Tuesday, September 16, 2014

Markets rally on China stimulus plans

Dow soared 100, advancer ahead of decliners 2-1 & NAZ added 33.  The MLP index jumped 5+ to 529 & the REIT index went up 2+ to 300.  Junk bond funds drifted lower & Treasuries gained.  Oil has a big rally & gold advanced for a 2nd straight day as a drop in the dollar & a report that China's central bank implemented new stimulus measures (see below) boosted demand for the metal as an alternative investment.

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CLV14.NYM....Crude Oil Oct 14....94.88 Up ...1.96 (2.1%)

Live 24 hours gold chart [Kitco Inc.]

Federal Reserve (FED) officials weighing whether to alter a pledge to keep interest rates low for a “considerable time” might draw inspiration from a decade-old solution.  In 2004, the FOMC was also debating the timing of an exit from a prolonged period of low interest rates.  To prepare markets, it was considering a change to language in its statement that’s similar to the FED’s current guidance on the future path of rates.  The FED for 2 years has assured investors that rates will be held near zero for a “considerable time” after it completes an asset-purchase program that’s set to end after the Oct meeting.  Officials have said it’s time to consider dropping the phrase, raising the question of what, if anything, to put in its place. History offers a clue.  Back in early 2004, when policy makers were reviewing their options, the benchmark federal funds rate had been kept at 1% since Jun 2003.  Since Aug 2003, the FED had said “policy accommodation can be maintained for a considerable period.”  The language was still in place when officials met in Jan 2004, amid signs of a strengthening economy.  Alan Greenspan, the chairman at the time, summed up that meeting by suggesting the committee “drop the ‘considerable period’ language & adopt some reference to ‘patience.’  The latter would in my view give us greater leeway to take action,” according to a transcript of the meeting.  His colleagues agreed, & their post-meeting statement was adjusted accordingly: “With inflation quite low and resource use slack, the committee believes that it can be patient in removing its policy accommodation.”  The federal funds rate was left at 1%.  In May 2004, to prepare financial markets for an approaching increase in rates, the statement language was changed again: “The committee believes that policy accommodation can be removed at a pace that is likely to be measured.”  At the next meeting, in Jun 2004, 5 months after “considerable” was replaced by “patient,” the FED raised its benchmark rate to 1.25%.  It also modified its language by adding the sentence: “Nonetheless, the Committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.”  That was the point at which Janet Yellen joined the FOMC conversation, when she began attending meetings after becoming pres of the San Francisco FED.  In a possible hint of how she will view the issue this time around, she argued later that year that changes in the statement should retain policy-maker flexibility.  “In view of the recent weakness in the economic data and the downgrading of the forecast, I would favor modifying the final sentence in our statement to indicate that we intend to fulfill our obligations to promote both price stability and sustainable growth,” she said in the Aug 2004 meeting.  Her suggestion wasn’t incorporated into the committee’s statement.  The FED kept “measured” in the statement until it was dropped in Jan 2006, & it kept raising rates in quarter percentage-point increments thru Jun 2006, pausing at 5.25%.

Fed Weighing Change to Statement Can Look to History

Washington Prime Group, a shopping-center landlord spun off this year from Simon Property (SPG), agreed to buy Glimcher Realty Trust (GRT) for $2B to create a diversified retail property owner.  GRT stockholders will receive $10.40 in cash & 0.1989 of a share of WPG each GRT share.  Based on yesterday’s closing prices, the transaction values GRT at $14.07, a 33% premium.  The deal gives WPG more malls, outlet & open-air shopping centers & an operating platform for its business, which is currently managed under an agreement with SPG that runs thru 2016.  The combined company expects to increase income through higher occupancies & rents.  “This adds a very high quality mix of assets to our portfolio,” WPG CEO Mark Ordan said.  “This puts us in great shape.”  The transaction is valued at $4.3B including debt.  The new entity, to be known as WP Glimcher, will have about 68M square feet of gross leasable space at 119 US properties.  Ordan will be chairman of WP Glimcher & GRT CEO Michael Glimcher will be CEO of the combined company.  The purchase is scheduled for completion in Q1 of 2015.  WPG fell 1.22 & GRT jumped 3.16 (30%).  If you would like to learn more about WPG, click on this link:

Washington Prime Group Agrees to Buy Glimcher for $2 Billion Cash, Stock

Washington Prime Group (WPG)

China is providing 500B yuan ($81.4B) of liquidity to the country’s 5 biggest banks as Premier Li Keqiang steps up stimulus to support economic growth, Sina.com reported.  The People’s Bank of China (PBOC) is providing the banks with 100B yuan each thru standing lending-facilities with tenor of 3 months.  The move shows the gov’s determination to support the economy even using broad-based stimulus that may exacerbate the country’s mounting debt. Premier Li’s target of about 7.5% GDP growth this year is threatened by a property slump.  The weakest industrial-output expansion since the global financial crisis & moderating investment & retail sales growth shown in data released last Fri, underscore risks of a deepening economic slowdown.  Those readings followed a 2nd straight drop in imports & a 40% decline in the broadest measure of new credit for Aug, as well as indicators showing a manufacturing pullback.

PBOC Provides $81.4 Billion in Liquidity to Five Chinese Banks, Sina Says

The markets liked to hear that China is throwing money into the economy to stimulate growth.  Now traders are waiting for Janet Yellen to speak tomorrow & they will weigh every one of her words.  The bond buying program is expected to end next month.  But they are anxious to hear about plans for raising interest rates.  Already the high yield sectors have been selling off in anticipation, but she is unlikely to say anything meaningful since that is still viewed as somewhere down the road.  After the China rally today, whatever she says will likely be greeted with more buying tomorrow.

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