OF MARKETS, ANALYSTS, AND CENTRAL BANKS 6/27/2008

A Mild Week for the Markets Takes a Serious Downturn

Just when you thought it was safe to go back into the water the DOW drops over 350 points on news of further weakness in financial stocks, an assault on General Motors and Citigroup by Goldman Sachs and a spike in oil to over $140 a barrel ($139.64 closing price). While I have to admit that we didn’t expect this particular slide on this specific date, we have been counseling clients that over the next 2-4 weeks we believe that the overall economic weakness will have been priced into the market and it may well be time to take a more assertive equities stance in certain portfolios. We suspect that the market may not make great positive strides for a few months or more, but that it may well be prudent to position some portfolios to take advantage of lower prices and be postured to take advantage of an upturn when it eventually comes.

The US economy, though weaker than most of us would care to have it, isn’t on the rocks and shows some areas of surprising strength. Today’s valuation for many equities reflects a market that is now well ‘oversold’ and may present some meaningful opportunities and positive returns as we wind our way through the remainder of the year. The markets may not do much between now and the presidential election because the markets hate uncertainty, but most observers continue to call for a late year rally of some strength.

Goldman Sachs’ Short Sale Recommendation of Citigroup

Goldman Sachs’ (GS) recent recommendation to ‘sell short’ Citigroup (C) shares may have possibly been an appropriate call given the nature of the financial markets, but when taken in context with the reality that Citigroup is one of Goldman’s most venerable competitors, it seems like a cheap shot. That the stock market reeled from the recommendation only made matters worse and the European Market sold off to levels not seen since 2005. Was this move warranted and do Citigroup shares deserve a short sell recommendation? Hard to tell. The stock is already trading at less than half of its 12 month high of over $52 a share. But then Goldman’s shares are also off by some 30% in the same time frame. Citigroup has been hammered as a result of the credit markets, but has shown a remarkable ability to raise capital. It is hard to believe that this stock, trading at less than $18 a share has more downside risk for shareholders than it does upside risk for short sellers. The next few months will tell the story.

Federal Reserve Open Market Committee Meeting (FOMC)

The Fed’s FOMC meeting earlier this week didn’t impress the markets and certainly didn’t do anything for the strength of the dollar. Though the immediate read wasn’t negative, it also wasn’t positive enough to give the dollar a rally that lasted more than 24 hours. The Fed asserted its intention to reign in inflation and left open the possibility of increasing interest rates in the fall, but pretty well shut the door on a rate hike when the Fed next meets in August.

"Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending," according to the Wednesday statement. "However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters."

What was clear is that the Fed sees increasing complexity in our economy, though they also see continually lessening likelihood of a recession. Real GDP growth in the first quarter has been revised upwards to an increase of 1%. New home sales showed a 2% increase in May and durable goods orders remained unchanged – good news on both fronts. The Producer Price Index (PPI) showed a seasonally adjusted increase of 1.4% bringing the 12 month increase to 7.2%, of which energy represented 4.9%. The Consumer Price Index (CPI) reflected similar increases of 1.8% and 8.8% on the May and 12 month figures respectively. None of these numbers are good, by the way, they all evidence inflation at unacceptable numbers, and support the Fed’s current inflation-fighting posture.

It will take a concentrated effort on the part of the Fed, the Treasury and the US Executive and Legislative branches to strengthen the dollar, fight off inflation, and bring down oil’s surreal price levels. That these bodies are all on the same page, or even the same chapter bodes well for the rest of us.

A Word to the Wise

In recent months I’ve heard a radio advertisement for a particular brand of internet and email security software that focuses on the evils of email spammers (read: scammer) and some of the offerings they put up trying to elicit a response. All an individual user has to do is open one of these emails and immediately the user begins to fall prey to the spammer’s agenda, which normally ends in a transfer of funds from the users personal account(s) to that of a scam artist somewhere around the globe – at the very least a virus begins to work its way into the computer and creates hassles and headaches that aren’t soon forgotten. Sadly, most of us have had experiences with some of this.

While it’s hard to believe that rational individuals get drawn into some of the more prevalent scams, it is remarkable just how many of these are successful – to the tune of tens of millions of dollars each year. So... we thought a review of one of the more egregious of these might be appropriate.

As many of us are aware, email fraud is rampant and you or your family may periodically receive an email from someone who identifies themselves as a mid to high-level official at a bank looking for someone to help move a large sum of money out of the country before it is required to be turned over to the government. The email gives assurances that the transaction is perfectly legal and offers a substantial percentage of the money for your facilitating the transaction.

While most of us readily identify it as a scam, I still receive questions from clients regarding the nature of these emails and whether it is a genuine opportunity. These emails are fraudulent.

We received the following reminders from a colleague and thought they were worth sharing.

1) There is no large sum of money that has been abandoned by some negligent contractor and is sitting at a bank somewhere. It is merely a ruse to get your attention and respond to the email or call the phone number;

2) You and about 1-million other people received this same email. This is a game of odds for these criminals. It only takes a few innocent people to engage these criminals and the returns for them payoff, at the expense of the unsuspecting party;

3) If you are corresponding or speaking to an individual, they are not who they say they are – regardless of how proper they sound, or how official the paperwork looks, or the fact that there is a receptionist who answers the telephone as “First Union International Bank of Nigeria”, for example. This is a scam, there is no bank, there is no receptionist, there is no official;

4) My favorite is the email where they ask you to contact their attorney in some other country to add legitimacy to their claim.

Finally, if it sounds too good to be true – IT IS! There is no free lunch, but that still does not stop people from giving it a try – it sounds harmless enough at first. These scams can be financially devastating, especially to the elderly or economically disadvantaged.

Rick Haskell – Signature Wealth Management

GOOD NEWS, BAD NEWS 6/20/2008

This has been a classic ‘good news – bad news’ week for the markets and the economy. The continued pressure on equities has driven most major market indexes south for the week, approaching their January and March lows. The culprit, the price of oil and investors ‘throwing in the towel’ on many regional banks. The May 30th issue of Signature Update suggested that this may well take place and while none of us appreciate lower market values, we can now breathe a collective sigh of relief. The good news? When things get uncomfortable for the masses, and they are, decision makers get moving… and they are.

Bush’s pronounced support for renewed oil drilling may not bring immediate benefits, but it will open up energy sources and ultimately increase supply. China’s decrease in consumer oil subsidies was met with an immediate drop in oil values of almost $5 per barrel. Will you feel this at the gas pump? Not yet, but it is part of a trend that actually started a few weeks before when the Saudi’s called for an Oil Producers and Consumers Summit. We’re not suggesting that the price of oil won’t see further increases, but we are saying that influential forces are gathering to do something about the problem – that they’re doing so to save their own skins and protect their profits is almost irrelevant. What they’re doing will continue to drive domestic demand to lower levels, may increase domestic production enough to meaningfully reduce our dependence on foreign oil supplies, should help curb the growth of international oil demand, and may well reign in the effect speculation has on the oil market. That’s a lot! Keep your fingers crossed, your air conditioning down, and drive your commute-mobile more often than your SUV.

Speculation does not always mean manipulation and there is an important place in our markets for commodities speculators. They bring much needed liquidity and can even out some of the seasonal ups and downs of various commodities prices – we’ve also seen that sometimes they can also make a bad situation worse. This may be one of those situations in which we have to take the good with the bad.

The Federal Reserve has now clearly shifted its focus towards containing inflation. The jobs report issued as of May 31^st, while not great for those out of work, represented some added support towards moderating inflation. Inflation can not be sustained without a corresponding increase in personal incomes, and incomes aren’t likely to increase while unemployment hovers above the 5% mark. Inflated prices only stay that way while demand stays strong. A weaker jobs report and stable personal income data, coupled with higher consumer prices leads to lower demand, which moderates inflation and ultimately brings prices down.

The effects of a still weakened housing market have already rippled through our economy. Ripple may not be the right term; think surf crashing against a battered coastline and that’s a more apt descriptor. But several of the national home builders report seeing the early signs of increasing demand. This is also supported by the number of offers being presented on foreclosed properties – the bargain hunters have begun to reappear in the market and they are traditionally at the forefront of increasing demand. That said, we still have many months of housing inventory to absorb before we can expect to see any meaningful increase in home values. What may then follow, after months of subtle increases, will be ‘write-ups’ in portfolio values for those battered financial institutions that so painfully had to disclose ‘write-downs’ earlier this year, which will finally bring some relief to the depressed values of these institutions. This may well come late in the economic cycle, but it may be an important contributor towards increased equities values.

Brian Wesbury’s comments this week are titled ‘The Phantom Recession is Already Over’ and it worth paying attention to. He writes, ‘While some of the analysts who had forecast a recession are willing to admit they were wrong, others are now claiming the reasons we are not in recession’, and then goes on to make one of the best cases I’ve read for economic stability rather than recession. He’s not talking about meaningful growth, but he is asserting that the media continues to have it wrong. Read Wesbury’s comments at (http://www.ftportfolios.com/Commentary/EconomicResearch/2008/6/16/the_phantom_recession_is_already_over).

Finally, late last night I listened to several commentators, analysts, traders, and economists on CNBC debate which of the presidential candidates would be best for the markets and the economy. Many would say this is a slam dunk and lean towards the republican candidate; not so. Nearly each one present reflected a mixed opinion, citing reasons why either candidate could be good for the markets – not one of them suggested that either candidate would be bad for the markets. I had to listen to some parts of this over and over to make sure I was hearing this correctly. The markets dislike uncertainty and as long as there is no clear leader in the presidential race there will be no clear direction in the markets. The Fed isn’t likely to make major moves in the mean time. What’s left is the consumer, and in spite of low consumer confidence levels, core consumer and business spending is up by double digit increases over the last three months. And that doesn’t happen during a recession!

REAL PRESSURES IN THE OIL MARKETS 6/13/2008

We’re all amazed, stunned is more like it, at the current price level of oil and how that has translated to the price of fuel. There is no one culprit in this disaster, but several major factors, including the weakened US dollar, the financial appetites of oil producing nations, commodities speculators, increased demand from emerging economies, and the swelling profits of major oil companies (foreign and domestic).

The Federal Reserve and the US Treasury appear to have gotten the message that the US dollar must be strengthened and are beginning to take steps that should minimize inflationary pressures on oil and other commodities. Lawrence Kudlow, Chief Economist for Prudential Annuities and CNBC regular, recently wrote an article titled ‘Bernanke Backs King Dollar’ wherein he offers advice to US Treasury Secretary, Henry Paulson, and presidential hopeful, John McCain. Kudlow points out that the Fed, the Treasury and the Executive branch all need to shift to a dollar strengthening policy and that the Fed needs to restore ‘an inflation-targeting policy that has been badly undermined of late’. He’s right, of course, but strengthening the dollar includes more than just increasing interest rates. It includes decreasing corporate tax rates and absorbing some of the excess money supply the Fed injected into the economy in recent months via lending operations.

OPEC recently called for a summit of oil producing and consuming nations to determine how much of oil’s price increase is due to speculation versus supply and demand versus currency exchange issues. While this may be an encouraging sign from those that may be profiting the most from higher priced oil, it may also be an attempt to shift the attention elsewhere. What is clear is that OPEC sees that the US and Western Europe, traditionally their best customers, are beginning to push efficiency measures and demand is decreasing. While the domestic demand decreases may not be in OPEC’s best interest they are definitely in the best interest of US businesses and consumers, and their effects will bring about permanent economic and environmental benefits.

Our legislative representatives in the House and Senate have heard the national outcry to increase regulations on oil speculation and for major oil companies to reign in their profits. Even though the problems our legislators are working to address are real, additional domestic regulations on corporations that are trying to compete on a global basis and levying more tax on any industry are never good solutions and terrible long-term policies. Free market economies really do work and a certain way to deepen the economic slow-down our economy has experienced is to place more burdens on the basic engine of our economy. Fortunately, it appears that sound minds may prevail and the current house and senate are steering clear of a burdensome course of action and seeking more progressive alternatives; such as adding incentives for exploration and developing alternative energy strategies. It remains to be seen what the next batch of executive and legislative officials will do - this is not a time to respond to populist pressures.

The US demand for oil is decreasing, albeit slightly. Given the transportation and fuel efficiency shifts we’re beginning to see, the ‘greening’ of America brought about largely due to concerns over global climate changes, and a generational shift towards greater social and environmental responsibility, we are likely to see substantial decreases in energy consumption across the board. First quarter decreases in seasonally adjusted household energy consumption were down 8%, with even greater expectations for the second quarter. Even though this doesn’t make up for the increase in energy consumption in developing economies (China and India represent the largest increase in consumption), the added demand has created no obvious, near-term supply problem. Tankers are not sitting empty at docks awaiting new supply, factories and workers are not idle due to fuel shortages, and no one under the age of 30 can remember seeing a line of more than 3 or 4 cars at a fuel pump. Though reasonable minds can recognize that there is only so much oil in the ground, many discount the technologies being brought to bear that will create energy from resources previously thought to be unprofitable.

To be sure, speculators have driven the price of oil beyond reasonable levels. Some suggest that these levels are here to stay, others recognize that the current price levels may not be sustainable, others still have used the term ‘bubble’ to describe the current commodities market and suggest that just as the ‘dot com’ and housing bubbles burst, this too shall pass. History says they are correct. Some solidly state that this time it’s different, but experience has shown that it’s almost never different – whenever there is an imbalance in a free market economy something moves to correct it.

In 1980, during another era of increasing commodities prices and uncertain economics, a noted Utah business and ecclesiastic leader stated that ‘There is only one energy shortage existing today, and that is what exists between our own two ears.’ The remark was more a commentary on the resiliency of our economy and the resourcefulness of our innovators than it was anything else. Ultimately prices came back into line, supplies became more plentiful and innovation brought about greater efficiencies. In this case it will most likely be several influences that converge to lower commodities pricing. Our free market economy will prevail and adjustments in both supply and demand, currency valuation, and corporate responsibility will evolve to support ongoing economic growth. Because, this time is no different than last time and history is always correct.

Rick Haskell – Signature Wealth Management

ARE YOU DIZZY YET? 6/6/2008

I got an email this week from my older brother, who confessed that all of the back and forth in the economy, the array of forecasts and figures published by various groups and boards, and the constant up and down of the markets was enough to make him dizzy. I had to agree. In fact, I confessed to him that none of it meant anything until after something happens, and that it only means something when it happens to you or your business. He’s smarter than I am, and for many years the two of us often explained that together, we know everything, just ask one of us – preferably when the other wasn’t around so we could suggest that this was something the other knew, and knew well. We live in different states now, so it makes the game a lot easier to play.

Why am I talking about my brother in a market and economic commentary? Well, for starters, like I said, he’s smarter that I am… and then there’s also the correlation he may have unknowingly pointed out, that all of this is enough to make you dizzy. If you don’t think decision makers like Bernanke, Greenspan or Buffett are dizzy, think again. The difference between their type of dizzy, and that of most people, is that they’re used to it, and they continue to make decisions and choices towards their stated goals and objectives – they have a plan they can focus on. The fact that they have points of focus lets them continue to see clearly in the midst of tremendous change. While many others can only see what appears to be swirling and turbulent economic times; sometimes bringing on a sort of paralysis as it pertains to their financial thoughts and actions.

Some months ago, we suggested that caution was key in this type of market and that a conservative stance may well be appropriate while the markets adjust themselves to a new paradigm that includes dramatically different energy, real estate, credit and commodities values and availability. In the mean time the DOW has descended well below 12,000 points, has run back up to over 13,000 and has quickly fallen back towards the 12,000 mark. All the while gold, oil, and the US dollar continue their little dance, not unlike the one we’ve seen from our presidential candidates. All of this is testing a near-term bottom in the domestic financial markets. And setting the stage for what may well be a robust 3^rd and 4^th quarter for 2008, with an even stronger 2009. If caution was warranted at the beginning of the year, it appears that it will soon be time to step forward and take opportunity.

As surely as we’ll know who our next president is going to be in a few months, the US dollar will gain strength, oil prices will settle down, and other commodity values will come to rest at levels that allow consumers to continue to purchase them. This week’s unexpected rise in consumer spending is evidence of the ongoing strength of the US economy and consumer – well beyond the benefits afforded because of the stimulus checks some have recently spent. Domestic corporations have continued to fare very well. To be sure, there has been pain in transportation, housing and financial services, but it is focused, understandable, and in time can effectively be countered by inventiveness, strategy and boldness. Add courage to these points, and we have the underpinning of why the US economy will long be the largest, strongest and most vibrant the planet has to offer.

Rick Haskell – Signature Wealth Management