Market Jumps Up, Fed Sits On Hands

The market ended Tuesday up 331 points. Why?  A bit of euphoria over oil prices reaching new lower highs (as opposed to true lows).  The rationale is that inflation could be ebbing, freeing the Fed to think less about tightening rates.  With scary sounds from the bush behind you, and quicksand in front of you, the best option is to do nothing.  The benchmark Fed funds rate will stay fixed at 2%, an outcome obvious to everyone.  The N.Y. Times suggests the Fed is less worried about inflation than about a weakening economy:

That move was expected. What drew the attention of Wall Street analysts was the policy makers’ decision to partly reverse the assessment of the economy they had issued after their last meeting. In June, the bankers had ratcheted up their worries about inflation while declaring that the downside pressure on the economy seemed to have diminished.

The Fed put it this way:

Although downside risks to growth remain, the upside risks to inflation are also of significant concern to the committee. The committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

The Conference Board expressed concern that unemployment could cross 6% in early 2009, so any sustained rally in the stock market seems unrealistic.  As we have stated before, financial stocks will eventually move upward, and oil prices down,  converging at some happy profit point for those who time it right, but there are a lot of moving parts in this economy and too many of them are not moving in the right direction.  We think of the recent talk of Alt-A loans coming under increasing default pressure, which can only increase as labor problems move in front of financial system worries. 

We also note the increased rhetoric over oil by the politicians, while prices are beginning to slack out.  It would seem to us unwise for any candidate to get so specific as to policy solutions when everything is in such flux; broad themes and long term policy should be the order of the day in order to avoid falling into situational flip flops.

The economy is no sitting donkey, waiting for an easy solution to be pinned to rear. 

The most interesting bit of news can be found in the recent performance of HSBC, the British banking giant.  They managed to see their profits fall 29% in the first half of the year (according to CNN), leaving them with $7.7 billion in gains.

They remain profitable despite having bought their way into the front of the American subprime market with the 2003 aquisition of Household International Inc.  The offset to this disastrous business decision in the United States has been their deep and rising presence in the Asian markets, providing a good portion of their yearly profits.

With this one company you see the wisdom of diversity, at the same time that many American financial concerns are considering selling off various profitable business units to raise capital.  Why auto makers overseas andHSBC can outperform American automakers and Citibank here, and with all American execs at higher pay scales, is a question to contemplate as we head into our fall season.