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1. Bernanke, Trichet Talk Money Supply
2. China Dumping U.S. Dollars
3. Which Stocks Should You Sell Now?
4. Study: Foreclosures Rise 17 Percent in Third Quarter
1. Bernanke, Trichet Talk Money Supply
Federal Reserve Chairman Ben Bernanke says that money supply is an unstable tool
when making interest rate decisions. However, European Central Bank President
Jean-Claude Trichet argues monetary policy can be a deciding factor when the
rate outlook is uncertain.
The two are attending a conference for central bankers in Frankfurt, Germany.
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"Forecast errors for money growth are often significant, and the empirical
relationship between money growth and variables such as inflation and nominal
output growth has continued to be unstable at times," said Bernanke.
"It would be fair to say that monetary and credit aggregates have not played a
central role in the formulation of U.S. monetary policy" since 1982, Bernanke
said.
However, Bernanke conceded that there is a place for money supply in analysis
saying, "Although a heavy reliance on monetary aggregates as a guide to policy
would seem to be unwise in the U.S. context, money growth may still contain
important information about future economic developments. Attention to money
growth is thus sensible as part of the eclectic modeling and forecasting network
used by the U.S. central bank."
Money supply data tracks the amount of money in circulation in the economy. The
Fed used to raise interest rates when the money supply was elevated and lower
rates when there wasn't enough money in circulation.
Money supply levels were thought to correlate with inflation and economic growth
in the late 1970s and '80s, but the Fed gradually abandoned its use and stopped
setting targets for money supply around 2000 when it deemed the information
unreliable.
Bernanke contends that financial innovations and the large amount of overseas
reserves of U.S. dollars make it difficult to rely on money supply.
"In response to regulatory changes and technological progress, U.S. banks have
created new kinds of accounts and added features to existing accounts," Bernanke
said. "More broadly, payments technologies, and practices have changed
substantially over the past few decades and innovations such as Internet banking
continue. As a result, patterns of usage of different types of transactions
accounts have at times shifted rapidly and unpredictably.
"Between one-half and two-thirds of U.S. currency is held abroad. As a
consequence, cross-border currency flows, which can be estimated only
imprecisely, may lead to sharp changes in currency outstanding and in the
monetary base that are largely unrelated to domestic conditions," he added.
The ECB's Trichet, in contrast to Bernanke, defends the use of money supply data
when setting monetary policy. "The dominant academic view seems to be that
monetary aggregates should have no part in monetary policy decisions. [But] a
model of monetary policy that includes no rule for money is incomplete in some
important respects," Trichet wrote in a Financial Times article prior to the
conference.
Trichet says, "When the economic analysis is complex and its conclusions
uncertain, cross checks with the monetary analysis have proved extremely
useful." For example, the ECB relied on money supply data when deciding to not
cut rates in 2003 and 2004 as well as when it decided to hike rates in Dec.
2005, saying those decisions "are testimony to the value of such cross checks."
Editor's Note:
2. China Dumping U.S. Dollars
At the same conference as Bernanke and Trichet, China's central bank governor
Zhou Xiaochuan shelved the academic talk of money supply and instead dropped a
bomb on the currency markets.
Zhou announced to the conference that China plans to diversify its $1 trillion
in foreign exchange reserves across different currencies, including the euro and
pound, and investment instruments, including emerging markets, reports Reuters.
"All central banks are trying to diversify," the People's Bank of China governor
said at a conference in Frankfurt. "We have had a very clear diversification
plan for several years."
Money News readers will recall that China on Tuesday reported that they have
accumulated a record sum of $1 trillion in foreign reserves and reported a
record-high trade surplus for October. The country said today that it expects
its trade surplus for 2006 to total $150 billion.
Of China's cash coffers, Money News wrote, "That's significant because it means
that if China decided to sell off any of its reserves by dumping say U.S.
dollars on the market and buying gold instead, the dollar's value would likely
tumble."
And that's exactly what's happening: China is preparing to sell off some of its
dollar reserves so that it can diversify into other currencies and investments.
"[Diversification] includes currencies, investment instruments, including
emerging markets," he told Reuters.
The dollar tumbled to a two-month low on the remarks. Gold and other precious
metals rallied. However, when Reuters asked if the diversification plan included
gold, Zhou said, "That's a separate thing."
Zhou said that key factors in China's diversification plan were liquidity,
safety, and efficiency.
Editor's Note:
3. Which Stocks Should You Sell Now?
Most investors choose their stocks and mutual funds carefully — and then forget
about them.
They add to the mix without subtracting. Years go by, and they may look at their
statements and say: "When did I buy that?" or "I still own that?"
Folks, it's time to prune. The end of the year is the perfect time to organize
what you own and get rid of what you no longer want. Here's how:
- Put it on your calendar. Start by setting aside a block of time, say a couple of
hours, to collect the information you need and set guidelines for analyzing your
investments. You can review everything you own in one marathon session, or
devote 30 minutes every day to review one or two investments.
- Start by examining your investment philosophy and goals. Do you believe you can
choose stocks and actively managed funds that beat the indexes? Or do you
believe that less managing means lower fees and eventually a better performance?
Are you saving for the long term or stashing away money you'll need within five
years for college or a down payment?
Once you answer these questions, you'll have a clearer idea of how individual
securities fit — or don't fit — your plans.
- Do a tax analysis, or ask your broker to do one for you. Sell securities that
will produce a loss that you can use on your tax return. This may mean selling
your entire holding of a stock, or selling only certain identified shares of a
mutual fund.
- Look for duplication. Do you have five stock funds that all seem to be dominated
by shares of Pfizer, General Electric, Home Depot and Citigroup? Unless you can
find a good reason why you own so many different funds that act similarly, sell
the four that are less worthy (perhaps they have weaker performances or higher
fees) and consolidate that money into the best fund. What about multiple stocks
that achieve the same portfolio goal? Maybe you like bank stocks, and so you own
several different ones. That's OK. On the other hand, if you find yourself
buying various versions of what's essentially the same stock over and over
again, pick the best and prune the rest.
- Would you buy it now? That's the toughest question investors have to ask
themselves because they get emotionally involved in the stocks that they own.
But evaluate your holdings by the same criteria that caused you to buy them. Are
they still attractively priced? Is the company's story still persuasive? Is it a
good value, relative to its cash on hand, its earnings and other companies in
its same niche? If the answer to all of your questions is "no," then maybe the
next thing you say should be "sell."
- Find a balance. Theoretically, your portfolio is structured to fit a certain
asset allocation. You may have initially decided, for example, to have 40
percent in large U.S. stocks, 20 percent in small U.S. stocks, 20 percent in
foreign stocks and 20 percent in bonds.
But every year, that gets skewed when some asset classes do well and others
don't. This year, your foreign funds and your large-cap stock funds have
probably far outstripped your small companies and your bonds. You may find you
want to get rid of some of the winning shares and invest more in securities
where the price is right.
- Give away stock. Want to get rid of some shares that will produce a taxable
gain? Here are a couple of alternatives. Give the stock to your college-student
children instead of tuition. If they're over 18, they can sell it, pay a tax
based on their (presumably lower) income tax rate, and then use the proceeds to
make that tuition payment. Or give the shares to the charity of your choice
instead of writing a check. You'll get the full deduction, and your charity
won't have to pay taxes on the proceeds.
- Start looking for your next purchase. Discover any holes in your portfolio? Now
you know what to shop for in the New Year.
© 2006 Reuters.
Editor's Note
4. Study: Foreclosures Rise 17 Percent in Third Quarter
Foreclosure activity is up in most U.S. cities, real-estate data firm RealtyTrac
reported Friday.
The Irvine, Calif.-based firm said that 318,355 properties in the United States
entered some stage of foreclosure in the third quarter, a 17 percent increase
over the prior quarter.
Detroit, Fort Lauderdale, Fla., and the Denver-Aurora, Colo. metro areas saw the
highest growth in foreclosure activities. One in every 80 Detroit households had
a property enter some stage of foreclosure, while in Fort Lauderdale it was one
in every 88 households and one in every 90 homes in Denver.
"The third quarter saw a marked increase in the number of properties entering
some stage of foreclosure," said James J. Saccacio, chief executive of
RealtyTrac. Factors pushing foreclosures up included slower home sales and home
appreciation rates, he said, as well as "adjustable rate mortgages re-setting at
higher monthly payments, putting homeowners into financial distress."
That said, while most of the country's 100 largest metro areas saw some increase
in foreclosure activity, there were a "handful" that reported lower rates of
properties entering the foreclosure process, RealtyTrac said.
Notably, Houston reported a 15 percent drop, and New York a 13 percent decline
from the second quarter.
Chicago — after a 72 percent increase in the second quarter — saw another
4 percent increase in the number of properties entering foreclosure, while Los
Angeles saw a 46 percent increase.
Two Florida metropolitan areas ranked in the top 10 metro areas with the highest
rates of foreclosure: Miami and Fort Lauderdale saw a 97 percent and an 87
percent increase, respectively, in the number of properties entering some stage
of foreclosure.
Among the 10 metro areas with the highest rates of foreclosure, only
Indianapolis saw a slight decline — a 2.5 percent drop — in the number of
properties in the foreclosure process from the previous quarter.
© 2006 Associated Press.
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