Thursday, March 31, 2011

At the Heart of Madness and/or Evil

I just finished reading "All the Devils Are Here" by Bethany McLean and Joe Nocera.  It is one of many books chronicling the global financial crash.  However, there is less narration and more conclusions than most.  The one that most resonated with me was "The rating agencies were at the very heart of the madness."

While there has been much highly-deserved criticism of bankers, the credit rating agencies have gotten off far too easy.  The big three are Moody's, Standard & Poor's, and Fitch's.  They are all still standing!  Sure, they have fired some of their senior executives.  But, they have not been fined enough to reflect their guilt.

If bankers ran around the world selling crap as investment, they were acting as salesmen.  The quality of that investment was certified by the credit rating agencies.  In order to make money, the rating agency would be paid by the banker.  If the rating agency didn't rate the credit quality high enough, the banker would take his business and fees to another rating agency.  The credit rating agencies sold their soul for money!  But, that is not a crime.

I understand why the bankers AND the credit agencies did what they did . . . GREED!  What I don't understand is why the credit rating agencies got off so easy?  Why has nobody gone to jail?  Or, even to trial?  Maybe, the regulators are still asleep?  We paid a terrible price the last time the regulators feel asleep and didn't want to "interfere with the functioning of the market."

The "banality of evil" was a phrase coined by Hannah Arendt to describe the Holocaust, when ordinary people accepted the rules of their environment and participated in actions they would have previously abhorred.  The nerds and geeks in credit rating agencies were pretty banal indeed.

Wednesday, March 30, 2011

Technical Problem for the Fed

I just read the speech of Charles Plosser, President of the Federal Reserve Bank of Philadelphia, that he gave last Friday. It was widely reported as the Fed's "Exit Strategy" from its very successful effort to save the economy. Mostly, I agree with him, especially his belief that the Fed's action be made clear long before they actually do something. The markets do over-react and go crazy whenever anything unexpected happens.

My problem is that he wants a formula to sell a pre-determined amount of the bonds they own each time the Fed raises interest rates, as they surely will. They will only raise rates as the economy grows and needs less support. Therefore, the market should be in a better position to buy those bonds that the Fed owns, right?

You'll recall that the Fed has been buying mortgage-backed-securities or bonds collateralized with home mortgages. In effect, the Fed has made almost every mortgage loan to buy homes since the recession started, and they don't like owning those "mortgages." They want to sell them. Here's my fear: what happens if the economy is growing and the Fed raises interest rates but sells too many bonds for the market to easily absorb?

To sell those mortgages into a soft market, they will have to sell them at a loss and at higher interest rates.
It is no secret that higher interest rates will reduce home sales, and that, ladies and gentlemen, is not something this country needs!

Coming Feature . . . Starring a Number!

The big show is Friday at 8:30AM. That's when the monthly jobs report is issued by the government, i.e., Bureau of Labor Statistics. It is the single most important statistic released each month and can easily move markets. If the number is much over 225 thousand jobs, the market will probably rise. If much less, the market will probably fall.

Today, the huge payroll company, ADP, estimated the number at 201 thousand, which is close enough to the consensus estimate. Further, the headhunting firm of Challenger, Gray estimated the number of planned layoffs dropped 18% from the previous month and 39% from the same month the previous year. In fact, layoffs during the first quarter were the lowest since 1995.

But, don't be surprised if the unemployment rate actually goes up from 8.9% of the labor force, depending on how many people re-entered the labor force, because they think they can now get a job. Clearly, the job market is improving but s-l-o-w-l-y!

Monday, March 28, 2011

An Exogeneous Week . . . Except Friday

Fridays are usually the most volatile trading day of the week, as traders try to protect themselves before the weekend when the market is closed. The most volatile Friday each month is usually the day when the "Monthly Jobs Report" is issued, which will be this Friday. That is the most closely watched economic report and can easily move markets. Because it is so volatile, traders tend to step aside as the day approaches. Therefore, I don't expect the market to be very interesting until Friday. That makes the market more vulnerable to exogeneous factors, such as war in Libya, radiation leaks in Japan, European debt issues, etc. While the consumer earnings and consumer spending reports came out this morning, showing good numbers, the futures didn't budge. The market was already expecting good numbers and was already watching for foreign events to move the market. This week, just read the front page, and wait until Friday to read the business page.

Send In The Clowns

On April 8th, there could be another government shutdown, unless Congress passes a budget. They are still operating until a continuing operating resolution, their third one, unable to agree on a budget for this fiscal year. The Tea Party wants another $61 billion cut out of the budget (Who doesn't?). The Democrats think it is immoral to cut funding for homeless veterans, poor children and pregnant women in order for high income earners to get another tax break. The Republicans are simply praying the Tea Party doesn't cause a government shutdown that the Republicans could be blamed for. Certainly, no business can be run this way, with no manager knowing what their budget is. How can the largest organization on the planet, i.e., the U.S. government, be run this way? Of course, the easy way to eliminate this year's deficit is to end the war in either Iraq or Afghanistan immediately, but that's not going to happen. And, if that sounds too difficult, imagine the smartest way to eliminate the budget; which is reducing the growth in entitlements, like Social Security and Medicare, which compose over half of the Federal budget. Instead, the needed cuts will be from the discretionary spending on human services. Who needs those anyway, other than homeless veterans, poor children, and pregnant women? This indecision on the budget process may be silly and inefficient, but the indecision on raising the debt ceiling is insane. Failure to do this will have immediate and costly implications. It is at that point that the elected clowns become the elected morons.

Saturday, March 26, 2011

The Cost of Market Prices

The average trading volume of oil futures is about 890,000 thousand, which equates to about 890 million barrels per day. Yet, the average consumption of oil is less than 20 million barrels per day. While there are certainly some other issues and uses, it does lend some perspective into just how much speculation there is in oil prices.

That sounds ominous and somewhat dangerous, but should not be worrisome . . . as long as it represents a larger universe of knowledgeable traders than mere distributors of oil. The larger the number, the harder it is for market collusion to drive market prices up or down.

Of course, traders can evidence a herd mentality as easily as distributors, and greater numbers might then cause greater volatility in market prices. While there is no evidence that actually happens, it does suggest there is a cost to reducing the odds of market collusion. It is the risk that speculators can get "spooked" and start trading irrationally . . . with consumers eventually paying either higher prices or lower prices. Either way, consumers would not then be paying market prices.

Friday, March 25, 2011

Poor Harry . . .

President Harry Truman is famed for asking "Give me a one-handed economist!" His lament was that economists always say "on the other hand." Today's economic news is a good example.

First, the GDP growth rate was revised upwards to 3.1%, which was better than expected. "On the other hand" shortly afterwards, consumer sentiment numbers were released, showing the lowest in a year. How is a person or even a President to read such numbers?

My take is that things continue to look good. GDP measures a much longer period, thus giving a better picture. Plus, the drop in consumer sentiment was so sharp that it looks suspicious. Today, I only need one hand . . . but tomorrow . . .who knows...??

The market seems to agree and is up 46 points at I type this. Keep up the good work!!

Thursday, March 24, 2011

Kicking Back . . .

Sometimes, things come into better focus when you stop looking at them. I'm sitting on a sunny balcony in Myrtle Beach, reading "Super Sectors" by John Nyaradi.

Sector rotation is a method of investment management whereby the investor buys cyclical stocks as the economy grows and defensive stocks as the economy declines. An example of a cyclical stock would be technology, and a defensive example would be consumer staples, like grocery stores.

Of course, the problem is that you have to be certain the economy is growing or declining. There is always a great deal of disagreement as to whether the economy is getting ready to grow or decline. Just watch CNBC!

Nyaradi's thesis is that sector rotation is important but sectors should be emphasized that have long run potential regardless of the business cycle. The ones he identifies are (1) energy, (2) health care, (3) technology, (4) financials, and (5) the rise of Asia.

Technically, the rise of Asia is not a sector of the economy, but it nonetheless is a long term investment plan I believe. I also agree with energy, health care, and technology. I disagree with financials, as that sector is undergoing massive change due to last year's financial re-regulation, plus that sector is most vulnerable to another collapse in the derivatives market.

Thank God for books, so we can get information and thoughts without CNBC!

Monday, March 21, 2011

Where's My Party Hat?

Did you feel the tide going out? It is the tide of uncertainty that swept over the market for the last few weeks. Markets don't like uncertainty!

There is less uncertainty about Khaddafi; he's toast! There is less uncertainty about Japan; it will take $235 billion over 5 years to rebuild, according to the World Bank. There is still some uncertainty about the possibility of nuclear disaster in Japan, but it also is receding.

Two months ago, I predicted the market needed to pull back 4-8 percent for awhile and give the economy a chance to catch up. We did go down 8 percent, and it is time for the bulls to run awhile. Of course, it won't be long before the bulls get too far ahead of the economy again and need to rest.

Right now, the futures market is predicting the Dow will open up about 120 points. If the Japanese reactor becomes more de-stabilized, the Dow will turn ugly again. But, for now, put your party hat on!

Friday, March 18, 2011

Drinking From a Firehose

It is hard to remember so many important news events happening at the same time. We're going to establish a no-fly zone over Libya, a move advocated by France, who does not have a reputation as a war-like nation. Did you hear that the protests in Bahrain were brutally surpressed by the Saudis? Gas at $4/gallon is a certainty. At the same time, the G-7 quickly agreed to intervention in the price of the Yen, something that hasn't happened since 2000. Last night, China raised interest rates again, to tamp down inflation, a move that normally tamps down the world stock markets. Importantly, there may be "stability" in Japan's reactor disaster, which is big news, even if premature.

Yesterday, the Dow rose 161 points. At this hour, the futures market is predicting the Dow will open up about 75 points. I suspect the market thinks a lot of news is good news. I don't!

There is a huge sense of relief when the sky does NOT fall, which results in a Relief Rally. (Besides, the market is usually positive before "triple-witching" Fridays, which is today.) I've been predicting a 4-8% decline in the market, and we are there. But, my prediction was without any regard to the trifecta of tragedies in Japan and their combined impact on the world economy. As Robert Frost would say, there are "miles to go before I sleep."

Thursday, March 17, 2011

No Flash Crash II . . . Whew!

Shortly before 3PM on May 6th of last year, I was stunned to watch the Dow drop almost 900 points in minutes during the now infamous "Flash Crash." Much studied since then, we have been assured the new market breakers would prevent that from happening again.

Shortly after 11AM yesterday, I watched the Dow drop almost 150 points in one minute and worried it might be Flash Crash II, but it was not. Apparently, the EU Energy Minister intimated nuclear tragedy was inevitable in Japan, and the market over-reacted (as it always does).

But, it revealed how nervous this market really is. Analysts debated whether correct news of actual meltdown would produce a 1,000 point drop or a mere 500 point drop. Disturbed by its own fragility, the market continued down, with the Dow closing down 242 points.

Last night, the Japanese market was down again but not badly. Europe is up, and futures suggest our market will open up about 70 points. But, don't believe the futures anytime soon. The market is not driven by economics nor earnings nor technical chart nor even geo-political problems. It is driven by headlines!

Wednesday, March 16, 2011

An Important Distraction

In the first quarter of last year, the market set a new post-Lehman high but got de-railed by the European Debt Crisis. In the first quarter of this year, the market set another new post-Lehman high but got de-railed by the North African revolutions, the tragedy in Japan, and, oh yeah, the European Debt Crisis . . . it's still here, darn it!

If you think the U.S. Congress is maddeningly frustrating, it looks downright decisive compared to the European Union and its Parliament. They are working on a plan to increase the size of the bailout fund, called the European Financial Stability Facility, guaranteed by the six EU members who have an AAA credit rating, along with nine others. Of course, those nations want something for the Fund in return, to make sure the weaker members don't back-slide and to limit exposure to their guarantee. They want each nation to become "Little Germanys," who control their pension and health care costs, who demand more of their taxpayers, and who make a good credit rating a national priority. (This is pure Austrian economics.)

While that sounds good collectively, it does limit the national sovereignty of each nation somewhat, if they fail to be fiscally prudent. Now the ECB or European Central Bank wants to make sanctions automatic, while the European Parliament wants each sanction debated before being implemented. We know how well that will work.

So, here we are facing the same problem a year later. Nobody ever said democracies were easy!

Tuesday, March 15, 2011

There are Rallies . . . and There are Rallies

As I write this on Tuesday night, Tokyo has opened up strongly, following their 17% drop this week. One would hope the crisis is over and their stock market can get back to business as usual.

However, until a meltdown is no longer a possibility, I do not believe their market is anywhere near normal.

Sometimes, there is a "dead cat bounce." Forgive the imagery, but it is an old Wall Street one. Imagine dropping a dead cat off your roof onto the driveway. It will bounce, maybe not much, but it will bounce. Bear markets do that as well.

There is also a "relief rally," when investors collectively grasp a straw of positive news and are just relieved to feel good again.

And, there is the "short-covering rally," which occurs when investors must buy stocks to cover the stocks they have sold short. It can be a very powerful rally but short.

Whatever type of rally we're seeing in Tokyo tonight . . . it is a mere "bear market rally," not a real "bull market rally."

Something Smells Fishy

While I am not complaining, the Dow closed down 137 -- only 137! It had been down as much as 296 points in the morning. With chaos in the Middle East, with no resolution to to European credit crisis, and with heart-breaking tragedy in Japan, the U.S. market is not showing as much sympathy as expected.

I still need to research the particulars, but have you noticed how often we've seen the market rally in the late afternoon recently. Overall, the volume remains light, especially in the mornings. Whatever volume there is, it seems to be in the afternoon, with an unusually high of level of buying.

In a normal bear market, one expects heavy selling at the close, but not this one, and that smells fishy to me. Of course, it could mean this is an abnormal bear market . . .

Perspective Changes Everything

Yesterday, the Arab League, which is arguably the planet's most impotent organization, actually requested the United Nations to establish a no-fly zone over Libya. They never speak unkindly of Arab despots. Even more incredible, the Saudi military entered Bahrain to protect the monarchy. In other words, one Arab nation "invaded" another.

In a normal environment, the price of oil would skyrocket upwards. Instead, it is down over $3 per barrel. Investors around the world are trying to raise cash and must sell assets, including oil. In addition, it is unclear if the demand for oil will decline in the short term. This change clearly reflects our preoccupation with the impact of the tragedy in Japan and its aftermath.

While it hard to focus on other issues, it is essential to maintaining perspective. (The U.S. economy continues to grow nicely. Did you notice that HP just increased their dividend by a whopping 50%?) This too will pass, and we can get back to hyper-ventilating over the price of oil.

From Uncertainty to Fear

A week ago, Japan was the world's third largest economy. It survived a major 9.0 earthquake and a horrific tsunami. The economic uncertainty sank in quickly, and world markets naturally sank as well. The Dow sank 51 points, which proved pleasantly resilient.

Since then, the radiation leaks in their 40-year-old nuclear reactors have demonstrated the potential to change a catastrophe into apocalypse. Overnight, the Japanese Prime Minister added more fear by warning that the wind was blowing radiation toward Tokyo. Their stock market dropped over 10% in one single day, absolutely horrific from a financial standpoint. The cost of reconstruction jumped from $35 billion to $122 billion in just one day. I'm confident it will rise much more. For comparison, their stock market has already lost $700 billion in market value.

Their stock market is down 17% in just two days, the worst two days since 1987. Right now, the U.S. futures indicate the Dow will open down about 230 points, yes, 230 points. It was down 283 earlier this morning. It feels like 2009, but it is not. A global financial crisis is much more frightening than an over-reaction to a natural disaster, even a horrific one like this.

Monday, March 14, 2011

So Far, So Good . . .

The first trading day after the disaster in Japan was better than expected, with the Dow dropping only 51 points. There was a good rally going into the close, but volume was quite weak all day. Most investors are too frightened or confused to make bets right now.

Today's light loss is the good news. The bad news is that this is not over. It will be a few more days or even weeks for the uncertainty to wane, before the market can really recover. The market is now down about 4% from its February high. Another 4% and I'll be looking for the bull market to return.

Today's losers were nuclear power companies and insurance re-insurers. If you are an aggressive "bottom-feeder," you will want to start studying those companies. Solar power companies were definite winners today, but that technology producing intermittent energy cannot replace nuclear without government subsidies, which looks unlikely in this political climate.

If you're in a bullish mood and think the danger is behind us, then think about the Libyan crisis and fear of oil disruptions. Oh, and don't forget the European summit this weekend provided only a weak back-stop solution to that crisis. Maybe, we just need a bigger plate?

More seriously, while we are in a bearish market, I still feel confident that 2011 will be bullish, even if March is a loser . . . a tragic loser!

Sunday, March 13, 2011

Japan and Austria

First, my thoughts and prayers go out to the people of Japan, who have sustained a horrific loss from the earthquake, followed by a tsunami, and followed by serious radiation leaks. It must be unimaginable for them.

From an investment standpoint, this will not be good, especially in the short-term. While the world economy has sustained catastrophic losses in the past and will do so in the future, we are now in the period of maximum uncertainty. Markets can handle bad news, but not uncertainty. When we have a ballpark estimate on how many hundreds of billions of dollars of damage were caused, when we know how the property insurers will be impacted, when we know how the Japanese government will react, when we know how the Japanese central bank will react, and the many other variables, the uncertainty will subside and the markets will improve. That may take a week or longer. In the meantime, hold your breath!

A tiny silver lining is that this market swoon will allow time for the U.S. economy to catch up to the U.S. stock market. Undoubtedly, the re-construction of Japan will produce immense profits for many U.S. companies. This helps our recovery, just like World War II helped our recovery from the Great Depression.

The object lesson of this tragedy is that tragedies can easily occur when a country is most economically vulnerable. When the Kobe earthquake occurred in 1995, Japan enjoyed a strong economy, with ample foreign reserves. Today, Japan has the highest debt-to-GDP of any developed nation, over 200%. Admittedly, most of those government bonds are helped by the Japanese people, unlike the U.S. where most of our debt is held by foreigners. But, the Japanese people will have less money to buy their government bonds, and foreigners will not be anxious to buy bonds of such a heavily-indebted nation.

Austrian economics is focused on maintaining a balanced-budget and setting aside reserves. The Japanese government has not been doing that, and the Japanese people will now pay the price. To attract foreigners to buy their bonds, they will have to raise the rate on those bonds, which has the unfortunate effect in increasing their cost of their currency, which then makes their exports more expensive to the rest of the world, who then buy fewer of those exports, leading to higher unemployment for the Japanese, because manufacturers don't need as many employees to make exports if foreigners are not buying. This downward spiral can be broken, but it requires real government leadership, which Japan has not seen in many years.

The U.S. stock market will go down but will not crash. So, take some time off. Be grateful we are spared such natural disasters. The market will come back . . . healthier than before . . . but not tomorrow.

Thursday, March 10, 2011

Maybe . . . just maybe?

Sometimes, you don't recognize that you're getting what you wished for. I've been wishing for the stock market to cool-off or take a break for several months, maybe even take a 4-8% dive. The stock market was just too far ahead of the economy.

Did anybody notice that market is actually down 1% over the past month? It is easy to miss because the market has been so violent over that time. Another 3% or so, then I'll start getting really bullish again. There is a good deal of angst in the market that it will weaken as QE2 ends on June 30. We'll know the answer to that long before the end date. If we are down only slightly between now and then, it will be party-time again!

Speaking of down, today looks ugly, about 80 points ugly on the Dow. Crazy Khaddafi bombed his own oil facility. More importantly, the credit rating for Spain was downgraded overnight. Most interesting, China reported they actually ran a trade deficit last month, due to the increased cost of their massive oil imports.

No good news this morning . . . except the market is taking a break . . . finally!

Wednesday, March 9, 2011

November 22nd, September 11th, and March 9th

Everybody with gray hair remembers the day Kennedy was assassinated, on November 22nd of 1963. Everybody post-puberty remembers the day America was attacked, on September 11th of 2001. But, do you remember where you were when the stock market hit its low point in this recession, which was two years ago today?

That morning, I had breakfast with the regional president of a major national bank and studied his level of concern. I was struck by his predictable American optimism. At lunch that day, I delivered "meals-on-wheels" with my wife. We were struck by the relative indifference of most recipients to the stock market. That night, we attended a political event, where one party blamed everything on the other party. America had not changed, not even our inability to handle the 24/7 news flow of bad news.

By that point, I was sitting on a good deal of cash in most portfolios. The next morning, I started buying the ETF for the DJIA for my aggressive clients. I'm really glad I did! Of course, hindsight being hindsight, I wish I had bought them even more.

The applicable cliche is that it is always darkest before the dawn, but the dawn always comes. In fact, during the last two years, the stock market has absolutely gotten a sunburn. It has been a great bull run, with stocks doubling in value in just two years, even though we are still about 15% below the stock market highs in 2007. Fortunately, the bull market is not over, but it is time to take a break and let the economy catch up. That break may not come until the end of QE2 at the end of June. But, like the dawn, it will come!

Tuesday, March 8, 2011

Bring On The Crisis . . . Any Crisis

For over three centuries, economics has been referred to as "the dismal science." I do think it is fair to say economists are somewhat more droll than normal people. Nonetheless, there is a distinct air of pessimism at this conference, as we face to the painful changes ahead. 87% believe the deficit is the single greatest problem facing America. Clearly, the greatest fear is that our political system will not permit the tough decisions to be made. More than one person has noted America cannot deal with tough issues until a crisis develops, when both political parties have sufficient "cover" to vote inconsistently from their talking points. But, this waiting for a crisis will only make the coming austerity even more difficult. There is clearly a mood to bring on the crisis as soon as possible.

Rahm Emmanuel is alleged to have stated that a crisis is a terrible thing to waste. That makes it even more sad that we wasted the last one . . . because our political system was more interested in their talking points and their re-election. Keep your fingers crossed for the next time and hope it is soon!

An Elevator Story

Yesterday, I was waiting for an elevator, when one of my favorite old economists walked up beside me. As the door opened, I asked him how he liked the conference so far. As we stepped inside, he answered "When I started attending this conference years ago, we were all Austrians." By that, he meant all good economists obsessed over balanced annual budgets and maintaining our credit rating.

Continuing, he said "Then, we all became Keynesians." By that, he meant we obsessed over the moral imperative to care for people who suffer during economic downturns by running budget deficits if necessary to increase economic growth.

Continuing again, he said "Then, we were all "Supply-Siders." By that, he meant it was common wisdom that cutting taxes would stimulate the economy.

Shaking his head somewhat sadly as the door opened, and he headed toward the bar, the old professor concluded "Now, we are all Austrians again."

I'm not sure what I stammered next, but I knew he was right. Suddenly, all economists find themselves preaching the virtues of good credit ratings.

At first, I thought this was a condemnation of economists, as being feckless, intellectual whores. Then, I realized he was agreeing with my long-held belief that no school of economics is right for all economic situations. There is a time and a place for Keynesian economics and another for Supply-Side economics, but it is not now.

Sunday, March 6, 2011

Learning Never Ends

Guiding the financial lives and portfolios of other people in a humbling passion. To do this well, it is mandatory to seek out the thoughts of others. I have found conferences are an excellent and efficient way to do this. One of my favorites is the annual Policy Conference of the National Association of Business Economics in Washington, where I am now. I'll be blogging about new thoughts over the next few days.

Yet, as I wait for tomorrow's conference on economic policies, I watched Fareed Zakaria's TV special tonight on Restoring America. The conclusion is that economic policies are not failing America, but political institutions are. He cited the electoral college and the U.S. Senate as examples. Last week, I heard a well-known lobbyist in Richmond say that legislatures are essential to keeping governments from functioning, which seems to be the objective. Last year, I visited China, where governments make all important decisions. Such different models for political decision-making . . . none of which were designed in the 24/7 Internet Age.

One of our panel discussions tomorrow is "The Politics of Deficit Reduction," which I look forward to. Deficit reduction right now is more important than tax cuts for the "rich", more important than maintaining entitlement levels, and more important than any political party or leader. I'm looking forward to the thoughts of others tomorrow. It is my job, and it is my passion!

Saturday, March 5, 2011

Thoughts on Friday

As expected, the Jobs Report came in at 192 thousand new jobs in February, safely between the concensus estimate of 185 thousand and the "whisper" estimate of 220 thousand. As a result, the market moved very little, having already priced in a good report.

Looking at the larger economy, this was indeed a good report. The economy continues to improve at an accelerating rate, albeit a relatively slow one. Absent a blow-up in the derivatives market, there is virtually no chance of a double-dip recession.

Getting back to the market on Friday, the fear that our recovery is jeopardized by the spike in oil prices pushed the market down, with the Dow down 88 points for the day . . . big deal.

While it is amazing that we are still so dependent on oil imports almost 40 years after the first oil shock, it is more understandable when you realize that oil is mis-priced from an economic standpoint. When you go to the store and buy a loaf of bread, you are paying all the costs associated with producing that loaf of bread, e.g., the wheat, the cooking, the transportation, the labor, etc. When you go to the gas station and buy a gallon of oil, you are not paying the full cost of getting the gas, because you are not paying for the very real cost of cleaning up the environment, you are not paying the very real cost of being dependent upon untrustworthy vendors, you are not paying the very real cost of foreign aid to Israel, etc. While we may pay that cost in taxes (or increasing borrowing from the Chinese), we would buy less gas if we paid the true cost of oil dependence at the pump. One economist estimated that cost over $100 per gallon.

If we paid the true cost at the pump instead of paying it in taxes, our economy would be severely damaged. The market was fixated on that nightmare scenario on Friday afternoon.

Friday, March 4, 2011

Priced to Perfection

Even though the market is usually sleepy just before release of the monthly Jobs Report, it was anything but sleepy yesterday. There was just too much good news, i.e., the ISM report was strong, oil was down, the dollar was down, and rumors swept the floor that today's report would show job growth of 220,000 instead of the concensus of 185,000. So, the Dow soared 191 points!

It worries me that there was so little volume. Most investors were standing on the sidelines. There were buyers, but the sellers were on strike. Low volume makes the market more volatile or "spikey."

If the report shows much more than 220,000 jobs were created last month, the market should rise somewhat. If it was less than 185,000, you can expect the market to over-react and give back much of yesterday's gain. We'll see . . .

Thursday, March 3, 2011

Not So Breathless Anticipation

Normally, the market is dull and boring the day before the monthly "Jobs Report" is issued, which will be tomorrow. Yet, futures are predicting a bullish day for today.

The economic data released this morning was so positive the market feels confident that tomorrow's report will also be good. The weekly initial claims report this morning was the best since May of 2008. Also, productivity continued to slow. It was 3.9% in 2010, which is good, but slowing to only 2.6% in the fourth quarter. The market suspects that is because employers has wrung about as much additional efficiency out of existing employees as possible and may have to finally increase hiring. Let's hope so!

The good news is that the number of people receiving unemployment compensation dropped from 7.8 million workers to 7.7 million. The bad news is that 7.7 people are receiving compensation. The worse news is that there are millions more who have already exhausted all their benefits and are getting nothing.

The concensus estimate for tomorrow's report is that 185,000 jobs were created in February. This would be a huge improvement over the 36,000 in January, but that number was skewed by the snowstorms. With 185,000 jobs being created each month, it will take 42 months to find jobs for 7.7 million people. That would be September of 2014.

Hold your breath today and hope tomorrow's report is much better than 185,000 . . .

Wednesday, March 2, 2011

As Bad as Crack Cocaine ??

This morning, Warren Buffett said revolving charge cards were not good for America, and we would be better off without them. Certainly as individuals, we're better off without them, but would the country be better off?

It would decrease consumption spending and corporate profits but only in the short term. They were introduced to "pull forward" consumer spending and ended up becoming a cancer on our financial health. While every person is responsible for their own decisions, some decisions are harder, even addictive, such as "buy now, pay later."

Personally, in a nation that spends hundreds of billions of dollars treating diabetes and obesity, it makes no sense for taxpayers to subsidize sugar production. A recent Congressional effort to end this brought coast-to-coast TV commercials about the government increasing the "food tax" on soft drinks. (You see, decreasing the subsidy paid to growers would increase the cost in the store.) There was much gnashing of teeth about the "Mommy-state."

So, it is permitted for the government to encourage sugar consumption by subsidies . . . because people have "free choice." It is permitted that credit card companies encourage financial bondage . . . because people have "free choice." How is it different from drug dealers who sell their sugar/debt/drugs to . . . people with "free choice?"

What do sugar companies, credit card companies, and drug dealers have in common? They all have the power to destroy lives of . . . people with "free choice."

What Happened Yesterday?

The Dow dropped 168 points or 1.38%. The first day of each month is nomally a good day for the market and has been up for seven months in a row. Some analysts link yesterday's drop to the mideast turmoil, but that is hardly news. Some link it to oil hitting $100/barrel again, a sympton of the mideast turmoil. Some link it to Bernanke's congressional testimony, in which he said the U.S. could weather more expensive oil.

I think one clear contributor to the drop was the continuing insider-trading scandal. Yesterday, a board member of both Goldman Sachs and Proctor & Gamble was named. This reminds me of the many previous scandals. Retail investors are painfully reminded that "the game is stacked against the little guy." As a result, the normal monthly inflows into equity funds that occur on the first of each month were disrupted. That was a lot of bad news, but legal actions are the least predictable.

This morning, futures indicate the market will open down modestly. Of course, Bernanke is speaking again before Congress, and the market may react to something he says. Normally, the market gets quiet just before the monthly Jobs Report, which comes out this Friday.

So, what happened yesterdy? The market is highly efficient in the long-term but often irrational in the short term. Yesterday, it just over-reacted irrationally, which is what the market does.

Tuesday, March 1, 2011

Interest Rates Going Up . . .When?

I just studied the forecast by the Interest Rate Committee of the Bank of America/Merrill Lynch. They do not expect rates to really increase much anytime soon. In fact, they predict the 10-year Treasury will be up modestly from 3.45% to 4.0% by year-end. They expect the Fed will start decreasing money supply in the second quarter of next year and will start raising interest rates in the third quarter.

Although it is unsaid, I suspect they are also looking for inflation to break out next year as well. They do say that one of the factors driving up rates is the perception that America doesn't have the political will to deal with its budget deficit, which seems a bit fatalistic to me.

My take is that this is a perfectly reasonable forecast, which is the reason I'm not buying any long term bonds. If I were looking for a mortgage, I would make a decision by Christmas at the latest.

Good Job . . . BofA/ML . . . now, can you develop a user-friendly name?

Nirvana ?

The market got two pleasant surprises yesterday. First, consumer income rose much more than expected in January. Second, consumer spending rose much less than expected. While the consumption-based economy that is still the American operating model is dependent upon consumers spending on goods and services, it depends on a healthy consumer.

With income up and spending down, either the savings rate increased or consumer debt decreased. Either way, it is more evidence of the deleveraging of America - a very good sign indeed.

Buoyed by this, the market rallied, with the Dow closing up almost 96 points. It is now up 5.42% for the first two months of the year. In the last 71 years, that has happened 26 times, when the market was up both January and February. Only once has the market then ended the year down. If I were a betting man, I'd bet the market will end the year up. But, I'm an investor instead and have been predicting an up year for months already. When gamblers and investors agree, it must be Nirvana?