged to 2.75%.

The move will help to keep rates low, which is probably a marginal good for the housing market, say, although it’s still a stick in the eye to the saving class. But with mortgage rates already at historic lows, and the housing market still under pressure, it’s hard to see what big impact this move will have.

Our colleague Mike Derby, who covers the Fed, called this a “wet firecracker.”

The major shift made by the Fed today – the decision to keep their portfolio steady – is a wet firecracker. It will not have much meaningful impact on economic activity and investors are likely to forget about it in short order when it doesn’t deliver much. It’s a sign of just how fraught the Fed’s options are, that this was their signature move.

Miller Tabak’s Dan Greenhaus says he was surprised that the Fed said it would buy longer-term Treasurys, a sign they’re more comfortable with keeping their balance sheet at bloated levels for longer than people thought.

But keep in mind what we’ve said earlier: this is a neutral move, in as much as it merely puts money that was out in the marketplace back into the marketplace (albeit, that money will now be held by the Treasury Department rather than private investors.) This isn’t about new money coming into the market, designed to be stimulating (and inflationary.) This about maintaining what’s already out there.

The move does have one other effect: it keep pressure on asset managers and investors to continue buying riskier assets in a search for yield, for better returns. The stock market has been a big beneficiery of this movement over the past year or so, as has the junk-bond market. ”

“Since there is no economic benefit to be garnered from this watered-down Fed stimulus, I can only guess that it is their aim to keep rates so low that we are forced into stocks,” Joan McCullough at East Shore Partners writes.

Falling prices aren't the same as sale prices.

Remember that scene in the first “Die Hard” (and the best one (well, the only really good one, I mean, the others are passable, except for that fourth one, but really, the first is a top-rate action movie, the others are just rehashed leftovers,) where John McClane throws the dead terrorist out of the window and the body plops down on the hood of the police cruiser that’s passing by, and McClane leans out the window, already a dirty, bloody mess with a machine gun in his hands, and screams “Welcome to the party, pal!”

That was the first thing that came into my head when I saw this Phil Izzo story (and that probably says something about me, but let’s leave that for some other blog) hit the Tape.

It appears that Wall Street economists, by a two-to-one margin, now believe that deflation is a bigger threat than inflation. So, for all the jawboning the Fed’s been doing about inflation, a con game they are likely to maintain this afternoon, Wall Street’s not buying it anymore.

A Wall Street Journal survey found that by a two-to-one margin Wall Street economists see deflation as a bigger threat to the U.S. economy over the next three years than inflation.

“Deflation is dangerously close,” said David Resler of Nomura Securities, one of 53 economists surveyed by the Wall Street Journal. Among economists who answered the question, nearly two-thirds said that deflation poses the bigger risk to the economy over the next three years; the remainder said inflation is the bigger threat. That compares to an April survey, when the economists were split 50/50 over whether inflation or disinflation posed the bigger risk over the next year.

I honestly don’t have much new to say about this; well, anything actually. We’ve been banging the drum on this topic for a long time. It’s just sort of, well, satisfying to see Wall Street coming over to our way of thinking. Even if the thoughts themselves are frankly depressing and even frightening. But you’ve got to face up to reality before you can start dealing with the situation.

Investors aren’t waiting for the Fed decision. There was enough bad news today for them to start the selling early. The DJIA was down about 150 earlier, now down 85. We’ll see if the market decides to turn the FOMC statement into a buying opportunity, or a selling opportunity.

Helicopter Ben'll never let us down. He won't, won't he?

The put may be in trouble.

Will the Fed announce today that it’s completely exhausted its effective policy tools, and we’re all just having to pull ourselves up by our own bootstraps and trudge our way out of this hole, or will the central bank assure us it’s got the situation under control, it’s not as bad as you think, and by the way, watch out for that inflation that’s surely coming as soon as things pick up, and by the way, we’re going to dip our toes back into the market.

It’s surprising to see stocks down as much as they are ahead of a meeting of the Fed’s rate-setting committee, the Federal Open Markets Committee, the FOMC. Usually, traders hold tight until the 2:15 p.m. ET statement from the committee. Then, all hell breaks loose for about half an hour. I can’t recall a big sell-off like this preceding the statement. It’s almost like somebody leaked the statement.

First things first: they are going to leave the fed funds rate in this zero to 0.25% band it’s been in for more than a year (note that at any other time, this would be considered absolute, sheer madness, and that is no exaggeration; that’s an indication of the true state of our economy.) Nobody but nobody doubts that. What is up for debate is what the Fed’s going to do next, now that it’s apparent to just about everybody that the economy is decelerating, or rolling over, or stalling, or crapping out, call it what you will.

The problem is, there may not be much more for them to do, and that could put a big crimp in the market’s fail-safe position: that the Fed will always bail them out.

Continue reading…

Global equities markets appear more cautious than at this time yesterday, as we move closer to the latest proclamations from the FOMC.

Let’s make this simple. Whatever the FOMC says, or action it might decide to embark on, the fact is it won’t create millions of jobs in the next several months. That’s what the economy needs, not more easy cash. The federal government can print money until the presses melt — it doesn’t matter if no one wants to (or simply can’t) spend or borrow, and that appears to be the current situation.

Stocks lower in Asia overnight and currently in Europe. Oil and gold futures both easing as US dollar gains. Second-quarter productivity due at 8:30 a.m. S&P futures down 7.80, DJ futures down 70. Ten-year note higher, yield at 2.81%. Euro down to $1.3152.