As we approach the Christmas and New Year’s holidays, we’d like to take the opportunity to thank the readers of Signature Update for the many comments, suggestions, and feedback we’ve received this past year. Many readers are also clients of our practice, Signature Wealth Management, while others are simply interested in keeping abreast of the impact of various events in our economy. Regardless, we appreciate your interest and hope you find Signature Update to be insightful, useful, and interesting.
The US and global economy isn’t taking time off for the holidays, but we are. We hope you’re able to spend extra time with your loved ones and enjoy the spirit of the season.
American consumers and businesses have been humbled this year by the dramatic financial crises we’re enduring. We all expect that there’s likely more to come; but we also know that as better times return to our economy, the memories of lost jobs, falling portfolio values, and distressed housing markets will linger and encourage prudence from some of us while others will blithely return to patterns of excess. Such is the nature of man and economy. For this experience to provide long term value to our society, we must be willing to remember, without fixating, to make decisions with a greater sense of rationality than avarice and greed and to allow optimism to always win out over pessimism while remembering that either should always temper the other.
As a people, we need to become more responsive and less reactive. We need to give our hearts to a cause without losing our minds in the support of irrational ideal. We need to learn to separate the issues and objectively pay attention to both sides of an argument before weighing in with our support.
Just in case Santa Claus is one of our readers, or perhaps more likely, one of you has Santa’s ear, we thought we’d use this forum to publish our Christmas Wish List. Here are our most hoped-for gifts this year. We think you’ll understand why we’re interested in each of them:
1) Success and bi-partisan cooperation for the incoming Obama administration – Harry Reed and Nancy Pelosi will need to lay off the partisan rhetoric and Republican leadership needs to offer more support for the new president.
2) The swift passage of an economic stimulus package that includes middle-class and business tax incentives, job creation, and infra-structure investment – let Larry Kudlow help design this and we’ll all have a better Christmas in 2009.
3) A national energy policy that weans us off of foreign oil in less than 20 years, provides incentives for renewable energy development that makes sense (i.e. not corn-based ethanol), and recognizes the efficiency of nuclear fuel sources – Chief of Staff Rahm Emanuel and congressional leaders will need to exercise more forward thinking and backbone than their predecessors have evidenced to get this done – if they’ll think more about children and grandchildren’s generations than short-sighted constituencies, they’ll have a much easier time of it.
4) Open credit markets where consumers and businesses can effectively borrow for capital investment and overall liquidity – Mr.’s Bernanke, Summers, and Geitner have a lot of work to do, and the American consumer and business leadership needs to be patient and faithful.
5) An SEC Chairperson willing to ‘clean house’ and enforce the law - Mary Shapiro’s about to have the job. She’ll need more backbone and less institutional memory to get the job done, and she’ll need to aggressively prosecute the likes of Bernard Madoff and naked short-selling violators.
6) A bottom in the housing market – Jim Cramer is standing firm on June 30, 2009 as the bottom of the real estate market – is he right, or is he ‘Cramer’? Booya!
7) The swift return of the up-tick rule in short selling – Ms. Shapiro must not repeat the mistakes of her office’s past and ought to include brief history lessons in her senior staff meetings.
8) Overhaul of ‘mark to market’ accounting rules for banks and publically held corporations – valuations that reflect the long-term nature of the instruments rather than what might be garnered for them during a fire-sale is imperative – we’re sure Steve Forbes has already written code language in his Forbes Magazine editorial columns.
9) Rational thinking from Hamas leadership in Palestine as a changing of the guard takes place at about the same time as Obama’s inauguration – the leadership change expected is violently anti-Israel and well armed, posing grave threats to Israeli citizens and those governments seeking middle east peace – that may not be as long a list as many would suppose.
10) Consumer Price Index (CPI) increase of 1.5% to 2%, including energy prices, with oil at less than $50 per barrel.
Personally, I’d also like more power tools (planer, joiner, and radial arm saw), a new Corvette, and the DOW at over 14,000; but that may be asking too much, too soon.
We wish you and your family a very Merry Christmas and a Happy New Year!
Signature Update is offered by Richard Haskell Sr., Managing Director of Signature Wealth Management
Tuesday, December 23, 2008
Wednesday, December 17, 2008
DEFCON One & $100 Billion and Change
DEFCON ONE might be the appropriate description of the level of economic defense the Federal Reserve and US Treasury adopted yesterday as the Fed cut interest rates to a target of 0% to .25% (1/4 of one percent). CBS MarketWatch offered the Defcon label Tuesday afternoon in an article discussing the Fed and Treasury’s willingness to do whatever necessary to avoid a depression (see CBS MarketWatch’s First Take article at http://www.marketwatch.com/news/story/The-Fed-goes-Defcon-1/story.aspx?guid=%7B8DA1A356%2D2B0F%2D4C8A%2D9396%2DEFDFAC959357%7D). Coming on the heels of a Consumer Price Index (CPI) decrease of 1.7% last month, the largest decrease since 1932, it is obvious that our nation’s economic policy makers are as committed to reviving business growth as they are staving to off excessive deflationary pressures. The US equities markets rewarded investors with a gain in the DOW of nearly 360 points, to close the day at 8,924.
Most of us recognize that sustained price hikes (inflation) are bad and suppose that falling prices (deflation) is good, but the fact is that a little of either can be economically healthy, while too much can be damaging. Just as unhealthy levels of inflation can only be sustained by wage increases and low unemployment, problematic levels of deflation are attended by decreases in personal income and unacceptable levels of unemployment - a possibility with which we are flirting far too actively. If prices for goods and services fall due to a systemic decrease in demand, profits erode, wages are reduced, businesses close their doors, and jobs are lost.
The Fed’s actions are historic. That’s a term that is all too often used casually, but this is not one of those times. Literally trillions of dollars are being pumped into our economy’s core, the very heart of our financial system, and soon there will be an enormous federal stimulus plan offered by the incoming administration. It can’t come soon enough. Likewise, it is regrettable that the outgoing administration has been unwilling to ‘partner’ with Obama’s team and jointly support a package that could be effected months before the newly seated house and senate will be able to pass post-inauguration legislation.
To be sure, federal intervention in the financial markets is generally unwelcome and should be discouraged, unless of course, it’s the best alternative we’ve got to an onerous set of problems. It’s a lot like democracy; it’s a lousy form of government, ripe for abuse, subject to failure and decent, except when compared to any other form of government understood by man.
The Federal Reserve has massive economic powers and is only now bringing out the biggest of their guns. Some are suggesting that the Fed has used the entirety of its arsenal and there’s nothing left to offer – that’s far from the truth. The Fed has the ability to open up its balance sheet well beyond the actions it has already taken, and it can actually ‘make a market’ if policy makers so choose. The resources of the Federal Reserve, apart from the US Treasury, represent sufficient economic capacity for numerous additional rounds in our current economic battle.
Clearly, the Bush administration is responding to allegations that suggest that they have stopped leading and governing, and are focused on packing up and getting out of town. Today’s initiatives appear to have Obama’s most senior economic appointee’s, Larry Summers and Tim Geitner, fingerprints all over them, along with those of Bernanke and Paulson, and rightfully so. These are the men who will be charged with restoring health to our economy and may help Obama be remembered throughout history in much the same way that we recall ‘the great’ Franklin Delano Roosevelt. Obama’s post-election/pre-inaugural approval rating is running 20-30 points ahead of any of the last three US presidents, and he may need every bit of that ‘good will’ being extended by the US electorate in order to marshal the support he’ll need to make and administer the tough choices that are undoubtedly in front of us all.
What we now refer to as ‘economics’, the study of supply and demand, production, buying and selling, and their relations with law, custom, and government was long referred to as ‘political economy’. It was only in the late 18th century that ‘economics’ began to be taught separate from political philosophy, and both grew out of the concepts of moral philosophies as studied in the 1600’s. Today, we recognize that all of economics is theoretic rather than empirical. We accept various economic theories as imperatives when they suit our particular needs or support favorite philosophies. In truth, economic principals are not as constant as one might suppose and the outcome of a particular course of action, though perhaps highly predictable, is rarely certain.
The Japanese have only recently come out of what has been referred to ‘the lost decade’ - a period of time in which their central bank maintained 0% interest rates, and their economy and population ‘flat lined’ through years of deleveraging. Personal savings rose, but investment did not; jobs were protected but few were created; prices became stable, but the Japanese currency suffered and their economy stagnated – all as a by-product of the government’s lack of willingness to innovate and take risks with economic policy.
The actions of the current US administration’s economic leaders and monetary theorists, principally Ben Bernanke and Henry Paulson, represent great lessons learned from the Japanese experience and our own depression of the 1930’s. As a result, though our economy may face some terribly difficult months, perhaps extending to a period of years, we will do anything but stagnate. Politicians and voters hoisted the banner of ‘change’ in recent campaigning, and the Obama administration is already heralding an era of change and innovation. We are ripe for it. The discomfort we may be experiencing as we endure our economy in recession may be just the fuel we need to usher in an era, not just of change, but of innovation and progress.
$100 Billion and Change
One year ago, The Royal Bank of Scotland (RBS), in a consortium with Fortis and Santander, purchased ABN Amro, a Dutch based commercial and consumer banking enterprise, for approximately $100 billion.
Today, that sum $100 billion could purchase Citigroup for $22.5 billion, Morgan Stanley for $10.5 billion, Merrill Lynch for $12.3 billion, Deutsche Bank for $13 billion, Barclay’s Bank for $12.3 billion, and still have $8.7 billion left over. That $8.7 billion could purchase the entirety of GM, Ford, Chrysler, and Honda’s F1 Racing Team.
Though this may be little solace for investors reeling from a year of nearly unprecedented markets losses, it ought to offer some relief as with the realization that we are all in this together.
Signature Update is offered by Richard Haskell Sr., Managing Director of Signature Wealth Management
Most of us recognize that sustained price hikes (inflation) are bad and suppose that falling prices (deflation) is good, but the fact is that a little of either can be economically healthy, while too much can be damaging. Just as unhealthy levels of inflation can only be sustained by wage increases and low unemployment, problematic levels of deflation are attended by decreases in personal income and unacceptable levels of unemployment - a possibility with which we are flirting far too actively. If prices for goods and services fall due to a systemic decrease in demand, profits erode, wages are reduced, businesses close their doors, and jobs are lost.
The Fed’s actions are historic. That’s a term that is all too often used casually, but this is not one of those times. Literally trillions of dollars are being pumped into our economy’s core, the very heart of our financial system, and soon there will be an enormous federal stimulus plan offered by the incoming administration. It can’t come soon enough. Likewise, it is regrettable that the outgoing administration has been unwilling to ‘partner’ with Obama’s team and jointly support a package that could be effected months before the newly seated house and senate will be able to pass post-inauguration legislation.
To be sure, federal intervention in the financial markets is generally unwelcome and should be discouraged, unless of course, it’s the best alternative we’ve got to an onerous set of problems. It’s a lot like democracy; it’s a lousy form of government, ripe for abuse, subject to failure and decent, except when compared to any other form of government understood by man.
The Federal Reserve has massive economic powers and is only now bringing out the biggest of their guns. Some are suggesting that the Fed has used the entirety of its arsenal and there’s nothing left to offer – that’s far from the truth. The Fed has the ability to open up its balance sheet well beyond the actions it has already taken, and it can actually ‘make a market’ if policy makers so choose. The resources of the Federal Reserve, apart from the US Treasury, represent sufficient economic capacity for numerous additional rounds in our current economic battle.
Clearly, the Bush administration is responding to allegations that suggest that they have stopped leading and governing, and are focused on packing up and getting out of town. Today’s initiatives appear to have Obama’s most senior economic appointee’s, Larry Summers and Tim Geitner, fingerprints all over them, along with those of Bernanke and Paulson, and rightfully so. These are the men who will be charged with restoring health to our economy and may help Obama be remembered throughout history in much the same way that we recall ‘the great’ Franklin Delano Roosevelt. Obama’s post-election/pre-inaugural approval rating is running 20-30 points ahead of any of the last three US presidents, and he may need every bit of that ‘good will’ being extended by the US electorate in order to marshal the support he’ll need to make and administer the tough choices that are undoubtedly in front of us all.
What we now refer to as ‘economics’, the study of supply and demand, production, buying and selling, and their relations with law, custom, and government was long referred to as ‘political economy’. It was only in the late 18th century that ‘economics’ began to be taught separate from political philosophy, and both grew out of the concepts of moral philosophies as studied in the 1600’s. Today, we recognize that all of economics is theoretic rather than empirical. We accept various economic theories as imperatives when they suit our particular needs or support favorite philosophies. In truth, economic principals are not as constant as one might suppose and the outcome of a particular course of action, though perhaps highly predictable, is rarely certain.
The Japanese have only recently come out of what has been referred to ‘the lost decade’ - a period of time in which their central bank maintained 0% interest rates, and their economy and population ‘flat lined’ through years of deleveraging. Personal savings rose, but investment did not; jobs were protected but few were created; prices became stable, but the Japanese currency suffered and their economy stagnated – all as a by-product of the government’s lack of willingness to innovate and take risks with economic policy.
The actions of the current US administration’s economic leaders and monetary theorists, principally Ben Bernanke and Henry Paulson, represent great lessons learned from the Japanese experience and our own depression of the 1930’s. As a result, though our economy may face some terribly difficult months, perhaps extending to a period of years, we will do anything but stagnate. Politicians and voters hoisted the banner of ‘change’ in recent campaigning, and the Obama administration is already heralding an era of change and innovation. We are ripe for it. The discomfort we may be experiencing as we endure our economy in recession may be just the fuel we need to usher in an era, not just of change, but of innovation and progress.
$100 Billion and Change
One year ago, The Royal Bank of Scotland (RBS), in a consortium with Fortis and Santander, purchased ABN Amro, a Dutch based commercial and consumer banking enterprise, for approximately $100 billion.
Today, that sum $100 billion could purchase Citigroup for $22.5 billion, Morgan Stanley for $10.5 billion, Merrill Lynch for $12.3 billion, Deutsche Bank for $13 billion, Barclay’s Bank for $12.3 billion, and still have $8.7 billion left over. That $8.7 billion could purchase the entirety of GM, Ford, Chrysler, and Honda’s F1 Racing Team.
Though this may be little solace for investors reeling from a year of nearly unprecedented markets losses, it ought to offer some relief as with the realization that we are all in this together.
Signature Update is offered by Richard Haskell Sr., Managing Director of Signature Wealth Management
Friday, December 12, 2008
Consequences of Leadership and Economic Data 12-12-2008
The Consequences of a Lack of Leadership
The FBI’s announcement of the arrest of Bernard Madoff, former NASDAQ chairman and founder of Madoff Investment Securities, LLC, shocked market insiders and sent regulatory officials scrambling late Thursday. Madoff’s allegedly fraudulent activities may have resulted in $50 billion in investor losses, principally effecting wealthy hedge fund investors, and raises serious questions concerning the effectiveness of the SEC and the New York State Securities Division. SEC Chairman Christopher Cox and his senior advisors will certainly come under increased scrutiny as details surface. Already among those details are reports that SEC officials were alerted to possible improprieties as far back as 2005, but remarkably failed to act.
The announcement earlier in the week of the arrest of Illinois Governor Rod Blagojevich, though initially shocking, continues a long, albeit unsurprising, string of corruption in Illinois politics. Though otherwise unrelated, the common brazenness with which Blagojevich and Madoff appear to have operated is both interesting and revealing. One CNBC commentator remarked that he couldn’t imagine how Madoff might be able to sleep at night given the enormity of what is now being considered a clever and sophisticated ‘ponzi scheme’. Blagojevich, though recognized as intelligent and measured, appeared to operate without respect for the public’s trust or consideration for the relevance of his office.
As the nation’s key investment, banking, insurance and manufacturing leaders have been brought before the public to defend their organization’s worthiness to receive hundreds of billions of dollars in federal aid, we’ve seen men and women of great accomplishment describe, and in some cases attempt to defend, years of poor judgment. In an age in which leadership in the private and public sectors are accorded high levels of respect and reward it is tragic that such breaches so often occur.
As the Obama administration takes office in January, the first measure of business will certainly be to restore health to the economy. Perhaps trillions of dollars will be invested in US corporations in the way of preferred stock capital and federally backed loans, and hundreds of billions more will be directed to public works and energy development. At the same time our national leadership addresses these fiscal and economic issues, attention must be given to how we got into the quagmire we’re in today, and as much effort needs to be directed towards how we avoid these kinds of problems in the future as to how we restore growth to the economy today.
The role of supervisory commissions in the public sector and boards of directors in business, and their fiduciary responsibilities, must be addressed. Both demand short term results, often at the cost of long term progress. Even the SEC, Treasury, and Comptroller of the Currency have played into this short term mentality as they continue to support ‘mark-to-market’ accounting and the elimination of the uptick rule in short selling.
Though these are simply examples of the sort of mentality that has led to some of the worst of our economic woes, and that may have allowed the actions of men such as Madoff and Blagojevich, they are telling and reflective of a lack of true leadership.
Economic Reports and Correlated Data
The US consumer is making their presence felt in the retail markets despite increases in unemployment and tightened credit standards. Though virtually every sector of the economy is facing some level of demand destruction, and retail and producer prices continue to fall, consumer purchases have increased over both previous month and year figures. Though it’s unlikely that a consumer rally would be sufficient to pull the economy out of recession at this point, the obvious improvement in consumer confidence provides welcome relief amidst the slate of other troublesome financial and economic news.
November retail sales figures have been released and represent an increase of .3% when sales of automobiles and gasoline are factored out. Contrary to media and anecdotal reports of lower holiday sales, and substantial decreases in overall spending, it appears that the US consumer is taking advantage of decreased fuel costs. The steep discounts offered by retailers at the start of the holiday buying season appear to have brought consumers to the table, but the increased purchase activity may not be enough to offer retailers relief from lagging profits.
Manufacturing inventories were up in October by 4.6% from October 2007, but down .6% from September 2008. Likewise, retail inventories were up over previous year figures though down from the previous month.
As of the end of November, 10.3 million Americans were out of work and unemployment figures are expected to increase to as much as 7% by the end of December, up from 6.7% in November. Regardless of the whether or not the proposed bailout of the US auto industry is acted upon, it is clear that additional manufacturing jobs will be lost as we enter the first quarter of 2009.
The Producer Price Index (PPI), which represents the cost of goods to retailers and distributors, fell by 2.2% in November, continuing a deflationary trend represented by 2.8% and .4% declines in October and September. The price to producer figures, the prices manufacturers and producers pay for goods from which they make their products, fell by yet larger amounts, down 4.3% in November and 3.9% in October. These figures suggest that the Consumer Price Index for December may be lower than anticipated, and could represent a decrease of 4-6% when holiday buying incentives are taken into consideration.
This mixed bag of economic data, coupled with the ongoing debate over the fate of the US auto manufacturers and their dealer networks, was enough to send the markets on another rollercoaster ride for the week, but left the equities markets relatively unchanged from Monday’s opening. Whether or not this represents a bottom in the volatile markets may remain to be seen. It certainly represents an increase in both consumer and investor confidence, and for right now, that’s about all we can hope for.
Signature Update is offered by Richard Haskell Sr., Managing Director of Signature Wealth Management
The FBI’s announcement of the arrest of Bernard Madoff, former NASDAQ chairman and founder of Madoff Investment Securities, LLC, shocked market insiders and sent regulatory officials scrambling late Thursday. Madoff’s allegedly fraudulent activities may have resulted in $50 billion in investor losses, principally effecting wealthy hedge fund investors, and raises serious questions concerning the effectiveness of the SEC and the New York State Securities Division. SEC Chairman Christopher Cox and his senior advisors will certainly come under increased scrutiny as details surface. Already among those details are reports that SEC officials were alerted to possible improprieties as far back as 2005, but remarkably failed to act.
The announcement earlier in the week of the arrest of Illinois Governor Rod Blagojevich, though initially shocking, continues a long, albeit unsurprising, string of corruption in Illinois politics. Though otherwise unrelated, the common brazenness with which Blagojevich and Madoff appear to have operated is both interesting and revealing. One CNBC commentator remarked that he couldn’t imagine how Madoff might be able to sleep at night given the enormity of what is now being considered a clever and sophisticated ‘ponzi scheme’. Blagojevich, though recognized as intelligent and measured, appeared to operate without respect for the public’s trust or consideration for the relevance of his office.
As the nation’s key investment, banking, insurance and manufacturing leaders have been brought before the public to defend their organization’s worthiness to receive hundreds of billions of dollars in federal aid, we’ve seen men and women of great accomplishment describe, and in some cases attempt to defend, years of poor judgment. In an age in which leadership in the private and public sectors are accorded high levels of respect and reward it is tragic that such breaches so often occur.
As the Obama administration takes office in January, the first measure of business will certainly be to restore health to the economy. Perhaps trillions of dollars will be invested in US corporations in the way of preferred stock capital and federally backed loans, and hundreds of billions more will be directed to public works and energy development. At the same time our national leadership addresses these fiscal and economic issues, attention must be given to how we got into the quagmire we’re in today, and as much effort needs to be directed towards how we avoid these kinds of problems in the future as to how we restore growth to the economy today.
The role of supervisory commissions in the public sector and boards of directors in business, and their fiduciary responsibilities, must be addressed. Both demand short term results, often at the cost of long term progress. Even the SEC, Treasury, and Comptroller of the Currency have played into this short term mentality as they continue to support ‘mark-to-market’ accounting and the elimination of the uptick rule in short selling.
Though these are simply examples of the sort of mentality that has led to some of the worst of our economic woes, and that may have allowed the actions of men such as Madoff and Blagojevich, they are telling and reflective of a lack of true leadership.
Economic Reports and Correlated Data
The US consumer is making their presence felt in the retail markets despite increases in unemployment and tightened credit standards. Though virtually every sector of the economy is facing some level of demand destruction, and retail and producer prices continue to fall, consumer purchases have increased over both previous month and year figures. Though it’s unlikely that a consumer rally would be sufficient to pull the economy out of recession at this point, the obvious improvement in consumer confidence provides welcome relief amidst the slate of other troublesome financial and economic news.
November retail sales figures have been released and represent an increase of .3% when sales of automobiles and gasoline are factored out. Contrary to media and anecdotal reports of lower holiday sales, and substantial decreases in overall spending, it appears that the US consumer is taking advantage of decreased fuel costs. The steep discounts offered by retailers at the start of the holiday buying season appear to have brought consumers to the table, but the increased purchase activity may not be enough to offer retailers relief from lagging profits.
Manufacturing inventories were up in October by 4.6% from October 2007, but down .6% from September 2008. Likewise, retail inventories were up over previous year figures though down from the previous month.
As of the end of November, 10.3 million Americans were out of work and unemployment figures are expected to increase to as much as 7% by the end of December, up from 6.7% in November. Regardless of the whether or not the proposed bailout of the US auto industry is acted upon, it is clear that additional manufacturing jobs will be lost as we enter the first quarter of 2009.
The Producer Price Index (PPI), which represents the cost of goods to retailers and distributors, fell by 2.2% in November, continuing a deflationary trend represented by 2.8% and .4% declines in October and September. The price to producer figures, the prices manufacturers and producers pay for goods from which they make their products, fell by yet larger amounts, down 4.3% in November and 3.9% in October. These figures suggest that the Consumer Price Index for December may be lower than anticipated, and could represent a decrease of 4-6% when holiday buying incentives are taken into consideration.
This mixed bag of economic data, coupled with the ongoing debate over the fate of the US auto manufacturers and their dealer networks, was enough to send the markets on another rollercoaster ride for the week, but left the equities markets relatively unchanged from Monday’s opening. Whether or not this represents a bottom in the volatile markets may remain to be seen. It certainly represents an increase in both consumer and investor confidence, and for right now, that’s about all we can hope for.
Signature Update is offered by Richard Haskell Sr., Managing Director of Signature Wealth Management
Monday, December 8, 2008
'It's Easier to Get Into These Things, Than it is to Get Out of Them 12/05/2008
In a recent interview with PBS’s Charlie Rose, Citigroup CEO, Vikram Pandit, offered revealing commentary on the state of the domestic financial markets, and Citigroup’s plans to restore fiscal health, responsibility, and shareholder value to their ailing company. He also offered the following regarding the nation’s current economic woes: ‘It’s easier to get into these things, than it is to get out of them’. And with that, Pandit provided a statement replete with irony and sarcasm, though neither appeared to be his intent.
That it was easy for policy makers, business leaders, and consumers to lead our economy down the road we’re currently traveling has become apparent. The question is ‘why?’ In the face of onerous regulations and near constant scrutiny, how could the tentacles of the credit markets become poisonous and so deeply entrenched for our nation’s economic leadership to have become so blind to them? Thankfully, few will ever really understand the entirety of the situation, well enough the enormity of it. Likewise, those in positions of authority and responsibility will likely commit the remainder of their careers in seeing to it that we don’t find ourselves in this position again. Sadly, the day will come that we’ll have forgotten the pain of falling equities markets, increasing unemployment, and unstable commodities prices, and we will repeat the mistakes of the past in the name of greater understanding about the future. Such is the human condition.
A battle between fear and confidence
The US equities markets closed the day last Friday with a 260+ point gain on the DOW in the face of disturbing employment and manufacturing data. Earlier in the week, traders were wringing their hands over November’s slumping retail and auto sales figures --none of which should have come as a surprise. Extending the emotion-driven trading patterns established earlier in the year, the post-election markets have been beset by swings, sometime intraday, representing a battle between fear and confidence. It appears as though the markets will have posted meaningful gains again today, Monday – at the moment the DOW is op another 200+ points with just over two hours to go in the trading session. If the markets can post back-to-back gains in the face of difficult economic data, it may be a sign that the worst behind us.
Non-farm payroll data reflected a decrease of over 553,000 jobs for November and unemployment rose to 6.7% nationally, up from 6.5% in October. Though decried as the worst jobs number since 1974, the figure is far from the worst we’ve seen in the post-war era. Since 1945, there have been 41 jobs reports worse than that reported for November, and it’s altogether likely that December will offer a worse figure still. Important to note is that the average unemployment rate since the end of WWII has been 6%. For those who are out of work, this is a huge number and their families are feeling the pain. For the economy as a whole, these numbers are worlds away from the 25%+ employment figures of the early 1930’s.
New orders for manufactured goods in October decreased for the third consecutive month by $21.9 billion or 5.1 percent to $407.4 billion, the U.S. Census Bureau reported Thursday. This followed a 3.1 percent September decrease. Excluding transportation, new orders decreased 4.2 percent. Shipments, also down three consecutive months, decreased $13.8 billion or 3.2 percent to $417.7 billion. This followed a 3.1 percent September decrease. These figures are the byproduct of tighter credit markets and foretell lower jobs figures in coming months.
Declining auto sales have been forecast for months, and with the US House of Representatives forcing auto makers to state and restate their financial woes to the nation, it is a wonder that there have been any domestic auto sales to report. The beating the ‘Big Three’ executives have taken in the press has been unrelenting, and this in the face of these CEO’s having taken the helms of these companies well after the labor contracts that are at the heart of their problems were negotiated. The fact is that the US auto manufacturers have produced and sold more cars, trucks, and SUV’s than they ought to have been expected to in the face of lower-cost foreign competitors. Add to this the recent tightening in the credit markets, and one can draw the conclusion that the main reason Ford, GM, and Chrysler dealerships are still able to move even small inventories is a result of brand loyalties and consumer enthusiasm for models such as Corvette, Mustang, and Charger.
November retail sales, always bolstered by post-Thanksgiving buying, had virtually no chance of being anything but lower than expected. Not only did November 2008 have the fewest post-Thanksgiving shopping days of any November on record, but consumers have been beaten with the constant reports of how bad things were going to be, with the entire self-fulfilling prophecy routine then being played out in department stores across the country. Expectations were too heavily drawn from historical data, representing months with more available shopping days and pushed by a certain degree of desperation on the part of some retailers. According to the International Council of Shopping Centers and the LA Times, November retail sales were off by 2.7% over the prior year. Given that November 2008 had only three shopping days following Thanksgiving compared to eight days for 2007 and an average of six days for each of the last five years, a drop of only 2.7% is more reflective of a highly successful ‘Black Friday’ sales campaign than is being reported. Early media reports of ‘Black Friday’ sales were bleak; but when the numbers were tallied, 2008 ‘Black Friday’ sales actually exceeded 2007 by 7%.
The market dynamics played out through much of 2008 have reflected emotional swings indicative of a battle between fear and confidence. On any given day, the markets respond vigorously to positive reports, often beginning as rumors, and then just as vigorously retrace themselves out of fear and uncertainty. These swings, often representing several hundred points or more for the DOW, though not unprecedented, are counterproductive at best. They indicate a lack of confidence in the financial system and will only be replaced by calm and positive trend lines once the credit markets return to a level of normalcy, housing prices stabilize, and job creation outpaces layoffs.
Obama’s economic stimulus package is intended to offer much needed relief but will only have a chance if our legislative bodies stop parading the follies of business leaders in front of us every week, and the national media outlets back away from the ‘doom and gloom’ reporting that has become their ‘stock in trade’. Certainly, there are problems to be reported, and the American public deserves to be informed; but to constantly overstate the difficulties and under-report successes, only fosters greater volatility and may add sufficient negativity to actually create the very problem that is being fretted over.
Our society is great at coming together to mourn, we’re able to rapidly raise the national awareness of both scientific and cultural issues, and collectively we will move ‘heaven and earth’ in support of a worthwhile cause. What we need is a national day of confidence - a holiday from negativity - with the reassuring words of our national leadership, offered as a united front to allow confidence to win out over fear just long enough to provide rational thought an even playing field with that of emotion and fear.
$40 Per Barrel Oil?
In mid-July, we suggested that energy costs would trend downward well before the end of the year and that the price of a barrel of oil would fall below $80 or $90. Privately, we projected per barrel costs as low as $60, but had no expectation of price reductions $40 per barrel. Though we may have correctly calculated the vigor with which the US dollar would strengthen and the US and foreign economies’ ability to reduce consumption, we clearly underestimated the overall economic slowdown that would further weaken demand.
The run up in oil and other commodities was fueled by a weakened US dollar, increasing global demand, and some level of speculative manipulation. While speculation has been curtailed by greater enforcement of various regulations, the demand destruction we’ve seen now raises new concerns over a deflationary cycle. The swelling federal deficits, though never considered welcoming, will have an inflationary effect once enough jobs are created and personal incomes begin to rise. If this can be done quickly enough to avoid a sustained deflationary trend, remains to be seen; but it is likely. It is also, just as certainly, part of the Obama economic recovery plan. Likewise, the incoming administration has a planned cure for the likely inflation cycle--increased taxes. Inflation can only be sustained as both the number of jobs and personal incomes rise. Given that we will one day be forced to pay for the trillions of dollars of bailouts being offered, it only makes sense that the Treasury and Federal Reserve should seek an opportune time to exact payment and calm the growth that excess deficits consistently produce.
Signature Update is offered by Richard Haskell Sr., Managing Director of Signature Wealth Management
That it was easy for policy makers, business leaders, and consumers to lead our economy down the road we’re currently traveling has become apparent. The question is ‘why?’ In the face of onerous regulations and near constant scrutiny, how could the tentacles of the credit markets become poisonous and so deeply entrenched for our nation’s economic leadership to have become so blind to them? Thankfully, few will ever really understand the entirety of the situation, well enough the enormity of it. Likewise, those in positions of authority and responsibility will likely commit the remainder of their careers in seeing to it that we don’t find ourselves in this position again. Sadly, the day will come that we’ll have forgotten the pain of falling equities markets, increasing unemployment, and unstable commodities prices, and we will repeat the mistakes of the past in the name of greater understanding about the future. Such is the human condition.
A battle between fear and confidence
The US equities markets closed the day last Friday with a 260+ point gain on the DOW in the face of disturbing employment and manufacturing data. Earlier in the week, traders were wringing their hands over November’s slumping retail and auto sales figures --none of which should have come as a surprise. Extending the emotion-driven trading patterns established earlier in the year, the post-election markets have been beset by swings, sometime intraday, representing a battle between fear and confidence. It appears as though the markets will have posted meaningful gains again today, Monday – at the moment the DOW is op another 200+ points with just over two hours to go in the trading session. If the markets can post back-to-back gains in the face of difficult economic data, it may be a sign that the worst behind us.
Non-farm payroll data reflected a decrease of over 553,000 jobs for November and unemployment rose to 6.7% nationally, up from 6.5% in October. Though decried as the worst jobs number since 1974, the figure is far from the worst we’ve seen in the post-war era. Since 1945, there have been 41 jobs reports worse than that reported for November, and it’s altogether likely that December will offer a worse figure still. Important to note is that the average unemployment rate since the end of WWII has been 6%. For those who are out of work, this is a huge number and their families are feeling the pain. For the economy as a whole, these numbers are worlds away from the 25%+ employment figures of the early 1930’s.
New orders for manufactured goods in October decreased for the third consecutive month by $21.9 billion or 5.1 percent to $407.4 billion, the U.S. Census Bureau reported Thursday. This followed a 3.1 percent September decrease. Excluding transportation, new orders decreased 4.2 percent. Shipments, also down three consecutive months, decreased $13.8 billion or 3.2 percent to $417.7 billion. This followed a 3.1 percent September decrease. These figures are the byproduct of tighter credit markets and foretell lower jobs figures in coming months.
Declining auto sales have been forecast for months, and with the US House of Representatives forcing auto makers to state and restate their financial woes to the nation, it is a wonder that there have been any domestic auto sales to report. The beating the ‘Big Three’ executives have taken in the press has been unrelenting, and this in the face of these CEO’s having taken the helms of these companies well after the labor contracts that are at the heart of their problems were negotiated. The fact is that the US auto manufacturers have produced and sold more cars, trucks, and SUV’s than they ought to have been expected to in the face of lower-cost foreign competitors. Add to this the recent tightening in the credit markets, and one can draw the conclusion that the main reason Ford, GM, and Chrysler dealerships are still able to move even small inventories is a result of brand loyalties and consumer enthusiasm for models such as Corvette, Mustang, and Charger.
November retail sales, always bolstered by post-Thanksgiving buying, had virtually no chance of being anything but lower than expected. Not only did November 2008 have the fewest post-Thanksgiving shopping days of any November on record, but consumers have been beaten with the constant reports of how bad things were going to be, with the entire self-fulfilling prophecy routine then being played out in department stores across the country. Expectations were too heavily drawn from historical data, representing months with more available shopping days and pushed by a certain degree of desperation on the part of some retailers. According to the International Council of Shopping Centers and the LA Times, November retail sales were off by 2.7% over the prior year. Given that November 2008 had only three shopping days following Thanksgiving compared to eight days for 2007 and an average of six days for each of the last five years, a drop of only 2.7% is more reflective of a highly successful ‘Black Friday’ sales campaign than is being reported. Early media reports of ‘Black Friday’ sales were bleak; but when the numbers were tallied, 2008 ‘Black Friday’ sales actually exceeded 2007 by 7%.
The market dynamics played out through much of 2008 have reflected emotional swings indicative of a battle between fear and confidence. On any given day, the markets respond vigorously to positive reports, often beginning as rumors, and then just as vigorously retrace themselves out of fear and uncertainty. These swings, often representing several hundred points or more for the DOW, though not unprecedented, are counterproductive at best. They indicate a lack of confidence in the financial system and will only be replaced by calm and positive trend lines once the credit markets return to a level of normalcy, housing prices stabilize, and job creation outpaces layoffs.
Obama’s economic stimulus package is intended to offer much needed relief but will only have a chance if our legislative bodies stop parading the follies of business leaders in front of us every week, and the national media outlets back away from the ‘doom and gloom’ reporting that has become their ‘stock in trade’. Certainly, there are problems to be reported, and the American public deserves to be informed; but to constantly overstate the difficulties and under-report successes, only fosters greater volatility and may add sufficient negativity to actually create the very problem that is being fretted over.
Our society is great at coming together to mourn, we’re able to rapidly raise the national awareness of both scientific and cultural issues, and collectively we will move ‘heaven and earth’ in support of a worthwhile cause. What we need is a national day of confidence - a holiday from negativity - with the reassuring words of our national leadership, offered as a united front to allow confidence to win out over fear just long enough to provide rational thought an even playing field with that of emotion and fear.
$40 Per Barrel Oil?
In mid-July, we suggested that energy costs would trend downward well before the end of the year and that the price of a barrel of oil would fall below $80 or $90. Privately, we projected per barrel costs as low as $60, but had no expectation of price reductions $40 per barrel. Though we may have correctly calculated the vigor with which the US dollar would strengthen and the US and foreign economies’ ability to reduce consumption, we clearly underestimated the overall economic slowdown that would further weaken demand.
The run up in oil and other commodities was fueled by a weakened US dollar, increasing global demand, and some level of speculative manipulation. While speculation has been curtailed by greater enforcement of various regulations, the demand destruction we’ve seen now raises new concerns over a deflationary cycle. The swelling federal deficits, though never considered welcoming, will have an inflationary effect once enough jobs are created and personal incomes begin to rise. If this can be done quickly enough to avoid a sustained deflationary trend, remains to be seen; but it is likely. It is also, just as certainly, part of the Obama economic recovery plan. Likewise, the incoming administration has a planned cure for the likely inflation cycle--increased taxes. Inflation can only be sustained as both the number of jobs and personal incomes rise. Given that we will one day be forced to pay for the trillions of dollars of bailouts being offered, it only makes sense that the Treasury and Federal Reserve should seek an opportune time to exact payment and calm the growth that excess deficits consistently produce.
Signature Update is offered by Richard Haskell Sr., Managing Director of Signature Wealth Management
Monday, November 24, 2008
Obama's Economic Recovery Plan and Senior Economic Team
The November 14, 2008 issue of Signature Update discussed the likelihood that the cost of federal intervention in the US economy would escalate into the trillions of dollars as the Obama administration tackles bailout, rescue and recovery efforts. Though the price tag hasn’t been identified as yet, Obama’s economic plans have begun to circulate even as he announced the leadership of his economic team and the structure for a wide-ranging stimulus package. The announcement of Tim Geithner as Treasury Secretary, and Larry Summers as the Director of the National Economic Counsel came as no surprise, but the news brought a 500 + point gain to the DOW on Friday afternoon, none-the-less. Geithner and Summers’ credentials are impressive, but do they represent the much heralded ‘change’ the Obama candidacy promised? It’s hard to tell. More importantly, the economy may be an area in which some ‘consistency amidst change’ may be more valuable than change itself.
As the President of the Federal Reserve Board of New York, Geithner has acted as a trusted ally of Fed Chairman Ben Bernanke. He is one of the key architects of the federal government’s handling of the Bear Sterns, Fannie Mae, Freddie Mac, AIG, Lehman Brothers, Wachovia and Citigroup difficulties, and he has certainly weighed in on the automobile manufacturers quest for another $25 billion. Geithner is relatively young, and has been virtually unknown outside of hardcore economic circles.
The appointment of Larry Summers as Obama’s chief economic advisor reflects the president-elect’s confidence of the job Summers, the former president of Harvard University, performed as Bill Clinton’s Treasury Secretary. Some expect that it may also signal Obama’s intent to replace Bernanke when his term is over; which term purposely does not correspond with a presidential term, so as to give the fed chairman a sense of autonomy from the current administration. Like Geithner, Summers has been a key observer and sometimes participant of the current administration’s handling of the economic crisis. Both are respected by their peers, corporate leadership, and domestic and foreign public policy makers.
Whether or not the appointment of Geithner and Summers represents change seems to be irrelevant in today’s market. Critical to the economy is whether or not the appointments offer a level of confidence to the markets, and if Friday and Monday’s stock market rallies can be taken as evidence, they can also be seen as a vote of confidence. We’re going to need it. Obama’s economic recovery plan seeks to add some 2.5 million jobs, offer lower income and middle class tax cuts, provide substantial investments in public infrastructure, and pump billions into alternative energy development. Though the cost of Obama’s plan hasn’t been announced, and most likely hasn’t even been calculated, it is clear that his administration will proceed regardless. Obama and his closest economic advisors appear to have thrown out any consideration of fiscal constraint as it relates to supporting the economy. While there is some evidence that monetary policy is more important than fiscal conservatism in striving to ‘right’ our economy, we can’t ignore the long term effects of budget deficits and easy money policies. If Obama has the political strength to champion the economy and keep the Democrat controlled house and senate from over-spending on other projects and causes, then we might be able to see a return towards balanced budgets sometime during his administration. Otherwise, we’ll simply be forwarding today’s problems on to future administrations and generations.
Aid to Citigroup
The Federal Reserve and US Treasury’s decision to offer $20 billion in aide to Citigroup over the weekend came as no surprise, but it does raise some interesting questions. Was the federal government’s involvement in Citigroup’s acquisition of Wachovia party to Citigroup’s problems today? And, how is it that we can step in and bailout Citigroup, with seemingly little scrutiny, when we can’t offer funds to the ailing US auto manufacturers without endless hearings and congressional approval? The answers may be more connected than one might suppose.
Treasury Secretary Paulson may recognize the federal government’s role in Citigroup’s current melt down and believe that TARP funds were specifically authorized for a Citigroup-like problem. Not only did the federal government encourage Citigroup to acquire the failing Wachovia, the government also has meaningful culpability in the credit market problems that have brought so many financial behemoths to their knees. At the same time, Paulson hasn’t felt that TARP authority extends to automakers, and is almost certainly supported by the recognition that while the current economic situation has great impact on these manufacturers, the roots of their problems lie in poorly negotiated labor contracts, resulting in extraordinary labor and legacy costs. Not to mention bloated dealer networks and excessive production capacity.
Many have sited high executive compensation, lack of innovation, and a neglect of fuel efficient product offerings for the automaker’s problems, but these issues have little bearing on the situation. The ‘Big Three’ offer a full slate of fuel efficient models ranging from tiny commute-mobiles to SUV hybrids. They employ innovative design and manufacturing elements well beyond their ability to afford; as can be seen by their multi-billion dollar losses. And while their executive compensation programs are beyond belief for most consumers, they aren’t out of line relative to other large corporate compensation and incentive plans.
Many in the media and House of Representative reveled in the CEO’s of Ford, GM, and Chrysler’s responses to questions about private jets, compensation, and executive treatment, but their time would have been better spent in dealing with the effects of labor contracts and integrating dealer networks. Congressional representatives repeatedly asked questions regarding the movement of thousands of jobs to global markets, but completely absent was the understanding that these manufacturers needed to relocate various manufacturing and assembly processes in an effort to work around excessive domestic labor contracts in an effort to decrease costs. The likes of Honda, Toyota, and Nissan have done the same thing as they’ve developed assembly plants in the US, which plants principally employ younger, lower cost workers not subject to the labor contracts of the 1970’s and 1980’s, nor the government regulations of the countries from which these manufacturers arose.
House Speaker Nancy Pelosi, on Sunday morning’s Face the Nation, stated that a bailout would certainly be provided the automakers, but appropriately required them to come back to the table with a recovery plan. Such a plan will have to address the issue of labor costs and seek federal support in renegotiating contracts in order to have any chance for success. The CEO’s tasked with offering these plans may also have to agree on a plan to consolidate product offerings and distribution systems in an attempt to ‘right size’ the domestic automobile industry. Regardless of the dollar amount offered through any form of federal intervention, the US auto industry must restructure itself in order to survive and be competitive on the domestic and global stage.
A Deflationary Trend
The prospects of deflation have hung over the market since late summer, as fuel and other commodities prices began to fall. With the steep decline in the price of basic metals (copper, nickel, aluminum, etc.) and agricultural commodities there is a very real concern that the benefit of falling prices for the consumer could give way to lower corporate earnings and fewer jobs. Most recognize the inherent problems of excessive inflation, but few consider what happens when the cost of goods and services declines beyond reasonable levels; the economic impact can be just as problematic. The massive job losses of the Great Depression were brought about largely as a result of tightening monetary policies and price deflation. Fortunately, today’s economic policy makers are striving to address these issues head on.
Corporations, and their stock values, live and die based on earnings. When earnings decline and profits disappear, eventually jobs are lost, which decreases demand and can create an entirely different downward spiral from that which our economy has faced in recent months. While decreasing energy costs can be likened to a tax cut, or rebate, for consumers, and perhaps save the all-important Christmas buying season, weakening demand can spell trouble for the much needed recovery. It is a difficult balance and one that must be attended to as the Obama administration offers a recovery plan. The 2.5 million jobs offered under Obama’s plan, in addition to those created through the proposed tax cuts and alternative energy development, may promote sufficient demand to stabilize core commodities prices and help the US economy avoid a deflationary cycle.
Signature Update is offered by Richard Haskell, Sr. - Signature Wealth Management
As the President of the Federal Reserve Board of New York, Geithner has acted as a trusted ally of Fed Chairman Ben Bernanke. He is one of the key architects of the federal government’s handling of the Bear Sterns, Fannie Mae, Freddie Mac, AIG, Lehman Brothers, Wachovia and Citigroup difficulties, and he has certainly weighed in on the automobile manufacturers quest for another $25 billion. Geithner is relatively young, and has been virtually unknown outside of hardcore economic circles.
The appointment of Larry Summers as Obama’s chief economic advisor reflects the president-elect’s confidence of the job Summers, the former president of Harvard University, performed as Bill Clinton’s Treasury Secretary. Some expect that it may also signal Obama’s intent to replace Bernanke when his term is over; which term purposely does not correspond with a presidential term, so as to give the fed chairman a sense of autonomy from the current administration. Like Geithner, Summers has been a key observer and sometimes participant of the current administration’s handling of the economic crisis. Both are respected by their peers, corporate leadership, and domestic and foreign public policy makers.
Whether or not the appointment of Geithner and Summers represents change seems to be irrelevant in today’s market. Critical to the economy is whether or not the appointments offer a level of confidence to the markets, and if Friday and Monday’s stock market rallies can be taken as evidence, they can also be seen as a vote of confidence. We’re going to need it. Obama’s economic recovery plan seeks to add some 2.5 million jobs, offer lower income and middle class tax cuts, provide substantial investments in public infrastructure, and pump billions into alternative energy development. Though the cost of Obama’s plan hasn’t been announced, and most likely hasn’t even been calculated, it is clear that his administration will proceed regardless. Obama and his closest economic advisors appear to have thrown out any consideration of fiscal constraint as it relates to supporting the economy. While there is some evidence that monetary policy is more important than fiscal conservatism in striving to ‘right’ our economy, we can’t ignore the long term effects of budget deficits and easy money policies. If Obama has the political strength to champion the economy and keep the Democrat controlled house and senate from over-spending on other projects and causes, then we might be able to see a return towards balanced budgets sometime during his administration. Otherwise, we’ll simply be forwarding today’s problems on to future administrations and generations.
Aid to Citigroup
The Federal Reserve and US Treasury’s decision to offer $20 billion in aide to Citigroup over the weekend came as no surprise, but it does raise some interesting questions. Was the federal government’s involvement in Citigroup’s acquisition of Wachovia party to Citigroup’s problems today? And, how is it that we can step in and bailout Citigroup, with seemingly little scrutiny, when we can’t offer funds to the ailing US auto manufacturers without endless hearings and congressional approval? The answers may be more connected than one might suppose.
Treasury Secretary Paulson may recognize the federal government’s role in Citigroup’s current melt down and believe that TARP funds were specifically authorized for a Citigroup-like problem. Not only did the federal government encourage Citigroup to acquire the failing Wachovia, the government also has meaningful culpability in the credit market problems that have brought so many financial behemoths to their knees. At the same time, Paulson hasn’t felt that TARP authority extends to automakers, and is almost certainly supported by the recognition that while the current economic situation has great impact on these manufacturers, the roots of their problems lie in poorly negotiated labor contracts, resulting in extraordinary labor and legacy costs. Not to mention bloated dealer networks and excessive production capacity.
Many have sited high executive compensation, lack of innovation, and a neglect of fuel efficient product offerings for the automaker’s problems, but these issues have little bearing on the situation. The ‘Big Three’ offer a full slate of fuel efficient models ranging from tiny commute-mobiles to SUV hybrids. They employ innovative design and manufacturing elements well beyond their ability to afford; as can be seen by their multi-billion dollar losses. And while their executive compensation programs are beyond belief for most consumers, they aren’t out of line relative to other large corporate compensation and incentive plans.
Many in the media and House of Representative reveled in the CEO’s of Ford, GM, and Chrysler’s responses to questions about private jets, compensation, and executive treatment, but their time would have been better spent in dealing with the effects of labor contracts and integrating dealer networks. Congressional representatives repeatedly asked questions regarding the movement of thousands of jobs to global markets, but completely absent was the understanding that these manufacturers needed to relocate various manufacturing and assembly processes in an effort to work around excessive domestic labor contracts in an effort to decrease costs. The likes of Honda, Toyota, and Nissan have done the same thing as they’ve developed assembly plants in the US, which plants principally employ younger, lower cost workers not subject to the labor contracts of the 1970’s and 1980’s, nor the government regulations of the countries from which these manufacturers arose.
House Speaker Nancy Pelosi, on Sunday morning’s Face the Nation, stated that a bailout would certainly be provided the automakers, but appropriately required them to come back to the table with a recovery plan. Such a plan will have to address the issue of labor costs and seek federal support in renegotiating contracts in order to have any chance for success. The CEO’s tasked with offering these plans may also have to agree on a plan to consolidate product offerings and distribution systems in an attempt to ‘right size’ the domestic automobile industry. Regardless of the dollar amount offered through any form of federal intervention, the US auto industry must restructure itself in order to survive and be competitive on the domestic and global stage.
A Deflationary Trend
The prospects of deflation have hung over the market since late summer, as fuel and other commodities prices began to fall. With the steep decline in the price of basic metals (copper, nickel, aluminum, etc.) and agricultural commodities there is a very real concern that the benefit of falling prices for the consumer could give way to lower corporate earnings and fewer jobs. Most recognize the inherent problems of excessive inflation, but few consider what happens when the cost of goods and services declines beyond reasonable levels; the economic impact can be just as problematic. The massive job losses of the Great Depression were brought about largely as a result of tightening monetary policies and price deflation. Fortunately, today’s economic policy makers are striving to address these issues head on.
Corporations, and their stock values, live and die based on earnings. When earnings decline and profits disappear, eventually jobs are lost, which decreases demand and can create an entirely different downward spiral from that which our economy has faced in recent months. While decreasing energy costs can be likened to a tax cut, or rebate, for consumers, and perhaps save the all-important Christmas buying season, weakening demand can spell trouble for the much needed recovery. It is a difficult balance and one that must be attended to as the Obama administration offers a recovery plan. The 2.5 million jobs offered under Obama’s plan, in addition to those created through the proposed tax cuts and alternative energy development, may promote sufficient demand to stabilize core commodities prices and help the US economy avoid a deflationary cycle.
Signature Update is offered by Richard Haskell, Sr. - Signature Wealth Management
Friday, November 14, 2008
US Markets and the World Stage 11-14-2008
A FREE MARKET ECONOMY FUELED BY… FEDERAL CAPITAL?
Modern economic theory, though much evolved in the last 50 years, doesn’t even have a term to describe the sort of economy we’re faced with today. Traditionally the most outwardly free-market economy in the world, the US economy has succumbed to federal intervention in recent months that has quickly moved our nation from capitalism to some modified form of free- market nationalism. If that term isn’t familiar to you, you needn’t be concerned – it isn’t familiar to anyone. It isn’t socialism, it isn’t capitalism, but even the renown economists Adam Smith, John Maynard Keynes, and Milton Friedman didn’t offer any descriptive term to identify this form of economic intervention. Someone will soon come up with a better label that more appropriately describes the sort of economy our nation is evolving towards, until then we will all wonder where this will take us.
In recent months the Federal Reserve has increased its balance sheet to over $2 trillion in assets and the Treasury has stepped in to shore up the financial system with hundreds of billions of dollars, only some of which fall under the $700 billion Treasury authority extended through the TARP (Troubled Assets Relief Program). By some estimates, federal intervention has now committed more than $1 trillion to the ailing US credit markets, and the Bush administration appears poised to ‘draw the line’ and offer no more. But there almost certainly will be more; likely much more.
Several states teeter on the brink of bankruptcy. The US automotive industry, and the 2.3 million jobs it reportedly represents, may very well not survive without tens of billions in additional capital relief. Our healthcare system is in dire need of reformation. Our education system, transportation and energy infrastructures, tax codes, and social security program will require enormous resources to meet the needs of future generations. President-elect Obama has an extraordinary undertaking in front of him as he becomes tasked with the responsibility to lead our people and government through this difficult time. He may very well end up being grouped with George Washington, Abraham Lincoln, and Franklin Roosevelt as being responsible for the transformation of the nation’s economy, the confidence of our citizenry, and re-establishing America’s prestige on the world stage. Like those before him, he will succeed, though more out of the sheer will and ingenuity of the American people, than of any great attribute of his own.
One might suppose that McCain is nearly as giddy at the prospect of avoiding this task as he is disappointed at having lost a hard-fought election. Likewise, Obama may well be questioning the value in having gotten what he asked for.
Obama has stated that we should prioritize and take our challenges one at a time, but in all likelihood he’ll be forced to into a position similar to that which Roosevelt found himself in when he championed the ‘New Deal’. His administration will likely succumb to pressures to offer an enormous relief package that addresses most of the major issues, while at the same time providing sufficient authority to deal with issues of lesser import and the need arises. The National Debt, already over $10 trillion, will almost certainly balloon to nearly $15 trillion as the various areas of economic crises are addressed, and as interest continues to accrue. Were it not for the reality that virtually every one of the world’s developed economies is in the same situation, such an increase in the federal debt would be devastating to the US currency. Regardless, it will make inflation more difficult to control, and interest rates and taxes will rise to levels that will require future generations to adjust their lifestyle expectations. There appears to be little choice in this.
The generation that experienced the economic transformation of Roosevelt’s ‘New Deal’, and the generations that followed, even to our time, have realized the benefits and the necessity of the actions taken at the time. Likewise, our generation, and those of our children and their children, will come to the same realization. In truth, Obama will either be praised for his leadership and handling of the economy, or he will be vilified – only time will tell.
Addressing New York’s Manhattan Institute on Thursday afternoon, President Bush heralded the strength, entrepreneurialism, and vibrancy of the American public. He boldly predicted the ongoing pre-eminence of the American economy, just as President-elect Obama has done. Bush received a standing ovation for his comments from a multi-national audience of business and economic leaders, gathered in advance of the G20 summit to be held this weekend. His comments reflected, and the audience’s reaction evidenced, the relative strength and leadership of the US economy, and our government and business leaders on the world stage.
US EQUITY MARKETS BENEFITED BY BUSH COMMENTS IN ADVANCE OF G20 SUMMIT
The US markets offered ‘more-of-the-same’ volatility on Thursday as the DOW opened sharply higher in the face of declining employment figures. The early move, counter-intuitive to the economic data released, appeared to have been more of a response to the market sell-off of previous sessions, as gains gave way to 300+ point losses by mid-day. Two hours before the market close, President Bush addressed New York’s Manhattan Institute, preparatory to the G20 Summit in Washington this weekend, and the market rallied to close at a gain of more than 550 points on the DOW.
Bush, an unpopular, lame-duck president, wasn’t expected to generate meaningful market enthusiasm with his comments. He took the liberty of labeling the global economic crisis as a ‘global meltdown’, but went on to make the case for America’s economic leadership in the global markets. His call for optimism, though rarely stimulating before the recent presidential election, appeared to buoy the markets and foster a late-day buying frenzy. His comments laid the tone for coordinated economic planning and regulation among the G20 nations, and he effectively drew a line in the sand as it pertains to governmental involvement in what has been the world’s most assertive free market economy.
It is likely that the surge in equity pricing accompanying Bush’s comments also reflected an over-sold market that has priced in continued economic weakness beyond any rational point. Though the surge drove market ‘bulls’ into a buying spree, it will likely be followed by a sell-off in the days ahead; a reflection of the increasingly volatile, and emotional, market conditions.
CHINESE STIMULUS PLAN – ENORMOUS, BUT INEFFECTIVE
China’s Ministry of Finance announced a $586 billion stimulus package Sunday; prior to the opening of the US financial markets. At first glance, the plan appeared to be a bold move on the part of China’s leadership, causing foreign and domestic equities markets to surge on the headlines. Upon closer inspection, the newly announced plan was more of a public relations move and principally offers a restatement of social and public works initiatives previously announced by the Beijing government; many of which are already underway.
The plan is comprised of an array of national infrastructure and social welfare projects, including constructing new railways, subways, airports and rebuilding communities devastated by an earthquake in southwest China in May, and is expected to be phased in over a 24-month period to aid China’s slowing economy. While the plan may improve the employment market in China’s urban areas, it is expected to offer little relief for China’s struggling rural economies.
Of China’s roughly 1.4 billion citizens, nearly 800 million live in impoverished conditions. While that may leave an upper and middle class comprising more than 400 million people, larger than the entire US population, it also leaves enormous hurdles for Chinese leadership. Economic growth in excess of 10% per year, coupled with a successful 2008 Summer Olympic effort, may have been enough to bring hope to China’s rural poor, but with a slowing economy presenting growth in the 4-6% range, and a weakened Chinese currency, it is likely that Beijing will need to marshal substantially greater resources to stimulate their economy in any meaningful way.
On a comparative basis (based on population), the $586 billion package would equate to a stimulus package of less than $90 billion in the US markets, or slightly more than the stimulus package the Bush administration offered US citizens earlier this year. That effort, though controversial at the time, did little to calm the US markets and provide anything more than a temporary surge in retail purchases.
Signature Update is offered by Richard Haskell, Sr., Managing Director of Signature Wealth Management
Modern economic theory, though much evolved in the last 50 years, doesn’t even have a term to describe the sort of economy we’re faced with today. Traditionally the most outwardly free-market economy in the world, the US economy has succumbed to federal intervention in recent months that has quickly moved our nation from capitalism to some modified form of free- market nationalism. If that term isn’t familiar to you, you needn’t be concerned – it isn’t familiar to anyone. It isn’t socialism, it isn’t capitalism, but even the renown economists Adam Smith, John Maynard Keynes, and Milton Friedman didn’t offer any descriptive term to identify this form of economic intervention. Someone will soon come up with a better label that more appropriately describes the sort of economy our nation is evolving towards, until then we will all wonder where this will take us.
In recent months the Federal Reserve has increased its balance sheet to over $2 trillion in assets and the Treasury has stepped in to shore up the financial system with hundreds of billions of dollars, only some of which fall under the $700 billion Treasury authority extended through the TARP (Troubled Assets Relief Program). By some estimates, federal intervention has now committed more than $1 trillion to the ailing US credit markets, and the Bush administration appears poised to ‘draw the line’ and offer no more. But there almost certainly will be more; likely much more.
Several states teeter on the brink of bankruptcy. The US automotive industry, and the 2.3 million jobs it reportedly represents, may very well not survive without tens of billions in additional capital relief. Our healthcare system is in dire need of reformation. Our education system, transportation and energy infrastructures, tax codes, and social security program will require enormous resources to meet the needs of future generations. President-elect Obama has an extraordinary undertaking in front of him as he becomes tasked with the responsibility to lead our people and government through this difficult time. He may very well end up being grouped with George Washington, Abraham Lincoln, and Franklin Roosevelt as being responsible for the transformation of the nation’s economy, the confidence of our citizenry, and re-establishing America’s prestige on the world stage. Like those before him, he will succeed, though more out of the sheer will and ingenuity of the American people, than of any great attribute of his own.
One might suppose that McCain is nearly as giddy at the prospect of avoiding this task as he is disappointed at having lost a hard-fought election. Likewise, Obama may well be questioning the value in having gotten what he asked for.
Obama has stated that we should prioritize and take our challenges one at a time, but in all likelihood he’ll be forced to into a position similar to that which Roosevelt found himself in when he championed the ‘New Deal’. His administration will likely succumb to pressures to offer an enormous relief package that addresses most of the major issues, while at the same time providing sufficient authority to deal with issues of lesser import and the need arises. The National Debt, already over $10 trillion, will almost certainly balloon to nearly $15 trillion as the various areas of economic crises are addressed, and as interest continues to accrue. Were it not for the reality that virtually every one of the world’s developed economies is in the same situation, such an increase in the federal debt would be devastating to the US currency. Regardless, it will make inflation more difficult to control, and interest rates and taxes will rise to levels that will require future generations to adjust their lifestyle expectations. There appears to be little choice in this.
The generation that experienced the economic transformation of Roosevelt’s ‘New Deal’, and the generations that followed, even to our time, have realized the benefits and the necessity of the actions taken at the time. Likewise, our generation, and those of our children and their children, will come to the same realization. In truth, Obama will either be praised for his leadership and handling of the economy, or he will be vilified – only time will tell.
Addressing New York’s Manhattan Institute on Thursday afternoon, President Bush heralded the strength, entrepreneurialism, and vibrancy of the American public. He boldly predicted the ongoing pre-eminence of the American economy, just as President-elect Obama has done. Bush received a standing ovation for his comments from a multi-national audience of business and economic leaders, gathered in advance of the G20 summit to be held this weekend. His comments reflected, and the audience’s reaction evidenced, the relative strength and leadership of the US economy, and our government and business leaders on the world stage.
US EQUITY MARKETS BENEFITED BY BUSH COMMENTS IN ADVANCE OF G20 SUMMIT
The US markets offered ‘more-of-the-same’ volatility on Thursday as the DOW opened sharply higher in the face of declining employment figures. The early move, counter-intuitive to the economic data released, appeared to have been more of a response to the market sell-off of previous sessions, as gains gave way to 300+ point losses by mid-day. Two hours before the market close, President Bush addressed New York’s Manhattan Institute, preparatory to the G20 Summit in Washington this weekend, and the market rallied to close at a gain of more than 550 points on the DOW.
Bush, an unpopular, lame-duck president, wasn’t expected to generate meaningful market enthusiasm with his comments. He took the liberty of labeling the global economic crisis as a ‘global meltdown’, but went on to make the case for America’s economic leadership in the global markets. His call for optimism, though rarely stimulating before the recent presidential election, appeared to buoy the markets and foster a late-day buying frenzy. His comments laid the tone for coordinated economic planning and regulation among the G20 nations, and he effectively drew a line in the sand as it pertains to governmental involvement in what has been the world’s most assertive free market economy.
It is likely that the surge in equity pricing accompanying Bush’s comments also reflected an over-sold market that has priced in continued economic weakness beyond any rational point. Though the surge drove market ‘bulls’ into a buying spree, it will likely be followed by a sell-off in the days ahead; a reflection of the increasingly volatile, and emotional, market conditions.
CHINESE STIMULUS PLAN – ENORMOUS, BUT INEFFECTIVE
China’s Ministry of Finance announced a $586 billion stimulus package Sunday; prior to the opening of the US financial markets. At first glance, the plan appeared to be a bold move on the part of China’s leadership, causing foreign and domestic equities markets to surge on the headlines. Upon closer inspection, the newly announced plan was more of a public relations move and principally offers a restatement of social and public works initiatives previously announced by the Beijing government; many of which are already underway.
The plan is comprised of an array of national infrastructure and social welfare projects, including constructing new railways, subways, airports and rebuilding communities devastated by an earthquake in southwest China in May, and is expected to be phased in over a 24-month period to aid China’s slowing economy. While the plan may improve the employment market in China’s urban areas, it is expected to offer little relief for China’s struggling rural economies.
Of China’s roughly 1.4 billion citizens, nearly 800 million live in impoverished conditions. While that may leave an upper and middle class comprising more than 400 million people, larger than the entire US population, it also leaves enormous hurdles for Chinese leadership. Economic growth in excess of 10% per year, coupled with a successful 2008 Summer Olympic effort, may have been enough to bring hope to China’s rural poor, but with a slowing economy presenting growth in the 4-6% range, and a weakened Chinese currency, it is likely that Beijing will need to marshal substantially greater resources to stimulate their economy in any meaningful way.
On a comparative basis (based on population), the $586 billion package would equate to a stimulus package of less than $90 billion in the US markets, or slightly more than the stimulus package the Bush administration offered US citizens earlier this year. That effort, though controversial at the time, did little to calm the US markets and provide anything more than a temporary surge in retail purchases.
Signature Update is offered by Richard Haskell, Sr., Managing Director of Signature Wealth Management
Friday, November 7, 2008
TURNING POINTS 11-7-2008
A Watershed Period in US History
The 1960’s will long be remembered as a critical period in American history, and 1967 will likely be heralded as the pivotal year during a decade that ushered in tremendous changes. It was the climax of a period during which we entered into a costly military conflict, were shocked by political assassinations and mourned those whose lives were lost, saw major shifts in civil rights legislation, and began a period of ‘personal freedom’ that many recall as lacking in accountability or purpose. Our nation had recovered from World War II and the Korean conflict, the economy had rebounded from two back-to-back recessions in 1953-1954 and 1957-1958, and though we felt prosperous, there was an obvious separation of classes that added to our nation’s growing unrest. Many political and economic pundits proclaimed the end of American prosperity and predicted decades of decline.
That was now over forty years ago and the world has changed in amazing ways. We’ve rejoiced over moments of peace and prosperity, and mourned the loss of too many lives. We’ve seen our economy rise and fall more than once, and we’ve witnessed the transition from an industrial economy to one driven by technology and service. Our political landscape has evolved but stayed within the framework the founding fathers established more than 230 years ago, and we continue to enjoy the benefits of the freedoms for which so many fought and continue to fight.
Similar to the 1960’s, the early 2000’s will likely be seen as a watershed period in US history, with 2008 being the pivotal year during another decade of change. A retrospective of this period will be highlighted by the 9/11 terrorist attacks on our citizens, government and economy, the awful cost of waging two wars, continued questioning of critical leadership decisions, the most worrisome economic period in some sixty years, and the dream-fulfilling election of the first African-American to the Whitehouse. With hope, we will also clearly see the extraordinary efforts of millions of Americans who struggled, sacrificed, and prevailed.
Each of the leading candidates in the recent US Presidential election proclaimed themselves to be arbiters of change; and with the election of Barak Obama, the US citizenry expects sweeping economic, political and social reforms. The benefits of such ‘change’ remain to be seen, but what is clear is that we are at a turning point in our society. We are poised for decades of technological development that may make the tech wave of the 1990’s and early 2000’s seem insignificant. Corporate America will assemble enormous resources focused on reducing our dependency on fossil fuels, aligning our information systems to maximize our ‘collective intelligence’, supporting innovations in bio-technologies and medicine, and continuing the transformation of how we communicate.
Recent economic events have reminded us that the US economy, though weakened by real estate, credit and energy crises, continues to be the leader in the global marketplace. The ‘de-coupling’ concept, promulgated by many as a byproduct of America’s diminishing relevance in the international financial markets has now been relegated to ‘fairy tale’ status. Burgeoning foreign economies such as Brazil, Russia, India and China (BRIC), though far stronger than in decades past, continue to evidence their reliance on western economic leadership, and other highly developed and relatively mature foreign markets continue to support the theory that when the US sneezes the rest of the world catches a cold. Similarly, though, the moral authority of the United Stated may have been challenged due to various leadership decisions made and carried out, the west, and the US in particular, continue to be looked towards for leadership in wide-ranging areas.
President George Bush #41 called for a kinder, gentler nation and hoped to see a thousand beams of light emanating from the collective efforts of our citizens. President-elect Obama will certainly raise a similar challenge, and with our nation having endured financial, military, and social trauma, perhaps we will be more able to fulfill the dream. It may become Obama’s legacy; it certainly will be ours.
Obama’s Financial Team and the Big Three Automakers
Very soon, perhaps even today, President-elect Obama will formalize his economic team and will likely announce his choice for Treasury Secretary. Among the leading contenders are names with which we are already familiar, including former Treasury Secretaries Larry Summers and Robert Rubin, former Fed Chairman Paul Volker, and current J.P. Morgan CEO Jamie Dimon - each of whom offer impressive credentials and reassuring experience.
Current Treasury Secretary Henry Paulson has evidenced his professional resolve as he has opened the door for the department’s new leadership. Such welcome of a new leadership team is unusual in typically territorial political environments, but it is more than necessary – it is vital. Paulson and others are willing, perhaps gratefully, to turn over the reigns of the Treasury’s massive economic authority to the new administration, while at the same time continue the daunting efforts required to implement TARP provisions and restore health to our economy. History may well remember Paulson as one of the most admirable talents of the Bush #43 administration.
One of the decisions that the newly-announced Treasury Secretary will be asked to influence will be that of just how much support should be given to struggling US automakers. To some, this is a non-issue; to others it is seen as another turning point in the direction of what is still considered to be a free-market economy. There are highly respected and eminently qualified economic minds that are already weighing in on both sides of this issue. What is clear is that Ford, GM, Chrysler, and the 2.5 million US employees whose livelihoods depend on the domestic auto industry are in trouble; and not only are most of the products they manufacture and support less than competitive in the US and global markets, they represent a business model that may be outdated. Regardless of the amount of support that will certainly be provided the US auto industry, there are sweeping changes that must be made in terms of product development, energy efficiency, union influence, and worker compensation – each of which will require sacrifice and may well challenge the electorate’s resolve for the ‘change’ so recently clamored for and sought after.
Signature Update is offered by Richard Haskell Sr., Managing Director of Signature Wealth Management
The 1960’s will long be remembered as a critical period in American history, and 1967 will likely be heralded as the pivotal year during a decade that ushered in tremendous changes. It was the climax of a period during which we entered into a costly military conflict, were shocked by political assassinations and mourned those whose lives were lost, saw major shifts in civil rights legislation, and began a period of ‘personal freedom’ that many recall as lacking in accountability or purpose. Our nation had recovered from World War II and the Korean conflict, the economy had rebounded from two back-to-back recessions in 1953-1954 and 1957-1958, and though we felt prosperous, there was an obvious separation of classes that added to our nation’s growing unrest. Many political and economic pundits proclaimed the end of American prosperity and predicted decades of decline.
That was now over forty years ago and the world has changed in amazing ways. We’ve rejoiced over moments of peace and prosperity, and mourned the loss of too many lives. We’ve seen our economy rise and fall more than once, and we’ve witnessed the transition from an industrial economy to one driven by technology and service. Our political landscape has evolved but stayed within the framework the founding fathers established more than 230 years ago, and we continue to enjoy the benefits of the freedoms for which so many fought and continue to fight.
Similar to the 1960’s, the early 2000’s will likely be seen as a watershed period in US history, with 2008 being the pivotal year during another decade of change. A retrospective of this period will be highlighted by the 9/11 terrorist attacks on our citizens, government and economy, the awful cost of waging two wars, continued questioning of critical leadership decisions, the most worrisome economic period in some sixty years, and the dream-fulfilling election of the first African-American to the Whitehouse. With hope, we will also clearly see the extraordinary efforts of millions of Americans who struggled, sacrificed, and prevailed.
Each of the leading candidates in the recent US Presidential election proclaimed themselves to be arbiters of change; and with the election of Barak Obama, the US citizenry expects sweeping economic, political and social reforms. The benefits of such ‘change’ remain to be seen, but what is clear is that we are at a turning point in our society. We are poised for decades of technological development that may make the tech wave of the 1990’s and early 2000’s seem insignificant. Corporate America will assemble enormous resources focused on reducing our dependency on fossil fuels, aligning our information systems to maximize our ‘collective intelligence’, supporting innovations in bio-technologies and medicine, and continuing the transformation of how we communicate.
Recent economic events have reminded us that the US economy, though weakened by real estate, credit and energy crises, continues to be the leader in the global marketplace. The ‘de-coupling’ concept, promulgated by many as a byproduct of America’s diminishing relevance in the international financial markets has now been relegated to ‘fairy tale’ status. Burgeoning foreign economies such as Brazil, Russia, India and China (BRIC), though far stronger than in decades past, continue to evidence their reliance on western economic leadership, and other highly developed and relatively mature foreign markets continue to support the theory that when the US sneezes the rest of the world catches a cold. Similarly, though, the moral authority of the United Stated may have been challenged due to various leadership decisions made and carried out, the west, and the US in particular, continue to be looked towards for leadership in wide-ranging areas.
President George Bush #41 called for a kinder, gentler nation and hoped to see a thousand beams of light emanating from the collective efforts of our citizens. President-elect Obama will certainly raise a similar challenge, and with our nation having endured financial, military, and social trauma, perhaps we will be more able to fulfill the dream. It may become Obama’s legacy; it certainly will be ours.
Obama’s Financial Team and the Big Three Automakers
Very soon, perhaps even today, President-elect Obama will formalize his economic team and will likely announce his choice for Treasury Secretary. Among the leading contenders are names with which we are already familiar, including former Treasury Secretaries Larry Summers and Robert Rubin, former Fed Chairman Paul Volker, and current J.P. Morgan CEO Jamie Dimon - each of whom offer impressive credentials and reassuring experience.
Current Treasury Secretary Henry Paulson has evidenced his professional resolve as he has opened the door for the department’s new leadership. Such welcome of a new leadership team is unusual in typically territorial political environments, but it is more than necessary – it is vital. Paulson and others are willing, perhaps gratefully, to turn over the reigns of the Treasury’s massive economic authority to the new administration, while at the same time continue the daunting efforts required to implement TARP provisions and restore health to our economy. History may well remember Paulson as one of the most admirable talents of the Bush #43 administration.
One of the decisions that the newly-announced Treasury Secretary will be asked to influence will be that of just how much support should be given to struggling US automakers. To some, this is a non-issue; to others it is seen as another turning point in the direction of what is still considered to be a free-market economy. There are highly respected and eminently qualified economic minds that are already weighing in on both sides of this issue. What is clear is that Ford, GM, Chrysler, and the 2.5 million US employees whose livelihoods depend on the domestic auto industry are in trouble; and not only are most of the products they manufacture and support less than competitive in the US and global markets, they represent a business model that may be outdated. Regardless of the amount of support that will certainly be provided the US auto industry, there are sweeping changes that must be made in terms of product development, energy efficiency, union influence, and worker compensation – each of which will require sacrifice and may well challenge the electorate’s resolve for the ‘change’ so recently clamored for and sought after.
Signature Update is offered by Richard Haskell Sr., Managing Director of Signature Wealth Management
Friday, October 31, 2008
Why Negative Numbers Can Sometimes Be Good For The Markets
This week saw continued volatility in the US and global equities markets, with the DOW claiming the second highest single point gain in history on Tuesday of 889 points. Most expected the markets to post substantial losses Wednesday as sellers might have stepped in to take short-term profits; but instead of high volume and steep declines, we saw a modest day-over-day point swing on light volume, as the Federal Reserve offered a widely anticipated .5% cut in the Fed Funds rate. Trading on Thursday showed meaningful gains in spite of the release of two obviously negative economic reports: 3rd Quarter 2008 GDP decline of .3%, and weekly jobless claims of 479,000.
So why is it that the market can get so excited about a .5% rate cut when rates are already so low as to be nominal, and how can the markets not react to reports of declining GDP and jobless claims representing continued unemployment of almost half a million workers? The answer has everything to do with expectations and confidence.
Though a .5% fed funds rate cut will obviously decrease the overall cost of short-term borrowing, the relative benefit is minimal with rates already deeply discounted; but it was an important move in terms of the Federal Reserve showing its ongoing commitment to support the credit markets through an extraordinarily difficult period. Equally as important was the Fed’s indication that inflation appears to be a non-issue when compared to overall financial concerns. This helped to calm the fears of those concerned over the possibility of a period of stagflation, a time period in which the economy might shrink while the costs of goods, services, and borrowing might increase.
The announcement of a decline in GDP for the 3rd quarter was actually better than expected, and may be an indicator of a milder, shorter recessionary period than the markets are currently bracing for. Economic consensus expected a .5% decline in GDP for the 3rd quarter to be followed by 4th Quarter 2008 and 1st Quarter 2009 declines of 2% and .7% respectively, before seeing a return to economic growth of 1% , 2% and 2.3% in the 2nd, 3rd and 4th Quarters of 2009. These appear to be very small numbers, but they have significant impact on employment. If we are to endure a more mild recession than has been feared, then fewer jobs will be lost, more debt payments will be made on a timely basis, more goods and services may be purchased, and the economy could have a less difficult time of regaining solid footing. Most important is the potential for a swifter return to a stable real estate market.
Even with jobless claims remaining steady and the unemployment rate unchanged for the past two months, we can expect that unemployment will increase from the current level of 6.1% to as much as 7.3% before the end of 2009, with a reduction back towards 5% in 2010. These are low unemployment rates for a recessionary period, as unemployment during sustained recessions often exceed 10-12%. So far in 2008, the economy has lost 760,000 jobs with non-farm payrolls standing at 137.3 million jobs.
The last few weeks have also represented the heart of the corporate earnings reporting season, and we’ve seen more surprises of higher than expected earnings than we have those that are lower than expected. Most of this has been ignored by the markets as confidence has remained low and uncertainty has remained high. Interesting to note: the three major hurricanes and natural disasters experienced during the 3rd Quarter reduced GDP by 1%. Without these events, our economy might have posted gains rather than the lower than expected decrease reported Thursday morning.
Oil and Energy Costs
In last week’s Signature Update, we discussed the economic and political benefit to reduced energy costs and how the timing of reduced fuel prices as we enter the holiday buying season couldn’t be better. With consumer confidence figures released for October reflecting a substantial decrease from September, 38 versus 64.1, it is critical that oil costs remain below $70 per barrel through the end of the year. OPEC met within the last week and announced their decision to cut production by 2 million barrels per day and the oil markets barely reacted, signaling that the global demand destruction is further entrenched than OPEC might have supposed.
This bodes well for a sustained move towards fuel efficiency that must transcend the price of oil. If we are to stave off future runs on the price of oil, we must continue our reduction in energy demands, otherwise $147 per barrel oil might seem like a bargain in the future. We must avoid the temptation to eschew ‘greening’ policies simply because the cost of energy declines. To not do so will simply continue to unnecessarily export billions of US dollars to foreign governments and to expand our nation’s dependency across the globe.
‘Wackonomics’
Walter E. Williams, a popular economic and political columnist published in numerous major US news publications and a Professor of Economics at George Mason University, wrote an article that appeared this week in the Deseret News (October 29, 2008 A13) in an attempt to explain what he refers to as ‘Wackonomics’. Williams’ comments address the irrational attitudes expressed by the news media, many politicians, and the population at large, over executive compensation and corporate greed. He rightly contrasts the outcry over executive compensation versus the silent acceptance of celebrity compensation, which most often dwarfs that received by CEO’s of publically held corporations. Though Williams stops short of describing how these highly paid CEO’s strive to increase their shareholder value in contrast to the personal motivation of most celebrities, he does state his interest to ‘talk to these people and learn their strategies’. The article is worth reading and can be viewed at http://www.gmu.edu/departments/economics/wew/articles/08/Wackonomics.htm.
So why is it that the market can get so excited about a .5% rate cut when rates are already so low as to be nominal, and how can the markets not react to reports of declining GDP and jobless claims representing continued unemployment of almost half a million workers? The answer has everything to do with expectations and confidence.
Though a .5% fed funds rate cut will obviously decrease the overall cost of short-term borrowing, the relative benefit is minimal with rates already deeply discounted; but it was an important move in terms of the Federal Reserve showing its ongoing commitment to support the credit markets through an extraordinarily difficult period. Equally as important was the Fed’s indication that inflation appears to be a non-issue when compared to overall financial concerns. This helped to calm the fears of those concerned over the possibility of a period of stagflation, a time period in which the economy might shrink while the costs of goods, services, and borrowing might increase.
The announcement of a decline in GDP for the 3rd quarter was actually better than expected, and may be an indicator of a milder, shorter recessionary period than the markets are currently bracing for. Economic consensus expected a .5% decline in GDP for the 3rd quarter to be followed by 4th Quarter 2008 and 1st Quarter 2009 declines of 2% and .7% respectively, before seeing a return to economic growth of 1% , 2% and 2.3% in the 2nd, 3rd and 4th Quarters of 2009. These appear to be very small numbers, but they have significant impact on employment. If we are to endure a more mild recession than has been feared, then fewer jobs will be lost, more debt payments will be made on a timely basis, more goods and services may be purchased, and the economy could have a less difficult time of regaining solid footing. Most important is the potential for a swifter return to a stable real estate market.
Even with jobless claims remaining steady and the unemployment rate unchanged for the past two months, we can expect that unemployment will increase from the current level of 6.1% to as much as 7.3% before the end of 2009, with a reduction back towards 5% in 2010. These are low unemployment rates for a recessionary period, as unemployment during sustained recessions often exceed 10-12%. So far in 2008, the economy has lost 760,000 jobs with non-farm payrolls standing at 137.3 million jobs.
The last few weeks have also represented the heart of the corporate earnings reporting season, and we’ve seen more surprises of higher than expected earnings than we have those that are lower than expected. Most of this has been ignored by the markets as confidence has remained low and uncertainty has remained high. Interesting to note: the three major hurricanes and natural disasters experienced during the 3rd Quarter reduced GDP by 1%. Without these events, our economy might have posted gains rather than the lower than expected decrease reported Thursday morning.
Oil and Energy Costs
In last week’s Signature Update, we discussed the economic and political benefit to reduced energy costs and how the timing of reduced fuel prices as we enter the holiday buying season couldn’t be better. With consumer confidence figures released for October reflecting a substantial decrease from September, 38 versus 64.1, it is critical that oil costs remain below $70 per barrel through the end of the year. OPEC met within the last week and announced their decision to cut production by 2 million barrels per day and the oil markets barely reacted, signaling that the global demand destruction is further entrenched than OPEC might have supposed.
This bodes well for a sustained move towards fuel efficiency that must transcend the price of oil. If we are to stave off future runs on the price of oil, we must continue our reduction in energy demands, otherwise $147 per barrel oil might seem like a bargain in the future. We must avoid the temptation to eschew ‘greening’ policies simply because the cost of energy declines. To not do so will simply continue to unnecessarily export billions of US dollars to foreign governments and to expand our nation’s dependency across the globe.
‘Wackonomics’
Walter E. Williams, a popular economic and political columnist published in numerous major US news publications and a Professor of Economics at George Mason University, wrote an article that appeared this week in the Deseret News (October 29, 2008 A13) in an attempt to explain what he refers to as ‘Wackonomics’. Williams’ comments address the irrational attitudes expressed by the news media, many politicians, and the population at large, over executive compensation and corporate greed. He rightly contrasts the outcry over executive compensation versus the silent acceptance of celebrity compensation, which most often dwarfs that received by CEO’s of publically held corporations. Though Williams stops short of describing how these highly paid CEO’s strive to increase their shareholder value in contrast to the personal motivation of most celebrities, he does state his interest to ‘talk to these people and learn their strategies’. The article is worth reading and can be viewed at http://www.gmu.edu/departments/economics/wew/articles/08/Wackonomics.htm.
Monday, October 27, 2008
Petro-Politics, Releif for the US Economy, and General Motors 10-24-2008
Relief for the US Consumer and Petro-Politics
Oil dipped below $70 per barrel in trading late Thursday for the first time in over 12 months. Aided by a stronger US dollar and weaker global demand, the price of light sweet crude has been in steady decline. Much to the delight of US consumers and the chagrin of OPEC and other oil rich dictatorships around the globe, an enormous tax on the US marketplace is finally being trimmed, and it couldn’t have come at more critical time.
The US consumer faces tough challenges as we head into the all-important holiday buying season. Recession fears have brought real economic slow down; and though the US consumer has always led us out of such difficulties, it hasn’t appeared likely that retail purchases would lead us towards economic strength again. Fortunately, declining fuel prices may leave $20-$25 more per week in consumer pockets than only a few short months ago; and this, coupled with renewed talks of another economic stimulus package, just may save the retail season, while at the same time provide much deserved economic pressure to unfriendly oil producing nations rarely sympathetic to US concerns.
This is a good news, good news story, with a bad news chaser. The decrease in demand that has driven some of oil’s price decline represents a domestic and global economic slowdown that won’t retreat for at least two or three calendar quarters. It is also indicative of a shift in our country from being net spenders to net savers as many have realized that their lifestyle demands simply grew beyond their resources. This shift will be uncomfortable as families adjust spending patterns, but will ultimately yield benefits as savings levels ultimately support capital investment and a more secure financial foothold for consumers.
With the dramatic retreat in the oil markets, the likes of Venezuela, Russia, Iran, and Saudi Arabia, currently awash in US dollars due to oil prices well over $100 per barrel, exporters of tremendous pressure on the US’s political and military establishments, will now have to face their own problems at home, without the aide of hundreds of billions of excess US dollars. As their corrupt leadership attempts to deal with the domestic unrest already being felt as a result of sharp declines in oil revenues, their citizenry may finally call for action and accountability where there has simply been rhetoric and excuses for years.
Over the past several years, these nations have exported fear, terrorism, and excessive anti-American sentiment alongside the enormous quantities of high-priced oil. Today, not only are oil prices down, but the volumes are in decline as well, making it more difficult for these countries as the value of their currency is declining against the US dollar. The convergence of these three important financial events equates to a tremendous loss of political, social, and economic strength for some of the US’s least cooperative foreign leaders.
General Motors and the three ‘C’s: Corvette, Cadillac, and Camaro
The upheaval in the American automotive industry took a sharp turn for the worse with the dramatic increase fuel prices this last year. As oil made its historic run to eventually top out at over $147 per barrel, the US transportation market was left bleeding in its wake. Airline, railroad, transports, and SUV manufacturers were devastated. The loneliest road in America, formerly the section of US Highway 50 running through central Nevada, all of a sudden became the approach road to any Hummer dealership in the country. Just as oil prices turned back towards $90, $80 and then $70 per barrel and fuel prices began a sharp decline, the credit crisis surged to strike yet another blow to automobile sales. For some, the blow may have been fatal.
US auto sales have fallen sharply in recent months. Overshadowed by the decline in housing prices, the credit crisis, and the turmoil on Wall Street, the US automotive industry has been fighting for its life, or at least its asset value. Successful auto dealers reported having difficulties making payrolls a few weeks ago and stock values plummeted. Ford Motor Corporation bottomed out today at $2 per share, down from a 52 week high of $8.75. And General Motors looks like a multi-car wreck taking place before our eyes.
Over the past few years we’ve commented several times that some form of reorganization must be part of General Motor’s (GM) long term business plan. The enormous legacy costs they carry from millions of former employees, many of whom are current retirees, is crippling, especially in light of continued upward revisions in their underfunded pension and medical benefit costs. When GM ruled the domestic market and proudly supported a major national labor force, they were better able to compete with other US auto manufacturers and appease the ever-hungry labor unions. But today, with only a fraction of the weakening US auto market, a labor force that bears little resemblance to the army of technicians formerly on GM’s payroll, and extraordinary pressure from foreign automobile brands, many with US manufacturing operations, GM is in serious trouble.
Two weeks ago GM’s corporate credit rating was downgraded by Standard and Poors, and the stock went into a tail spin to close at $4.00 per share, down from a 52 week high of $39.45. Without the appropriate credit rating, GM may barely be able to hang on through the end of the year without some sort of intervention, whether from a bankruptcy filing, takeover bid, or sale to a private equity firm.
Analysts project that GM’s current cash position will only support operations through 2009, after which the unthinkable could possibly occur. But GM has tremendous value if it can be stripped of its legacy costs. Several of GM’s domestic brands still rate extraordinary loyalty from enthusiasts: Corvette, Cadillac, Camaro, the three ‘C’s of the automotive world are alive and racing, literally. GMAC, though tainted through association with the sub-prime mortgage disaster, remains a powerful, and profitable, financing arm. GM’s dealer portfolio is impressive and includes some of the wealthiest and most successful auto dealers in the country. And GM’s manufacturing operations control vast pools of real estate, technology, and skilled labor world-wide.
Some of GM’s future strength may rest in emerging markets and green technology, but other manufacturers are developing those same markets and technologies in what may ultimately be a fast-paced, high-stakes game of musical chairs. The likes of Toyota, Nissan, Honda, Ford, Chrysler and others have invested billions towards the same end, and it’s likely that only one or two companies will be able to capture the right technologies, in the right markets, at the right time to win big. Though most of the others will be able to ride some of the same wave, some brands won’t survive, and the others will spend years playing catch-up.
The GM brand will almost certainly survive, but without some of the baggage that currently holds it down. If a corporate reorganization was part of GM’s long-term business plan before, it’s likely to be part of its short-term strategy today. A bankruptcy would rid GM of its excess pension and medical liabilities, give it room to breathe as it restructures debt, and allow it to remake itself as a leaner, greener domestic and international manufacturing powerhouse once more.
Unthinkable only a few short months ago, GM is now inexpensive enough for a private equity firm to make a credible run at the company. Cerberus Capital Management, LP, the private equity firm that owns Chrysler, Air Canada, and the half of GMAC that GM no longer owns, is reportedly in talks with GM executive leadership to acquire the auto manufacturer. Cerberus has made no secret of its interest in owning the entirety of GMAC, and if it has to purchase the auto manufacturer to gain control of its lucrative financing arm, then so be it. This was Cerberus’s strategy in acquiring Chrysler, but it quickly realized that the manufacturing concern took more of the luster off of Chrysler Credit than it had bargained for. An acquisition of GM would allow Cerberus to merge the two automobile manufacturers, gain enormous economies of scale, perhaps shed some the legacy cost liabilities in the process and reintroduce GM/Chrysler to the public markets. Cerberus could possibly be left with the financing arms they’ve long sought after, and end up saving two automotive legends at the same time. The logistics of such a transition would be enormous, and the painful red ink that might be written at the dealer level could take years to erase, but the Corvette would still be an American icon, Cadillac could continue to reign as an American luxury brand, and Camaro could once again steal the hearts of teen-agers (young and old) throughout the heartland.
Oil dipped below $70 per barrel in trading late Thursday for the first time in over 12 months. Aided by a stronger US dollar and weaker global demand, the price of light sweet crude has been in steady decline. Much to the delight of US consumers and the chagrin of OPEC and other oil rich dictatorships around the globe, an enormous tax on the US marketplace is finally being trimmed, and it couldn’t have come at more critical time.
The US consumer faces tough challenges as we head into the all-important holiday buying season. Recession fears have brought real economic slow down; and though the US consumer has always led us out of such difficulties, it hasn’t appeared likely that retail purchases would lead us towards economic strength again. Fortunately, declining fuel prices may leave $20-$25 more per week in consumer pockets than only a few short months ago; and this, coupled with renewed talks of another economic stimulus package, just may save the retail season, while at the same time provide much deserved economic pressure to unfriendly oil producing nations rarely sympathetic to US concerns.
This is a good news, good news story, with a bad news chaser. The decrease in demand that has driven some of oil’s price decline represents a domestic and global economic slowdown that won’t retreat for at least two or three calendar quarters. It is also indicative of a shift in our country from being net spenders to net savers as many have realized that their lifestyle demands simply grew beyond their resources. This shift will be uncomfortable as families adjust spending patterns, but will ultimately yield benefits as savings levels ultimately support capital investment and a more secure financial foothold for consumers.
With the dramatic retreat in the oil markets, the likes of Venezuela, Russia, Iran, and Saudi Arabia, currently awash in US dollars due to oil prices well over $100 per barrel, exporters of tremendous pressure on the US’s political and military establishments, will now have to face their own problems at home, without the aide of hundreds of billions of excess US dollars. As their corrupt leadership attempts to deal with the domestic unrest already being felt as a result of sharp declines in oil revenues, their citizenry may finally call for action and accountability where there has simply been rhetoric and excuses for years.
Over the past several years, these nations have exported fear, terrorism, and excessive anti-American sentiment alongside the enormous quantities of high-priced oil. Today, not only are oil prices down, but the volumes are in decline as well, making it more difficult for these countries as the value of their currency is declining against the US dollar. The convergence of these three important financial events equates to a tremendous loss of political, social, and economic strength for some of the US’s least cooperative foreign leaders.
General Motors and the three ‘C’s: Corvette, Cadillac, and Camaro
The upheaval in the American automotive industry took a sharp turn for the worse with the dramatic increase fuel prices this last year. As oil made its historic run to eventually top out at over $147 per barrel, the US transportation market was left bleeding in its wake. Airline, railroad, transports, and SUV manufacturers were devastated. The loneliest road in America, formerly the section of US Highway 50 running through central Nevada, all of a sudden became the approach road to any Hummer dealership in the country. Just as oil prices turned back towards $90, $80 and then $70 per barrel and fuel prices began a sharp decline, the credit crisis surged to strike yet another blow to automobile sales. For some, the blow may have been fatal.
US auto sales have fallen sharply in recent months. Overshadowed by the decline in housing prices, the credit crisis, and the turmoil on Wall Street, the US automotive industry has been fighting for its life, or at least its asset value. Successful auto dealers reported having difficulties making payrolls a few weeks ago and stock values plummeted. Ford Motor Corporation bottomed out today at $2 per share, down from a 52 week high of $8.75. And General Motors looks like a multi-car wreck taking place before our eyes.
Over the past few years we’ve commented several times that some form of reorganization must be part of General Motor’s (GM) long term business plan. The enormous legacy costs they carry from millions of former employees, many of whom are current retirees, is crippling, especially in light of continued upward revisions in their underfunded pension and medical benefit costs. When GM ruled the domestic market and proudly supported a major national labor force, they were better able to compete with other US auto manufacturers and appease the ever-hungry labor unions. But today, with only a fraction of the weakening US auto market, a labor force that bears little resemblance to the army of technicians formerly on GM’s payroll, and extraordinary pressure from foreign automobile brands, many with US manufacturing operations, GM is in serious trouble.
Two weeks ago GM’s corporate credit rating was downgraded by Standard and Poors, and the stock went into a tail spin to close at $4.00 per share, down from a 52 week high of $39.45. Without the appropriate credit rating, GM may barely be able to hang on through the end of the year without some sort of intervention, whether from a bankruptcy filing, takeover bid, or sale to a private equity firm.
Analysts project that GM’s current cash position will only support operations through 2009, after which the unthinkable could possibly occur. But GM has tremendous value if it can be stripped of its legacy costs. Several of GM’s domestic brands still rate extraordinary loyalty from enthusiasts: Corvette, Cadillac, Camaro, the three ‘C’s of the automotive world are alive and racing, literally. GMAC, though tainted through association with the sub-prime mortgage disaster, remains a powerful, and profitable, financing arm. GM’s dealer portfolio is impressive and includes some of the wealthiest and most successful auto dealers in the country. And GM’s manufacturing operations control vast pools of real estate, technology, and skilled labor world-wide.
Some of GM’s future strength may rest in emerging markets and green technology, but other manufacturers are developing those same markets and technologies in what may ultimately be a fast-paced, high-stakes game of musical chairs. The likes of Toyota, Nissan, Honda, Ford, Chrysler and others have invested billions towards the same end, and it’s likely that only one or two companies will be able to capture the right technologies, in the right markets, at the right time to win big. Though most of the others will be able to ride some of the same wave, some brands won’t survive, and the others will spend years playing catch-up.
The GM brand will almost certainly survive, but without some of the baggage that currently holds it down. If a corporate reorganization was part of GM’s long-term business plan before, it’s likely to be part of its short-term strategy today. A bankruptcy would rid GM of its excess pension and medical liabilities, give it room to breathe as it restructures debt, and allow it to remake itself as a leaner, greener domestic and international manufacturing powerhouse once more.
Unthinkable only a few short months ago, GM is now inexpensive enough for a private equity firm to make a credible run at the company. Cerberus Capital Management, LP, the private equity firm that owns Chrysler, Air Canada, and the half of GMAC that GM no longer owns, is reportedly in talks with GM executive leadership to acquire the auto manufacturer. Cerberus has made no secret of its interest in owning the entirety of GMAC, and if it has to purchase the auto manufacturer to gain control of its lucrative financing arm, then so be it. This was Cerberus’s strategy in acquiring Chrysler, but it quickly realized that the manufacturing concern took more of the luster off of Chrysler Credit than it had bargained for. An acquisition of GM would allow Cerberus to merge the two automobile manufacturers, gain enormous economies of scale, perhaps shed some the legacy cost liabilities in the process and reintroduce GM/Chrysler to the public markets. Cerberus could possibly be left with the financing arms they’ve long sought after, and end up saving two automotive legends at the same time. The logistics of such a transition would be enormous, and the painful red ink that might be written at the dealer level could take years to erase, but the Corvette would still be an American icon, Cadillac could continue to reign as an American luxury brand, and Camaro could once again steal the hearts of teen-agers (young and old) throughout the heartland.
Feel Good Products: A Consumer Necessity During a Difficult Economy
The US consumer is a complex and resourceful animal; we appear to have a need to be satisfied that transcends even the most difficult times. Consider how we reacted to the Great Depression: at a time of extraordinary financial turmoil, most in the nation turned inwards towards family and culture, making the era one of the most memorable for American arts and crafts. The entire ‘craftsman’ style and ‘arts and crafts’ movement came out of the depression, and though few were able to afford luxury purchases or finely crafted products for their homes, we saw a surge in artistry and craftsmanship that would come from the home. American households, under extraordinary fiscal pressure, continued to crave warmth, values, family, and entertainment.
As our society surfaced from World War I and then came through the prosperous 1920’s, personal values declined steadily and styles trended towards the complex, though relatively cool lines of the ‘art deco’ movement. However, as the nation plunged headlong into financial turmoil of the 1930’s, and finally another world war in the 1940’s, hearts and minds turned towards home, family, and warmth. Many of us remember the 1940’s and 1950’s as a simpler, more wholesome time for home and family, but few stop to realize that it became that way after an entire movement swung the pendulum back to a place of personal satisfaction, a time in which the home became the center of our lives again, while we created memories around the fireplace, the radio, and the kitchen table.
This same sort of transition took place after the conflict in Vietnam. The 1960’s and 1970’s were punctuated by societal, financial, and political unrest. But by the late 1970’s and early 1980’s we were once again seeking hearth and home. We eschewed the establishment, and welcomed national leadership in the warmth and genuine tones of Jimmy Carter and the values oriented confidence offered by Ronald Reagan. Home designs once again trended towards warmth and away from sleek and modern. Toll painting, quilting, wood working, gardening and scrap booking became national pastimes once more. But in the years since, we’ve morphed back to a point where high tech has replaced high touch, and an economy that has rewarded complex promises more readily than sound advice. The societal pendulum swings with amazing consistency, you just need to look at thirty and fifty year time frames to see it with any clarity.
While our nation adjusts to the current challenges facing our economy, consumers will once again put more of themselves into gift giving, home decor, and creative efforts. We tend to want to get as much out of our purchases as before, but with fewer dollars to put towards them, we begin to invest more of our own effort in an attempt to create a higher level of quality or a greater affect. At the end of the day, it’s all about feeling good, and the US consumer will transition towards ways to drive personal and family pleasure without having to spend as much as they have might have before.
I recently visited in the home of an affluent client whom I knew to be in the process of remodeling their kitchen and family room. Their original plans included interior decorators, expensive wall treatments, commercial appliances, and high end furnishings, so I wasn’t at all surprised to find rooms that had been transformed into warm, comfortable, and attractive spaces. As we talked about the decorating process and I looked more closely at the level of finish, I was interested to note that the artwork was all about older family photographs instead of the prints and oil paintings I had expected to find. The planned for, costly wall treatments and window fabrics had given way to warm colors accented by home made draperies and personally applied, vinyl wall lettering, quotes and sayings that reinforced the values of home and family. The finished rooms were as tasteful, attractive, and inviting as anyone might have wished for, but instead of simply being the product of an expensive group of technicians, the space was a reflection of a family that had economized, sacrificed, and made it their own.
This is the stuff of which the American consumer is made. We continued to demand quality and comfort, and when need be, we’re willing to exert the time and effort to offer it to ourselves for ourselves, rather than go without. As we create and innovate, we find more satisfaction in our own efforts than we might otherwise have found by having spent more and benefited less. When we haven’t as much money to spend we invest more of ourselves to achieve a similar affect.
As our society transforms itself from a nation of net spenders back towards an economy reflective of meaningful personal investment, consumers will face choices that will motivate them to do more with less. Less glamour and more comfort, fewer excesses and greater warmth; personal, emotional and heart felt will replace expensive and cutting edge. In recent years we’ve seen personal savings levels fall to negative numbers in the minus 2% to 3% range. Almost overnight that trend is reversing and will likely settle in at a personal savings rate somewhere between 4% and 8%. The contraction of household incomes as unemployment rises above the 6% level is likely to make the transition more painful, and as consumers feel the pain they’ll look for simple pleasures.
Once the transition has been made it will take several years before a noticeable shift begins back towards excesses and less personal trends. In the mean time, cottage businesses reflective of our evolving national ethos are most likely to prosper. As they do so, we’ll see that the innovation and resourcefulness of the consumer will have found a way to bring the economy back to the robust growth trends of the 1950’s and 1990’s.
As our society surfaced from World War I and then came through the prosperous 1920’s, personal values declined steadily and styles trended towards the complex, though relatively cool lines of the ‘art deco’ movement. However, as the nation plunged headlong into financial turmoil of the 1930’s, and finally another world war in the 1940’s, hearts and minds turned towards home, family, and warmth. Many of us remember the 1940’s and 1950’s as a simpler, more wholesome time for home and family, but few stop to realize that it became that way after an entire movement swung the pendulum back to a place of personal satisfaction, a time in which the home became the center of our lives again, while we created memories around the fireplace, the radio, and the kitchen table.
This same sort of transition took place after the conflict in Vietnam. The 1960’s and 1970’s were punctuated by societal, financial, and political unrest. But by the late 1970’s and early 1980’s we were once again seeking hearth and home. We eschewed the establishment, and welcomed national leadership in the warmth and genuine tones of Jimmy Carter and the values oriented confidence offered by Ronald Reagan. Home designs once again trended towards warmth and away from sleek and modern. Toll painting, quilting, wood working, gardening and scrap booking became national pastimes once more. But in the years since, we’ve morphed back to a point where high tech has replaced high touch, and an economy that has rewarded complex promises more readily than sound advice. The societal pendulum swings with amazing consistency, you just need to look at thirty and fifty year time frames to see it with any clarity.
While our nation adjusts to the current challenges facing our economy, consumers will once again put more of themselves into gift giving, home decor, and creative efforts. We tend to want to get as much out of our purchases as before, but with fewer dollars to put towards them, we begin to invest more of our own effort in an attempt to create a higher level of quality or a greater affect. At the end of the day, it’s all about feeling good, and the US consumer will transition towards ways to drive personal and family pleasure without having to spend as much as they have might have before.
I recently visited in the home of an affluent client whom I knew to be in the process of remodeling their kitchen and family room. Their original plans included interior decorators, expensive wall treatments, commercial appliances, and high end furnishings, so I wasn’t at all surprised to find rooms that had been transformed into warm, comfortable, and attractive spaces. As we talked about the decorating process and I looked more closely at the level of finish, I was interested to note that the artwork was all about older family photographs instead of the prints and oil paintings I had expected to find. The planned for, costly wall treatments and window fabrics had given way to warm colors accented by home made draperies and personally applied, vinyl wall lettering, quotes and sayings that reinforced the values of home and family. The finished rooms were as tasteful, attractive, and inviting as anyone might have wished for, but instead of simply being the product of an expensive group of technicians, the space was a reflection of a family that had economized, sacrificed, and made it their own.
This is the stuff of which the American consumer is made. We continued to demand quality and comfort, and when need be, we’re willing to exert the time and effort to offer it to ourselves for ourselves, rather than go without. As we create and innovate, we find more satisfaction in our own efforts than we might otherwise have found by having spent more and benefited less. When we haven’t as much money to spend we invest more of ourselves to achieve a similar affect.
As our society transforms itself from a nation of net spenders back towards an economy reflective of meaningful personal investment, consumers will face choices that will motivate them to do more with less. Less glamour and more comfort, fewer excesses and greater warmth; personal, emotional and heart felt will replace expensive and cutting edge. In recent years we’ve seen personal savings levels fall to negative numbers in the minus 2% to 3% range. Almost overnight that trend is reversing and will likely settle in at a personal savings rate somewhere between 4% and 8%. The contraction of household incomes as unemployment rises above the 6% level is likely to make the transition more painful, and as consumers feel the pain they’ll look for simple pleasures.
Once the transition has been made it will take several years before a noticeable shift begins back towards excesses and less personal trends. In the mean time, cottage businesses reflective of our evolving national ethos are most likely to prosper. As they do so, we’ll see that the innovation and resourcefulness of the consumer will have found a way to bring the economy back to the robust growth trends of the 1950’s and 1990’s.
Monday, October 20, 2008
A SELF-FULFILLING PROPHECY and PRESIDENTIAL IMPACT
A SELF-FULFILLING PROPHECY 10-17-2008
If someone had come to me two years ago asking how often the DOW would swing more than 500 points in any one day - from opening, to low, to high, to close - I might have responded, rarely… not very often. If the question had come only a year ago, I’d have likely suggested that it happens, but only a few times a year - seldom enough to be an event when it does. Were I to be asked that same question today, I’d have to stop, look at the DOW for that very day, and then suggest it could happen on any given day and today is one of those days. At this writing, the low to high differential on the DOW, forget including the open to close, is over 560 points. This is the stuff of amusement park rides and nightmares - not of rational markets.
In recent days, there’s been much made of whether or not the Treasury and Federal Reserve acted swiftly enough to avoid aggravating an already weakening economy; and once again, the Washington ‘blame game’ is being played out in the national press. In truth, the actions of the Federal Reserve and Treasury have likely come late enough as to not stem the flow of red ink in the domestic and global credit, debt, and equities markets, but how could they have come any time sooner? Had Paulson and Bernanke brought enough liquidity to the economy a year ago to stem the tide of what we’re now suffering, the public outcry and political confrontation would have been enormous. Forget that they’d have needed prophetic vision to have seen just how deeply this would run, and how widespread an effect the credit crisis would have.
The reality is that the volatile markets we’re enduring are a byproduct of credit market forces emanating from years of loose credit and possibly unsustainable economic growth, fueled by credit. Today, it’s all too clear to see the trail and where it has led us; that’s the beauty of hindsight. Where this will take our economy tomorrow is far less certain.
What is most concerning to many of us today is what may be labeled as a self-fulfilling prophecy. The emotion and fear exhibited by some over the last several months regarding a much heralded recession has unreasonably constrained capital investment, job creation, corporate and personal borrowing, and consumer spending. So much so, that we are now likely experiencing the very recession that most already supposed us to be in, though we were not! Their very suppositions and reactions have now almost certainly caused what they feared was already upon them.
GDP figures for all but the 4th Quarter of 2007 have not only been positive, but in most cases higher than expected. Early indications of 3rd Quarter 2008 GDP growth follow the same trend. But 4th Quarter 2008 and 1st Quarter 2009 will almost certainly reflect negative GDP growth, and that makes a recession. We haven’t seen a recession stemming from fear or a lack of confidence since 1907, and those that had been experienced previous to that time were relatively brief in duration, but admittedly occurred in economic times that bear little resemblance to the complex, fast moving, and globally connected economy we have today.
PRESIDENTIAL IMPACT
With little more than two weeks to go before the US Presidential election, it appears increasing likely that Senator Obama will be the next POTUS. Many are elated, others are frustrated, and some just don’t care. Regardless, it’s important to understand some of the impact that may come from an Obama presidency, and in contrast (allowing for equal time and opportunity), what a McCain administration might otherwise offer.
Under an Obama presidency, in all likelihood, there will be an immediate sense of increasing confidence in the electorate. Persuasive and confidence-inspiring rhetoric, an attractive Obama trait, may help calm fears and heal some open wounds. The import of which is not to be taken lightly.
The federal deficit may decrease, not as a byproduct of decreased spending, but due to an increase in personal and corporate tax rates of varying types, not just the obvious federal income tax. There will likely be continued pressure to keep interest rates low, possibly at the risk of a weaker dollar and even greater risk of inflationary pressures. Job creation at the low end of the wage scale may improve as employers are pressured to keep jobs in the US, and increases in federal minimum wage levels are almost certain. The term ‘pro business’ may become as caustic as ‘lucrative executive compensation’ is today, and while many successful US corporations may seek asylum offshore, there may be a pain-inducing effort towards protectionism, both in keeping corporations in the US and trade tariffs. The role of government in business is likely to increase, and government intervention in health care will continue at a fevered pace, though likely still missing the point as in prior democratic administrations.
The replacement of two or more Supreme Court justices is near certain, but given the age and makeup of the court today, it is most likely that those who may leave the bench will be those that have a more liberal bent to begin with, notwithstanding unexpected health conditions. The makeup of the various lower courts will likely be very different as more liberally-minded judges are likely to replace many of their retiring conservative peers.
Conservative commentators will likely gain the same type of traction that their liberal counterparts have seen in recent years, but only after what might be an attractive ‘honeymoon’ period. Conservationist efforts may overtake more productive ‘green business’ activities, resulting a more ‘tree hugging’ environmental movement than a more effective business led campaign.
In the event that McCain becomes the next US president, it is most likely that liberal commentators will immediately surge and the negative rhetoric that has surrounded the Bush administration will continue. Unless McCain is a more eloquent and convincing orator than his two republican predecessors, it is likely that only the conservative faithful will gain much additional confidence and trust in the economy and government.
Taxes on those that contribute the greatest portion of federal revenues may decrease at the cost of fewer federal services and higher federal deficits. Trade barriers are likely to remain low, and the globalization of our economy will continue to increase at a rapid pace, though trade imbalances may ebb and flow. In the short term, the US may continue to be seen less than favorably around the globe as many nations will continue to see a McCain administration as a continuation of those that came before, but in time, assuming deft foreign policy actions, the US’s global esteem should improve even as the US economy regains lost strength.
Free market influences may constrain jobs at first, but will likely give way to more higher paying jobs as entrepreneurs and innovators are encouraged to build, grow, and develop ideas into profitable business enterprises. ‘Green’ business practices are likely to escalate rapidly as it becomes more obvious that businesses can profit from them while improving public relations.
The makeup of the US Supreme Court could shift farther to the right as aging liberal justices are replaced, and liberal columnists and activists are likely to gain enough additional momentum to make a second McCain term as hard fought as the first. US forces abroad will almost certainly maintain a high level of activity.
The overall effect of either of the candidates on the US economy during the next two presidential terms is uncertain. There are as many respected decision makers who favor one candidate as there are those that favor the other. Some predictably conservative voices in our society sound like they favor a change in parties for the coming administration, and at the same time, many more liberally minded business executives appear to be leaning towards a house, senate, and presidency that represent the same party.
ON THE LIGHTER, BUT STILL ENLIGHTENING, SIDE
The following came to me this week by way of email. I thought you might enjoy it and maybe even learn something from it.
BAR STOOL ECONOMICS:
Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that's what they decided to do. The ten men drank in the bar everyday and seemed quite happy with the arrangement, until one day, the owner threw them a curve. 'Since you are all such good customers’, he said,’ I'm going to reduce the cost of your daily beer by $20’. Drinks for the ten now cost just $80.
The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?'
They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay!
And so:
The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).
Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.
'
I only got a dollar out of the $20, 'declared the sixth man. He pointed to the tenth man, 'but he got $10!'
'Yeah, that's right,' exclaimed the fifth man. 'I only saved a dollar, too. It's unfair that he got ten times more than I!
''That's true!!' shouted the seventh man.
'Why should he get $10 back when I got only two? The wealthy get all the breaks!
''Wait a minute,' yelled the first four men in unison. 'We didn't getanything at all. The system exploits the poor!'
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!
And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.
For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible
If someone had come to me two years ago asking how often the DOW would swing more than 500 points in any one day - from opening, to low, to high, to close - I might have responded, rarely… not very often. If the question had come only a year ago, I’d have likely suggested that it happens, but only a few times a year - seldom enough to be an event when it does. Were I to be asked that same question today, I’d have to stop, look at the DOW for that very day, and then suggest it could happen on any given day and today is one of those days. At this writing, the low to high differential on the DOW, forget including the open to close, is over 560 points. This is the stuff of amusement park rides and nightmares - not of rational markets.
In recent days, there’s been much made of whether or not the Treasury and Federal Reserve acted swiftly enough to avoid aggravating an already weakening economy; and once again, the Washington ‘blame game’ is being played out in the national press. In truth, the actions of the Federal Reserve and Treasury have likely come late enough as to not stem the flow of red ink in the domestic and global credit, debt, and equities markets, but how could they have come any time sooner? Had Paulson and Bernanke brought enough liquidity to the economy a year ago to stem the tide of what we’re now suffering, the public outcry and political confrontation would have been enormous. Forget that they’d have needed prophetic vision to have seen just how deeply this would run, and how widespread an effect the credit crisis would have.
The reality is that the volatile markets we’re enduring are a byproduct of credit market forces emanating from years of loose credit and possibly unsustainable economic growth, fueled by credit. Today, it’s all too clear to see the trail and where it has led us; that’s the beauty of hindsight. Where this will take our economy tomorrow is far less certain.
What is most concerning to many of us today is what may be labeled as a self-fulfilling prophecy. The emotion and fear exhibited by some over the last several months regarding a much heralded recession has unreasonably constrained capital investment, job creation, corporate and personal borrowing, and consumer spending. So much so, that we are now likely experiencing the very recession that most already supposed us to be in, though we were not! Their very suppositions and reactions have now almost certainly caused what they feared was already upon them.
GDP figures for all but the 4th Quarter of 2007 have not only been positive, but in most cases higher than expected. Early indications of 3rd Quarter 2008 GDP growth follow the same trend. But 4th Quarter 2008 and 1st Quarter 2009 will almost certainly reflect negative GDP growth, and that makes a recession. We haven’t seen a recession stemming from fear or a lack of confidence since 1907, and those that had been experienced previous to that time were relatively brief in duration, but admittedly occurred in economic times that bear little resemblance to the complex, fast moving, and globally connected economy we have today.
PRESIDENTIAL IMPACT
With little more than two weeks to go before the US Presidential election, it appears increasing likely that Senator Obama will be the next POTUS. Many are elated, others are frustrated, and some just don’t care. Regardless, it’s important to understand some of the impact that may come from an Obama presidency, and in contrast (allowing for equal time and opportunity), what a McCain administration might otherwise offer.
Under an Obama presidency, in all likelihood, there will be an immediate sense of increasing confidence in the electorate. Persuasive and confidence-inspiring rhetoric, an attractive Obama trait, may help calm fears and heal some open wounds. The import of which is not to be taken lightly.
The federal deficit may decrease, not as a byproduct of decreased spending, but due to an increase in personal and corporate tax rates of varying types, not just the obvious federal income tax. There will likely be continued pressure to keep interest rates low, possibly at the risk of a weaker dollar and even greater risk of inflationary pressures. Job creation at the low end of the wage scale may improve as employers are pressured to keep jobs in the US, and increases in federal minimum wage levels are almost certain. The term ‘pro business’ may become as caustic as ‘lucrative executive compensation’ is today, and while many successful US corporations may seek asylum offshore, there may be a pain-inducing effort towards protectionism, both in keeping corporations in the US and trade tariffs. The role of government in business is likely to increase, and government intervention in health care will continue at a fevered pace, though likely still missing the point as in prior democratic administrations.
The replacement of two or more Supreme Court justices is near certain, but given the age and makeup of the court today, it is most likely that those who may leave the bench will be those that have a more liberal bent to begin with, notwithstanding unexpected health conditions. The makeup of the various lower courts will likely be very different as more liberally-minded judges are likely to replace many of their retiring conservative peers.
Conservative commentators will likely gain the same type of traction that their liberal counterparts have seen in recent years, but only after what might be an attractive ‘honeymoon’ period. Conservationist efforts may overtake more productive ‘green business’ activities, resulting a more ‘tree hugging’ environmental movement than a more effective business led campaign.
In the event that McCain becomes the next US president, it is most likely that liberal commentators will immediately surge and the negative rhetoric that has surrounded the Bush administration will continue. Unless McCain is a more eloquent and convincing orator than his two republican predecessors, it is likely that only the conservative faithful will gain much additional confidence and trust in the economy and government.
Taxes on those that contribute the greatest portion of federal revenues may decrease at the cost of fewer federal services and higher federal deficits. Trade barriers are likely to remain low, and the globalization of our economy will continue to increase at a rapid pace, though trade imbalances may ebb and flow. In the short term, the US may continue to be seen less than favorably around the globe as many nations will continue to see a McCain administration as a continuation of those that came before, but in time, assuming deft foreign policy actions, the US’s global esteem should improve even as the US economy regains lost strength.
Free market influences may constrain jobs at first, but will likely give way to more higher paying jobs as entrepreneurs and innovators are encouraged to build, grow, and develop ideas into profitable business enterprises. ‘Green’ business practices are likely to escalate rapidly as it becomes more obvious that businesses can profit from them while improving public relations.
The makeup of the US Supreme Court could shift farther to the right as aging liberal justices are replaced, and liberal columnists and activists are likely to gain enough additional momentum to make a second McCain term as hard fought as the first. US forces abroad will almost certainly maintain a high level of activity.
The overall effect of either of the candidates on the US economy during the next two presidential terms is uncertain. There are as many respected decision makers who favor one candidate as there are those that favor the other. Some predictably conservative voices in our society sound like they favor a change in parties for the coming administration, and at the same time, many more liberally minded business executives appear to be leaning towards a house, senate, and presidency that represent the same party.
ON THE LIGHTER, BUT STILL ENLIGHTENING, SIDE
The following came to me this week by way of email. I thought you might enjoy it and maybe even learn something from it.
BAR STOOL ECONOMICS:
Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that's what they decided to do. The ten men drank in the bar everyday and seemed quite happy with the arrangement, until one day, the owner threw them a curve. 'Since you are all such good customers’, he said,’ I'm going to reduce the cost of your daily beer by $20’. Drinks for the ten now cost just $80.
The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?'
They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay!
And so:
The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).
Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.
'
I only got a dollar out of the $20, 'declared the sixth man. He pointed to the tenth man, 'but he got $10!'
'Yeah, that's right,' exclaimed the fifth man. 'I only saved a dollar, too. It's unfair that he got ten times more than I!
''That's true!!' shouted the seventh man.
'Why should he get $10 back when I got only two? The wealthy get all the breaks!
''Wait a minute,' yelled the first four men in unison. 'We didn't getanything at all. The system exploits the poor!'
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!
And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.
For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible
Friday, October 10, 2008
Shock and Awe
I’m sure that you, like many, are sickened by the recent slate of financial news, and the daily reports of further declines in the equity and debt markets. You might be among those that simply want to ignore your investment statements, or you might even feel numb to the constant battering the markets have received. Believe me, I understand.
I’m going to ask that you not ignore the news, your statements, or the difficulties around us. Rather, this is precisely the time you need to stay informed, and understand as much as possible about our markets, your money, and our collective futures. Believe it or not, right now, you are among the single most important group of decision makers in the country. You are a voter and a consumer, and two of the most important events in recent years are about to unfold: the US Presidential Election, and crucial holiday buying season.
This week’s issue of Signature Update will present numerous topics, far more than usual, because there has been such unusual activity in the domestic and global financial markets. Hopefully, as you learn more about the markets and economy, you’ll better understand the impact your decisions, and those of others, have on all of us.
The Three C’s: Confidence, Clarity, and Credit
The value of stocks can be expressed in many different ways, and one of those is the ratio between the price of the stock and the earnings per share of the company they represent. This is referred to as the P/E Ratio and can range widely depending on the industry the company is in. It is an indication of whether or not the stock is overpriced, oversold, or priced in line with their peers in the market. As of Wednesday afternoon, the average P/E ratio of the stocks that make up the S&P 500 was less than 11, an astoundingly low figure, perhaps half of what it should be, and an indication that the US stock market is dramatically oversold, or undervalued.
Likewise, credit markets have their own indicators of value. One of these is the LIBOR, or the London Inter Bank Offering Rate, and this figure typically is slightly higher than the US Fed Funds rate and short term treasury rates. When the LIBOR is high against benchmark rates, it suggests that there is a lack of confidence in the credit markets, and a concern that those banks involved may not be able to make good on their promises to repay. As of 6:47 am EDT this morning, the LIBOR was at 4.82%, one week ago it was at 4.33% and one month ago it was at 2.82%. By contrast, the Fed Funds rate is at 1.5% today, was at 2% one week ago, and was at 2% one month ago. The LIBOR spread has widened dramatically.
The question is, 'Why is the LIBOR so high, and why is the average P/E ratio of the S&P so low’? The answer has everything to do with Confidence, Clarity, and Credit.
Consumers and businesses around the world have been shocked by the constant negativity and stories of doom and gloom reported through the press. In a day when we have near constant access to financial news, 24/7 reporting of even the most minor economic, political or social event, coupled with inexpensive trading of stocks, bonds, and mutual funds, it creates a scenario ripe for volatility. Reactions run high, common sense goes out the window, and the volume of selling transactions goes through the roof. This puts immense downward pressure on the price of stocks unless there are ready buyers; and with the credit markets being as constrained as they are, money becomes tight and few buyers are present. Likewise, with such negativity reported in the press, coupled with lower stock prices, investors often demand redemptions in mutual funds, private equity funds, and hedge funds and the selling pressure expands. The result: stock prices tumble.
The issue in the credit markets includes that of clarity. The complex credit instruments used in today’s markets can be difficult for even the most experienced investor to understand. Often the complexity impedes the ability to know exactly what the value of the instrument is and what assets, or collateral, stand behind the instrument. When the value of these assets start to fall, as is the case when the value of real estate declines, it becomes very difficult to clearly assess the value of the instrument; and whatever clarity was present when the instrument was created becomes clouded. Without clarity, there is no confidence, and the credit markets slow down, or can seize up altogether.
This is exactly the scenario we’ve faced for the past several weeks in the markets. The DOW is down some 3,000 points in the face of all of this; all due to emotion, fear, and a lack of confidence, not due to any meaningful economic shifts.
Recognize that the fundamentals of our economy haven’t changed in this time frame. Oil prices continue to fall, now well below $90 per barrel. Unemployment, though higher than we’d like at 6.1%, is still low by historical standards. Interest rates, with the Fed Funds rate at 1.5%, are low. Businesses continue to grow, and the buying and selling of goods and services continues throughout our economy, though at a slower rate than in previous years.
Real Estate
August existing home sales figure were reported earlier this week and represented an increase of 7.4%. That’s great news for the real estate markets and a meaningful figure for all of us to understand. While it doesn’t necessarily mean that the housing market is now in a sustained upward correction, it does mean that there are buyers willing to step in at today’s prices, many of whom are now finding home ownership affordable for the first time in years. With the recent tightening in the availability of credit, many of these buyers are being forced to wait on the sidelines, but the signs that they are there and interested are unmistakable. As credit availability eases, especially at the low interest rates being seen today, these buyers may be able to present a strong front in the battle to stabilize the residential real estate market.
Warren Buffett
Warren Buffett is a name virtually every financially-aware American is aware of, and a shrew investor. Among the many things for which Buffett is famous is the saying ‘When everyone around you is frightened, it’s time to be brave’. This holds especially true for the financial markets today, and Buffett has once again shown why he is one of the nation’s premier investors. Last week alone, Buffett invested more than $8 billion of his company’s surplus cash into the stock market as he purchased interests in both Goldman Sachs and General Electric. This week the shares of each of those companies declined with the rest of the markets. Buffett, though, only sees profitability in his purchases. At more than eighty years of age, Buffett continues to focus his vision to the long term - one of the traits that has made him one of the wealthiest individuals in the world.
Federal Reserve and Treasury Actions
A large portion of the decline in investor confidence has been due to the House and Senate’s delay in passing the Troubled Asset Relief Program bill, or TARP. Not only did our legislators delay the passing of this important piece of legislation, they amended it to the point that frustrations among investors reached a fever pitch, and they’re yet to subside. TARP will be effective once the Treasury begins to purchase the targeted assets, but this will take another 3-4 weeks to begin, and likely several more weeks for the effects to be felt. Had confidence remained as high as it was the day this legislation was introduced, there would have been an immediate and positive effect on the markets, once passed. Now we’ll have to wait for it to actually impact the economy before we can enjoy any positive impact in the markets.
The passage of TARP may not be the ideal solution to the problem at hand, but it appears to have been the best solution available in the time frames dictated by the credit and equities markets.
The most recent actions of the Treasury and Federal Reserve, including a historic coordinated rate cut with other central banks, and greatly expanded credit facilities to assist money center, commercial and investment banks, as well as American businesses, will have a positive impact on the flow of funds throughout the domestic and international economy. But it will take time, perhaps four to eight weeks before the impact can be measured or felt by investors and consumers.
Short Sales Resume
Short sales on all publically traded companies were once again allowed as of 12:00 am midnight on October 9th. Little wonder then that companies like General Motors became the target of such aggressive selling pressure after Standard and Poors announced a down grade in GM’s credit worthiness. S&P’s announcement wasn’t news to anyone paying attention to GM’s balance sheet in recent months or years, but short sellers in the market hammered the stock, just as they resumed attacks on various financial services stocks and sent the markets into a veritable freefall.
The SEC simply must bring back the ‘up tick’ rule that only allows for short selling of a stock when the last transaction has been to the positive, otherwise, short sellers can create their own profits by pressuring the stock price downwards.
The Penalty for Missing the Market
Over the past 20 years, the US stock market has been much like a tide, experiencing ebbs and flows. These ups and downs remind us of the unpredictability of market movements. When stock prices are declining, many investors run the risk of making emotion-based decisions and pulling out of the market. We believe that by remaining fully invested through volatile weeks or months, however, investors can potential avoid sitting on the sidelines at the wrong time.
Unless there is a specific guarantee program active on a client account that strategically takes money out of the market when faced with volatility and then moves back into the market when appropriate, staying the course of a diversified and considered investment strategy works.
Remember: It’s time in the market that matters, not market timing. How significant is the potential penalty for missing the market? In the time period shown below, being out of the market on the 70 days when the market advanced most would have significantly reduced an investor’s average annual total return.
During the period of 1987 to 2007, those who were invested in the S&P 500 all 5,296 day posted an annualized return of 11.5%; those that missed the best 10 days only received 7.96%; those that missed the best 40 days saw an 1.3%; and those that missed the best 70 days actually lost 3.63%.
While market fluctuations can be disconcerting, timing can be costly. A strategic, personalized investment plan, combined with the ongoing counsel of your Investment Professional, can help you to remain focused and keep market downturns in perspective.
Source: Goldman Sachs Asset Management. Calculation is based on 5,296 days, excluding weekends and holidays The returns are based on the S&P 500 Index, a market-weighted index of 500 of the largest U.S. stocks in a variety of industry sectors. It is not possible to invest directly in an unmanaged index.
Jim Cramer – the Mad Man of Wall Street
On Monday morning of this week, Jim Cramer was a guest on The Today Show and declared that anyone needing access to their money within the next five years should take it out of the market now, and then proffered that the US stock markets would see another 20% decline before regaining stability. Cramer’s a well respected guy and The Today Show is seen by millions – his pronouncement helped move the market over 800 points lower before sanity prevailed and the DOW closed off some 369 points. Many have suggested his remarks, and The Today Show’s release of them, was nothing short of irresponsible, some citing no observable evidence that Cramer has reduced his own long or short positions in the current market.
By Monday afternoon, many had asked what I thought of Cramer’s comments. Though I had my own opinions, fortunately I had already asked the same question while on a conference call with a portfolio manager from the UK, and again later in the day of a fellow economist I pay attention to. They both gave a similar answer, consistent with my own thoughts:
Cramer is an entertainer and a trader, not an investor – there’s a big difference. He often treats 3-6 months as long term, and has been much better at calling the direction of a particular stock than he has the market, economy or a given industry. That said - he's also a really entertaining guy, has a wealth of experience, and I've learned a lot from listening to him over the years. If you believe that TARP and the other Federal Reserve and Treasury actions don’t have enough horsepower to be effective, then Cramer's right and we're in for a tough time that will likely take 3-5 years to overcome. However, if you think the package will do what it is intended to do, then Cramer's over-reaction, like many of his media peers, is patently incorrect. By the way, Cramer is famous for his over reactions and on-air rants.
To be candid, the 20% decline figure may not be far off, but the five year time frame is excessive, to be sure.
I’m going to ask that you not ignore the news, your statements, or the difficulties around us. Rather, this is precisely the time you need to stay informed, and understand as much as possible about our markets, your money, and our collective futures. Believe it or not, right now, you are among the single most important group of decision makers in the country. You are a voter and a consumer, and two of the most important events in recent years are about to unfold: the US Presidential Election, and crucial holiday buying season.
This week’s issue of Signature Update will present numerous topics, far more than usual, because there has been such unusual activity in the domestic and global financial markets. Hopefully, as you learn more about the markets and economy, you’ll better understand the impact your decisions, and those of others, have on all of us.
The Three C’s: Confidence, Clarity, and Credit
The value of stocks can be expressed in many different ways, and one of those is the ratio between the price of the stock and the earnings per share of the company they represent. This is referred to as the P/E Ratio and can range widely depending on the industry the company is in. It is an indication of whether or not the stock is overpriced, oversold, or priced in line with their peers in the market. As of Wednesday afternoon, the average P/E ratio of the stocks that make up the S&P 500 was less than 11, an astoundingly low figure, perhaps half of what it should be, and an indication that the US stock market is dramatically oversold, or undervalued.
Likewise, credit markets have their own indicators of value. One of these is the LIBOR, or the London Inter Bank Offering Rate, and this figure typically is slightly higher than the US Fed Funds rate and short term treasury rates. When the LIBOR is high against benchmark rates, it suggests that there is a lack of confidence in the credit markets, and a concern that those banks involved may not be able to make good on their promises to repay. As of 6:47 am EDT this morning, the LIBOR was at 4.82%, one week ago it was at 4.33% and one month ago it was at 2.82%. By contrast, the Fed Funds rate is at 1.5% today, was at 2% one week ago, and was at 2% one month ago. The LIBOR spread has widened dramatically.
The question is, 'Why is the LIBOR so high, and why is the average P/E ratio of the S&P so low’? The answer has everything to do with Confidence, Clarity, and Credit.
Consumers and businesses around the world have been shocked by the constant negativity and stories of doom and gloom reported through the press. In a day when we have near constant access to financial news, 24/7 reporting of even the most minor economic, political or social event, coupled with inexpensive trading of stocks, bonds, and mutual funds, it creates a scenario ripe for volatility. Reactions run high, common sense goes out the window, and the volume of selling transactions goes through the roof. This puts immense downward pressure on the price of stocks unless there are ready buyers; and with the credit markets being as constrained as they are, money becomes tight and few buyers are present. Likewise, with such negativity reported in the press, coupled with lower stock prices, investors often demand redemptions in mutual funds, private equity funds, and hedge funds and the selling pressure expands. The result: stock prices tumble.
The issue in the credit markets includes that of clarity. The complex credit instruments used in today’s markets can be difficult for even the most experienced investor to understand. Often the complexity impedes the ability to know exactly what the value of the instrument is and what assets, or collateral, stand behind the instrument. When the value of these assets start to fall, as is the case when the value of real estate declines, it becomes very difficult to clearly assess the value of the instrument; and whatever clarity was present when the instrument was created becomes clouded. Without clarity, there is no confidence, and the credit markets slow down, or can seize up altogether.
This is exactly the scenario we’ve faced for the past several weeks in the markets. The DOW is down some 3,000 points in the face of all of this; all due to emotion, fear, and a lack of confidence, not due to any meaningful economic shifts.
Recognize that the fundamentals of our economy haven’t changed in this time frame. Oil prices continue to fall, now well below $90 per barrel. Unemployment, though higher than we’d like at 6.1%, is still low by historical standards. Interest rates, with the Fed Funds rate at 1.5%, are low. Businesses continue to grow, and the buying and selling of goods and services continues throughout our economy, though at a slower rate than in previous years.
Real Estate
August existing home sales figure were reported earlier this week and represented an increase of 7.4%. That’s great news for the real estate markets and a meaningful figure for all of us to understand. While it doesn’t necessarily mean that the housing market is now in a sustained upward correction, it does mean that there are buyers willing to step in at today’s prices, many of whom are now finding home ownership affordable for the first time in years. With the recent tightening in the availability of credit, many of these buyers are being forced to wait on the sidelines, but the signs that they are there and interested are unmistakable. As credit availability eases, especially at the low interest rates being seen today, these buyers may be able to present a strong front in the battle to stabilize the residential real estate market.
Warren Buffett
Warren Buffett is a name virtually every financially-aware American is aware of, and a shrew investor. Among the many things for which Buffett is famous is the saying ‘When everyone around you is frightened, it’s time to be brave’. This holds especially true for the financial markets today, and Buffett has once again shown why he is one of the nation’s premier investors. Last week alone, Buffett invested more than $8 billion of his company’s surplus cash into the stock market as he purchased interests in both Goldman Sachs and General Electric. This week the shares of each of those companies declined with the rest of the markets. Buffett, though, only sees profitability in his purchases. At more than eighty years of age, Buffett continues to focus his vision to the long term - one of the traits that has made him one of the wealthiest individuals in the world.
Federal Reserve and Treasury Actions
A large portion of the decline in investor confidence has been due to the House and Senate’s delay in passing the Troubled Asset Relief Program bill, or TARP. Not only did our legislators delay the passing of this important piece of legislation, they amended it to the point that frustrations among investors reached a fever pitch, and they’re yet to subside. TARP will be effective once the Treasury begins to purchase the targeted assets, but this will take another 3-4 weeks to begin, and likely several more weeks for the effects to be felt. Had confidence remained as high as it was the day this legislation was introduced, there would have been an immediate and positive effect on the markets, once passed. Now we’ll have to wait for it to actually impact the economy before we can enjoy any positive impact in the markets.
The passage of TARP may not be the ideal solution to the problem at hand, but it appears to have been the best solution available in the time frames dictated by the credit and equities markets.
The most recent actions of the Treasury and Federal Reserve, including a historic coordinated rate cut with other central banks, and greatly expanded credit facilities to assist money center, commercial and investment banks, as well as American businesses, will have a positive impact on the flow of funds throughout the domestic and international economy. But it will take time, perhaps four to eight weeks before the impact can be measured or felt by investors and consumers.
Short Sales Resume
Short sales on all publically traded companies were once again allowed as of 12:00 am midnight on October 9th. Little wonder then that companies like General Motors became the target of such aggressive selling pressure after Standard and Poors announced a down grade in GM’s credit worthiness. S&P’s announcement wasn’t news to anyone paying attention to GM’s balance sheet in recent months or years, but short sellers in the market hammered the stock, just as they resumed attacks on various financial services stocks and sent the markets into a veritable freefall.
The SEC simply must bring back the ‘up tick’ rule that only allows for short selling of a stock when the last transaction has been to the positive, otherwise, short sellers can create their own profits by pressuring the stock price downwards.
The Penalty for Missing the Market
Over the past 20 years, the US stock market has been much like a tide, experiencing ebbs and flows. These ups and downs remind us of the unpredictability of market movements. When stock prices are declining, many investors run the risk of making emotion-based decisions and pulling out of the market. We believe that by remaining fully invested through volatile weeks or months, however, investors can potential avoid sitting on the sidelines at the wrong time.
Unless there is a specific guarantee program active on a client account that strategically takes money out of the market when faced with volatility and then moves back into the market when appropriate, staying the course of a diversified and considered investment strategy works.
Remember: It’s time in the market that matters, not market timing. How significant is the potential penalty for missing the market? In the time period shown below, being out of the market on the 70 days when the market advanced most would have significantly reduced an investor’s average annual total return.
During the period of 1987 to 2007, those who were invested in the S&P 500 all 5,296 day posted an annualized return of 11.5%; those that missed the best 10 days only received 7.96%; those that missed the best 40 days saw an 1.3%; and those that missed the best 70 days actually lost 3.63%.
While market fluctuations can be disconcerting, timing can be costly. A strategic, personalized investment plan, combined with the ongoing counsel of your Investment Professional, can help you to remain focused and keep market downturns in perspective.
Source: Goldman Sachs Asset Management. Calculation is based on 5,296 days, excluding weekends and holidays The returns are based on the S&P 500 Index, a market-weighted index of 500 of the largest U.S. stocks in a variety of industry sectors. It is not possible to invest directly in an unmanaged index.
Jim Cramer – the Mad Man of Wall Street
On Monday morning of this week, Jim Cramer was a guest on The Today Show and declared that anyone needing access to their money within the next five years should take it out of the market now, and then proffered that the US stock markets would see another 20% decline before regaining stability. Cramer’s a well respected guy and The Today Show is seen by millions – his pronouncement helped move the market over 800 points lower before sanity prevailed and the DOW closed off some 369 points. Many have suggested his remarks, and The Today Show’s release of them, was nothing short of irresponsible, some citing no observable evidence that Cramer has reduced his own long or short positions in the current market.
By Monday afternoon, many had asked what I thought of Cramer’s comments. Though I had my own opinions, fortunately I had already asked the same question while on a conference call with a portfolio manager from the UK, and again later in the day of a fellow economist I pay attention to. They both gave a similar answer, consistent with my own thoughts:
Cramer is an entertainer and a trader, not an investor – there’s a big difference. He often treats 3-6 months as long term, and has been much better at calling the direction of a particular stock than he has the market, economy or a given industry. That said - he's also a really entertaining guy, has a wealth of experience, and I've learned a lot from listening to him over the years. If you believe that TARP and the other Federal Reserve and Treasury actions don’t have enough horsepower to be effective, then Cramer's right and we're in for a tough time that will likely take 3-5 years to overcome. However, if you think the package will do what it is intended to do, then Cramer's over-reaction, like many of his media peers, is patently incorrect. By the way, Cramer is famous for his over reactions and on-air rants.
To be candid, the 20% decline figure may not be far off, but the five year time frame is excessive, to be sure.
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