Originally published in The Papyrus, Summer 2001. A Publication of Hermes Econometrics

How Hermes Parallels The Fed To Protect Your Investment

When on Wall Street, Do as the Fed does… Hermes Econometrics has tried not to fight the policies of the Federal Reserve Board (the Fed). As a matter of fact, it could be said that Hermes Econometrics joined the Fed at inception. Did you know that both Hermes Econometrics and the Fed use econometric modeling to determine where the economy is headed? The Federal Reserves analysis protects our country’s economy while Hermes Econometrics strives to protect your investments.

The Federal Reserve Bank is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, stable, and liquid monetary and financial system. There are twelve Federal Reserve districts in the United States. Operations of the Federal Reserve Board are implemented by the Federal Open Market Committee (FOMC). The FOMC consists of the seven-member Federal Reserve Board, the President of the New York Federal Reserve District bank and four members serving one-year terms which rotate through the eleven remaining districts.

The Federal Reserve Board consists of seven members nominated by the President of the United States and confirmed by Congress. The current Fed Chairman is Alan Greenspan, originally nominated by President Reagan and again by President Bush, Sr. and President Clinton. The FOMC holds eight regularly scheduled meetings each year resulting in widely publicized interest rate decisions. Before each meeting there is the usual flurry of speculation and after each meeting there is the predictable 24-hour flood of talking head analysis. Hermes Econometrics takes into consideration stock market reactions to Fed decisions and does not second-guess our model results.

                      Due to the Fed’s successful history using econometrics,

                             Hermes has incorporated econometric methods.

The Fed employs in-depth econometric analysis to determine and forecast quarterly statistics such as Gross Domestic Product and to aid in setting US economic policies. These methods are also used to determine interest rate direction and FOMC activities. FOMC activities include adding and subtracting liquidity by buying and selling intermediate(2-5 year) Treasury notes. As a result of the Federal Reserve Board’s successful history using econometric methods, Hermes Econometrics has also incorporated econometrics within our models. Hermes Econometrics has developed models that include a wide range of useful data which lead to a daily decision of where to invest our portfolios. Our models use up to 50 financial, economic, market and psychological variables.

Hermes Econometrics monitors markets daily to see if conditions are positive, negative or neutral. When conditions are positive or neutral, portfolios are fully invested for growth. When conditions are negative, such as much of last year and this year, portfolios are defensively invested in neutral money market funds. The Hermes Fund Enhancement Program wraps risk management around mutual funds or variable annuities to provide both enhanced growth and downside protection. This enables investors to benefit from two distinct portfolio management approaches: diversity and risk reduction. The fund and annuity diversify the investment and reduce the concentration risk of owning simply one stock. The econometric model reduces overall market risk. The purpose of this article has been to briefly familiarize you with econometric modeling and the Federal Reserve Bank. We also know that economics can be confusing and accordingly leave you with some quotable quotes of Dr. Greenspan: "...how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have..." …"If you think that you know what I mean, then I have not done a good enough job in obfuscating the true meaning of my statements." To "Follow the Fed" yourself, please go to:

http://www.federalreserve.gov/