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