Dollars and Jens
Tuesday, January 30, 2007
FOMC meeting started today, finishes tomorrow. The smart money says the fed funds target, constant since June, stays at 5.25%.

Mind, there is some difference of opinion as to what the course will be in the next few months, and what the concerns should be.
Call it the Federal Reserve's new conundrum: If the U.S. economy has slowed as much as some data suggest, why is the labor market still so strong?

Chairman Ben S. Bernanke and his colleagues are debating the significance of an unemployment rate that's near a five-year low and 2006 job growth that's almost as strong as the prior year's. Either the labor market is lagging behind the slowdown by a few months, or the economy is stronger than official numbers suggest.
A tight labor market is only a problem for the fed if it starts driving wages up faster than productivity. Unit labor costs have been running in the 2-3% range, above the quasi-official inflation target range, but not so much that, if you expect a slowdown, you feel the need to get ahead of inflation on the basis of nothing else. So here's the something else: the spread between 5 year nominal bond rates and 5 year inflation indexed bond rates has widened above 2.35% for the first time since September, after dipping near 2.1% in the meantime. On account of these things are indexed to the CPI, which overstates inflation by about half a point, 2.35% is actually consistent with the comfort range, but if you subscribe, as I do, to a sort of expectations-augmented expectations-augmented Phillip's curve view of the world, this backtracking can be something of a concern with the labor market as tight as it is.

Well, I titled this post "calendar", and should finish the observation I had in mind when I started this post: the rest of this week is a busy three days of data release. Tomorrow morning, six hours before the release of the FOMC statement, we get the advance release of 4Q GDP growth. Thursday morning is the NIPA report — income and personal consumption expenditures, including the price index for the latter. Friday morning is the employment report. Thing is, sometimes the fed gets these things before their official release; they will almost certainly have most of the NIPA data and probably a good idea what payrolls will look like before they move. If the Fed were to surprise us tomorrow — and, frankly, I think they're more likely to hike rates than to cut them — it might be an early indicator to us that something suggesting economic strength is likely to be reflected in the next couple releases.

One more thing, while I'm here: the GDP report will not indicate that the U.S. economy has slowed.

Valuing Stock Options
For the first time, the SEC has allowed a company to value the options it gives its employees based on market prices:
In its system, Zions created "tracking securities," called employee stock option appreciation rights securities, that emulate the options it awards employees. The company sold them to sophisticated investors in an auction last June, providing a market value for the options based on bids received _ which was only about half of that derived from academic models.

"We are thrilled to finally have this (SEC) letter in hand," Evan Hill, another Zions vice president, said in an e-mail message Tuesday to The Associated Press. "This is great news for all option-granting companies. Companies can now have the market tell them what their (employee stock options) are worth."

The SEC did attach some conditions to its approval of the method, including a requirement that the auctions be held on or near the date on which the stock options are granted to employees.
I assume they've covered the competitiveness of the auction.

I tend to trust Black-Scholes more for short-term options than for options with the lifespan of a typical incentive stock option.

Monday, January 29, 2007
supply-chain bottlenecks
It's not important that you read the post from which this originates, but it's suggested that
[Hugo] Chavez's popularity depends on his largess, but the strength of his finances (which used to be known as the government budget) depends upon refinery capacity among oil-consuming nations — the essential bottleneck that has caused the current price spike.
This is actually exactly wrong; shortages of refinery capacity will drive up the cost of gasoline, but will push down the cost of petroleum. Oil is only worth something insofar as it can be converted into gasoline, asphalt, cheese whiz (I assume), and other consumer goods; if refining capacity were permanently cut in half, the value of oil would drop dramatically; the refiners would only be buying half as much as they do now.

Friday, January 12, 2007
Nasdaq puts
I've done some of this. I've held some of these options for a while, and have bought some more since I started reading "Fooled by Randomness".

I don't necessarily think the market is substantially overvalued (Morningstar thinks QQQQ is worth 42, and it's priced at 45, and they keep better track than I do), especially if the economy keeps growing at a steady rate without inflation. Forever. But I'd rather not have all of my eggs in that "forever" basket, and the volatility index seems to suggest that the market is willing to bet on forever. So excuse me while I buy some cheap insurance.

Tuesday, January 02, 2007
The evolution of the New York Stock Exchange
An interesting story on John Thain and his leadership of the New York Stock Exchange as it moves into an electronic future.

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