Fed Beige Book Reveals Economy Still Slowing

Good Afternoon!

The markets have been pretty quiet today. Stocks are down mildly since the Fed beige book came out. This is the most recent data that the Fed has on the economy. The report showed that the economy continues to suffer:

"Sept. 3 (Bloomberg) -- Business across most of the U.S. was ``slow'' last month, while almost all Federal Reserve districts reported pressure to raise prices because of higher commodity costs, the central bank said in its regional economic survey.

Consumer spending was ``slow'' in most of the 12 Fed districts as the housing market ``weakened or remained soft,'' the Fed said in its Beige Book report, published two weeks before policy makers meet to decide on interest rates. A ``general pullback in hiring'' helped keep wage increases ``moderate,'' the Fed said today.

With the economy weakening under the impact of the yearlong financial crisis and housing recession, and consumer prices rising, most investors anticipate the Fed will keep interest rates unchanged through December. Policy makers have lowered the rate 3.25 percentage points over the past year.

``The pace of economic activity has been slow in most districts,'' the report said. ``Wage pressures were characterized as moderate by most districts amid a general pullback in hiring.''
While prices of energy and other commodities have declined recently, the Fed said companies in the San Francisco district, the largest region, reported that ``upward price pressure remained significant,'' while ``price levels remained high'' in three other districts. Philadelphia-area retailers saw ``rising wholesale costs,'' the Fed said."

My Take:

This is a pretty gloomy beige book. Prices are up, wages are down, and consumer spending continues to be slow.

One of the Fed presidents was on earlier today discussing unemployment. He expects the jobless rate to rise over 6% later this year.

The market seems very jittery and nervous right now. Investors have been flying into treasuries over the last few weeks. Take a look at the 10-year yield below:

Yields on the 10 year and other treasuries have been plummeting as investors fly out of stocks and into treasuries. We are starting to inch back to where we were in March when Bear Stearns blew up. Fear continues to grip the markets as the credit crunch refuses to abate.

The good news here is mortgage rates should drop slightly as long as the demand for treasuries is high because many mortgage rates are based of the 10-year.

Now don't get too excited over lower rates! The banks seem to be setting their own interest rates due to fear and insolvent balance sheets! However, some of this relief in the 10-year should still get passed on.

Bottom Line:

Today was a pretty ho-hum day in the markets.

There are two sectors to keep an eye on. Tech is sharply reversing so I would watch any investments you have in this sector.

The big sector story over the last few weeks has been commodities . There is another rumor going around that a second commodity hedge fund blew up.

Some of the recent high flying commodity plays like Potash(POT) have been getting creamed:

This is what can happen when the bottom falls out in commodities. Hedge funds get stuck on the long side and go bust or decide to close up. Two things can happen here: Either they try to stay alive and sell their commodites and attempt to rotate, or they go belly up and are forced to sell all of their assets via liquidation. Either scenario floods the marketplace with excess supply which then destoys prices.

So going forward keep the following in mind:

As these commodity hedge funds start blowing up, you can expect to see violent drops in things like oil, gold, and commodity related stocks. Stay away from this sector unless you are shorting it!

Fear and uncertianty continue to build in the stock market. I expect to start seeing a rise in the VIX shortly.

Any major negative market moving event could create a sever market correction in my opinion. Things are very fragile right now.

Stay nimble.