December 21, 2009 Edition, Volume III
Inside Signature Update
- The Takeaway – Merry Christmas and Happy Holidays!
- The Market – Thankfully Quiet this Week… so far
- The Economy – Animal Spirits and Personal Economy
THE TAKEAWAY – Merry Christmas and Happy Holidays
For most of us the shopping is winding to a close, the Christmas cards have been sent and we’re looking forward to Christmas with our families and loved ones. In this case Christmas may be the spiritually-oriented Christian event or it may simply be a holiday season filled with tradition and gift giving. Regardless, it becomes more important than markets and economics; even if only briefly.
It interests me that Christmas takes on different attributes for different households. Regardless of theology, most would agree that this time of year is one during which people are more open, a little kinder, and more likely to be considerate of others. For families with small children it’s a time of great excitement and fervor and it’s hard not to focus on the build-up and energy of Christmas morning around the gift laden tree. Hopefully for more mature families, couples without children in the home, and single adults the holidays take on a warmer, more comforting tone allowing us to reflect on those for whom we care and the more meaningful aspects of our lives.
From the staff of Signature Management and Signature Update, as well as from the Haskell family, we wish you a Merry Christmas and hope you enjoy a wonderful holiday. May you be surrounded by those you love and find a moment to reflect on that which is important above all else.
THE MARKET – Thankfully Quiet this Week… so far
The markets tend to quiet down before the Christmas holiday as traders take time off and hedge funds prepare to settle positions before the end of the year. Light volume tends to give way to a brief flurry of activity in year-end trades establishing tax losses or gains; otherwise activity is limited. This year this all comes as welcome relief and most of us are pleased to bring 2009 to a close.
When a weekend storm in the Eastern United States is the hottest news story on a Monday morning, you know things are quieting down in the market. Early trading on Monday added to the DOW’s gains by over 100 points as some investors moved into health care related stocks; one of the strongest indicators that the White House will have a unified House and Senate bill ready for the President’s signature by Christmas Eve. The winners in this legislative effort turn out to be insurers, drug makers and to some degree the public. The ‘public option’ that we declared dead-in-the-water some months ago is now nowhere to be seen; thank goodness.
Undoubtedly, there will be various corporate developments and announcements to add a little spice to the next week’s markets. Some of those could be meaningful, but most likely they’ll simply be adding detail to existing reports or laying the ground work for early 2010 deals yet to be announced.
Thankfully, most legislators will have left Washington for their home states by Christmas Eve and won’t return until after the first of the year. There’s little they can do other than host a few parties and offer interviews to hungry news outlets; neither of which tends to move markets and sometimes doesn’t even register with voters.
THE ECONOMY - Animal Spirits and Personal Economy
What we call Economics today, was referred to as Political Economy well into the 20th Century, with a few major universities only recently changing department names: Glasgow University in Scotland being the last of these to change its Department of Political Economy to Department of Economics in 1997-1998. Even today, economists are closely tied to political ideologies and many have a difficult time separating the two. Indeed, macro-economics may be inseparable from politics as it deals with economics beyond the scope of businesses and households and strives to explain regional, national or global issues.
The economic conditions of 2007-2009 tested and broke many widely accepted models and theories, and left many economists questioning their decision making and forecasting tools. Some believe we’re entering into an era in which increased volatility and access to massive amounts of information may give rise to an entirely new set of models and theories. Others suggest we’re simply going through a time period in which a given model’s degree of accuracy may falter, but the model itself will hold.
My expectation is that we may not be able to rely on macro economic modeling in the future as heavily as many have come to depend upon. As the volume of economic transactions has increased and the number of empowered decision makers has expanded (with diverse levels of education, preparation and experience) we likely need to consider behavioral economic factors far more than had previously been thought. Keynes referred to these factors as ‘animal spirits’ in his 1936 work A General Theory of Employment, Interest and Money and untold articles and books have been written in an attempt to define them and articulate the impact of their facets and features. In the end, these animal spirits simply refer to human nature; and attempts to confine, or define them to a predictable model may be wrought with disappointment.
We’ve seen that our economies need wider margins for unpredictability and error. In this case 'economies' is intended to refer to the various economies with which one interfaces: economies of household, businesses and government. Even one’s personal economy, a term you’ll hear more often in the coming weeks and months and one that doesn’t refer to facts and figures as much as it does concepts and ideologies, may need to be challenged and considered in a far more important light than ever before.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
Monday, December 21, 2009
Friday, December 11, 2009
Things Are Exactly That Bad... and that's good!
December 11, 2009 Edition, Volume III
Inside Signature Update
- The Market – The Yield Curve: Revisited
- The Economy –Things are exactly that Bad… and that’s good!
- The Takeaway – We told you not to get caught
THE MARKET – The Yield Curve: Revisited
Even though Signature Update has discussed positive-sloping yield curves in the past, it seems appropriate to mention the shape of the current curve. Yield curves, the graphic representation of treasury yields for varying lengths of maturity, most often foretell the general direction of the stock market. A positive slope reflects higher treasury yields for longer maturities – which is exactly what one would expect – and has routinely been a precursor to prolonged equity market gains. A flat or negatively sloped curve, like the one we saw in the later part of 2007 and 2008, is indicative of a disquieted credit market and most often leads to lower stock market values.
Sometimes we misinterpret these forecasting tools and suppose they mean something other than what they’ve so accurately represented for many years. As investors, we often want to look only at the positive side of the markets and may mistake an otherwise obvious sign. This is often the case when a negatively sloping curve is suggestive of declining stock market values. As economists, we tend to be more pragmatic and are most interested in the changing economic landscape; regardless of the direction of change.
The current yield curve not only has a positive slope, but is steeper than at any time since the early 1980’s. It suggests an upward trending equities market for an extended period of time and is difficult to ignore. Recent economic updates reflecting increased consumer spending, manufacturing activity, and improving labor patterns support continued market improvement and paint a compelling picture for a profitable 2010.
One of the more positive signs we’ve seen has been the recent improvement in the US dollar, aligned with stock market gains. Divergent dollar/equities movement had become a concerning trend, and while we may continue to see more uncorrelated dollar/equities moves, it appears the trend is breaking none too soon.
The weak dollar, though good for export activity and ‘gold bugs’ has elicited concern the world over. Even without outward support from the Federal Reserve and US Treasury, the dollar has gained ground in recent weeks and the upward sloping yield curve, also an indicator of future interest rates, supports meaningful currency exchange gains and hope for moderated inflation pressures. Both offer welcome relief to consumers and investors, excepting those gold investors who may have fallen prey to opportunistic pressures in the precious metals and commodities markets.
THE ECONOMY – Things are exactly that Bad… and that’s good!
A reader recently sent me an internet link to an interesting graphic representing the state-by-state change in unemployment from January 2007 to October 2009 (see weblink below). The image the graphic created was one of alarm, and the reader, as might be expected, sought reassurance while asking ‘could things really be this bad?’ The chart steadily became more concerning as it cycled through each month and paints a picture most would find alarming… unless, of course, the observer understood the history of employment cycles.
My answer to the reader’s question: ‘Yes, they’re exactly that bad’. I then went on to remind him that a similar graphic for the mid 1970’s and early 1980’s looked yet worse; as would one for the recessions of the 1830’s, 1850’s, 1860’s, 1880’s, 1890’s, 1907, and 1920’s. Likewise, a graphic for the depressions of the 1870’s, 1890’s and 1930’s would make the current graph look insignificant.
The point is that labor economies cycle through patterns of growth followed by recessive periods. Until the 1930’s these recessive periods were far more frequent than they have been in the last sixty plus years, and worse, they tended to last longer and drive deeper. The accumulated economic impact stifled growth and development throughout the country as individuals and businesses constantly strove to recover from last year’s recession, while endeavoring to prepare for what might come next. Economic stability was an audacious hope at the time.
The implementation of federal and state banking, investment and securities regulations, in addition to the creation of the Federal Reserve and FDIC served to bring relative economic stability to the country and each have served us well. I’m not trying to sound like an apologist for the Federal Reserve, though I’m frequently supportive of various Fed policies, and I’m certainly not a fan of excessive regulation, but the necessity of a strong central bank and active regulatory environment is critical in even the freest of markets.
Which brings us to Friday’s passage of legislation by the US House of Representatives calling for the most significant increase in the regulation of US banks and other corporations since the Great Depression. The bill passed without Republican support and absent the vote of 27 Democrats; passage in the Senate seems unlikely.
The Obama administration issued a statement in support of the legislation; "The crisis from which we are still recovering was born not only of failure on Wall Street, but also in Washington. We have a responsibility to learn from it, and to put in place reforms that will promote sound investment, encourage real competition and innovation, and prevent such a crisis from ever happening again." Good words, but with unfortunate affect.
This bill offers another layer of inefficient bureaucracy on top of an already highly regulated industry. Certainly, there are new financial products, such as Credit Default Swaps (CDS) and Collateralized Debt Obligations (CDO), that merit regulatory supervision, but too much regulation can be just as damaging as too little. The current populist call for regulating everything from executive salaries to a family’s carbon footprint (not part of the bill in reference) is overreaching and ultimately can produce more harm than good. Thankfully, the Senate version of the bill offers a more reasoned approach and with hope, audacious though it may be, by the time the legislation makes its way through the congressional reconciliation process it may offer more productive solutions than the current House version.
http://cohort11.americanobserver.net/latoyaegwuekwe/multimediafinal.html
THE TAKEAWAY – We told you not to get caught
Expect higher interest rates to filter through the economy even before the Federal Reserve moves to raise the Fed Funds and other target rates. Though the increased cost of borrowing may be disheartening to some, they will help bankers choose to lend more freely and will help stave off potential inflation pressures.
Look to the Senate to lead the way towards more reasoned regulatory pressures, but be willing to speak out to your House and Senate representatives; it’s your money they’re spending and your nation they seek to govern.
4th Quarter GDP forecasts are likely to be revised upwards in coming weeks as the economy appears to be making a more robust recovery than previously expected. Though it will take many more months for the improvement to provide meaningful relief for the labor markets, the strengthening dollar and moderating commodities markets are welcome signs. Oh… and stock market gains don’t hurt much!
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
Inside Signature Update
- The Market – The Yield Curve: Revisited
- The Economy –Things are exactly that Bad… and that’s good!
- The Takeaway – We told you not to get caught
THE MARKET – The Yield Curve: Revisited
Even though Signature Update has discussed positive-sloping yield curves in the past, it seems appropriate to mention the shape of the current curve. Yield curves, the graphic representation of treasury yields for varying lengths of maturity, most often foretell the general direction of the stock market. A positive slope reflects higher treasury yields for longer maturities – which is exactly what one would expect – and has routinely been a precursor to prolonged equity market gains. A flat or negatively sloped curve, like the one we saw in the later part of 2007 and 2008, is indicative of a disquieted credit market and most often leads to lower stock market values.
Sometimes we misinterpret these forecasting tools and suppose they mean something other than what they’ve so accurately represented for many years. As investors, we often want to look only at the positive side of the markets and may mistake an otherwise obvious sign. This is often the case when a negatively sloping curve is suggestive of declining stock market values. As economists, we tend to be more pragmatic and are most interested in the changing economic landscape; regardless of the direction of change.
The current yield curve not only has a positive slope, but is steeper than at any time since the early 1980’s. It suggests an upward trending equities market for an extended period of time and is difficult to ignore. Recent economic updates reflecting increased consumer spending, manufacturing activity, and improving labor patterns support continued market improvement and paint a compelling picture for a profitable 2010.
One of the more positive signs we’ve seen has been the recent improvement in the US dollar, aligned with stock market gains. Divergent dollar/equities movement had become a concerning trend, and while we may continue to see more uncorrelated dollar/equities moves, it appears the trend is breaking none too soon.
The weak dollar, though good for export activity and ‘gold bugs’ has elicited concern the world over. Even without outward support from the Federal Reserve and US Treasury, the dollar has gained ground in recent weeks and the upward sloping yield curve, also an indicator of future interest rates, supports meaningful currency exchange gains and hope for moderated inflation pressures. Both offer welcome relief to consumers and investors, excepting those gold investors who may have fallen prey to opportunistic pressures in the precious metals and commodities markets.
THE ECONOMY – Things are exactly that Bad… and that’s good!
A reader recently sent me an internet link to an interesting graphic representing the state-by-state change in unemployment from January 2007 to October 2009 (see weblink below). The image the graphic created was one of alarm, and the reader, as might be expected, sought reassurance while asking ‘could things really be this bad?’ The chart steadily became more concerning as it cycled through each month and paints a picture most would find alarming… unless, of course, the observer understood the history of employment cycles.
My answer to the reader’s question: ‘Yes, they’re exactly that bad’. I then went on to remind him that a similar graphic for the mid 1970’s and early 1980’s looked yet worse; as would one for the recessions of the 1830’s, 1850’s, 1860’s, 1880’s, 1890’s, 1907, and 1920’s. Likewise, a graphic for the depressions of the 1870’s, 1890’s and 1930’s would make the current graph look insignificant.
The point is that labor economies cycle through patterns of growth followed by recessive periods. Until the 1930’s these recessive periods were far more frequent than they have been in the last sixty plus years, and worse, they tended to last longer and drive deeper. The accumulated economic impact stifled growth and development throughout the country as individuals and businesses constantly strove to recover from last year’s recession, while endeavoring to prepare for what might come next. Economic stability was an audacious hope at the time.
The implementation of federal and state banking, investment and securities regulations, in addition to the creation of the Federal Reserve and FDIC served to bring relative economic stability to the country and each have served us well. I’m not trying to sound like an apologist for the Federal Reserve, though I’m frequently supportive of various Fed policies, and I’m certainly not a fan of excessive regulation, but the necessity of a strong central bank and active regulatory environment is critical in even the freest of markets.
Which brings us to Friday’s passage of legislation by the US House of Representatives calling for the most significant increase in the regulation of US banks and other corporations since the Great Depression. The bill passed without Republican support and absent the vote of 27 Democrats; passage in the Senate seems unlikely.
The Obama administration issued a statement in support of the legislation; "The crisis from which we are still recovering was born not only of failure on Wall Street, but also in Washington. We have a responsibility to learn from it, and to put in place reforms that will promote sound investment, encourage real competition and innovation, and prevent such a crisis from ever happening again." Good words, but with unfortunate affect.
This bill offers another layer of inefficient bureaucracy on top of an already highly regulated industry. Certainly, there are new financial products, such as Credit Default Swaps (CDS) and Collateralized Debt Obligations (CDO), that merit regulatory supervision, but too much regulation can be just as damaging as too little. The current populist call for regulating everything from executive salaries to a family’s carbon footprint (not part of the bill in reference) is overreaching and ultimately can produce more harm than good. Thankfully, the Senate version of the bill offers a more reasoned approach and with hope, audacious though it may be, by the time the legislation makes its way through the congressional reconciliation process it may offer more productive solutions than the current House version.
http://cohort11.americanobserver.net/latoyaegwuekwe/multimediafinal.html
THE TAKEAWAY – We told you not to get caught
Expect higher interest rates to filter through the economy even before the Federal Reserve moves to raise the Fed Funds and other target rates. Though the increased cost of borrowing may be disheartening to some, they will help bankers choose to lend more freely and will help stave off potential inflation pressures.
Look to the Senate to lead the way towards more reasoned regulatory pressures, but be willing to speak out to your House and Senate representatives; it’s your money they’re spending and your nation they seek to govern.
4th Quarter GDP forecasts are likely to be revised upwards in coming weeks as the economy appears to be making a more robust recovery than previously expected. Though it will take many more months for the improvement to provide meaningful relief for the labor markets, the strengthening dollar and moderating commodities markets are welcome signs. Oh… and stock market gains don’t hurt much!
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
Friday, December 4, 2009
It May Not Be Over, But It's Better
December 4, 2009 Edition, Volume III
Inside Signature Update
- The Market – Executive Compensation Returns to the Spotlight
- The Economy – It May Not be Over, But It’s Better!
- The Takeaway – Improving Trends Well Into 2010
THE MARKET – Executive Compensation Returns to the Spotlight
The Obama Administration’s plan to curtail executive compensation at firms taking advantage of TARP resources is well within the purview of policy makers. Without question, compensation plans at many firms presented phenomenal rewards for taking risks now recognized to be excessive. Fed Chairman Bernanke, FDIC head Sheila Bair, Treasury Secretary Geithner and senior Congressional and Administration leaders have each addressed the issue recently with calls for new regulatory oversight. Many have continued to press for compensation limits reaching far beyond reason in a free-market system.
We knew this was coming. Regulatory reform of the financial services industry is an obvious byproduct of the crisis we’ve lived with for almost two years. With the markets stabilizing, policy makers have begun to turn their attention to preventing a similar debacle in the future, and rightly so.
Many will suggest the Administration’s plan to cut 2009 compensation by as much as 50% of 2008 pay levels for the top 25 executives at AIG, Citigroup, Bank of America, GM, Chrysler, and GMAC is overreaching, but we can’t ignore that these firms received $240 billion (more than half) of TARP funds invested so far. Of those firms that have sought to repay their TARP obligations, including recently announced Bank of America, most have sited the need to independently govern their core business operations as one of the most important factors in their decision. The Administration’s move is unprecedented and will bring changes in compensation plans for most levels of corporate pay by a trickle-down effect for years to come.
Truth be known, it’s probably the right thing to do and may go a long way towards decreasing income inequality in the US. High corporate incomes in and of themselves don’t represent a societal imbalance, but the upward creep of executive pay among US business leaders has evidenced more than an increase in their effectiveness and has come to represent an inefficient leadership market. It has also become a focus of shareholder advocacy groups and social reformers from across the globe.
It remains to be seen how closely new compensation agreements will track long-term corporate benefit, or if 2010 executive pay plans will be held to the same levels. The Administration has wisely chosen to avoid direct impact on compensation for executives at firms outside of those most dependant on TARP, but no one expects the impact of recent policy to be contained to only a few firms. This may long be viewed as one of the smarter, though aggressive moves on the part of center/left policy makers to influence an area of corporate activity previously thought only approachable by outright regulatory intervention.
THE ECONOMY – It May Not be Over, But It’s Better!
The US Department of Labor’s announcement Friday morning of a November unemployment rate of 10% surprised many traders, investors and economists. Consensus expectations had been for job losses in the range of 125,000; much higher than the 11,000 figure released. Additionally, downward revisions of prior month losses presented a stronger-than-expected picture for the US labor markets. Not surprisingly, the news sent the equities market higher in early trading, while the dollar gained ground and interest rates edged higher.
The good news here is less obvious than one might suppose. Certainly, we’re pleased to see a better jobs report and we can breathe a collective sigh of relief as a result. The troubles in the labor market may not be over as yet, but they are better - much better than expected. A one month improvement isn’t enough to reverse many months of mounting job losses, and there’s much to be done before the unemployment rate decreases to the 5-6% range, but 10% is better than 10.2% and that’s all there is to it. If nothing else, the shift should give much needed hope to the nation’s jobless.
An important facet of the market’s reaction to the news wasn’t simply that the stock market closed the day higher. Of import are the strengthened US dollar (as can be seen by a 4% decrease in the price of gold) and an increase in interest rates. In recent months the stock market has moved inversely to the dollar – as one gained, the other lost. Historically this hasn’t been the case and Friday’s gain in equity values along side of gains in the dollar may be an indication that the two are once again set to act in concert.
Intuition tells us that a stronger dollar represents a stronger economy and should give rise to improved investment values. Very true, except in times when the dollar has been going through a devaluation process. While this recent move for the dollar and equity values may not be enough to suggest a change in trend, it’s certainly a good sign and sends an important message to the rest of the world.
Chairman Bernanke and the Federal Reserve
Fed Chairman Ben Bernanke’s appearance before the US Senate Thursday, in a round of confirmation hearings, offered a more considerate treatment of the nation’s top monetary policy maker than many had expected. Bernanke is under fire from legislative leaders on both the left and right sides of the aisle and true to form, handled himself with a resolve that bespeaks of the man’s strength and character. Though the senators treated Bernanke far more professionally than they did Treasury Secretary Timothy Geithner only a few weeks ago, but some left little ambiguity of their negative impressions of the Fed’s performance in recent years and Bernanke himself.
Representative’s Ron Paul (R-TX) and Alan Grayson (D-FL) actively sought to delay Bernanke’s Senate confirmation hearings and have gathered a surprising degree of support from fellow congressional representatives. Rejection of the Fed and its leadership isn’t anything new, in fact, the Fed has most often been a source of national contention; even outrage. It’s only been in recent times, while the Fed has enjoyed strong, capable economic leadership that the Fed’s reputation has become one of trust and stability.
Beginning with Fed Chairman Paul Volcker (1979-1987), the central bank entered into an era of economic leadership that went beyond the string of political appointees previously in charge of the nation’s money supply and banking system. Prior to Volcker’s appointment, the Federal Reserve had only twice been lead by a professional economist; Marrinier Eccles (1934-1948) and Arthur Burns (1970-1978). Virtually all other Fed Chairmen have come from business, academia and political circles and many were considered puppets of politicians and the wealthy. Under its recent string of strong economic leadership the Fed became the most powerful and perhaps most highly respected central bank in the world; the recent crisis notwithstanding.
It is this very strength and reputation, coupled with creative leadership and a powerful balance sheet that moved the US and global economy from the brink of disaster in the fall of 2008. Bernanke may not be the only leader capable of guiding the economy through what will undoubtedly be a long and difficult recovery process; he clearly has the mindset and international political capital to get the job done. Years from now, after an intense period of scrutiny we may find facets of Bernanke’s leadership wanting; we may also herald him as the right man for the job during a particularly difficult time in our nation’s history.
THE TAKEAWAY – Improving Trends Well Into 2010
The US equities markets continue to experience volatile swings, sometimes intra-day, but are poised for continued rebounds well into 2010.
Interest rate increases, thought to be as far in the future as next Fall, now may begin to present themselves in the late spring. A strengthening dollar and lower gold prices are sure to prevail.
A move towards more long-term performance based compensation of the nation’s business leaders likely coincides with a return to growth in the labor markets – both will lead to important GDP gains and a strengthening of the US dollar.
10% unemployment can hardly be called good, but it’s better than 10.2% and better still than the November projection of 10.4%. Higher than normal unemployment rates will likely linger throughout 2010, but businesses small and large are finally beginning to return to higher capacity levels and pressure on the nation’s unemployed is slowly beginning to improve… it couldn’t have come at a better time.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
Inside Signature Update
- The Market – Executive Compensation Returns to the Spotlight
- The Economy – It May Not be Over, But It’s Better!
- The Takeaway – Improving Trends Well Into 2010
THE MARKET – Executive Compensation Returns to the Spotlight
The Obama Administration’s plan to curtail executive compensation at firms taking advantage of TARP resources is well within the purview of policy makers. Without question, compensation plans at many firms presented phenomenal rewards for taking risks now recognized to be excessive. Fed Chairman Bernanke, FDIC head Sheila Bair, Treasury Secretary Geithner and senior Congressional and Administration leaders have each addressed the issue recently with calls for new regulatory oversight. Many have continued to press for compensation limits reaching far beyond reason in a free-market system.
We knew this was coming. Regulatory reform of the financial services industry is an obvious byproduct of the crisis we’ve lived with for almost two years. With the markets stabilizing, policy makers have begun to turn their attention to preventing a similar debacle in the future, and rightly so.
Many will suggest the Administration’s plan to cut 2009 compensation by as much as 50% of 2008 pay levels for the top 25 executives at AIG, Citigroup, Bank of America, GM, Chrysler, and GMAC is overreaching, but we can’t ignore that these firms received $240 billion (more than half) of TARP funds invested so far. Of those firms that have sought to repay their TARP obligations, including recently announced Bank of America, most have sited the need to independently govern their core business operations as one of the most important factors in their decision. The Administration’s move is unprecedented and will bring changes in compensation plans for most levels of corporate pay by a trickle-down effect for years to come.
Truth be known, it’s probably the right thing to do and may go a long way towards decreasing income inequality in the US. High corporate incomes in and of themselves don’t represent a societal imbalance, but the upward creep of executive pay among US business leaders has evidenced more than an increase in their effectiveness and has come to represent an inefficient leadership market. It has also become a focus of shareholder advocacy groups and social reformers from across the globe.
It remains to be seen how closely new compensation agreements will track long-term corporate benefit, or if 2010 executive pay plans will be held to the same levels. The Administration has wisely chosen to avoid direct impact on compensation for executives at firms outside of those most dependant on TARP, but no one expects the impact of recent policy to be contained to only a few firms. This may long be viewed as one of the smarter, though aggressive moves on the part of center/left policy makers to influence an area of corporate activity previously thought only approachable by outright regulatory intervention.
THE ECONOMY – It May Not be Over, But It’s Better!
The US Department of Labor’s announcement Friday morning of a November unemployment rate of 10% surprised many traders, investors and economists. Consensus expectations had been for job losses in the range of 125,000; much higher than the 11,000 figure released. Additionally, downward revisions of prior month losses presented a stronger-than-expected picture for the US labor markets. Not surprisingly, the news sent the equities market higher in early trading, while the dollar gained ground and interest rates edged higher.
The good news here is less obvious than one might suppose. Certainly, we’re pleased to see a better jobs report and we can breathe a collective sigh of relief as a result. The troubles in the labor market may not be over as yet, but they are better - much better than expected. A one month improvement isn’t enough to reverse many months of mounting job losses, and there’s much to be done before the unemployment rate decreases to the 5-6% range, but 10% is better than 10.2% and that’s all there is to it. If nothing else, the shift should give much needed hope to the nation’s jobless.
An important facet of the market’s reaction to the news wasn’t simply that the stock market closed the day higher. Of import are the strengthened US dollar (as can be seen by a 4% decrease in the price of gold) and an increase in interest rates. In recent months the stock market has moved inversely to the dollar – as one gained, the other lost. Historically this hasn’t been the case and Friday’s gain in equity values along side of gains in the dollar may be an indication that the two are once again set to act in concert.
Intuition tells us that a stronger dollar represents a stronger economy and should give rise to improved investment values. Very true, except in times when the dollar has been going through a devaluation process. While this recent move for the dollar and equity values may not be enough to suggest a change in trend, it’s certainly a good sign and sends an important message to the rest of the world.
Chairman Bernanke and the Federal Reserve
Fed Chairman Ben Bernanke’s appearance before the US Senate Thursday, in a round of confirmation hearings, offered a more considerate treatment of the nation’s top monetary policy maker than many had expected. Bernanke is under fire from legislative leaders on both the left and right sides of the aisle and true to form, handled himself with a resolve that bespeaks of the man’s strength and character. Though the senators treated Bernanke far more professionally than they did Treasury Secretary Timothy Geithner only a few weeks ago, but some left little ambiguity of their negative impressions of the Fed’s performance in recent years and Bernanke himself.
Representative’s Ron Paul (R-TX) and Alan Grayson (D-FL) actively sought to delay Bernanke’s Senate confirmation hearings and have gathered a surprising degree of support from fellow congressional representatives. Rejection of the Fed and its leadership isn’t anything new, in fact, the Fed has most often been a source of national contention; even outrage. It’s only been in recent times, while the Fed has enjoyed strong, capable economic leadership that the Fed’s reputation has become one of trust and stability.
Beginning with Fed Chairman Paul Volcker (1979-1987), the central bank entered into an era of economic leadership that went beyond the string of political appointees previously in charge of the nation’s money supply and banking system. Prior to Volcker’s appointment, the Federal Reserve had only twice been lead by a professional economist; Marrinier Eccles (1934-1948) and Arthur Burns (1970-1978). Virtually all other Fed Chairmen have come from business, academia and political circles and many were considered puppets of politicians and the wealthy. Under its recent string of strong economic leadership the Fed became the most powerful and perhaps most highly respected central bank in the world; the recent crisis notwithstanding.
It is this very strength and reputation, coupled with creative leadership and a powerful balance sheet that moved the US and global economy from the brink of disaster in the fall of 2008. Bernanke may not be the only leader capable of guiding the economy through what will undoubtedly be a long and difficult recovery process; he clearly has the mindset and international political capital to get the job done. Years from now, after an intense period of scrutiny we may find facets of Bernanke’s leadership wanting; we may also herald him as the right man for the job during a particularly difficult time in our nation’s history.
THE TAKEAWAY – Improving Trends Well Into 2010
The US equities markets continue to experience volatile swings, sometimes intra-day, but are poised for continued rebounds well into 2010.
Interest rate increases, thought to be as far in the future as next Fall, now may begin to present themselves in the late spring. A strengthening dollar and lower gold prices are sure to prevail.
A move towards more long-term performance based compensation of the nation’s business leaders likely coincides with a return to growth in the labor markets – both will lead to important GDP gains and a strengthening of the US dollar.
10% unemployment can hardly be called good, but it’s better than 10.2% and better still than the November projection of 10.4%. Higher than normal unemployment rates will likely linger throughout 2010, but businesses small and large are finally beginning to return to higher capacity levels and pressure on the nation’s unemployed is slowly beginning to improve… it couldn’t have come at a better time.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
Wednesday, November 25, 2009
Tough Decisions for California and the Nation 11-25-2009
November 25, 2009 Edition, Volume III
Inside Signature Update
- The Market –Tough Decisions for California; and the Nation
- The Economy – Unemployment and Inventory Levels
- The Takeaway – Gold, Retail, Consumer Discretionary and Healthcare
THE MARKET – Tough Decisions for California; and the Nation
Most of my extended family lives in California; in fact I’m leaving my Utah home in a few hours to join them for the Thanksgiving holiday. My oldest daughter and her family, as well as all of my siblings and virtually all of my cousins, aunts and uncles continue to live in the state I called home for more than half of my life. We were often proud of the trend-setting nature of the state’s social and economic patterns, though admittedly some of California’s populist culture has made even the most open-minded of us occasionally pause with wonder and amusement.
California now faces a dilemma of nearly unimaginable proportions as budget problems continue to mount and a multi-year drought puts pressure on the state’s agricultural and recreation/tourism industries. The state’s real estate and construction industry has been devastated and may take several more years to regain its footing. Long a favorite state for potential business expansion, California’s once rising real estate market and labor costs repelled many would-be employers and provided incentive for others already housed in the state to relocate. Now, with property values at bargain levels throughout much of the state and a motivated labor pool, one might expect California to once again be favored for corporate relocation and economic development; but the opposite is more likely the case.
The state’s budget woes and the need to either face massive tax increases or suffer dramatic cuts in spending now keeps potential employers at bay. The weight of the problem now thwarts hopes for growth among the state’s existing businesses and further depresses future revenue projections. Even CalPERS, the state’s pension and retirement plan, the nation’s largest, is facing hard choices as unfunded liabilities continue to mount.
But all is not lost. California faces the opportunity to once again be a trendsetter as the state remakes itself. The state’s problems are not all that far removed from some of the nation’s economic difficulties. The public policy decisions of California’s decision makers may either serve as an example for good governance and effective leadership in moving the state beyond crisis mode or become an example of what to avoid. The choice is taking shape as the race to replace Governor Schwarzenegger includes candidates ranging from pro-business conservative Meg Whitman (former EBay CEO and senior McCain campaign advisor) to longtime liberal activist Jerry Brown (the state’s current Attorney General and former Governor).
These two candidates could hardly represent more divergent choices. But regardless of where the race leads, one thing is certain: California is in for some tough decisions requiring strong, creative and able leadership as well as a daring electorate. Once again, California may simply be a step ahead of the curve and offering a glimpse into some of the issues facing the rest of the nation.
THE ECONOMY - Unemployment and Inventory Levels
Most might suppose that employment and inventory levels have little to do with one another, but the correlation is significant. In the 3rd quarter of 2008 as Bush administration officials and the Federal Reserve were working to fend off a debilitating credit crisis, business owners and managers found themselves more fearful than at any time in recent memory. In an effort to move the US congress to action, the rhetoric coming out of the Washington helped shift employers into depression mode; within weeks the labor markets were under extraordinary pressure.
As the Obama administration came to power there was a decidedly anti-business tone, raising concerns yet higher and resulting in today’s unemployment rate of more than 10%. Retailers and distributors moved to curb inventories, sending employment downward and creating some of the recessive pattern into which the economy continued to fall.
Now the tide has begun to turn. Inventory levels have sunk so low that even modest sales growth demands manufacturing levels return to normal. The weaker dollar has made import goods less attractive and domestic manufacturing growth is now in the earliest stages of development. Within the coming months, this will lead to noticeable employment increases.
The US consumer, battered and bloodied this past year, has once again shown signs of resiliency. Retail sales figures have begun to post gains in important areas and appear to be set to rally for the holidays. Though this is far from certain, it’s important to note that sales growth in consumer electronics and other high tech sectors is surprising even the most ardent pessimists. Microsoft’s recent revenue report reflecting a surge in Xbox sales simply punctuates the developing trend already observable in Intel and other high tech manufacturers.
By the time domestic manufacturers top off inventory levels, the Obama stimulus plan should have pumped several hundred billion more into the US economy - benefiting the labor market further and bringing sufficient discretionary income to the market, thus offering consumers the ability to take advantage of complete retail inventories and driving retail sales yet higher. Though we’re not likely to see the excessive retail sales growth of 2003 – 2007, it now appears that retailers are poised to return to more appropriate activity levels without having to cut prices and costs at every turn.
October’s real estate sales increase of 6.2%, though perhaps an anomaly with most of the growth coming from southern states, adds another facet of hope for the distressed construction industry. Real estate inventories are among the most critical as it relates to price changes and employment levels; at 6.7 months of supply at current sales rates, they’re lower than at any time in almost two years.
Even still, unemployment is likely to remain high through 2010 and may not fall below 7% until 2011. That’s tough thing to bear for those already out of work, but the trend is clearly improving and the worst may be over for the labor market.
THE TAKEAWAY – Gold, Retail, Consumer Discretionary and Healthcare
The price of gold continues to climb and appears likely to cross $1,200 an ounce in a matter of days thanks to ongoing weakness in the US dollar. The announcement earlier this week that powerful hedge funds have taken positions in gold only adds fuel to speculative concerns. Though gold may have become a very profitable trading vehicle in recent months, it lacks the fundamentals to be considered for long-term inclusion in a well-thought-out investment portfolio.
Consumer spending and personal income gains bode well for the retail sector and add to hopes for a strong holiday buying season. Consumer discretionary and retailing stocks may continue to do well in the coming months.
The Senate’s decision to send its healthcare bill to debate keeps hopes alive for passage of sweeping healthcare legislation in early 2010. While the Senate and House’s proposals are still miles apart, it now seems clear some form of healthcare reform legislation will pass; hospital groups and insurers may be poised for meaningful gains as a result.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
Inside Signature Update
- The Market –Tough Decisions for California; and the Nation
- The Economy – Unemployment and Inventory Levels
- The Takeaway – Gold, Retail, Consumer Discretionary and Healthcare
THE MARKET – Tough Decisions for California; and the Nation
Most of my extended family lives in California; in fact I’m leaving my Utah home in a few hours to join them for the Thanksgiving holiday. My oldest daughter and her family, as well as all of my siblings and virtually all of my cousins, aunts and uncles continue to live in the state I called home for more than half of my life. We were often proud of the trend-setting nature of the state’s social and economic patterns, though admittedly some of California’s populist culture has made even the most open-minded of us occasionally pause with wonder and amusement.
California now faces a dilemma of nearly unimaginable proportions as budget problems continue to mount and a multi-year drought puts pressure on the state’s agricultural and recreation/tourism industries. The state’s real estate and construction industry has been devastated and may take several more years to regain its footing. Long a favorite state for potential business expansion, California’s once rising real estate market and labor costs repelled many would-be employers and provided incentive for others already housed in the state to relocate. Now, with property values at bargain levels throughout much of the state and a motivated labor pool, one might expect California to once again be favored for corporate relocation and economic development; but the opposite is more likely the case.
The state’s budget woes and the need to either face massive tax increases or suffer dramatic cuts in spending now keeps potential employers at bay. The weight of the problem now thwarts hopes for growth among the state’s existing businesses and further depresses future revenue projections. Even CalPERS, the state’s pension and retirement plan, the nation’s largest, is facing hard choices as unfunded liabilities continue to mount.
But all is not lost. California faces the opportunity to once again be a trendsetter as the state remakes itself. The state’s problems are not all that far removed from some of the nation’s economic difficulties. The public policy decisions of California’s decision makers may either serve as an example for good governance and effective leadership in moving the state beyond crisis mode or become an example of what to avoid. The choice is taking shape as the race to replace Governor Schwarzenegger includes candidates ranging from pro-business conservative Meg Whitman (former EBay CEO and senior McCain campaign advisor) to longtime liberal activist Jerry Brown (the state’s current Attorney General and former Governor).
These two candidates could hardly represent more divergent choices. But regardless of where the race leads, one thing is certain: California is in for some tough decisions requiring strong, creative and able leadership as well as a daring electorate. Once again, California may simply be a step ahead of the curve and offering a glimpse into some of the issues facing the rest of the nation.
THE ECONOMY - Unemployment and Inventory Levels
Most might suppose that employment and inventory levels have little to do with one another, but the correlation is significant. In the 3rd quarter of 2008 as Bush administration officials and the Federal Reserve were working to fend off a debilitating credit crisis, business owners and managers found themselves more fearful than at any time in recent memory. In an effort to move the US congress to action, the rhetoric coming out of the Washington helped shift employers into depression mode; within weeks the labor markets were under extraordinary pressure.
As the Obama administration came to power there was a decidedly anti-business tone, raising concerns yet higher and resulting in today’s unemployment rate of more than 10%. Retailers and distributors moved to curb inventories, sending employment downward and creating some of the recessive pattern into which the economy continued to fall.
Now the tide has begun to turn. Inventory levels have sunk so low that even modest sales growth demands manufacturing levels return to normal. The weaker dollar has made import goods less attractive and domestic manufacturing growth is now in the earliest stages of development. Within the coming months, this will lead to noticeable employment increases.
The US consumer, battered and bloodied this past year, has once again shown signs of resiliency. Retail sales figures have begun to post gains in important areas and appear to be set to rally for the holidays. Though this is far from certain, it’s important to note that sales growth in consumer electronics and other high tech sectors is surprising even the most ardent pessimists. Microsoft’s recent revenue report reflecting a surge in Xbox sales simply punctuates the developing trend already observable in Intel and other high tech manufacturers.
By the time domestic manufacturers top off inventory levels, the Obama stimulus plan should have pumped several hundred billion more into the US economy - benefiting the labor market further and bringing sufficient discretionary income to the market, thus offering consumers the ability to take advantage of complete retail inventories and driving retail sales yet higher. Though we’re not likely to see the excessive retail sales growth of 2003 – 2007, it now appears that retailers are poised to return to more appropriate activity levels without having to cut prices and costs at every turn.
October’s real estate sales increase of 6.2%, though perhaps an anomaly with most of the growth coming from southern states, adds another facet of hope for the distressed construction industry. Real estate inventories are among the most critical as it relates to price changes and employment levels; at 6.7 months of supply at current sales rates, they’re lower than at any time in almost two years.
Even still, unemployment is likely to remain high through 2010 and may not fall below 7% until 2011. That’s tough thing to bear for those already out of work, but the trend is clearly improving and the worst may be over for the labor market.
THE TAKEAWAY – Gold, Retail, Consumer Discretionary and Healthcare
The price of gold continues to climb and appears likely to cross $1,200 an ounce in a matter of days thanks to ongoing weakness in the US dollar. The announcement earlier this week that powerful hedge funds have taken positions in gold only adds fuel to speculative concerns. Though gold may have become a very profitable trading vehicle in recent months, it lacks the fundamentals to be considered for long-term inclusion in a well-thought-out investment portfolio.
Consumer spending and personal income gains bode well for the retail sector and add to hopes for a strong holiday buying season. Consumer discretionary and retailing stocks may continue to do well in the coming months.
The Senate’s decision to send its healthcare bill to debate keeps hopes alive for passage of sweeping healthcare legislation in early 2010. While the Senate and House’s proposals are still miles apart, it now seems clear some form of healthcare reform legislation will pass; hospital groups and insurers may be poised for meaningful gains as a result.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
Wednesday, November 18, 2009
Take Advantage of Low Rates While You Can 11-18-2009
November 18, 2009 Edition, Volume III
Inside Signature Update
The Market – Crisis in Commercial Real Estate?
The Economy – Delicate Balance Between Rates & Inflation Pressures
The Takeaway - Take Advantage of Low Rates While You Can
THE MARKET – Crisis in Commercial Real Estate – it’s not what you may think!
Reports have circulated in recent months regarding a possible ‘melt down’ in the commercial real estate market; needlessly raising fears of a second credit crisis, similar to that which we experienced in the fall of 2008. As recently as mid-October, billionaire investor Wilbur L. Ross Jr., was quoted by Bloomberg as saying the U.S. is in the beginning of a “huge crash in commercial real estate.”
Sounds ominous doesn’t it? Relax, this is not what some would have us think. To understand the potential problem, we need to understand the dynamics of the market.
According to a December 2008 report from the Federal Reserve Bank of Dallas the value of the entire US commercial real estate market stood at just over $3 trillion in 2007 and represented $1.7 trillion in mortgage debt. At the same time, the value of the residential market was estimated to be as high as $21 trillion (now less than $17 trillion) with $14.6 trillion in mortgage debt. Not only did the commercial market enjoy an average loan-to-value ratio of less than 57%, compared to almost 70% for the housing market, but the difference in the sheer size of the residential market is staggering, with residential real estate being valued at 7 times the commercial market. Additionally, the underwriting requirements for residential mortgage lending became notoriously weak leading up to 2007, while commercial requirements remained far more stringent.
It’s not that there aren’t difficulties in commercial real estate; it’s simply that they pale by comparison. The Bloomberg report projected U.S. commercial property sales to fall to the lowest in almost two decades as the industry endures its worst slump since the savings and loan crisis of the early 1990s. In the interview Ross, the 71-year-old chairman and chief executive officer of WL Ross & Co. LLC, said he would use ‘extreme caution’ before putting money into commercial real estate, especially office space, because properties are losing tenants. ‘I think it’s going to take quite a while to work itself out,’ Ross said.
Commercial real estate, like employment, is a lagging indicator of economic activity, and similar to employment is experiencing some of the lowest occupancy rates at any time since the 1980’s. In such circumstances, property owners with highly leveraged projects may find it difficult to meet mortgage obligations and the risk of default rises. But with commercial mortgages representing less than 12% of those in the residential market, the impact is of significantly less consequence.
Likewise, as the economy improves both employment and commercial occupancy levels will rise. The US stock markets have correctly responded to the risks by modestly adjusting stock values for those banks and insurance companies representing the bulk of the mortgage exposure. Even still, the equity markets have continued their climb above 10,000 on the DOW, with little in sight to curb current trends.
THE ECONOMY – Delicate Balance Between Low Rates and Inflation Pressures
Wednesday morning’s release of the October CPI figures (consumer price index) reflected an increase of .3% and re-ignited ongoing concerns over just how long the Federal Reserve can keep interest rates at ultra-low levels while waiting for the employment market to recover. The pressure on the Fed is mounting as the gold and oil markets continue to climb and inflation concerns replace fears of deflation.
The Fed’s monetary policy of low rates and open markets is running into increasing opposition from central bankers around the world as the dollar continues to weaken. Aggressive monetary policy alone can yield an increase in inflation; when coupled with the free spending fiscal plans of the Obama administration and current House and Senate leadership, the inflationary pressures become more than we may be able to bear. Rates may have to rise sooner than most of us might like and the labor market may face extended pressure as a result.
Policy makers have hoped to keep rates low and spending levels high in an attempt to stimulate the job market, but we’re now beginning to see that other factors may soon take the forefront. The economy has clearly begun to expand in recent months and continued growth is critical to putting America back to work; with low interest rates being one of the more important aspects to recovery efforts. They’re also starting to jeopardize needed international capital relationships, threaten currency rates and trade balances, and compromise price stability at home and abroad.
The Fed has taken great care thus far to limit the potentially negative impact of low interest rates and continues to have a strong grasp on the situation. It’s unlikely that Bernanke will allow rates to stay at low levels long enough to do more harm than good, but the balancing act becomes increasingly more difficult with each passing month.
If unemployment levels stabilize and begin to retreat by the end of the 1st Quarter 2010, as many are now predicting, the Fed’s job will be much easier. The Fed can then signal to the international market its intent to increase rates, even if plans to do so are still 2-3 months in the future. Bernanke and company’s pledge is more valuable than gold in the international markets and bankers around the world will act on the Fed’s intentions as long as there is a time frame they find plausible.
As was suggested by Dallas Federal Reserve President Richard Fisher, when US monetary policy shifts to tighten rates it will do so swiftly and aggressively. Those having bet against the US dollar, or who might have added gold or other commodities to their portfolios, will need to take swift action to protect themselves.
In the mean time, it’s becoming more evident that the US Congress must undergo a budget trimming process similar to what most families have had to endure – otherwise fiscal excess will undo too much of the good the Fed has worked so hard to accomplish.
THE TAKEAWAY – Take Advantage of Low Rates While You Can
Those able to take advantage of declining lease rates and commercial property values may find the current climate can help trim budgets and increase long-term asset values – fears over a commercial real estate bubble are overblown and don’t even come close to the impact of what we’ve experienced in the housing market.
The US equities market continues to offer the best returns available, and there appears to be little on the near-term horizon to counter the current trend. Year-end asset sales for tax purposes may have an impact, but most investors will realize gains rather than losses for 2009.
The Fed’s low rate policy is beginning to show signs that a shift will have to take place earlier than we might prefer – the labor market and those who have bet against the dollar (gold, currency hedges, etc.) are likely to get caught in the squeeze.
Health care proposals between the House and Senate are still so far apart that passage seems unlikely. Though many of the legislation’s sponsors are touting similarities, the reality is that there are simply irreconcilable differences on which neither side appears willing to concede.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
Inside Signature Update
The Market – Crisis in Commercial Real Estate?
The Economy – Delicate Balance Between Rates & Inflation Pressures
The Takeaway - Take Advantage of Low Rates While You Can
THE MARKET – Crisis in Commercial Real Estate – it’s not what you may think!
Reports have circulated in recent months regarding a possible ‘melt down’ in the commercial real estate market; needlessly raising fears of a second credit crisis, similar to that which we experienced in the fall of 2008. As recently as mid-October, billionaire investor Wilbur L. Ross Jr., was quoted by Bloomberg as saying the U.S. is in the beginning of a “huge crash in commercial real estate.”
Sounds ominous doesn’t it? Relax, this is not what some would have us think. To understand the potential problem, we need to understand the dynamics of the market.
According to a December 2008 report from the Federal Reserve Bank of Dallas the value of the entire US commercial real estate market stood at just over $3 trillion in 2007 and represented $1.7 trillion in mortgage debt. At the same time, the value of the residential market was estimated to be as high as $21 trillion (now less than $17 trillion) with $14.6 trillion in mortgage debt. Not only did the commercial market enjoy an average loan-to-value ratio of less than 57%, compared to almost 70% for the housing market, but the difference in the sheer size of the residential market is staggering, with residential real estate being valued at 7 times the commercial market. Additionally, the underwriting requirements for residential mortgage lending became notoriously weak leading up to 2007, while commercial requirements remained far more stringent.
It’s not that there aren’t difficulties in commercial real estate; it’s simply that they pale by comparison. The Bloomberg report projected U.S. commercial property sales to fall to the lowest in almost two decades as the industry endures its worst slump since the savings and loan crisis of the early 1990s. In the interview Ross, the 71-year-old chairman and chief executive officer of WL Ross & Co. LLC, said he would use ‘extreme caution’ before putting money into commercial real estate, especially office space, because properties are losing tenants. ‘I think it’s going to take quite a while to work itself out,’ Ross said.
Commercial real estate, like employment, is a lagging indicator of economic activity, and similar to employment is experiencing some of the lowest occupancy rates at any time since the 1980’s. In such circumstances, property owners with highly leveraged projects may find it difficult to meet mortgage obligations and the risk of default rises. But with commercial mortgages representing less than 12% of those in the residential market, the impact is of significantly less consequence.
Likewise, as the economy improves both employment and commercial occupancy levels will rise. The US stock markets have correctly responded to the risks by modestly adjusting stock values for those banks and insurance companies representing the bulk of the mortgage exposure. Even still, the equity markets have continued their climb above 10,000 on the DOW, with little in sight to curb current trends.
THE ECONOMY – Delicate Balance Between Low Rates and Inflation Pressures
Wednesday morning’s release of the October CPI figures (consumer price index) reflected an increase of .3% and re-ignited ongoing concerns over just how long the Federal Reserve can keep interest rates at ultra-low levels while waiting for the employment market to recover. The pressure on the Fed is mounting as the gold and oil markets continue to climb and inflation concerns replace fears of deflation.
The Fed’s monetary policy of low rates and open markets is running into increasing opposition from central bankers around the world as the dollar continues to weaken. Aggressive monetary policy alone can yield an increase in inflation; when coupled with the free spending fiscal plans of the Obama administration and current House and Senate leadership, the inflationary pressures become more than we may be able to bear. Rates may have to rise sooner than most of us might like and the labor market may face extended pressure as a result.
Policy makers have hoped to keep rates low and spending levels high in an attempt to stimulate the job market, but we’re now beginning to see that other factors may soon take the forefront. The economy has clearly begun to expand in recent months and continued growth is critical to putting America back to work; with low interest rates being one of the more important aspects to recovery efforts. They’re also starting to jeopardize needed international capital relationships, threaten currency rates and trade balances, and compromise price stability at home and abroad.
The Fed has taken great care thus far to limit the potentially negative impact of low interest rates and continues to have a strong grasp on the situation. It’s unlikely that Bernanke will allow rates to stay at low levels long enough to do more harm than good, but the balancing act becomes increasingly more difficult with each passing month.
If unemployment levels stabilize and begin to retreat by the end of the 1st Quarter 2010, as many are now predicting, the Fed’s job will be much easier. The Fed can then signal to the international market its intent to increase rates, even if plans to do so are still 2-3 months in the future. Bernanke and company’s pledge is more valuable than gold in the international markets and bankers around the world will act on the Fed’s intentions as long as there is a time frame they find plausible.
As was suggested by Dallas Federal Reserve President Richard Fisher, when US monetary policy shifts to tighten rates it will do so swiftly and aggressively. Those having bet against the US dollar, or who might have added gold or other commodities to their portfolios, will need to take swift action to protect themselves.
In the mean time, it’s becoming more evident that the US Congress must undergo a budget trimming process similar to what most families have had to endure – otherwise fiscal excess will undo too much of the good the Fed has worked so hard to accomplish.
THE TAKEAWAY – Take Advantage of Low Rates While You Can
Those able to take advantage of declining lease rates and commercial property values may find the current climate can help trim budgets and increase long-term asset values – fears over a commercial real estate bubble are overblown and don’t even come close to the impact of what we’ve experienced in the housing market.
The US equities market continues to offer the best returns available, and there appears to be little on the near-term horizon to counter the current trend. Year-end asset sales for tax purposes may have an impact, but most investors will realize gains rather than losses for 2009.
The Fed’s low rate policy is beginning to show signs that a shift will have to take place earlier than we might prefer – the labor market and those who have bet against the dollar (gold, currency hedges, etc.) are likely to get caught in the squeeze.
Health care proposals between the House and Senate are still so far apart that passage seems unlikely. Though many of the legislation’s sponsors are touting similarities, the reality is that there are simply irreconcilable differences on which neither side appears willing to concede.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
Friday, November 13, 2009
An Ill-Conceived Attack on Fed Powers
November 13, 2009 Edition, Volume III
Inside Signature Update
- The Market - Expectations for Steady, Though Modest, Growth
- The Economy I – Get Ready for the VAT – Value-Added Tax
- The Economy II – An Ill-Conceived Attack on Fed Powers
- The Takeaway – Higher Equity Values and Tax Rates
THE MARKET – Expectations for Steady, Though Modest, Growth
The continued rally in the US equities market is simply a reflection of a weakening dollar, low interest rates, moderated inflation pressures, and earnings growth in most market sectors. With widely reported corporate earnings growth and 3.5% GDP expansion for the 3rd Quarter, as well as promising retail sales reports, the DOW stands firmly above the 10,200 level. Most market analysts, traders and investors expect relatively steady, though modest improvement in the markets as we move into 2010.
Likewise, gold has continued its rally, and while there may still be room for gold to appreciate above these levels, especially in the face of a weak US dollar, most prudent investors are nervous at what has all of the earmarks of a bubble in the precious metals market.
Oil’s upward movement towards the $80 per barrel level is more fundamentally supported by increases in demand, but has also enjoyed the weaker dollar. When the Fed finally moves to increase interest rates and strengthen the dollar, precious metals and oil will give up their exchange related gains. These commodities are ripe for speculation at these levels and ought not to be considered as long-term investment assets.
For months we’ve suggested that this rebound is far from over and evidence continues to mount suggesting that a recovery, both in the economy and the stock market, has plenty of room for continued expansion – and profits.
THE ECONOMY I - Get Ready for the VAT - Value Added Tax
Both the Obama administration and House and Senate Democrats have vowed to increase taxes on high income Americans while providing tax cuts for the middle class and bringing yet more relief for lower income earners. While this may make for great campaign rhetoric, it’s not at all likely. Not only have the administration and legislators introduced bills which would expand federal budgets by trillions of dollars for many years to come, they’ve begun to talk about a new kind of tax with which most Americans are unfamiliar.
House Speaker Pelosi confirmed plans to introduce a value-added tax in an effort to offset the rising costs associated with federal spending plans, saying ‘somewhere along the way, a value-added tax plays into this’.
Those who’ve traveled through Europe may be familiar with the VAT tax, or value- added tax. VAT is a form of national sales tax and now ranges between 17% and 25% in most European countries. Introduced as an alternative to income taxes, it quickly became a companion to personal and business income tax and represents much of the increase in taxation experienced throughout Western Europe in the last 50 years.
Simply put, the value added tax is a tax levied on most business transactions and on most goods and services. Though policy makers may discuss it in terms of taxing higher consumption families more aggressively than those with less discretionary incomes, the VAT tax raises the cost of virtually everything in a marketplace, regardless of one’s income level. Even if a tax credit is applied to help offset value-added tax payments made by lower income Americans, it will be virtually impossible to mitigate the impact of the rising cost of goods and services associated with VAT throughout the production and manufacturing process.
President George H.W. Bush’s infamous phrase, ‘read my lips, no new taxes’, used first in the 1988 New Hampshire primary and then most famously in his acceptance speech at the Republican Party National Convention in New Orleans that same year, came back to haunt him and helped Clinton unseat the once-popular President. One has to wonder how often President Obama replays that scenario in his mind as he considers just how difficult his re-election bid may become.
THE ECONOMY II - An Ill-Conceived Attack on Federal Reserve Powers
Senate Banking Committee Chairman Chris Dodd (D-CT) announced Tuesday plans to curtail the powers of the Federal Reserve and the FDIC in a sweeping piece of legislation promising to reform banking and avoid future crises. Dodd cited the ‘abysmal failure’ of the Fed’s role as banking regulator and moved to create a new regulator, the Financial Institutions Regulatory Administration (FIRA). Fortunately the legislation faces nearly as many challenges as the ill-fated health care bill recently passed by the House of Representatives; it hasn’t sufficient support to make it out of the Senate.
Dodd, like most bureaucrats, believes the best solution to a bureaucratic challenge is another layer of bureaucracy. This latest proposal shows how little he and his committee understand about how close we came to financial calamity before then Treasury Secretary Paulson and Fed Chairman Bernanke used the Fed’s considerable powers to avert disaster. Certainly, Bernanke and company had a hand in creating the crisis, as did many others; including Dodd and his party’s leadership. To attempt to limit the problem solving ability of the central bank is more dangerous than most might suppose.
Treasury Secretary Timothy Geithner and House Financial Services Committee Chair Barney Frank laid some of the groundwork for Dodd’s proposal in late October as they discussed the need to reform and bring oversight to the financial markets. Though the outward intent of proposed reforms appears reasonable in light of recent events, they expose policy makers’ interest in gaining influence over the Federal Reserve and FDIC.
While the FDIC may arguably be fair game, it is critical that the Federal Reserve remain as independent as possible in order to maintain the relationship of trust it enjoys in the financial markets and with central bankers around the world. A Federal Reserve overseen by a politically organized federal agency would yield a weaker US dollar and impotence while striving to maintain modest inflationary pressures and domestically advantageous exchange rates. Without its full range of powers the Fed simply cannot affect is primary mission.
FDIC Chairwoman Sheila Bair sharply criticized the proposal and added ‘The oversight council described in the proposal currently lacks sufficient authority to effectively address systemic risks.’ Though some level of regulation in response to the financial crisis through which we have now lived for more than a year is inevitable and even necessary, the current administration’s direction, as proposed by some of its most loyal operatives, is simply counterproductive, perhaps even power-seeking. What we need are objective and progressive reserve requirements to aid in preserving liquidity for banks operating in the capital markets, and a regulatory structure long on accountability and short on political motives.
The current rhetoric appears as ill-conceived as was the Graham-Leach-Bliley Act’s 1999 repeal of Glass-Steagall without structuring capital market requirements for those banks playing both sides of the market. In its current form, the proposal could weaken policy makers’ authority to get us out of the turmoil it may well get us into in the future.
THE TAKEAWAY – Higher Equity Values and Tax Rates
Investors sitting in cash or other fixed instruments may have already missed the largest part of the current market recovery, but modest, steady growth in equities appears likely through 2010. This is not a time to stay on the sidelines.
It’s virtually impossible for tax rates to rest at current levels, well enough improve, given the planned level of spending. The revenue to be garnered by taxing only the highest income earners isn’t enough to pay the bill. Tax rates for all but the lowest income levels are likely to increase, starting with the sun-setting of major portions of the Bush tax cuts in 2011.
Democratic leadership in the House and Senate are frustrated at their inability to pass major legislative initiatives as members of their own party thwart a too-liberal agenda. One needn’t be ultra conservative to see the flaws in their reasoning.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
Inside Signature Update
- The Market - Expectations for Steady, Though Modest, Growth
- The Economy I – Get Ready for the VAT – Value-Added Tax
- The Economy II – An Ill-Conceived Attack on Fed Powers
- The Takeaway – Higher Equity Values and Tax Rates
THE MARKET – Expectations for Steady, Though Modest, Growth
The continued rally in the US equities market is simply a reflection of a weakening dollar, low interest rates, moderated inflation pressures, and earnings growth in most market sectors. With widely reported corporate earnings growth and 3.5% GDP expansion for the 3rd Quarter, as well as promising retail sales reports, the DOW stands firmly above the 10,200 level. Most market analysts, traders and investors expect relatively steady, though modest improvement in the markets as we move into 2010.
Likewise, gold has continued its rally, and while there may still be room for gold to appreciate above these levels, especially in the face of a weak US dollar, most prudent investors are nervous at what has all of the earmarks of a bubble in the precious metals market.
Oil’s upward movement towards the $80 per barrel level is more fundamentally supported by increases in demand, but has also enjoyed the weaker dollar. When the Fed finally moves to increase interest rates and strengthen the dollar, precious metals and oil will give up their exchange related gains. These commodities are ripe for speculation at these levels and ought not to be considered as long-term investment assets.
For months we’ve suggested that this rebound is far from over and evidence continues to mount suggesting that a recovery, both in the economy and the stock market, has plenty of room for continued expansion – and profits.
THE ECONOMY I - Get Ready for the VAT - Value Added Tax
Both the Obama administration and House and Senate Democrats have vowed to increase taxes on high income Americans while providing tax cuts for the middle class and bringing yet more relief for lower income earners. While this may make for great campaign rhetoric, it’s not at all likely. Not only have the administration and legislators introduced bills which would expand federal budgets by trillions of dollars for many years to come, they’ve begun to talk about a new kind of tax with which most Americans are unfamiliar.
House Speaker Pelosi confirmed plans to introduce a value-added tax in an effort to offset the rising costs associated with federal spending plans, saying ‘somewhere along the way, a value-added tax plays into this’.
Those who’ve traveled through Europe may be familiar with the VAT tax, or value- added tax. VAT is a form of national sales tax and now ranges between 17% and 25% in most European countries. Introduced as an alternative to income taxes, it quickly became a companion to personal and business income tax and represents much of the increase in taxation experienced throughout Western Europe in the last 50 years.
Simply put, the value added tax is a tax levied on most business transactions and on most goods and services. Though policy makers may discuss it in terms of taxing higher consumption families more aggressively than those with less discretionary incomes, the VAT tax raises the cost of virtually everything in a marketplace, regardless of one’s income level. Even if a tax credit is applied to help offset value-added tax payments made by lower income Americans, it will be virtually impossible to mitigate the impact of the rising cost of goods and services associated with VAT throughout the production and manufacturing process.
President George H.W. Bush’s infamous phrase, ‘read my lips, no new taxes’, used first in the 1988 New Hampshire primary and then most famously in his acceptance speech at the Republican Party National Convention in New Orleans that same year, came back to haunt him and helped Clinton unseat the once-popular President. One has to wonder how often President Obama replays that scenario in his mind as he considers just how difficult his re-election bid may become.
THE ECONOMY II - An Ill-Conceived Attack on Federal Reserve Powers
Senate Banking Committee Chairman Chris Dodd (D-CT) announced Tuesday plans to curtail the powers of the Federal Reserve and the FDIC in a sweeping piece of legislation promising to reform banking and avoid future crises. Dodd cited the ‘abysmal failure’ of the Fed’s role as banking regulator and moved to create a new regulator, the Financial Institutions Regulatory Administration (FIRA). Fortunately the legislation faces nearly as many challenges as the ill-fated health care bill recently passed by the House of Representatives; it hasn’t sufficient support to make it out of the Senate.
Dodd, like most bureaucrats, believes the best solution to a bureaucratic challenge is another layer of bureaucracy. This latest proposal shows how little he and his committee understand about how close we came to financial calamity before then Treasury Secretary Paulson and Fed Chairman Bernanke used the Fed’s considerable powers to avert disaster. Certainly, Bernanke and company had a hand in creating the crisis, as did many others; including Dodd and his party’s leadership. To attempt to limit the problem solving ability of the central bank is more dangerous than most might suppose.
Treasury Secretary Timothy Geithner and House Financial Services Committee Chair Barney Frank laid some of the groundwork for Dodd’s proposal in late October as they discussed the need to reform and bring oversight to the financial markets. Though the outward intent of proposed reforms appears reasonable in light of recent events, they expose policy makers’ interest in gaining influence over the Federal Reserve and FDIC.
While the FDIC may arguably be fair game, it is critical that the Federal Reserve remain as independent as possible in order to maintain the relationship of trust it enjoys in the financial markets and with central bankers around the world. A Federal Reserve overseen by a politically organized federal agency would yield a weaker US dollar and impotence while striving to maintain modest inflationary pressures and domestically advantageous exchange rates. Without its full range of powers the Fed simply cannot affect is primary mission.
FDIC Chairwoman Sheila Bair sharply criticized the proposal and added ‘The oversight council described in the proposal currently lacks sufficient authority to effectively address systemic risks.’ Though some level of regulation in response to the financial crisis through which we have now lived for more than a year is inevitable and even necessary, the current administration’s direction, as proposed by some of its most loyal operatives, is simply counterproductive, perhaps even power-seeking. What we need are objective and progressive reserve requirements to aid in preserving liquidity for banks operating in the capital markets, and a regulatory structure long on accountability and short on political motives.
The current rhetoric appears as ill-conceived as was the Graham-Leach-Bliley Act’s 1999 repeal of Glass-Steagall without structuring capital market requirements for those banks playing both sides of the market. In its current form, the proposal could weaken policy makers’ authority to get us out of the turmoil it may well get us into in the future.
THE TAKEAWAY – Higher Equity Values and Tax Rates
Investors sitting in cash or other fixed instruments may have already missed the largest part of the current market recovery, but modest, steady growth in equities appears likely through 2010. This is not a time to stay on the sidelines.
It’s virtually impossible for tax rates to rest at current levels, well enough improve, given the planned level of spending. The revenue to be garnered by taxing only the highest income earners isn’t enough to pay the bill. Tax rates for all but the lowest income levels are likely to increase, starting with the sun-setting of major portions of the Bush tax cuts in 2011.
Democratic leadership in the House and Senate are frustrated at their inability to pass major legislative initiatives as members of their own party thwart a too-liberal agenda. One needn’t be ultra conservative to see the flaws in their reasoning.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
Thursday, November 5, 2009
When Warren Buffett Goes 'All In'
When Warren Buffett Goes ‘All In’
November 5, 2009 Edition, Volume III
Inside Signature Update
- The Market – Warren Buffett Goes ‘All-In’
- The Economy – Economic Potpourri
- The Takeaway – Cautious Optimism is Still the Prudent Stance
THE MARKET – When Warren Buffet Goes ‘All-In’
The DOW broke the 10,000 point mark again Thursday in late trading to close at 10,006, suggesting Warren Buffett’s announced purchase of Burlington Northern (BNI) earlier this week may well be the most solidly bullish report the US stock markets have seen for months. Not only is the $26 billion investment the largest Buffett has made to date with his Berkshire Hathaway holding company (BRK.A, BRK.B), but it also marks the first time Buffet and his partner Charlie Munger have been willing to include Berkshire Hathaway stock as part of a deal.
Though Buffett is still sitting on an enormous amount of cash, measured in the tens of billions of dollars, he’s essentially ‘all-in’ relative to the domestic equities market. There’s little any other investor or government report could offer that would speak more boldly for the future of the US economy and investment market.
M&A (Mergers and Acquisitions) activity often confirms the strength of a bull market rally, and this week announcements, including Stanley Works’ (SWK) acquisition of Black and Decker (BDK), add weight to the term ’M&A paves the way!’. Expect more activity on the M&A front as cash-rich firms look to merge with others in an effort to increase sales and benefit from cost efficiencies – both lead to higher earnings and share values.
Ford’s posting of a $1 billion profit for the 3rd quarter on better-than-expected revenues lent an added measure of optimism for the US auto market. Ford, the only one of the ‘big three’ auto makers to turn down federal bailout funds, looks to post yet stronger 2010 and 2011 results. US auto sales, expected to lag following August’s end to ‘cash for clunkers’, have now posted monthly sales increases for August, September and October. The annual sales pace now exceeds the critical 10,000,000 unit mark for domestic manufacturers and suggests consumers are finally willing to replace outdated vehicles with newer models from dealer inventories.
Don’t be surprised to see Ford (F), now trading below $7.50 per share, to climb back to double digits. There’s still room for growth in the US stock markets for 2009 and recent activity is simply strengthening the case that 2010 will provide yet more for forward-thinking investors.
THE ECONOMY – Economic Potpourri
The Federal Reserve’s FOMC Statement released Wednesday added some focus to what must occur before interest rates are likely to increase, but not enough to strengthen the still-weakened dollar. The release once again affirms the Fed’s commitment to low rates for an extended period and support for a stable inflation environment.
Gold Bugs and other commodities speculators point to the report to strengthen their argument that the declining dollar will push prices higher; seemingly ignoring the Fed’s repeated focus towards a stable inflation environment. An article posted on Minyanville draws an argument for strong growth in precious metals pricing, and even discusses the International Monetary Fund’s (IMF) recent sale of 200 tons of bullion to India, but draws poorly supported conclusions. Gold Bugs, you’ve gotta love ‘em.
September’s ISM report (Institute of Supply Management) fueled hopes for stronger-than-projected 3rd quarter revision and 4th quarter GDP figures. Though the 3rd quarter number is already in at a positive 3.5%, the all-important revised figure isn’t due out for weeks. Consensus expectations have held at the 2-2 ½% level for the 4th quarter, but may update towards 3%+ as September’s manufacturing gains of more than 1% left inventory levels still lower than in previous months.
Lower inventories, coupled with increasing demand, equate to growing labor needs in 2010; in spite of a likely increase in the national unemployment rate to 9.9% when the Bureau of Labor Statistic (BLS) reports Friday morning. The turn around in the labor market is slow in coming, as it always is following deeply recessive periods, and will likely offer meaningful improvement in 2010, but 4%,5% and 6% unemployment levels aren’t likely to be seen for some time to come.
Though the ‘cash for clunkers’ program served to take advantage of dealer inventories and helped stimulate manufacturer and dealer employment levels, it didn’t provide the anticipated environmental benefit. Reports suggest that the $3 billion program will have reduced US oil consumption by only .2%, or less than $700 million (US News and World Report). Additionally, the program focused sufficient demand for certain models that dealers were able to sell them with little other financial incentive, and most buyers ended up paying more of a premium for the new vehicle (over what the same model could have been purchased for just one month earlier) than they received in added trade-in value for the old one.
In sum, the US taxpayer would have been better off, both long and short-term, had the Obama administration simply given money directly to auto manufacturers and dealers – it would have cost less and provided just as much benefit. Oh well…
THE TAKEAWAY – Cautious Optimism is Still the Prudent Stance
Expect further gains in the US equities markets, though not at 2nd and 3rd quarter double digit levels. Manufacturing and consumer goods are likely to benefit the most in coming months. Cautious optimism is still the prudent stance.
Don’t get caught up in ‘gold fever’ along with the Gold Bugs – it may make you feel all warm inside at first, but most often leads to disappointing results.
Look for more M&A activity to point to market segments for growth and opportunity
Don’t expect stronger dollar policies from the Fed or Treasury until after employment conditions improve by at least 2-3%.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
November 5, 2009 Edition, Volume III
Inside Signature Update
- The Market – Warren Buffett Goes ‘All-In’
- The Economy – Economic Potpourri
- The Takeaway – Cautious Optimism is Still the Prudent Stance
THE MARKET – When Warren Buffet Goes ‘All-In’
The DOW broke the 10,000 point mark again Thursday in late trading to close at 10,006, suggesting Warren Buffett’s announced purchase of Burlington Northern (BNI) earlier this week may well be the most solidly bullish report the US stock markets have seen for months. Not only is the $26 billion investment the largest Buffett has made to date with his Berkshire Hathaway holding company (BRK.A, BRK.B), but it also marks the first time Buffet and his partner Charlie Munger have been willing to include Berkshire Hathaway stock as part of a deal.
Though Buffett is still sitting on an enormous amount of cash, measured in the tens of billions of dollars, he’s essentially ‘all-in’ relative to the domestic equities market. There’s little any other investor or government report could offer that would speak more boldly for the future of the US economy and investment market.
M&A (Mergers and Acquisitions) activity often confirms the strength of a bull market rally, and this week announcements, including Stanley Works’ (SWK) acquisition of Black and Decker (BDK), add weight to the term ’M&A paves the way!’. Expect more activity on the M&A front as cash-rich firms look to merge with others in an effort to increase sales and benefit from cost efficiencies – both lead to higher earnings and share values.
Ford’s posting of a $1 billion profit for the 3rd quarter on better-than-expected revenues lent an added measure of optimism for the US auto market. Ford, the only one of the ‘big three’ auto makers to turn down federal bailout funds, looks to post yet stronger 2010 and 2011 results. US auto sales, expected to lag following August’s end to ‘cash for clunkers’, have now posted monthly sales increases for August, September and October. The annual sales pace now exceeds the critical 10,000,000 unit mark for domestic manufacturers and suggests consumers are finally willing to replace outdated vehicles with newer models from dealer inventories.
Don’t be surprised to see Ford (F), now trading below $7.50 per share, to climb back to double digits. There’s still room for growth in the US stock markets for 2009 and recent activity is simply strengthening the case that 2010 will provide yet more for forward-thinking investors.
THE ECONOMY – Economic Potpourri
The Federal Reserve’s FOMC Statement released Wednesday added some focus to what must occur before interest rates are likely to increase, but not enough to strengthen the still-weakened dollar. The release once again affirms the Fed’s commitment to low rates for an extended period and support for a stable inflation environment.
Gold Bugs and other commodities speculators point to the report to strengthen their argument that the declining dollar will push prices higher; seemingly ignoring the Fed’s repeated focus towards a stable inflation environment. An article posted on Minyanville draws an argument for strong growth in precious metals pricing, and even discusses the International Monetary Fund’s (IMF) recent sale of 200 tons of bullion to India, but draws poorly supported conclusions. Gold Bugs, you’ve gotta love ‘em.
September’s ISM report (Institute of Supply Management) fueled hopes for stronger-than-projected 3rd quarter revision and 4th quarter GDP figures. Though the 3rd quarter number is already in at a positive 3.5%, the all-important revised figure isn’t due out for weeks. Consensus expectations have held at the 2-2 ½% level for the 4th quarter, but may update towards 3%+ as September’s manufacturing gains of more than 1% left inventory levels still lower than in previous months.
Lower inventories, coupled with increasing demand, equate to growing labor needs in 2010; in spite of a likely increase in the national unemployment rate to 9.9% when the Bureau of Labor Statistic (BLS) reports Friday morning. The turn around in the labor market is slow in coming, as it always is following deeply recessive periods, and will likely offer meaningful improvement in 2010, but 4%,5% and 6% unemployment levels aren’t likely to be seen for some time to come.
Though the ‘cash for clunkers’ program served to take advantage of dealer inventories and helped stimulate manufacturer and dealer employment levels, it didn’t provide the anticipated environmental benefit. Reports suggest that the $3 billion program will have reduced US oil consumption by only .2%, or less than $700 million (US News and World Report). Additionally, the program focused sufficient demand for certain models that dealers were able to sell them with little other financial incentive, and most buyers ended up paying more of a premium for the new vehicle (over what the same model could have been purchased for just one month earlier) than they received in added trade-in value for the old one.
In sum, the US taxpayer would have been better off, both long and short-term, had the Obama administration simply given money directly to auto manufacturers and dealers – it would have cost less and provided just as much benefit. Oh well…
THE TAKEAWAY – Cautious Optimism is Still the Prudent Stance
Expect further gains in the US equities markets, though not at 2nd and 3rd quarter double digit levels. Manufacturing and consumer goods are likely to benefit the most in coming months. Cautious optimism is still the prudent stance.
Don’t get caught up in ‘gold fever’ along with the Gold Bugs – it may make you feel all warm inside at first, but most often leads to disappointing results.
Look for more M&A activity to point to market segments for growth and opportunity
Don’t expect stronger dollar policies from the Fed or Treasury until after employment conditions improve by at least 2-3%.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
Friday, October 30, 2009
GDP Beats Expectations 10-29-2009
October 23, 2009 Edition, Volume III
Inside Signature Update
- The Market – Corporate Dividends Paying Off
- The Economy – 3rd Quarter GDP Beats Expectations
- The Takeaway – It’s Tough to be a Bear in the Midst of a Recovery
THE MARKET – Corporate Dividends Paying Off
Dividend yielding stocks have fared better in the market recovery than most others. In today’s market a stock yielding a solid dividend is representative of a solid company – and that’s gold in an uncertain market.
Not only can investors consider the dividend yield when it comes to evaluating overall investment performance, but there’s mounting evidence that dividend paying corporations are better able to secure credit capital and take advantage of growth opportunities. While many others are unable to obtain the funds needed to fund inventory, payroll, and capital expansion, corporations with strong balance sheets and good cash flow continue to enjoy the ability to leverage growth as opportunities arise.
Though today’s credit markets are more liquid than they were even three months ago, banks and capital market firms continue to exercise caution with any type of lending; only their best customers are able to secure needed capital at preferred rates. The phenomenon won’t soon disappear and the longer the disparity exists the more difficult it will be for firms with weaker balance sheets to compete.
The Economic Cycle Research Institute’s gauge of future domestic economic activity hit a 5-year high at the end of September, marking the indicator’s highest pace since 1967. Firms with access to capital will benefit by this growth while others will be less able to compete. Investors interested in benefiting from growth opportunities may find greater strength in a more risk averse environment by looking at dividend yielding equities in the coming months.
THE ECONOMY – 3rd Quarter GDP Beats Expectations
The best news the labor market could have possibly received came Thursday morning as the US Department of Commerce announced 3rd quarter GDP gains of 3.5%; 2/10ths higher than expectations. Pessimists are clamoring the gain is due largely to ‘cash-for-clunkers’ and inventory builds, but when autos and inventory adjustments are stripped away the gain holds at just under 2% - higher than expectations.
The Department of Labor reported total jobless claims at 5.96 million – a difficult number by any measure. With unemployment almost certain to breach 10%, how is it that today’s reports represent a meaningful inflection point for the labor market? Employment only begins to improve after growth resumes. Initial improvement comes for those already employed, finding jobs more secure than they may have been 1-2 months ago; next comes a return to full employment for those experiencing a cut back in hours; and finally, businesses begin to hire to meet growing needs.
Though today’s GDP number is meaningful, and many are citing an ‘end to the great recession’, we still have an all-important retail season to get through and 4th quarter results to digest before we’ll see real improvement in labor markets. For most, that’s more important than any other figure or report.
THE TAKEAWAY – It’s Tough to be a Bear in the Midst of a Recovery
- The markets were under pressure this week as ‘Bears’ anticipated a lower-than-expected GDP report – even Goldman Sachs weighed in suggesting the figure wouldn’t breach 3% - they were wrong and Thursday’s markets were up sharply. It’s tough to be a Bear in the midst of a recovery.
- Even though the much needed ‘Top Line Sales Growth’ discussed in last week’s Signature Update hasn’t materialized across the board, sufficient gains have been made to keep markets near the 10,000 level on the DOW. Look for additional strength through the remainder of the year.
- The Federal Reserve has begun to draw back on overall market liquidity as the economy, credit and housing markets appear to have seen their worst. This accounts for some modest and temporary stabilization in the dollar, but it will be many months before the Fed will have the luxury of increasing market interest rates. Investors making trades against the dollar may find short-term benefit, but be careful of being caught short as monetary policies change.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
Friday, October 23, 2009
Top Line Sales Growth Wanted 10-23-2009
October 23, 2009 Edition, Volume III
Inside Signature Update
- The Market – Top Line Sales Growth Wanted
- The Economy – Demand Driven Oil
- The Takeaway – There’s Room for Growth and Profits
THE MARKET – Top Line Sales Growth Wanted
Earnings reports continue to support the domestic equities rally with the DOW holding near the 10,000 level. Most often investors and traders focus on earnings rather than the total revenue line as equity values are often discussed as a function of earnings per share (EPS) or the price to earnings ratio (PE). In recessive times skilled business managers reduce expenses to make up for lagging revenues in an effort to 1) survive and 2) provide profitability for shareholders. Market analysts adjust their expectations accordingly, confident that margins as secure as possible.
As the post-recession market trends higher, the focus shifts to revenue growth – or top line sales figures. Sales growth represents overall market improvement and becomes the catalyst for higher profits and stock valuations. Same-store sales growth for retail outlets and industry revenue gains for technology, manufacturing, and banking are key in this part of an economic cycle.
Thus far, the figures have been encouraging enough to hold markets at impressive levels while market makers and others pour over incoming reports, but the real test will be in consumer sales as we head into the critical Christmas retail season. Management and analyst’s expectation are optimistic for year-over-year improvement, but following 2008’s disappointing results that’s not saying much. The important retailers to watch are mid-range and high-end chains such as Target, Kohl’s and Nordstrom. Wal-Mart and Costco have already benefited as consumers shifts away from higher-end retailers in search of bargains during the recession increased revenues. The test now becomes whether or not more expensive retailers can bring shoppers back without discounters losing market share.
Gains in manufacturing and distribution appear to be following suit as low inventory levels requiring replenishment and mild consumer spending increases add fuel to recovery trends. Expectations for an 11,000 – 12,000 point DOW still seem optimistic, but not as wildly so as in the latter part of the summer.
THE ECONOMY – Demand Driven Oil
We often speak the price of gold in terms of the value of the dollar, suggesting that it rises and falls as a byproduct of international exchange rates more than any other factor. And while industrial demand for gold and other precious metals does have an impact, it’s decidedly less significant. That’s not true for all commodities; including oil.
The price of a barrel of oil is once again on the rise, and only part of the increase can be accounted for relative to the value of the dollar. As the economy improves, both domestic and international, the demand for oil as an energy resource rises in direct proportion. One would think that a 2-3% increase in demand for any material would produce a similar increase in price, but not so. Demand increases, or decreases, disproportionately alter pricing when production has limits, either real or imposed; as is the case with oil. When consumer demand for gasoline decreased by 8% at the end of summer 2008, oil prices began to spiral downwards and finally rested near $35 per barrel. It appears the decline from $147 to below $60 was due to real demand destruction in the market, while the remaining decline may have been a result of fear over a declining
We’re now on the other side of the demand scenario. Oil has now topped $81 and with the improvement of the economy, energy demand is on the rise. At the same time, the dollar continues to weaken and oil, like gold, may once again become subject to speculative forces. Though we can point to a ‘greener’, more energy efficient domestic market, we certainly haven’t made the improvements needed to curb the
THE TAKEAWAY – There’s Room for Growth and Profits
- Expect more encouraging news from the earnings front as some of the nation’s largest corporations report next week, but short-term pressure could dampen the market if the Case-Shiller Index (real estate index due out next week) disappoints.
- The
- Though international equities also offer meaningful performance gains, continued dollar weakness threatens to offset investor benefit.
- Oil producers and refiners may offer short to mid-range gains, but gold continues to be sufficiently high to be in full speculation mode.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
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