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
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