Market Update 9/20/13

Federal Reserve Maintains Accommodative Stance

The Federal Reserve unexpectedly refrained from reducing the $85 billion pace of monthly bond buying, saying it needs more evidence of sustainable improvement in the economy and warning that an increase in interest rates threatened to curb the expansion.

“Conditions in the job market today are still far from what all of us would like to see,” Chairman Ben S. Bernanke said at a press conference today in Washington after a two-day meeting of the Federal Open Market Committee. “The committee has concern that rapid tightening of financial conditions in recent months would have the effect of slowing growth.”

Bernanke stressed that the pace of bond buying would be dependent on economic data, and the Fed has no predetermined schedule for tapering the purchases that have pushed its balance sheet to $3.66 trillion.

“There is no fixed calendar schedule, I really have to emphasize that,” Bernanke said. “If the data confirms our basic outlook for growth and the labor market, then we could begin later this year.”

Debt Ceiling Debate Resurfaces

Only days remain until some government operations will be shut down unless Washington is able to reach an extension.  In order for this to transpire, Congress must pass a continuing resolution that will be approved by the Senate.  It is expected that Congress will include a resolution that defunds Obamacare which will ultimately lead to rejection by the Senate.  If both sides cannot come to an agreement, funding for some government operations will be cutoff and agencies suspended.  Some projects that would possibly be suspended could include national parks and museums, processing of US passport applications, and various call centers.

The debt limit is expected to be reached in mid-October at which time the Treasury will not have the authority to borrow additional funds.  If the limit is reached the Treasury will use any available cash to fund current expenses but it is estimated that many bills will be left unpaid.  Before any agreement can be met to avoid reaching the limit there are several hurdles involved:  House Speaker John Boehner wants spending cuts included in any agreement to increase the borrowing limit.  President Obama has suggested that any spending cuts would have to come with tax increases.  Additionally, Boehner wants to delay several Obamacare provisions such as the requirement for uninsured individuals to obtain this insurance.

Federal Reserve chairman Ben Bernanke said on Wednesday that “a government shutdown…and a failure to raise the debt limit could have very serious consequences for the financial markets and the economy.”   Warren Buffett described his thoughts on the scenario a little differently, suggesting these inactions would be “pretty damn dumb”.

Apple’s new iPhone models hit the shelves

Apple’s two newest iPhone models (5C and 5S) went on sale this morning.  Lines began forming at some Apple stores weeks ago and have increased in size over the last few days.  Indeed, today on the way into work, lines at the AT&T stores in Kirkwood and St. Louis Hills each saw around 50 people waiting in the rain in an attempt to get their hands on the new iPhones.  The biggest demand (from initial reports) seems to be for the iPhone 5s; more specifically, the gold version of the 5S.  Apple’s record high for iPhone sales on opening weekend was 5 Million, set last year.  Analysts are predicting that Apple will surpass that number this time around.  While the 5S seems to be the “hotter item”, the 5C is predicted to also have a high demand among consumers looking for a less expensive alternative to the 5S.  The biggest concern, though, will be whether or not Apple will have supply constraints, especially for the iPhone 5S.  On Monday, Apple will release the sales numbers for the opening weekend.  It will be interesting to see how these numbers come in and will offer some insight as to how well the iPhone 5C will fare with consumers, specifically in emerging markets.

Emerging Markets

Emerging Markets have been rallying in the last four months, making up their earlier losses.  However, they retreated today when India’s Central Bank unexpectedly announced that they were raising the repo rate, which is the rate that the Central Bank lends to Indian banks overnight, in order to help control their inflation rate.  Elsewhere, Super Typhoon Usagi is expected to hit Taiwan on Saturday and Hong Kong on Sunday.  Like Tropical Storm Sandy, this storm could have a disruptive impact on the two emerging economies.  All told, Emerging Markets are still down around 3.7% this year and are trading at 10.7 times projected earnings, which is a tremendous discount compared to historical multiples.

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