China Mad For Star Wars,But For How Long?

China may be having stock market troubles,but it's people have gone out and spent their entertainment dollars anyway.Disney's Star Wars had a more than 53 million dollar opening in China-the largest film opening ever.*
You can't walk into a mall without running into Star Wars,it's been said.Our gross box office there is up 54% on the year,said Richard Gelford,CEO of Imax Corporation.I think there's a disconnect between the market and consumer discretionary in China.Star Wars had a more than 8.1 million Imax opening.We were up about 6% in China last night.We get real time feedback from a thousand theatres worldwide,Mr.Gelford explained.*
China has a massive buildup in debt,added Ruchir Sharma of Morgan Stanley Investment Management.Just when exactly this leads to a meltdown is hard to predict;but this is the main threat faced by the global economic community.The Chinese economy has become so large and important today.*
In the US, what we're looking for in 2016 is that growth forecasts will come down by a percent to just 1.5%.If you look at the history of commodity prices,they spend a long time,15-20 years,correcting the excesses.What you can expect is,an extensive trading range.I doubt we'll get much beyond 10-15% down.We'll probably get back to 40-50 dollar oil and languish there for a long time.*
Walt Disney (DIS),Imax Corp (IMAX),Morgan Stanley (MS)

The Fed's Rate Hike:What Was Behind It and What It Means

The Federal Reserve announced today that it is hiking the Fed Funds Rate,its iconic interest rate,by 0.25%.*
This action marks the end of an extraordinary seven-year period during which the Fed Funds Rate was held near zero,said Federal Reserve chair Janet Yellen at a post-announcement press conference.It reflects the Open Market Committee's confidence that the economy will continue to strengthen.The Committee judged that a modest increase in the FFR target is now appropriate.The labour market has clearly shown continued improvement.Overall,the Committee sees the risk to both the labour market and economic growth as being balanced.
Low energy prices and the appreciation of the dollar have weighed on inflation.Long-term inflation expectations remain anchored.In considering future policy decisions,we will carefully monitor progress towards our 2% inflation goal.The limit on inflation is due to transitory factors which we expect to slacken over time.An abrupt tightening could increase the risk of pushing the overheated economy into recession.*
It's important not to overblow the significance of this first move-it's only a quarter of a percent.The policy we judge to be accommodative.I continue to judge there is slack in the economy:the depressed level of labour participation and the high level of part-time employment.With rates close to zero,we have less room to respond to negative shocks.If we do not begin to slightly reduce the amount of accommodation,the odds are good the economy would overshoot our goals.
It doesn't mean we need to see inflation reach 2% before we move again.I'm not going to give you a simple formula for when we would move again.It could be on a variety of different forms of evidence,but I don't want to give a simple benchmark.We do expect inflation to be moving up,but we don't expect it to reach 2%.
All oil prices need to do for us to reach our inflation goal is stabilise.I certainly grant that we've seen a number of shocks,but we don't expect them to drop much lower;but to stabilise.Market expectations are for oil to stabilise for awhile and then move up.*
Were there an unexpected,persistent change in financial market conditions,we would need to take them into account.I do not think that expansions die of old age,but the economy does get hit by shocks,and there are significant odds that the economy hits some unforeseen shock that sends it into recession,and of course we would respond.Some European central banks have cut their overnight lending rates;we could study taking the overnight rates into negative territory.This is something we have contemplated-our options.It would be nice to have a buffer in the FFR,to have some ability to respond.We have a far more resilient financial system now than we had before the financial crisis,but we will be evaluating this carefully.*
For average Americans,the Fed's decision reflects our confidence in the US economy.We see an economy that is on the path of sustainable improvement.I hope they will take this to mean that conditions will continue to strengthen and job prospects will be good.Some consumer borrowing rates,some credit card rates (and adjustable rate mortgage and small business loan rates) may move up slightly.
Gradual rate hikes does not mean mechanical,evenly spaced hikes.We will be data-dependent,and as the conditions evolve,we will take them into account.*
We are constantly monitoring foreign economic developments;we understand that our fates are linked.We've made a commitment to the emerging market policy makers that we will communicate as clearly as we can to avoid spillover to the emerging markets.Our economy doing well is encouraging to other economies around the globe.We have taken care to avoid unnecessary negative spillover to the emerging markets,Fed chair Janet Yellen told the reporters.*
In sum,the Fed judges that the US economy is doing so well,they need to slow it down it a bit,so it doesn't overheat into high inflation and another recession.The way they do that is by raising the Fed Funds Rate,which raises the rates on certain consumer loans such as credit card balances and adjustable rate mortgages.

Taking Advantage of Market Volatility

This volatility is a real problem,said Rob Kapito,President of BlackRock,the world's largest money manager.People are back in cash,but my message is to get invested in the marketplace and try to put all this noise away.There's always noise in the marketplace.Most companies have been buying back stock and paying dividends.I'd like people to think about who benefits from lower oil prices.Discretionary goods are going to see a pop in this.Tech advances are changing the business models of many companies.Think through what's going to change.Look at companies that are innovative and changing their models,and those that are just lagging behind.
You're going to live longer,and you're not going to have saved enough for retirement.You can't invest for the future in the future.The millennials are saving,but we need to get others thinking about it.You can benefit from being a long-term investor in those sectors.*
I think you've put in a low on oil prices,adds Jeff Saut of Raymond James Financial.The oil stocks have been absolutely crushed.If crude oil has bottomed,you're going to see some pretty good action on the way back up.If we've seen a low,you're going to do very well in an energy etf or an energy-centric mutual fund.*
I'm just a little bit concerned about the near-term volatility,said Brian Jacobsen of Wells Fargo Advantage Funds.However,I would view that as a buying opportunity.Any weakness,I'd be buying into the equity front.*
Coach(COH),Macys(M),Energy Select Sector SPDR Fund(XLE),iShares Select Dividend ETF(ETY)

Investment Issues:Fed Policy;China;Oil and Transport

The Fed hasn't learned the lessons of what they did 10 years ago,and I fear they're doing it again,said Stephen Roach,senior fellow at Yale University.Is a one percent rate hike going to restrain the economy?Absolutely not.If anything,the Fed is going to disappoint us in terms of how much it adjusts rates this year.They're in total denial that cheap money and an accommodative policy had anything to do with the train wreck of 08-09.The US really needs export growth as it contemplates the weakness of the American consumer.
I've been completely optimistic on China.It's slowed,but with a slowing that was implemented strategically.China's adamant about going to market-based systems.Defaults are a sign of health in this.
The Fed is fearful of doing its job as a steward of the real economy,Mr.Roach added.*
Volatility has to wring itself out,acording to Paul Schatz of Heritage Capital.The bulls have to make a new high here,or the Dow will slip below 17,000.We've been long TLT,the long Treasury bond etf,all of 2014,but we're getting close to taking some off the table.We're going to have oil in the 40s;eventually,we're going to have oil in the 60s.
If the historic trend following such a steep oil price decline is followed,CNBC floor reporter Bob Pisani pointed out,oil will be at 75.00 in the second half of the year.*
Actually,I think the decline in oil prices is going to help us,said CSX chairman and CEO Michael Ward.It's good for the consumer.We're seeing the volumes continue the same as they were before the decline.We fully pass on the lower fuel prices to our customers,based on the price of West Texas Intermediate crude.We were up about six percent in carloads.We see an uptick in virtually every market we serve.We expect to grow beyond the rate of the economy.There are some issues on the west coast now,but over time that may create more shipments through the east coast,the railroad executive explained.*
iShares 20+ Year Treasury Bond ETF(TLT),CSX Transportation(CSX)

Federal Reserve Modifies Guidance,Not Policy

Although the Federal Reserve's Open Market Committee held steady its low interest rate monetary policy on Wednesday,it has altered its guidance because it doesn't want to be bogged down in the past.The FOMC reaffirmed that the 0-0.25 interest rate range remains appropriate,Fed Chair Janet Yellen said in a news conference after the FOMC meeting drew to a close-the last such meeting of the year.The FOMC judges it can be patient in beginning to normalise monetary policy,Ms.Yellen continued;adding,however,that some modification to our guidance is appropriate at this time.The majority of the FOMC believes interest rates will be raised in 2015.*
Progress continues to maximum employment.Job growth has been strong recently.The Committee continues to see sufficient underlying strength in the economy to continue to support employment growth.Inflation continues to run beneath the Committee's 2% objective.The Committee expects inflation to gradually move back to its objective.For the US,the oil price drop is a net positive.*
History shows central bank independence promotes better economic performance.We are accountable to Congress in explaining what we do,but I would be very concerned about any change to the policy of no audits of monetary policy.*
We certainly did review global economic developments,including developments in the Russian economy.The drop in oil prices is posing a series of difficult conditions for the Russian economy.I expect the spillover to the US would be small,Ms.Yellen noted,citing the small percentage of Russian holdings in US portfolios and the small amount of trade between the two countries.*
The S&P 500 rose 40.15,or 2,4%,in response to the Fed's decision.

War With Iran:What To Expect-and what to do

President Barack Obama warned Iran Wednesday that the time left for a diplomatic solution is shrinking.Investors are contemplating just what to expect and how to respond if war indeed breaks out.Aaron Gurwitz,Chief Investment Officer at Barclays Wealth,says the problem is,this is an unknown unknown.I don't know how to assess the chances of a war.
In an attack on Iran,the price of oil would probably rise very sharply.It would be very hard to get oil to customers.Expect 150-200 dollar a barrel oil if the Strait of Hormuz is closed.
It would be a huge impact on markets and the global economy.Risk assets such as equities and junk bonds would be sold.We at Barclays don't want to go into cash now.You might want to buy the VXX as volatility would spike,or an oil etf.
I worry about it as a citizen and an investment strategist.You hear people talking about starting a war in a very sensitive region.Those who would lose sleep should probably put something in their portfolio,Mr.Gurwitz counseled.
Barclays PLC ADR(BCS)
Some possibilities for the situation researched by this blog include:
iPath S&P GSCI Crude Oil Total Return(OIL)
iPath S&P 500 VIX Short-Term Futures ETN(VXX)
iPath S&P 500 VIX Mid-Term Futures ETN(VXZ)
It is generally unwise to concentrate too much in any one asset.Also bear in mind that VXX is more volatile than VXZ.None of the notes above pay dividends or interest.
For less experienced investors,allocating more to the bond and cash portions of their portfolios would seem the safest course in difficult times.Some of the most popular bond funds are:
iShares Barclays Aggregate Bond Fund(AGG)
Vanguard Total Bond Market ETF(BND)

The Value of Talks

U.S. Treasury Secretary Hank Paulson says there's no doubt oil prices are a problem.He attributes them to supply and demand factors.You're going to get volatility with tight supply.It can only be good news to talk about it with the Saudis.That's a productive idea.We have not had the investment we need in new production and alternate sources.It's always of great value to talk to other policymakers around the world.That builds up a level of trust so we can call each other,Mr.Paulson explained.As for the financial crisis,regulation needs to be updated to catch up with hedge funds.Clearly the Federal Reserve needs greater visibility and authority with investment banks,given the new lending facility for the banks.There's a role for market discipline and moral hazard.When assets are being revalued,you're going to go through times like this,Mr.Paulson observed.