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In today's Motley Fool Take:
- The Fed's New Stance
- Quote of Note
- Citigroup Ups Its Dividend
- TMF Money Advisor
- Fannie Mae's Q2 Tanks
- Discussion Board of the Day: McDonald's
- Quick Takes: Merrill Lynch, The New York Times, Budget deficit
- And Finally...
The Fed's New Stance
The easiest way to interpret Alan Greenspan-speak is to watch the bond market. After today's 10 a.m. release of the Fed chairman's testimony before Congress, the 10-year Treasury yield started a sharp climb that didn't level off until yields were 17 basis points higher than when the day began.
Interpretation? The risk of deflation is much lower than previously thought.
Implication? Chances are good that interest rates have seen their lows of this cycle.
This bond market move is powerful. The benchmark yield began the day at 3.73%; by noon, it was 3.85%; and as of early afternoon, the yield had reached 3.90%. That puts the yield on the 10-year Treasury at its highest since May 6 -- and an incredible 83 basis points higher than its June 16 low of 3.07%.
Today's bond-market action seemed a reaction to the last four paragraphs of Greenspan's testimony, which were on the subject of inflation. Basically, Greenspan concluded that our fledgling economic recovery, along with a continued low level of inflation, will be enough to offset any meaningful risk of deflation. The key excerpt is as follows:
A very low inflation rate increases the risk that an adverse shock to the economy would be more difficult to counter effectively. Indeed, there is an especially pernicious, albeit remote [emphasis mine], scenario in which inflation turns negative against a backdrop of weak aggregate demand, engendering a corrosive deflationary spiral. ... However, given the now highly stimulative stance of monetary and fiscal policy and well-anchored inflation expectations, the Committee concluded that economic fundamentals are such that situations requiring special policy actions are most unlikely to arise.
The bond market's subsequent sell-off (lower prices, higher yields) signaled a reversal of deflationary sentiment. Previous Fed comments had played up the possibility of deflation, along with the possibility of the Fed taking radical measures to fight it. In particular, within the past few months, the Fed has openly considered targeting lower long-term interest rates (whereas traditional Fed policy has only involved manipulation of short-term rates).
Now, however, those "special policy actions," as Greenspan referred to them in his testimony, are no longer under any serious consideration. As a result, bond traders no longer have much incentive to hold long-term Treasuries at multi-decade low yields. That's the substance of today's bond market sell-off.
Still, the question remains as to whether the economy really will pick up enough steam over the coming quarters to offset any renewed deflationary concerns. Stay tuned.
Quote of Note
"Everything I am or ever hope to be, I owe to my angel mother." -- Abraham Lincoln (1809-1865)
Citigroup Ups Its Dividend
Financial services giant Citigroup
The company said in a prepared statement that, in response to the new tax law, it would now pay in dividends capital formerly returned to shareholders through share buybacks. And return they do:
Div'ds Shares Paid Repurch'd Total 2002 $3,676 $5,483 $9,159 2001 3,185 3,045 6,230 2000 2,654 4,066 6,720 1999 1,973 3,906 5,879 1998 1,846 3,085 4,931 1997 1,692 3,447 5,139 In $millions
Dividends are the better deal for shareholders where a company like Citigroup appears to buy back shares regularly and without regard to whether they represent a good investment at current prices. At the same time, Citigroup deserves at least some credit: The tax change calls the bluff of those that buy back shares primarily to offset dilution and to cover up their high stock option grants. If they don't offer dividends, their fig leaf is gone.
Citigroup joins a growing list of companies, including Bank of America
If you own Citigroup and have been rewarded -- as have many investors -- more power to you. But whether holding on or considering buying, make sure you understand Citigroup's complex financial operations. If you don't, resist the dividend bribe.
TMF Money Advisor
There's no better independent help for your financial affairs than TMF Money Advisor. It gives you all the tools you need to plan ahead and -- more importantly -- take action to secure your financial future. Sign up today for your 30-day free trial!
Fannie Mae's Q2 Tanks
Both Fannie Mae and its smaller, embattled cousin Freddie Mac
Fannie Mae's mark-to-market derivatives portfolio booked $1.88 billion in losses for the quarter. That's substantially more than the $498 million in market losses during the prior second quarter. The company's net interest income actually rose 38%, though, to $3.5 billion. Excluding the derivatives' impact, Fannie Mae earned $1.86 a share, 20% ahead of last year's Q2 results.
Fannie Mae has worked hard to distance itself from Freddie Mac's accounting concerns. CEO Franklin Raines said recently in a BusinessWeek interview, "... We spent millions of dollars on internal systems and we maintain strict control over what kind of derivatives can be used and our accounting for them. We are compulsive about managing risk."
That's far and away from Freddie Mac's admission that "lack of sufficient accounting expertise and internal control" helped create the mess it's in. Still -- and unfortunately for shareholders -- the distinction between Fannie and Freddie may not be enough to sway headline-lovin' lawmakers from tightening regulatory controls over both companies as if they were one and the same.
Discussion Board of the Day: McDonald's
Have you checked out the latest line of electronic toy premiums at McDonald's? Isn't that auto racing game the coolest? Is the company really turning itself around or is this just a temporary blip after so many months of same-store-sales declines? All this and more -- in the McDonald's discussion board. Only on Fool.com.
Investment bank and brokerage firm Merrill Lynch
Media company The New York Times
The Bush administration said the budget deficit will be $455 billion this year and $475 billion next year, both 50% higher than its February estimates and far different from last July's forecast of a return to surplus in 2005. New spokesman Scott McClellan said the deficit would amount to 4.2% of gross domestic product and that the government should hold the line at 4%.
Today on Fool.com:
- For updated stories throughout the day, bookmark our ever-changing News section.
- Why I Bought Microsoft: Tom Jacobs takes the plunge. Should you?
- Biotech's (Latest) Big Bang: With promising new cancer drugs, are these biotechs the real deal?
- As lenders charge the highest fees ever for the smallest customer infractions, Dayana Yochim imagines the next mailing she gets from her credit card company.
- In Fool's School, the quick ratio. Can your company meet its short-term obligations?
Bob Bobala, Robert Brokamp, Paul Elliott, Mathew Emmert, Jeff Fischer, Tom Jacobs, LouAnn Lofton, Bill Mann, Selena Maranjian, Rex Moore, Rick Munarriz, Matt Richey, Reggie Santiago, Kate Southerland, Dayana Yochim