July 16, 2009 Edition, Volume III
Inside Signature Update
- On the Earnings Front
- Mousetrap or Health Care Reform?
- CIT Group Bankruptcy Looming
On the Earnings Front
The US equities market posted slow but steady gains over the last five trading sessions to close Wednesday at 8,616 points on the DOW for the first time since mid June, and higher than at any point in the entire month of May. So much for the oft repeated phrase, ‘sell in May and go away’. As we noted two weeks ago, summer market sell off’s aren’t likely in the early stages of a recovery and this summer’s market may well push the DOW and S&P in to new territory for 2009, opening the door for potentially impressive third and fourth quarter market rebounds; it all depends on earnings.
While 2nd Quarter GDP (gross domestic product) figures won’t be released until the end of the month, early earnings reports from the technology and financial services sectors are sufficiently robust for most analysts to expect 2nd Quarter GDP declines to be much improved from 1st Quarter figures (5.5% decline) and well ahead of early expectations – something along the lines of -3.0% to -3.3%.
Strong earnings reports from industry leaders Intel and Goldman Sachs sparked Wednesday’s 257 point rally for the DOW as traders and investors expect other major firms to post better than expected earnings for the quarter. Weak retail sales and worsening employment figures notwithstanding, the US economy appears to have firmly turned the corner and is setting the stage for real GDP growth in the 3rd and 4th Quarters.
In addition to better-than-expected reports from Intel and Goldman Sachs, JP Morgan reported net income gains of 36% and drug manufacturers Novartis and Baxter soundly beat estimates, with Baxter recording a net income gain of 8%. Johnson & Johnson, a consumer products bellwether, posted a 3½% profit for the quarter based on consumers shifting to the firm’s lower-priced, mass-marketed brands as opposed to more expensive products offered through specialty retailers and high-end department stores. In economic terms, Johnson & Johnson’s products often act as substitutes for higher-priced alternatives and experience increasing sales volumes during more difficult times in much the same way that Wal-Mart and Target have benefited from the recent recession over Macy’s and Nordstrom’s.
Even rail transport company, CSX is benefiting from the improvement in the economy as their earnings came in at $.78 per share. Though the figure represents a 20% decline from the same period in 2008, they were higher than analyst’s estimates as CSX reported higher than anticipated rail volume. Railroads are more likely to ship raw goods into manufacturing plants, while surface transport (trucks) ship finished goods to wholesale and retail distribution points well in advance of retail sales activity, making rail transport a key economic indicator.
The markets continue to look for corroborating evidence that the worst is behind us – a wave of broad-based, strong earnings reports are as good as it gets and the reports filtering in thus far are nothing short of impressive. Admittedly, strong earnings are always among the first to be reported and the market will almost certainly give up some gains as retail and consumer-driven firms post their results.
Thursday’s decline in new jobless claims by some 100,000 came as a welcome surprise, but may not mean that the labor market is marking meaningful improvement. Employment figures, gauged on a week-by-week basis, experience greater fluctuation than other indicators marked over a longer time frame. The decrease is nonetheless important as it adds validity to the stabilization in the rate of increase in unemployment. Stabilization is one thing; improvement is altogether different and likely won’t be seen for some months to come as employment gains lag economic recovery by three months or more.
Mouse Trap or Health Care Reform?
For those who remember Mouse Trap, the 60’s era board game popularized by Rube Goldberg and Marvin Glass, the organizational chart of the Obama Health Care Plan will look pleasantly familiar, though substantially more complex.
While this may be the House and Senate’s idea of reform, few can follow the little ball as if makes its way from consumer to health care provider and back.
Complicated further by Representative John Dingell’s (D-Mich) confirmation that the plan will require a federal tax increase in excess of $1 trillion, the plan has little likelihood of passage in the Senate.
Senator Kaye Bailey Hutcheson (R-TX) declared the legislation non-passable in a CNBC interview Wednesday, citing the bill’s complex bureaucracy and extraordinary cost. This on the same day that the Democrat controlled Senate panel reviewing the legislation approved it for consideration by the entire Senate.
As hoped for, the Obama administration has backed off of some of the anti-business rhetoric of recent weeks, recognizing that their posturing, though popular among House and Senate liberals, was costing critical support from business leaders for any possible passage of healthcare and energy initiatives. Perhaps too little, too late – neither initiative appears now to have the support to make it through Congress this year and the administration has repeatedly stated that if it doesn’t happen this year, it’s likely not to happen in Obama’s first term.
CIT Group Bankruptcy Looming
The pending state of CIT Group (CIT), as is hangs on the edge of bankruptcy, may have much broader ranging impact than investor’s loss of market value. CIT is one of the nation’s largest lenders to small and medium sized businesses and the potential liquidity loss to the employers of some 70% of US workers could exacerbate an already troubled labor market. CIT’s provision of short-term financing and equipment leasing capital aid businesses in inventory and equipment purchasing, in addition to providing liquidity to cover payroll, rents, advertizing and other meaningful business expenses, without which, many small to medium sized businesses cannot operate.
Look for the current administration to offer a helping hand to CIT. The US Treasury extended $2.3 billion to CIT under the TARP programs and risks losing the entire investment, added to the expanding problems CIT’s demise might offer the still sensitive economy, the problem may be too substantial for policy makers to ignore.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
Thursday, July 16, 2009
Monday, July 13, 2009
Cap and Trade - am economic tradeoff
July 9, 2009 Edition, Volume III
Inside Signature Update
Obama Administration Making Its Mark on the Markets
Cap and Trade Policies – an economic tradeoff
Obama Administration Making Its Mark on the Markets
The weakness in the equities markets over the past several weeks has more to do with policies announced by the Obama administration than on any other input. During a time in which the administration should be obsessively focused on the employment market and restoring America’s economic underpinnings, precious resources, including time, are being directed towards other facets of the administration’s wide ranging and sometimes idealistic agenda. This may well represent change, but it is not what the American people bargained for, and Obama’s numbers in the poles are telling an important story; one in three voters has lost confidence in the newly elected president’s ability to deftly deal with the economy and the employment markets. Not good… not good at all.
Too much of the rhetoric coming out of Washington has turned decidedly anti-business, not unlike it did prior to the market’s decline ending in a March low on the DOW at nearly 6,500 points. Following heavy handed dealings with the financial services and automobile industries, the administration has prematurely turned its attention to health care and energy. While most would agree that a re-engineering of these industries may ultimately be important, the tenor of the administration’s actions is damaging the markets as it is ill timed and taking important focus away from much needed attention to the labor markets and restoring confidence in the economy.
Ideally, there are numerous fronts that must be addressed, but doing so while the nation bleeds jobs is simply a waste of capital; economic and political. I’ll repeat CNBC’s Jim Cramer’s sentiment expressed Wednesday afternoon; I want Obama to succeed at restoring jobs and growth to the US economy, but right now he, his advisors, and key legislative representatives in the House and Senate are blowing it. It’s time for a change!
Cap and Trade Policies – an economic tradeoff
The Energy Bill recently passed by the US House of Representatives includes more than 1,200 pages of policy, amendments and ‘stuff’. ‘Stuff’ best describes most of it as 300 pages of amendments and special interest bequests were added to the bill just hours before its passing. At the heart of the bill is a plan to reduce greenhouse gas emissions to 17% below 2006 levels by 2020 through the use of a ‘cap and trade’ system in which companies would buy and sell pollution permits to meet emissions limits. Predictably, the Democrats are pleased with themselves for passing such a sweeping piece of legislation, the Republicans are outraged at the cost the public will bear, and most people just don’t care; but this is one we all need to care about.
When energy prices are high, politicians and the public clamor for greater energy efficiency, but once prices subside, the noise goes away and little improvement is made. Let’s face it, there’s a high cost to changing energy policy and there’s a cost of not changing as well; we just get confused over which cost we’re willing to bear when the short-term pricing moves up and down at the gas pump or on our monthly utility statements. Most would agree that we must reduce, or even eliminate our nation’s dependence on foreign oil or fossil fuels altogether; that’s an ambitious goal, but few of us honestly see a prosperous future without such changes.
This is a difficult time to consider stepping up to pay for such a major overhaul of our energy policy and it is taking important capital away from the more important need for job creation. Regardless, we’ll soon need to bite the bullet, and in keeping with the theme of an ‘Economic Reset’, at some point we’ll need to simply set our sights on the future and run. There’s more than a little naïveté in that statement, but the public and our political representatives have oft times shown a lack of willingness to address this issue when it may be more advantageous to do so, and many would suggest that we’re running out of time. The Obama administration sees the current situation as an opportunity and may be making a run at it as they work towards several major policy initiatives, including healthcare reform. Change is costly and may cause a myriad of other difficulties; prudent change on the other hand, complemented or offset by cost reductions in other areas, has a chance of success. Does the current administration, with effective control of the house and senate, have the strength and courage to trim other waste in order to make room for the expense of forward-thinking initiatives? Likely not, but we can always hope.
There is a current and future cost to higher levels of pollution. Whether you subscribe to ‘global warming’ theories or you simply don’t appreciate viewing dense haze, breathing in polluted air, or enduring another ‘smog alert’; it’s difficult to ignore the reality. While we have substantially more fuel-efficient transportation systems, energy production and manufacturing processes than at any time in the past 100 years, we also have many more people to support and we use far more energy per person than ever before. That’s a trend that’s simply not going to reverse itself; it would be economic suicide were we to attempt such an exchange.
As other less developed nations move towards an improved quality of life the problem will simply exacerbate itself. Jared Diamond, the author of Collapse, makes an interesting point as he suggests that ‘the larger danger that we face is not just of a two-fold increase in population, but of a much larger increase in human impact if the Third World’s population succeeds in attaining a First World standard’. With lifestyle changes in many emerging economies, it is becoming ever more incumbent on us to decrease our ecological footprint, both personally and as a society, before we risk being suffocated by it as others attain our standard of living.
There are numerous ways of curtailing greenhouse gases, we have the technology and understand how to deploy it, but the problem lies more in how to motivate firms and consumers to choose efficiency over lower-cost alternatives. While a ‘cap and trade’ system has numerous pitfalls, it may represent an efficient way to affect a shift in production and consumption.
‘Cap and trade’ refers to the issuance of pollution permits to businesses allowing certain levels of specific pollutants from that business at a cost that reasonably must be viewed as a pollution tax. Firms that re-engineer their manufacturing processes sufficiently to emit less pollution than their permit allows may sell the excess (unused) pollution capacity to firms that emit pollutants beyond the limits of their permits. The trading of these permits is likely to create additional revenues for very efficient firms and increase costs for firms that are less efficient, but such additional costs may be less than the fines a firm may have to pay if it emits pollutants in excess of allowable levels based on current standards. The current system of pollution standards provides incentives for firms to avoid being fined by not emitting more pollution than allowed, but doesn’t offer real incentive for a firm to become more efficient than imposed standards would dictate. A ‘cap and trade’ system has the ability to reward very efficient firms, while at the same time keeping less efficient firms from paying heavy fines and penalties to federal, state and municipal bodies. The taxing authorities which now depend on collecting such fines, and as such are less likely to assist a firm in creating more efficient processes, would receive the bulk of their revenues from the cost of the permits up front rather than through a process of monitoring, fining and collecting from offending firms.
In terms of an economic model designed to offer incentives and create surplus, a ‘cap and trade’ system may be preferable to most others. However, it is costly, and the cost will undoubtedly be passed onto consumers. As a result, consumer demand for a given product at a higher price point will decline and the result may be fewer jobs. It is also likely that less-expensive substitutes may gain market share. Some firms will simply choose to bypass the system and move higher polluting manufacturing processes to other countries with lower costs or standards – again resulting in domestic unemployment. These are two of the main points of contention many have with the proposed system, and at a time when job creation should be first and foremost on the minds of our nation's policy makers, a 'cap and trade' system may not be all that expedient.
We already have major US firms that have moved their manufacturing processes offshore to gain cost advantages; sometimes to avoid high union labor and benefit costs, other times to seek out lower costs of land and rents, and to find lower emissions costs or to be allowed to continue to use higher polluting, lower cost manufacturing processes. While we can surmise that imposing a cost to purchase pollution permits may be enough to push some firms to look to other markets for producing goods it may also attract firms from other markets with efficient processes that may find themselves profiting from the secondary market sale of their unused credits. Other firms may find that the cost of permitting may be lower than the cost of fines and penalties. Yet other firms may choose to re-engineer and may find greater profitability by doing so - both in terms of lower costs and higher revenues - such has been the case of many US corporations thus far.
If there is to be a marketplace for the trading of permits, rest assured that a regulatory environment will develop to govern it – in the mean time the trading of permits may be a breeding ground for abuse and unfair practices.
Those nations that have succeeded in encouraging ‘green’ concepts for businesses and consumers have done so at great political and economic costs, but with the attending benefits such investments may offer. Curitiba, Brazil is a prime example of a city transformed by courageous elected leaders determined to provide a higher quality of life for their constituents. After 20 plus years of re-engineering, Curitiba is considered the most livable major city on the planet and much of the rest of Brazil is now following suit; as are many other major metropolitan areas in other countries. Innovative practices not unlike the proposed ‘cap and trade’ system have set Curitiba apart as their efforts have transformed the regional economy.
The current energy bill may never make it through the US Senate in the Fall; the very fact that the energy issue is being raised in tough economic times speaks of our interest in improving our national energy structure and will ultimately bode well for our economy and society. If we are to maintain our position as the world’s economic leader, we will have to take bold action to do so – this may be just one example of more to come.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
Inside Signature Update
Obama Administration Making Its Mark on the Markets
Cap and Trade Policies – an economic tradeoff
Obama Administration Making Its Mark on the Markets
The weakness in the equities markets over the past several weeks has more to do with policies announced by the Obama administration than on any other input. During a time in which the administration should be obsessively focused on the employment market and restoring America’s economic underpinnings, precious resources, including time, are being directed towards other facets of the administration’s wide ranging and sometimes idealistic agenda. This may well represent change, but it is not what the American people bargained for, and Obama’s numbers in the poles are telling an important story; one in three voters has lost confidence in the newly elected president’s ability to deftly deal with the economy and the employment markets. Not good… not good at all.
Too much of the rhetoric coming out of Washington has turned decidedly anti-business, not unlike it did prior to the market’s decline ending in a March low on the DOW at nearly 6,500 points. Following heavy handed dealings with the financial services and automobile industries, the administration has prematurely turned its attention to health care and energy. While most would agree that a re-engineering of these industries may ultimately be important, the tenor of the administration’s actions is damaging the markets as it is ill timed and taking important focus away from much needed attention to the labor markets and restoring confidence in the economy.
Ideally, there are numerous fronts that must be addressed, but doing so while the nation bleeds jobs is simply a waste of capital; economic and political. I’ll repeat CNBC’s Jim Cramer’s sentiment expressed Wednesday afternoon; I want Obama to succeed at restoring jobs and growth to the US economy, but right now he, his advisors, and key legislative representatives in the House and Senate are blowing it. It’s time for a change!
Cap and Trade Policies – an economic tradeoff
The Energy Bill recently passed by the US House of Representatives includes more than 1,200 pages of policy, amendments and ‘stuff’. ‘Stuff’ best describes most of it as 300 pages of amendments and special interest bequests were added to the bill just hours before its passing. At the heart of the bill is a plan to reduce greenhouse gas emissions to 17% below 2006 levels by 2020 through the use of a ‘cap and trade’ system in which companies would buy and sell pollution permits to meet emissions limits. Predictably, the Democrats are pleased with themselves for passing such a sweeping piece of legislation, the Republicans are outraged at the cost the public will bear, and most people just don’t care; but this is one we all need to care about.
When energy prices are high, politicians and the public clamor for greater energy efficiency, but once prices subside, the noise goes away and little improvement is made. Let’s face it, there’s a high cost to changing energy policy and there’s a cost of not changing as well; we just get confused over which cost we’re willing to bear when the short-term pricing moves up and down at the gas pump or on our monthly utility statements. Most would agree that we must reduce, or even eliminate our nation’s dependence on foreign oil or fossil fuels altogether; that’s an ambitious goal, but few of us honestly see a prosperous future without such changes.
This is a difficult time to consider stepping up to pay for such a major overhaul of our energy policy and it is taking important capital away from the more important need for job creation. Regardless, we’ll soon need to bite the bullet, and in keeping with the theme of an ‘Economic Reset’, at some point we’ll need to simply set our sights on the future and run. There’s more than a little naïveté in that statement, but the public and our political representatives have oft times shown a lack of willingness to address this issue when it may be more advantageous to do so, and many would suggest that we’re running out of time. The Obama administration sees the current situation as an opportunity and may be making a run at it as they work towards several major policy initiatives, including healthcare reform. Change is costly and may cause a myriad of other difficulties; prudent change on the other hand, complemented or offset by cost reductions in other areas, has a chance of success. Does the current administration, with effective control of the house and senate, have the strength and courage to trim other waste in order to make room for the expense of forward-thinking initiatives? Likely not, but we can always hope.
There is a current and future cost to higher levels of pollution. Whether you subscribe to ‘global warming’ theories or you simply don’t appreciate viewing dense haze, breathing in polluted air, or enduring another ‘smog alert’; it’s difficult to ignore the reality. While we have substantially more fuel-efficient transportation systems, energy production and manufacturing processes than at any time in the past 100 years, we also have many more people to support and we use far more energy per person than ever before. That’s a trend that’s simply not going to reverse itself; it would be economic suicide were we to attempt such an exchange.
As other less developed nations move towards an improved quality of life the problem will simply exacerbate itself. Jared Diamond, the author of Collapse, makes an interesting point as he suggests that ‘the larger danger that we face is not just of a two-fold increase in population, but of a much larger increase in human impact if the Third World’s population succeeds in attaining a First World standard’. With lifestyle changes in many emerging economies, it is becoming ever more incumbent on us to decrease our ecological footprint, both personally and as a society, before we risk being suffocated by it as others attain our standard of living.
There are numerous ways of curtailing greenhouse gases, we have the technology and understand how to deploy it, but the problem lies more in how to motivate firms and consumers to choose efficiency over lower-cost alternatives. While a ‘cap and trade’ system has numerous pitfalls, it may represent an efficient way to affect a shift in production and consumption.
‘Cap and trade’ refers to the issuance of pollution permits to businesses allowing certain levels of specific pollutants from that business at a cost that reasonably must be viewed as a pollution tax. Firms that re-engineer their manufacturing processes sufficiently to emit less pollution than their permit allows may sell the excess (unused) pollution capacity to firms that emit pollutants beyond the limits of their permits. The trading of these permits is likely to create additional revenues for very efficient firms and increase costs for firms that are less efficient, but such additional costs may be less than the fines a firm may have to pay if it emits pollutants in excess of allowable levels based on current standards. The current system of pollution standards provides incentives for firms to avoid being fined by not emitting more pollution than allowed, but doesn’t offer real incentive for a firm to become more efficient than imposed standards would dictate. A ‘cap and trade’ system has the ability to reward very efficient firms, while at the same time keeping less efficient firms from paying heavy fines and penalties to federal, state and municipal bodies. The taxing authorities which now depend on collecting such fines, and as such are less likely to assist a firm in creating more efficient processes, would receive the bulk of their revenues from the cost of the permits up front rather than through a process of monitoring, fining and collecting from offending firms.
In terms of an economic model designed to offer incentives and create surplus, a ‘cap and trade’ system may be preferable to most others. However, it is costly, and the cost will undoubtedly be passed onto consumers. As a result, consumer demand for a given product at a higher price point will decline and the result may be fewer jobs. It is also likely that less-expensive substitutes may gain market share. Some firms will simply choose to bypass the system and move higher polluting manufacturing processes to other countries with lower costs or standards – again resulting in domestic unemployment. These are two of the main points of contention many have with the proposed system, and at a time when job creation should be first and foremost on the minds of our nation's policy makers, a 'cap and trade' system may not be all that expedient.
We already have major US firms that have moved their manufacturing processes offshore to gain cost advantages; sometimes to avoid high union labor and benefit costs, other times to seek out lower costs of land and rents, and to find lower emissions costs or to be allowed to continue to use higher polluting, lower cost manufacturing processes. While we can surmise that imposing a cost to purchase pollution permits may be enough to push some firms to look to other markets for producing goods it may also attract firms from other markets with efficient processes that may find themselves profiting from the secondary market sale of their unused credits. Other firms may find that the cost of permitting may be lower than the cost of fines and penalties. Yet other firms may choose to re-engineer and may find greater profitability by doing so - both in terms of lower costs and higher revenues - such has been the case of many US corporations thus far.
If there is to be a marketplace for the trading of permits, rest assured that a regulatory environment will develop to govern it – in the mean time the trading of permits may be a breeding ground for abuse and unfair practices.
Those nations that have succeeded in encouraging ‘green’ concepts for businesses and consumers have done so at great political and economic costs, but with the attending benefits such investments may offer. Curitiba, Brazil is a prime example of a city transformed by courageous elected leaders determined to provide a higher quality of life for their constituents. After 20 plus years of re-engineering, Curitiba is considered the most livable major city on the planet and much of the rest of Brazil is now following suit; as are many other major metropolitan areas in other countries. Innovative practices not unlike the proposed ‘cap and trade’ system have set Curitiba apart as their efforts have transformed the regional economy.
The current energy bill may never make it through the US Senate in the Fall; the very fact that the energy issue is being raised in tough economic times speaks of our interest in improving our national energy structure and will ultimately bode well for our economy and society. If we are to maintain our position as the world’s economic leader, we will have to take bold action to do so – this may be just one example of more to come.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
Thursday, July 2, 2009
Irresponsible Interference with the Fed
July 2, 2009 Edition, Volume III
Inside Signature Update
- Irresponsible Interference with the Fed
- Sell in May and Go Away, unless a recovery is in the offing
- Economic Potpourri
Politically Irresponsible Interference with the Fed
When California Representative Darrell Issa challenged Federal Reserve Chairman Ben Bernanke and the Federal Reserve’s integrity last week it set off a maelstrom Issa likely hadn’t anticipated. Issa, the ranking Republican member of the House Oversight and Government Reform Committee accused Bernanke and the Fed of a cover-up related to Bank of America’s acquisition of Merrill Lynch and alleged threats, or pressure, that may have been applied to Bank of America CEO Ken Lewis. Little in this situation is new, excepting Issa’s bold and irresponsible challenge released virtually simultaneously with the Federal Reserve’s Open Market Committee (FOMC) statement following the recent Fed meetings. Issa’s move was risky, costly to the markets and to his credibility, and now appears to have been a crude attempt to upstage the Fed – poorly done.
Before Issa’s staff released the statement, they knew full well that the timing would undermine the FOMC statement, which is intended to offer the markets a view into the thinking of the Fed Board of Governors as they address monetary policy. The FOMC statement, which should have provided some lift to the markets as it evidenced the Fed’s intention to ‘stay the course’ as it relates to current monetary policy and low interest rates, was only able to undo some of the damage Issa and his staff inflicted as the DOW tumbled and then stabilized to close down almost 75 points on the day. Contrary to what the public might suppose, the Federal Reserve, and its chairman trade on trust and integrity, without which they cannot aide in guiding our economy through difficult times. The credit markets recoiled immediately following Issa’s statement and the equity markets followed. Billions of dollars of investor resources evaporated as a result; needlessly.
Before the end of the day Issa made himself available to the financial press and back pedaled when pressed on what he meant by ‘cover-up’. For a nation now accustomed to terms such as ‘Watergate’, ‘Iran-Contra’, and ‘Whitewater’, the very use of the term ‘cover-up’ by a public official can be reckless, especially if they don’t have the backbone to stand behind their words, which Issa clearly did not.
Bernanke’s testimony before the US House of Representatives the next morning was solid and forthright as he stated, “Let me be clear: At no time during these discussions did I or any member of the Federal Reserve direct, instruct or advice anyone at Bank of America to withhold from public disclosure information about Merrill Lynch, its anticipated or actual losses, its compensation packages or bonuses, or any other related matter," Though the current disparity between statements offered by former Treasury Secretary Hank Paulson, Bank of America CEO Ken Lewis and Fed Chairman Bernanke may well need to be sorted out, the proper place is not in the media and the timing of such a discourse should be for the benefit of the American people and our economic process rather than any one player seeking public attention.
Sell in May and Go Away, unless a recovery is in the offing
The market adage ‘Sell in May and Go Away’ addresses the likelihood that May equity values are likely to be higher than those to found at the end of the summer, and more often than not it’s true. Despite arguments from professional traders looking for bargains and transaction fees, or optimism expressed by many advisors, more often than not stock market values are lower by mid-September than they are just before Memorial Day. While it may not make sense to liquidate a portfolio due to transaction costs and tax considerations, it is worth noting the phenomenon. Except when following an economic downturn and recession.
Though a market rebound for the summer is by no means a certainty, a gradual increase in equity values is likely as signs of economic improvement pervade the markets. If the Obama administration’s stimulus plan is going to make an impact, which has yet to be observed, it will do so before the end of the summer. Second quarter corporate earnings will be announced soon and may offer a lift to the markets if they meet or exceed expectations as well.
Economic Potpourri
The ‘green shoots’ so often referenced while discussing the economy’s stabilization and recovery are springing up with greater consistency each week. Within the last week a bevy of economic data has been released, most of which supports economist’s observations that a modest turn around is taking shape.
- This morning’s US Census Bureau’s US Manufacturing report represents durable and non-durable goods increases for 3 of the last 4 months with increases in May of 1.8% and 1.2% respectively. The report also shows a slight increase in manufacturing inventory levels, the first in nine months.
- The Institute for Supply Management’s (ISM) July 1st report represented seven of eighteen industry sectors showing growth in June, reflected by gains in the production index of 12.1%.
- The US Bureau of Economic Analysis reports an upward revision in 1st Quarter GDP to a decrease of 5.5% versus the 5.7% reported earlier. Not a major change, but we’ll take what we can get.
- Personal Savings rates increased to a 16 year high to a level of 6.9% and personal income rose an unexpected 1.4% - this is good news-bad news as it may also put a damper on consumer spending.
- The Fed FOMC represented little concern over any meaningful risk of either inflation or deflation in the foreseeable future and suggested that the current monetary policy of extremely low interest rates will remain unchanged.
Sadly, just as there are ‘green shoots’, there are problematic economic pests that would eat away at them:
- The Consumer Confidence Index (CCI) declined in June by almost 4.5% after a multi-month upward trend. Presumably the impact of continuing unemployment, a decline in the CCI often is a precursor to declines in consumer spending.
- The futures market for credit contracts are currently priced to reflect an increase in interest rates later this year. Though this is contradictory to current Fed policy, it may lead to higher corporate and consumer borrowing rates.
- Unemployment, though rising more slowly than in the 4th quarter of 2008 and 1st quarter of 2009, rests at 9.4% and may exceed 10% before we see real improvement. This is in contrast to Obama administration claims that their stimulus package is providing improvement in the job market.
- The World Bank reported a 2009 estimate for US GDP with a 2.9% overall decline amidst an even sharper decline globally, but the report did represent a greater than expected GDP growth rate for 2010.
Though the net impact of the various signs of improvement versus ongoing difficulties appears to be positive and points towards sustained economic growth it also appears that our recovery will be long and may be arduous. Many are calling the recent recession ‘The Great Recession’, and clearly it has been the hardest hitting in recent memory. But from my perspective, the comparison and play on words to the 1930’s era ‘Great Depression’ tempts fate just a little too much.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
Inside Signature Update
- Irresponsible Interference with the Fed
- Sell in May and Go Away, unless a recovery is in the offing
- Economic Potpourri
Politically Irresponsible Interference with the Fed
When California Representative Darrell Issa challenged Federal Reserve Chairman Ben Bernanke and the Federal Reserve’s integrity last week it set off a maelstrom Issa likely hadn’t anticipated. Issa, the ranking Republican member of the House Oversight and Government Reform Committee accused Bernanke and the Fed of a cover-up related to Bank of America’s acquisition of Merrill Lynch and alleged threats, or pressure, that may have been applied to Bank of America CEO Ken Lewis. Little in this situation is new, excepting Issa’s bold and irresponsible challenge released virtually simultaneously with the Federal Reserve’s Open Market Committee (FOMC) statement following the recent Fed meetings. Issa’s move was risky, costly to the markets and to his credibility, and now appears to have been a crude attempt to upstage the Fed – poorly done.
Before Issa’s staff released the statement, they knew full well that the timing would undermine the FOMC statement, which is intended to offer the markets a view into the thinking of the Fed Board of Governors as they address monetary policy. The FOMC statement, which should have provided some lift to the markets as it evidenced the Fed’s intention to ‘stay the course’ as it relates to current monetary policy and low interest rates, was only able to undo some of the damage Issa and his staff inflicted as the DOW tumbled and then stabilized to close down almost 75 points on the day. Contrary to what the public might suppose, the Federal Reserve, and its chairman trade on trust and integrity, without which they cannot aide in guiding our economy through difficult times. The credit markets recoiled immediately following Issa’s statement and the equity markets followed. Billions of dollars of investor resources evaporated as a result; needlessly.
Before the end of the day Issa made himself available to the financial press and back pedaled when pressed on what he meant by ‘cover-up’. For a nation now accustomed to terms such as ‘Watergate’, ‘Iran-Contra’, and ‘Whitewater’, the very use of the term ‘cover-up’ by a public official can be reckless, especially if they don’t have the backbone to stand behind their words, which Issa clearly did not.
Bernanke’s testimony before the US House of Representatives the next morning was solid and forthright as he stated, “Let me be clear: At no time during these discussions did I or any member of the Federal Reserve direct, instruct or advice anyone at Bank of America to withhold from public disclosure information about Merrill Lynch, its anticipated or actual losses, its compensation packages or bonuses, or any other related matter," Though the current disparity between statements offered by former Treasury Secretary Hank Paulson, Bank of America CEO Ken Lewis and Fed Chairman Bernanke may well need to be sorted out, the proper place is not in the media and the timing of such a discourse should be for the benefit of the American people and our economic process rather than any one player seeking public attention.
Sell in May and Go Away, unless a recovery is in the offing
The market adage ‘Sell in May and Go Away’ addresses the likelihood that May equity values are likely to be higher than those to found at the end of the summer, and more often than not it’s true. Despite arguments from professional traders looking for bargains and transaction fees, or optimism expressed by many advisors, more often than not stock market values are lower by mid-September than they are just before Memorial Day. While it may not make sense to liquidate a portfolio due to transaction costs and tax considerations, it is worth noting the phenomenon. Except when following an economic downturn and recession.
Though a market rebound for the summer is by no means a certainty, a gradual increase in equity values is likely as signs of economic improvement pervade the markets. If the Obama administration’s stimulus plan is going to make an impact, which has yet to be observed, it will do so before the end of the summer. Second quarter corporate earnings will be announced soon and may offer a lift to the markets if they meet or exceed expectations as well.
Economic Potpourri
The ‘green shoots’ so often referenced while discussing the economy’s stabilization and recovery are springing up with greater consistency each week. Within the last week a bevy of economic data has been released, most of which supports economist’s observations that a modest turn around is taking shape.
- This morning’s US Census Bureau’s US Manufacturing report represents durable and non-durable goods increases for 3 of the last 4 months with increases in May of 1.8% and 1.2% respectively. The report also shows a slight increase in manufacturing inventory levels, the first in nine months.
- The Institute for Supply Management’s (ISM) July 1st report represented seven of eighteen industry sectors showing growth in June, reflected by gains in the production index of 12.1%.
- The US Bureau of Economic Analysis reports an upward revision in 1st Quarter GDP to a decrease of 5.5% versus the 5.7% reported earlier. Not a major change, but we’ll take what we can get.
- Personal Savings rates increased to a 16 year high to a level of 6.9% and personal income rose an unexpected 1.4% - this is good news-bad news as it may also put a damper on consumer spending.
- The Fed FOMC represented little concern over any meaningful risk of either inflation or deflation in the foreseeable future and suggested that the current monetary policy of extremely low interest rates will remain unchanged.
Sadly, just as there are ‘green shoots’, there are problematic economic pests that would eat away at them:
- The Consumer Confidence Index (CCI) declined in June by almost 4.5% after a multi-month upward trend. Presumably the impact of continuing unemployment, a decline in the CCI often is a precursor to declines in consumer spending.
- The futures market for credit contracts are currently priced to reflect an increase in interest rates later this year. Though this is contradictory to current Fed policy, it may lead to higher corporate and consumer borrowing rates.
- Unemployment, though rising more slowly than in the 4th quarter of 2008 and 1st quarter of 2009, rests at 9.4% and may exceed 10% before we see real improvement. This is in contrast to Obama administration claims that their stimulus package is providing improvement in the job market.
- The World Bank reported a 2009 estimate for US GDP with a 2.9% overall decline amidst an even sharper decline globally, but the report did represent a greater than expected GDP growth rate for 2010.
Though the net impact of the various signs of improvement versus ongoing difficulties appears to be positive and points towards sustained economic growth it also appears that our recovery will be long and may be arduous. Many are calling the recent recession ‘The Great Recession’, and clearly it has been the hardest hitting in recent memory. But from my perspective, the comparison and play on words to the 1930’s era ‘Great Depression’ tempts fate just a little too much.
Signature Update is offered by Richard Haskell, Managing Director of Signature Wealth Management and CEO of Signature Management, LLC
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