Federal Reserve Signals Unwinds from Quantitative Easing
Federal Reserve officials set an October start for shrinking their $4.5 trillion stockpile of assets, moving to unwind a pillar of their crisis-era support for the economy. They also continued to forecast one more interest rate hike later this year, saying storm damage will have only a temporary impact on the economy. Policy makers left the benchmark interest rate unchanged in a range of 1% to 1.25%. U.S. central bankers are counting on steady growth and low unemployment to raise inflation closer to their goal, which would support their policy of gradual tightening through interest-rate increases and a reversal of quantitative easing.
The announcement is a third big policy step for Janet Yellen, now in the final year of her term as Fed chair: She has overseen the end of large-scale asset purchases; the liftoff of rates from zero; and now the pullback from an unprecedented balance- sheet buildup without disruption to financial markets or the economy so far.
While the storms (hurricanes Harvey, Irma and Maria) will temporarily boost inflation thanks to higher prices for gasoline and other items, “apart from that effect, inflation on a 12-month basis is expected to remain somewhat below 2% in the near term but to stabilize around the committee’s 2 percent objective over the medium term,” the Fed said. The economy expanded at a 2.1% annual rate in the first half—in line with the pace during this expansion—and U.S. government 10-year notes yield about 2.24% percent, down from 2.45% at the start of the year. The Fed’s preferred price gauge rose 1.4% in July from a year earlier. “The labor market has continued to strengthen” and economic activity “has been rising moderately so far this year,” the Fed statement said. The Federal Market Open Committee (FOMC) repeated language saying “near- term risks to the economic outlook appear roughly balanced.”
The decision to leave the target range for the federal funds rate unchanged and begin the balance-sheet runoff in October was unanimous. The Fed reiterated that interest rates are likely to rise at a “gradual” pace, though updated forecasts indicated that officials see the path as less steep than before. In their new set of projections, Fed officials estimated three quarter-point rate hikes would be appropriate next year—the same number they saw in June—based on the median in the so-called dot plot of interest rate forecasts.
The Fed’s decision to exit from balance-sheet policies comes a decade after the global financial crisis began to tip the economy into a recession at the end of 2007. The reduction in assets will be slow, just $10 billion a month to start. “They have been very cautious,” Drew Matus, chief market strategist at MetLife Investments in Whippany, New Jersey, said before the announcement. “Other countries went into quantitative easing and they are still stuck,” Matus added. “The U.S. is the first to get out.”
The Fed said the balance-sheet runoff would follow the framework released in June: $6 billion in Treasuries and $4 billion in mortgage-backed securities per month, rising every three months until the amounts reach $30 billion and $20 billion per month, respectively. The Fed anticipates ending the runoff at some point, though it does not yet have a specific date.
Minutes from the July meeting also showed deepening worries about a prolonged period of low inflation. FOMC participants—including Fed governors and regional bank presidents—forecast that inflation will reach their 2% target in 2019, compared with an expectation of 2018 in June. They have missed the inflation target for most of the past five years.
Citations
- https://bloom.bg/2fBwuiQ Bloomberg
- https://yhoo.it/2xirNVe – Yahoo! Finance
American Whiskey Attracts New Customers and Investors
The American whisky market is heating up. “Just 15 years ago, it was very difficult to pay more than $30 for a bourbon off the store shelf,” says Jeffery Lindenmuth, executive editor of the trade publication Whiskey Advocate. Today, off-the-shelf bottles regularly retail for two to three times that amount.
Demand has been building for more than a decade. As of August 2016, there were 1,315 active craft distillers active in the U.S., according to the American Craft Spirits Association. Ten years ago, there were just over three dozen. This renaissance has attracted plenty of new customers. Sales of bourbon, Tennessee whiskey and rye whiskey reached $3.1 billion last year, up 8% from 2015, according to the Distilled Spirits Council. Top shelf brands are benefiting the most: From 2010 to 2016, high end premium and super-premium revenues grew by 44% and 141%, respectively.
Despite its newfound sophistication, American whisky is, by far, a more affordable drinking option than its Scottish or Japanese counterparts. This extends to rarer bottles sold at auction, where Scotch and Japanese whisky often fetch five, even six figures. (A 50-year-old single malt Macallan recently sold for $83,656.) In comparison, “even the most desirable American bottles, like the Pappy Van Winkle line barely break $2,000 at auction,” says Lindenmuth. “These prices make collecting American whisky very attractive.”
As does the fact that many American producers sell barrels at what they believe is a fair price (rather than what the market will bear), a price structure often maintained by retailers. In an attempt to limit the number of bottles that are immediately re-sold on the secondary market, stores have developed their own systems, explains Jonny McCormick, a writer for Whiskey Advocate. Some create lotteries, or sell only to long-time customers. Others simply tweet out when a new shipment has arrived, and allow buyers to purchase on a first-come basis. Despite these precautions, it is a setup where “flippers and investors can prosper,” says Lindenmuth.
Select the right bottle and you could make a 10x return on investment in a few years. Lew Bryson, a long-time whiskey writer, has his own strike-it-rich story: In 2004, he bought a bottle of Hirsch Reserve 16 Year Old bourbon for $40. The bottle sells for north of $2,000 today. This 5,000% return on investment is largely due to the fact that Hirsch Reserve 16 Year Old is very rare. The batch only made 400 bottles, and comes with a long, prestigious (and complicated) back story.
Unlike wine, price depends less on a whisky’s vintage (older whiskies still sell for more, but the aging process stops once the spirit is bottled), and even more on exclusivity. The quality of the bourbon matters too, of course, as does the distillery that produced it. “Hirsch is no longer made, and it has a reputation as being one of the best bourbons ever made,” says Lew, an intoxicating combination for collectors and enthusiasts alike. “I’ve seen it at bars for $350 a shot.”
Lew knows how crazy that sounds—a whisky lover living on a freelance writer’s salary, he would never pay $2,000 for a bottle of bourbon. But as the market continues to mature, it could attract deep pocketed investors who will. “I believe there is a lot of room to run for American whiskey,” says Lindenmuth.
Citations
- http://for.tn/2yt52vo – Fortune
- http://bit.ly/2xl3CTs – Forbes
The Good News Is . . .
- Housing starts for August came in slightly higher than expected at a 1.18 million annualized rate. Single-family housing starts were a major positive in the report. Housing permits also came in much stronger than expected at a 1.3 million annualized rate and did not include any significant effects from Hurricane Harvey. The growth in permits was primarily due to multi-family homes which surged 19.6% to a 500,000 annualized rate. Housing starts for July starts were revised upward to 1.190 from 1.155 million and July housing permits were also revised to 1.230 million from 1.223 million.
- AutoZone Inc., the leading retailer of automotive replacement parts and accessories in the U.S., reported earnings of $15.52 per share, an increase of 6.5% over year-earlier earnings of $14.58 per share. The firm’s earnings topped the consensus estimate of analysts by $0.16. The company reported revenues of $3.51 billion, an increase of 3.4%. Management attributed the results to improvements in same store sales, and greater efficiencies in the firm’s inventory management and deliveries to dealers.
- U.S. defense contractor Northrop Grumman announced it would buy missile and rocket maker Orbital ATK for about $7.8 billion in cash (or $134.50 per Orbital share), giving it access to lucrative contracts with NASA and the U.S. Army. The deal will also help Northrop increase its arsenal of missile defense systems and is a rare departure for the company, which has not made a large acquisition in several years. The acquisition, which would establish Orbital as a new business sector under Northrop, also comes ahead of a likely jump in demand from the planned upgrades of U.S. ballistic systems. The Air Force last summer called for proposals to replace its aging nuclear cruise missiles and intercontinental ballistic missile (ICBM) system as the military moves ahead with a costly modernization of older atomic weapons systems. Orbital’s main businesses of missile defense, government satellites, and the prospect to develop an in-orbit satellite servicing business is an opportunity for Northrop. Orbital is one of two companies hired by NASA to fly cargo to the International Space Station under an initial contract worth up to $3.1 billion.
Citations
- https://bloom.bg/2eVhfSb – Bloomberg
- http://cnb.cx/2lwnm3s – CNBC
- http://bit.ly/2xU1yoH – AutoZone Inc.
- http://for.tn/2hcqb8V – Fortune
Planning Tips
Tips for Getting the Best Return on Your Home Remodel Investment
Existing home sales are also on an uptrend. This is good news if you are thinking of putting some money into your home with an eye toward resale value down the road. Not all home renovation projects are equal. In fact, few of them even come close to recouping their costs when it is time to sell your home. The average home renovation returns just 65% at sales time—and that is if the sale occurs soon after the project is complete. If you are looking to add value right away, the ideal renovation may not be a new kitchen with granite counters and stainless steel appliances or an in-ground pool. According to experts, like those at Remodeling Magazine, projects that boost curb appeal fare far better than improvements inside the home, with very few exceptions. Below are some home renovation projects with the best return on investment (ROI). Note that the costs cited can vary by locale. Be sure to consult your financial advisor and real estate specialist to determine if these updates are appropriate for your situation.
Install fiberglass insulation in the attic – There is nothing exciting about enhancing your attic insulation, but from a purely cost-benefit point of view, this is the best home improvement that you can make. According to the experts, you will see a 107% return on your attic insulation project, which will cost on average $1,200 to $2,000. Not only that, you will see a difference in your home utility bills in the interim.
Replace your front door – An automatic win when it comes to curb appeal, a new front door will return about 90 percent of its value in sales price. The most popular replacements for 2017 are stately stone veneer models and sensible steel doors. A welcoming and attractive front entrance is a winning feature with potential buyers and real estate professionals alike. The average cost for this update is $1,500 to $2,500.
Install new vinyl siding – This is probably not the project you want to tackle just before you sell your home unless your existing siding is a real eyesore. That is because it only returns about 80 – 84% percent at resale, although that is still excellent compared to a major kitchen remodel at just 65%. Just be sure to give some thought to your color selection—a nice taupe or beige with dark shutters, for example, disguises dirt and still looks elegant. Though costs can vary considerably, the average outlay is $12,000.
Upgrade your garage door – Another curb appeal home improvement, upgrading your garage door to an attractive wood or carriage-style garage door delivers about 80% of its cost when you sell your home. Garage doors with plenty of windows tend to do a little better than those without. Use one of the new remodeling preview apps to get an idea of what different doors will look like before you take the plunge. On average, you can expect to pay $2,300 to $3,000.
Switch to hardwood floors – Depending on where you live and the style of your home, upgrading your carpet or laminate floors to hardwood flooring can return 78 – 91% of the cost when you resell your home. Keep in mind that engineered wood products do not fare nearly as well, so go for the real thing unless you are not planning to sell right away. Look for a universally appealing finish, and keep in mind that oak is a perennial favorite among homebuyers. Your cost, on average will be $5,000 – $6,000.
Citations
- http://bit.ly/2o2dsnf – Remodeling Magazine
- http://bit.ly/1JAbGT6 – HGTV.com
- http://bit.ly/2o8WcwG – Investopedia
- http://bit.ly/2jMJ2Zg – Realtor.com
- http://bit.ly/2xxZuSv – Zillow
