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Fed Speaks; Millionaires Hoard; Gang of Eight

Doug Cubberley, Special to CNBC.com
Wednesday, 22 May 2013 | 4:32 PM ET
Ben Bernanke
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Ben Bernanke

Recapping the day's news and newsmakers through the lens of CNBC.

Big Ben Speaks; Markets Do Double Take

Notes:

Fed Chairman Ben Bernanke told Congress that the job market is still too shaky and that ending the stimulus plan too early could place the economy in peril, but he wouldn't rule out winding down the bond-buying program at one of the Fed's next few meetings.

Intervening in its efforts to keep borrowing rates low would risk slowing or ending the recovery, Bernanke testified to members of the Joint Economic Committee.

Bernanke said the economy has grown moderately this year and that unemployment, at 7.5 percent, has dropped to a four-year low but remains too high for a healthy economy. He noted that growth could slow as higher taxes and deep federal spending cuts take their toll. With all those risks, Bernanke's comments suggest that the Fed is not yet ready to reduce bond purchases, which have stimulated borrowing and encouraged spending by keeping long-term interest rates low.

Stocks initially reacted well to Bernanke's comments but later beat a significant retreat after the notes from the Federal Open Market Committee showed a Fed more willing to scale back QE3 as early as June—a view the market did not read into Bernanke's remarks. The Fed's next meeting is June 18.

Treasurys continued to sell off in the afternoon, and the 10-year yield held above 2 percent—well above the low of 1.88 percent it reached during Bernanke's initial statement to the committee.

Quotes:

"A premature tightening of monetary policy could lead interest rates to rise temporarily, but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further."
—Fed Chairman Ben Bernanke

"All of our mouths have 2 sides. Today Chairman #Bernanke spoke out of both of them."
—Bill Gross, PIMCO managing director and co-CIO, via Twitter

Millionaire Economic Indicator

Notes:

In a recent U.S. Trust survey of people with a net worth of at least $3 million (one-third had $10 million or more), 88 percent of respondents feel financially secure, and 70 percent feel confident about their future financial security. Most millionaires now place a higher priority on growth than on wealth preservation—a reversal from last year.

However, like an investor individual version of a cash-hoarding corporation, the wealthy are sitting on mountains of cash. The survey found that 56 percent have a "substantial" amount of cash. Only 16 percent of them plan to invest that cash in the next couple of months. And only 40 percent plan to invest it over the next two years.

Quotes:

"It may be a case where the psychology comes first. They just haven't taken that next step with their money yet."
—Keith T. Banks, president of U.S. Trust and Bank of America Private Wealth Management.

Immigration Reform Inches Ahead

Notes:

Late Tuesday night, the Senate Judiciary Committee passed immigration legislation in 13-5 vote. Republicans Sen. Jeff Flake (R-AZ), Sen. Lindsey Graham (R-SC), and Sen. Orrin Hatch (R-UT) joined the panel's 10 Democrats in favor of the bill, the first major hurdle.

Sen. Marco Rubio appeared on CNBC on Tuesday to discuss the bill and its chances. Immigration is a key issue for business and corporations in terms of affordable labor and bringing the creative talent that drives innovation. Facebook is among the leaders of a Silicon Valley-based lobbying group formed to focus on the issue of immigration reform.

A leading voice in the Senate's "Gang of Eight," Rubio told CNBC's Larry Kudlow that the primary concern from conservatives remains a bill that is tackling too much. He said many conservatives are willing to accept 11 million undocumented immigrants currently living in the U.S. if the law can prevent future illegal immigration.

Quotes:

"Now is the time to act on this issue and get it solved, because we can't leave it the way it is. The status quo is just as bad."
—Sen. Marco Rubio

IRS Official Lerner Pleads the Fifth

Notes:

Lois Lerner, the IRS official who oversees non-profit applications, refused to testify today to a congressional panel probing misconduct, instead invoking her Fifth Amendment right. Before doing so, she doggedly insisted she had done nothing wrong, citing accusations by lawmakers that previously she had provided false testimony. Agents under Lerner had targeted conservative organizations, including "Tea Party" groups.

Quotes:

"I have not done anything wrong. I have not broken any laws. I have not violated any IRS rules or regulations, and I have not provided false information to this or any other committee."
—Lois Lerner, IRS director of exempt organizations

A Transport Bubble?

Notes:

Electric carmaker Tesla Motors is up more than 170% for the year, valuing each car it's sold at more than $500,000 based on outstanding shares versus total sales (base price for a Tesla is $60,000 to $95,000, depending on options and where you buy due to tax credits). Meanwhile, Ford shares have topped $15 from $10 over roughly the same period and it appears to have all its F-150s in a row. Accordingly, traders are big on the Blue Oval but think Tesla's tax-credit strategy might have little spark left in it.

The index tracking the airline industry is up 30% so far this year, largely via consolidation, capacity discipline and unbundling (charging those extra fees flyers just love).

So what remains for best buys for a momentum trade? The airlines Hunter Keay, senior airline analyst at Wolf Trahan, likes most are Delta Air Lines, U.S. Airways, Copa Airlines (a Panamanian carrier), United Airlines and Alaska Airlines. He expects them to be valued at about 10 times' cash in three or four years.

Quotes:

"The multiples are very low, and they're still generating a lot of cash and they're growing their earnings through margin expansion."
—Hunter Keay, Wolf Trahan senior airline analyst

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