Sunday, May 29, 2011

Another Old-Fashioned Greek Tragedy

A year ago, Greece narrowly avoided bankruptcy with a $156 billion bailout from the EU and IMF.  The funds would be paid in various tranches as certain improvements were made in the Greek financial position.  Since then, they have successfully cut their annual deficit by a third, to only 10.5% of budget.  During this process, many thousands of protesters have taken to the streets, even leaving some deaths in the wake.

The opposition party is seizing the opportunity to oppose the government, who must enact even more austerity measures to qualify for the next tranche of bailout funds.  (It also raises the long-running question of whether democracies are equipped to govern during a crisis.)

If Greece tried to issue new bonds, they would have to pay 14-16%, close to credit card balances.  They must have the next tranche of bailout funds.  Greece has already issued about $300 billion in bonds and needs the bailout to keep paying interest and retiring the bonds that are maturing.  At the same time, it is estimated that the Greek government owns about $300 billion in land and actual operating businesses, not to mention tourism attractions.  It seems logical to sell assets or privatize them to reduce the outstanding bonds.  The opposing party is naturally opposed to this.

Ironically, the oldest democracy is also crippled by the same triad of economic philosophies as the largest democracy.  The governing party is normally Keynesian but is trying to implement Austrian (Tough Love balanced budget) economics.  The opposition party is normally Austrian and insists upon tax cuts (Supply Side economics).  As in the U.S., this paralysis is crippling.

Does it really matter?  The GDP of Greece is only about the same as Michigan.  The PIG nations of Portugal, Ireland, and Greece have a combined GDP roughly equivalent to that of Florida.  Could the U.S. survive without Michigan or even Florida?  Sure, but there would still be a huge cost.  The European Union will also survive if Greece defaults, but God only knows what will happen inside Greece.  It won't be good in the short term.  For the European Union, their borrowing costs would increase modestly, because the Greek bonds were denominated in Euros, instead of Drachmas.

But, if Greece leaves the European Union, what about Ireland or Portugal?  If membership in the EU actually means financial integrity, the EU's borrowing rates will go back down after all the weaker members are excused.  Will the demand for the Euro fall?  Yes, but it will reset rather quickly, based on a reduced level of demand for Euros in the then reduced EU.

Given the punishment the European stock markets have suffered over the last few years, I do like the European phone companies and other utilities as income producing investments that have the possibility of capital gains as well.

The opportunity I'm searching for is that company or fund that will buy up Greek assets on the cheap that are being privatized . . . let me know what you find!!

Saturday, May 28, 2011

Above My Paygrade

A client sent me an article by Allan Sloan from Fortune dated May 2, 2011 entitled "The Hocus-Pocus Behind Paul Ryan's Medicare Reform."

He is certainly no fan of Obama-care, calling it "long on regulations and short on common sense," because it doesn't penalize those who eat, drink or smoke too much nor deal with the malpractice lawyers.

Yet, he calls the Paul Ryan plan unworkable as well, saying "It's wonderful to talk about empowering people -- but you also have to protect them, especially when their abilities, health, and finances are less than optimal.  It's hard enough for young, healthy people to pick among health insurance policies.  The idea of old, sick, and financially stressed people being able to competently sort through pages and pages of Medicare options is ludicrous."  That struck a chord with me.

Years ago, when I started my own business, I had to buy a health care policy on the private market.  Even though I had three degrees from three colleges, three different certifications, and over three decades of experience, I felt completely clueless in sorting through all the options, especially since I had only the vaguest idea what coverages I might need in the future.

As it turns out, there was no decision to make since only one company would insure me anyway.  The two others declined, allegedly because I had gout ten years earlier.  (I suspect the truth was that I was not young enough for them.)

Medicare is a ticking time-bomb.  Obama-care was not the cure and neither is Ryan-care!  Maybe, it is also about the paygrade for the elected children in Congress . . .

Little Green Apples . . .

As sure as God made those sour little things, the Chinese are manipulating their currency, which makes it all the more puzzling when the Justice Department announced yesterday that China was not, in fact, guilty.  Only lawyers could get so side-tracked by trees that they cannot see the forest.  Economists can simply see the trade gap between China and the U.S. last year approached $300 billion and immediately recognize the Chinese are guilty.

While there may be some political imperative to deny the obvious, we should also understand the Chinese government is obsessive about internal tranquility.  Their greatest fear is street riots, like we saw during the "Arab Spring" this year in North Africa.  However, as rich as China is, they do not have the means to buy tranquility from their people, like the House of Saud in Saudi Arabia does.  The Chinese government has to provide jobs instead.  To do this, they must insure their factories can sell the goods produced.  To do this, they must insure their products are cheap.  To do this, they must keep their currency cheap.  To do this, they buy U.S. assets, like Treasury bonds.

Don't look for much change in this . . . but there is change, and the value of their currency has been inching up slowing.  One reason is international pressure to do so.  Another reason is that the Chinese government has wisely become concerned about lending more money to a country as profligate as the U.S. 

It was also revealed this week that the Chinese have been buying so much land in Latin America that legislatures are considering some bans or limitations, especially in Brazil.  Thus, there is less money flowing into U.S. Treasury bonds.

Often, people fret that the Chinese will just "dump" their $900 billion in U.S. Treasury bonds to intentionally create a crash.  That would easily be the most stupid investment move in financial history, as they would lose enormously.  Plus, under Quantitative Easing, the Fed could simply buy all those bonds.  It is a baseless fear.

As long as it is in the best interests of China to manipulate their currency, they will continue to do so, as they are more fearful of their own people than the U.S.  And, as long as lawyers still run the world, Congress will deny God made little, green apples . . . and only God knows why.

Thursday, May 26, 2011

A Slowdown, Yes . . . A Double-Dip Recession, No!

Today's report on first quarter GDP growth was disappointing, coming in at 1.8% compared to an expected growth of 2.2%.  Of course, 2.2% shows expectations were already low.  This is not news.  The real question is what will GDP growth be during the current quarter.  My reading of it is that the economy is continuing to slow.  Supporting this belief, today's release of weekly jobless claims was surprisingly high.   Since the stock market is a leading economic indicator (historically leading about 6 months), the lackluster stock market performance currently suggests a lackluster economy will continue.

How worried am I about this?  Very little, as the economy did grow reasonably last year, and there is an enormous amount of uncertainty right now, i.e., about the debt ceiling, about income tax rates, about municipal cut-backs, etc.  This is a slowdown, not even a garden-variety recession.

My only long-term concern remains the under-regulated derivatives market, which could cripple the financial system quite suddenly.  And, we all remember a financial crisis is far worse than any garden-variety recession.

So, relax . . . enjoy the summer . . . and slow down, just like the economy!

Tuesday, May 24, 2011

What Do We Expect Greece To Do?

Austerity is a safe, clinical-sounding word that doesn't describe what is really being asked of the Greek citizens.  Imagine yourself being told such things as:

I know you've been planning to retire next year, but you'll have to work another five years!
I know you've been retired for several years, but we must cut your monthly check by 20%!
I know you were expecting a knee transplant soon, but you'll have to keep the painful knee!
I know the prices of food and gas are already high, but they must go higher . . . much higher!
I know you want your kids to get an education, but we must increase their tuition by 20%!
And, did I mention we're increasing your taxes as well, but only 20%?
(You should also know the IRS is really cracking down on cheats!!)
Gee, I'm really sorry your employer laid you off!
Have a nice day!

When it happens to other people in other nations, it is austerity.  When it happens to you, it is a life-altering disaster.  Is it any wonder the people are taking to the streets in protest?

With all sympathy to and respect for the Greek people, these measures are nonetheless necessary for Greece to deal with their mountain of debt.  Shame on them for borrowing so much.  Shame on their leaders for lacking the courage to stop over-consumption.  Shame on the lenders for supplying the narcotics that debt becomes.  There is no shortage of blame, but now is the time for the Greek people to deal with their disaster.

Imagine what would happen in the U.S. if we are asked to embrace this "austerity"?  Are we asking the Greeks to do more than we would do?  (Years from now, the Greeks will describe this period of time like the Greatest Generation describes the Great Depression in this country.)

Don't think it cannot happen here.  In fact, it WILL happen here, if the Congressional children fail us again!

Monday, May 23, 2011

When It Rains, It Spews?

There is an avalanche of bad news/uncertainty (which is the same thing to the stock market).  What will happen when QE2 ends?  What will happen if the Congressional children allow the U.S. to default?  Why do Greece, Portugal and now Italy keep getting downgraded?  Will the Euro survive?  Will the over-built real estate market in China send them into a banking crisis, like what happened in the U.S.?  Why have tornadoes done so much damage this year?  Is it global warming?  Now, on top of all that, another volcanic eruption in Iceland threatens another shut down of airspace over Europe, and airline stocks are getting crushed.  It is small wonder the Dow is likely to open down about a 100 points this morning.

Frankly, I'm surprised the market is not down even more.  We're still UP over 6% so far this year.  Either it is a testament to some underlying strength in the economy, or QE2 is even stronger than we think. 

Gentlemen, place your bets . . . on the market . . . and other "controllables," like when the volcano will stop spewing!

Saturday, May 21, 2011

Bonding with Bonds . . .

Every weekday evening, you probably watch some earnest newscaster telling you the stock market was up or down, quoting the Dow, the S&P, and the NASDAQ closing prices.  But, he seldom mentions the much larger bond market.  Jim Cramer of CNBC describes the world of investments as an ice cream sundae, with the cherry on top being the stock market and the much larger bowl of ice cream  underneath being the bond market.

The stock market and the bond market really are different animals, driven by their own fundamentals.  The traditional view is that investors flee to the "safety" of bonds, when they get scared of the more risky stock market.  There is a push-pull of risk between stocks and bonds.  Buy stocks when you are bullish, and buy bonds when you are bearish.

When investors flee the stock market, they compete to buy the available bonds, paying more for the bonds they want.  Since the interest payable on the bond is fixed when issued, higher prices mean lower yields.  Some economists see falling interest rates as evidence that investors have become bearish, recommending additional stimulus.  Frankly, that is an over-reaction.

The problem with bonds is that they are so unique and individualized.  Each is like a commercial banker making a business loan, with all the attendant covenants and warranties.  While there are about 15,000 different stocks, there are about 14,000,000 different bond issues.  Each is unique, making the purchase of individual bond issues very technical!  For this reason, most investors prefer to buy the expertise available in mutual funds composed of bonds.

The most important general rule to remember about bonds is that their market value drops when interest rates increase.  That makes sense, since new buyers will not buy the older bonds with lower interest rates unless they can buy them cheaply.  The fixed interest payment divided by the new purchase price will pay about the same amount as current interest rates available.  Plus, the longer the average maturity, the bigger the drop in market value.

With an individual bond, you can always hold it until maturity and get the face amount as repayment.  That is not the case in a mutual fund composed of bonds.  You can lose a lot of money buying a long-term bond fund . . . a lot!

Yesterday, I attended a lecture on the portfolio disclosure practices of fund managers and was appalled at the intentional obfuscation.  Many of those managers are intentionally making it so obtuse and complicated that nobody can understand them.  At a minimum, I would never buy a bond fund that was not rated at least a four star by Morningstar.  And, in the current interest rate environment, I would never buy a long-term bond fund.

Friday, May 20, 2011

Slimed by Association . . .

As I expect the stock markets to be volatile for the summer and fall, my interest was piqued when I learned there was a lecture on the latest techniques in volatility management at the NAPFA Conference in Salt Lake City.  I was hoping to hear the latest research on cash allocation per asset class of risk or affordable retail hedges or even volatility ETFs.

Instead, it was the old information on strategies for the use of options.  There is the "covered call' strategy, which I've used for certain income investors who don't care if a particular stock gets sold without notice.  There is the "costless collar" strategy, which is great for investors who have a large, concentrated, low-basis single stock position.  There is the "protective put" strategy, which allows an investor to lock-in capital gains, IF they are willing to pay a big fee up front.  All of these and others are valid uses of options, not speculation!

It occurred to me that I have repeatedly lamented the systemic danger posed by derivatives, but options are also derivatives.  Technically, derivatives are any investment instrument whose value is "derived" from the value of something else.  For example, the value of a put or call on IBM cannot be determined without knowing the value of IBM.  Used in this fashion to limit risk, options are a good derivative.  Even when used for speculation by the gun-slingers, they are still okay, because they are known.

The bad derivatives are those made under the radar-screen, especially credit derivatives of all types.  Huge bets can be made against a company or even a nation (ask Greece) under cover of darkness, and then those same bad characters can work to destroy that company or nation in the daylight.  This is a danger to our financial system that was not addressed in last year's financial re-regulation bill.  It was attempted but failed!

So, forgive me for lambasting all derivatives.  Some are good, some are okay, and some are downright evil . . .

Thursday, May 19, 2011

The Frying Pan . . . not the fire

Yesterday, I met with a person who was extremely critical of Ben Bernanke, Chairman of the Federal Reserve.  He felt the balance sheet expansion of the Fed was un-American and was simply an effort to save a Democratic President.  (Pointing out that Benanke was appointed by a Republican President seemed insignificant to him.)

Thinking about it afterwards, I believe Bernanke did everything he could, including some very imaginative things, to prevent a return to the depression of the 1930s.  He was very successful in preventing a depression.  He was more interested in saving the country than saving a President, any President.  At the same time, he set the stage for a return to the stagflation of the 1970s.  Last week's economic data releases support that observation.  Retail sales rose less than expected, while producer prices rose more than expected.  Remember the 1970s?

If Bernanke's choice was between the 1930s or the 1970s, he made a good choice.  He picked the frying pan instead of the fire.  Of course, we could still die in the frying pan, albeit more slowly. 

To escape the stagflation of the 1970s, Fed Chairman Paul Volcker raised interest rates enough to intentionally cause a recession.  But, that was a different type of inflation, i.e., demand-pull instead not the cost-push inflation we face today.  The 1970s economy was simply over-heated.  While the symptoms of the 1970s may be similar to today's symptoms, their causes were different.  The world environment was also very different.  Unfortunately, no unilateral decision by the U.S. will be enough to return the world to the 1990s.  Remember how good the 1990s were?

Blaming this complicated mess on any one person is pointless at best and destructive at worst.

What! No CE?

As a NAPFA-Registered Personal Financial Advisor, I am required to have at least 60 hours of Continuing Education (CE) credits for re-certification.  This is the most demanding of any financial planning organization, and that's why I'm attending their annual conference in Salt Lake City.  So, why did I come so far and spend so much money, only to waste one hour on a class that doesn't give any CE credit?

It was called "When Logic Leaves the Room."  With apologies to the excellent speaker, Ted Klontz, this is what I took away from his lecture.

The front third of the brain is the thinking portion.  The back two-thirds of the brain house the survival instinct and emotion factory.  Since the thinking portion is so much smaller and since emotions can arise five times faster than thoughts, the thinking portion is easily over-whelmed by the larger portion of the brain.  Due to the nature of financial planning, advisors are required to live in the front portion of the brain, enjoying the cozy company of logic.  Clients can live where they wish, when they wish.

However, sometimes a client may be experiencing emotions from the back part of the brain.  Long ago, I learned never to argue with emotions.  When logic leaves the room, it is time to go silent.  Be understanding . . . but be silent. 

Most behavior scientists advise listeners of emotion to be understanding and to be re-assuring.  Unfortunately, that is a problem for serious financial advisors.  The SEC goes crazy whenever an advisor re-assures a client that "everything will be okay."  They view such a statement as a guarantee, which is strictly forbidden.  (Logic doesn't live at the SEC either.)

We are therefore reduced to telling one of Warren Buffett's many good stories.  For example, if a person is worried about the normal gyrations of the stock market, we can say "when asked what the stock market would do the next day, Warren responded that, while he had no idea what it would do the next day, he did know it would be up in ten years."

Besides, a big hug is often better than any words!  At least, the SEC doesn't prohibit hugs.

But,  I wish I could have earned another CE for that lecture!

Tuesday, May 17, 2011

Far From the Maddening Crowd . . . of Economists

Long-time readers know I've been a long-time member of the National Association of Business Economics and have great respect for their research.  Last week, they released their latest survey of members.

Overall, they have decreased their estimate of GDP growth for this year from 3.3 percent to only 2.8 percent.  I have to agree that economic conditions have weakened, and a decrease is appropriate . . . unfortunately!

(Surprisingly, the impact of the tragedies in Japan appears modest, reducing second quarter GDP a mere .15 percent, while increasing it a mere .10 percent in the second half of this year.)

There was also considerable discussion about whether the recovery is sustainable.  Clearly, a majority of members feel it is, which is good.  Only 11 percent believe the recovery will be "subpar with severe wealth losses and onerous debt issues, inhibiting spending and lending."  My expectation is that the recovery will continue, albeit weakly, UNLESS we have a "blow-out" in the derivatives market, which will make the 11 percent crowd correct . . . unfortunately!

The third section dealt with unemployment projections.  They expect "moderate improvement," which seems optimistic to me, but I hope they are right.  They predict year-end unemployment to be 8.5 percent this year and 8 percent next year.  Recoveries from financial shocks are always "jobless recoveries" . . . unfortunately!

If Machines Could Apologize . . .

Then, my computer owes everybody an apology.  For some reason, I've not been able to sign into my own blog.  My last entry has even disappeared??  But, as I just got into Salt Lake City and started using my netbook, instead of my laptop,  I'm delighted that I can get back to work.  So, stay tuned . . .

Friday, May 13, 2011

A Cacophony of Sounds . . . All Bad

What a day Thursday was!  There was lots of news, and none of it was good, darn it! 

First, the U.S. trade gap with other nations worsened.  Despite a surge in exports resulting from our cheapening dollar, the cost of importing (think, oil) surged even more, also because of the cheapening dollar.

The high level trade talks with China ended badly, with us complaining about their continuing human rights violations and them refusing to let their currency appreciate faster.  They seem to think the 5% rise over the past year deserves some respect, but we don't.  We are on pace for another record trade deficit with China, surpassing last year's stunner of $273 billion.

Meantime, the Greek police were using tear gas on demonstrators opposed to the austerity package imposed upon them by the rest of Europe.  Not surprisingly, the Euro dropped in value, which meant the dollar rose, and that has been bad for the market for at least a year now.

A rising dollar also makes commodities cheaper, sending them down.  But then, the oil inventories report showed a large unexpected increase, meaning people are curbing their driving, suggesting the economy is weaker than we think.  Down went the commodities, including gold and silver.

Did I mention that the verdict for a major insider-trading trial brought down a Wall Street legend today, scaring the gee-willies out of a great many other traders?  Some may be selling their investments and leaving the country . . .

I'm surprised the Dow was only down 130 points!  While I'm bearish on the market in the short-term, the flow of news today was anything but "fair and balanced."  It was all bad!

The Frying Pan . . . Not the Fire

Yesterday, I met with a person who was extremely critical of Ben Bernanke, Chairman of the Federal Reserve.  He felt the balance sheet expansion of the Fed was un-American and was simply an effort to save a Democratic President.  (Pointing out that Bernanke was appointed by a Republican President seemed insignficant to him.)

Thinking about it afterwards, I believe Bernanke did everything he could, including some very imaginative things, to prevent a return to the depression of the 1930s.  He was very successful in preventing a depression.  He was more interested in saving the country than saving a President, any President.)  At the same time, he set the stage for a return to the stagflation of the 1970's.  Today's economic data releases support that observation.  Retail sales rose less than expected, while producer prices rose more than expected.  Remember the 1970's?

If Bernanke's choice was between the 1930's or the 1970's, he made a good choice.  He picked the frying pan instead of the fire.  Of course, we could die in the frying pan, just more slowly. 

To escape the stagflation of the 1970's, Fed Chairman Paul Volcker raised interest rates enough to intentionally cause a recession.  But, that was a different type of inflation, i.e., demand-pull instead not cost-push.  That economy was simply over-heated.  While the symptoms of the 1970's may be similar to today's symptoms, their causes were different.  The world environment was also very different.  No unilateral decision by the U.S. will be enough to return the world to the 1990's.

Sunday, May 8, 2011

Happy Anniversary . . . Not!

Friday marked the first anniversary of the infamous Flash Crash, when the Dow dropped 900 points in a matter of minutes, before making a seemingly miraculous recovery.  I was watching it "live" as it happened and knew it was a market malfunction, not a market correction.

Since then, the Flash Crash has been studied and studied.  The most common belief is that there was an innocent "fat-finger" input error by a brokerage firm.  That may be and is certain to happen again.  So, new rules on shorting became effective in February.  In June, new rules become effective on "limit up, limit down" which means the price cannot be more than 10% different from the average price over the last five minutes.  Both of these steps do help but are only modest first steps.

I think the real culprit is "high-frequency" trading, where mindless computers keep generating buy or sell orders, that literally trade in nano-seconds, based solely on price and volume action on various exchanges. 

So, can it happen again?  Absolutely, but remember no retail investor actually lost any money during the Flash Crash!  The orders were voided.  It just further reduces investor confidence, which is not helpful.

I don't worry about another Flash Crash.  That is just messy and embarrassing.  I do worry about a derivatives crash . . . a lot!

Saturday, May 7, 2011

Late Afternoon Rumor

Late Friday afternoon, the market was doing fine but then suddenly dropped about 50 points and didn't recover before the bell rang, closing the market.  There was a rumor that Greece was dumping the Euro and replacing it with their old currency, the Drachma and leaving the European Union.  Not only did the market sink, but so did the Euro, while the dollar rallied.

What makes this interesting is that it was totally untrue.  Yet, the market reacted anyway.  What was true was that European central bankers were meeting to discuss the ongoing financial crisis of Greece, whose austerity package is not austere enough.  Certainly, the Greeks most impacted by the austerity package are ready to dump the Euro and leave the Union but only because they don't understand the consequences.

If Greece did this, the first question would be what happens to the bonds they have already issued, which are payable in Euros, not Drachmas.  With that uncertainty, the value of those bonds would crash.  If Greece tried to issue new bonds, the interest rate would be prohibitive.  Taxes would immediately be increased to pay the additional interest.  There would be massive layoffs by both government and business.  Greece would likely experience a genuine depression.  It would be both ugly, tragic and unnecessary!

Yet, the market reacted as if the Greeks would really choose that alternative, which says more about the panicky nature of traders than the Greeks.

Below the Headline . . .

Yesterday's Job Report was heralded by the bad news that the rate of unemployment increased from 8.8% to 9%.  That's bad news, right?  Not really, because people re-entered the job force to look for work, creating a bigger labor pool.  That's actually good news, because the economy is creating jobs, and they see it.  I've been writing for over a year that the unemployment rate will get higher before it starts to drop.

Even better news, most of these new jobs are being created by business, not government.  In fact, this was the largest increase in private jobs in over 5 years.  That's good news, right?  Not really, because a large number of those jobs were the low skill, low pay, dead-end type.  For example, McDonald's hired 69 thousand workers.  Of course, one can argue that there must be a good reason McDonald's hired so many people.  They obviously see business improving.

Another good sign in yesterday's report was that the Department of Labor said they made a mistake last month and under-reported the number of jobs created in March, significantly under-reported them.  That's good news, right?  Yes, that is indeed some good news!

The stock market rallied strongly on this report but gave back much of the gains by late afternoon.

Bottom Line:  The economy continues to improve, albeit slowly.  The stock market continues to improve, although erratically.  The economy has shown a little weakening over the last few months, but it will not go back into recession.  The stock market remains vulnerable to another heart attack, as long as derivatives control it, but that is below the headline . . . way below.

Thursday, May 5, 2011

Where the Cookie Crumbs Lead . . .

Looks like the bear is returning to the market.  This morning, the weekly jobless claims number came in substantially worse than expected.  Considering yesterday's ADP estimate of jobs created last month was also a disappointment, expectations for the big release tomorrow of the Jobs Report from the Department of Labor are falling and, of course, so is the market.

When bears are roaming, many investors sleep better, if they are sitting on lots of cash.  And, sleeping well is more important than wringing the last ounce of performance out of the market.  Some like to buy a volatility ETF to "hedge" the downdraft.  Some prefer to sell growth stocks and buy dividend stocks. 

Recent statistics or the trail of cookie crumbs strongly suggest that the economy is slowing down.  The stock market is reflecting that.  So, consider doing whatever you need to do . . . to sleep well.  Better yet, talk to your financial advisor soon!

Wednesday, May 4, 2011

Friday...The Time of the Month

The first Friday in each month is often quite volatile, because that is when the most important economic data is released, i.e., the Jobs Report issued by the Department of Labor.  The first Friday is coming up.

Economists look forward to this day, so they can gain greater insight in the enigma that is our economy.  Investors dread this day, because the market can over-react to a number that is unknowable.

Today, the payroll giant, ADP, released their best guess that March produced only 179 thousand jobs, quite a bit below the 200 thousand that were expected.  The stock market was already weak on other economic news, but this really hurt, with the Dow down 83 points.  Disappointment will be priced into the futures market at the open.  A slight miss below expectations will produce minimal reaction.  A slight miss above expectations will produce a nice rally.  Let's see . . . of course, there's always next month!

Did U.S. Special Forces Just Rescue the Dollar?

I didn't ask that question.  It was Steve Cortes of Veracruz on CNBC, who also answered that question.  Of course, as an old Special Forces officer myself, I was interested.

The dollar has been sinking all year.  However, he states that "history shows us that the country with the strongest military is always the reserve currency.  I think the ability of those heroes, of SEAL Team 6, to project power globally shows us that U.S. military is uncontested in its dominance, and I think the currency will re-assert accordingly."

Frankly, a strong dollar is not good for U.S. business at this point.  A cheap dollar helps our exporters and decreases imports, which is a good thing.  That is the same reason that China has been keeping their currency so cheap, although they are finally allowing the Yuan to appreciate somewhat.  We should not forget that China is greatly increasing their military spending, especially naval spending.  It would be a source of enormous pride for the Chinese if the Yuan also achieved reserve currency status.

If he is right that the dollar will rally, I just cannot see it happening before QE2 ends on June 30th.  My belief is that the dollar is in for a long, sustained decline.  Neither the Treasury Secretary nor the Fed Head are permitted to confirm this, but I suspect they know that a cheap dollar is in the best interest of the U.S.

My hope is that the successful Special Forces operation will draw enough media attention away from the hot issue of raising the debt ceiling, so that a compromise can finally be achieved.  Special Forces operations work better outside the glare of the media, and so do legislators!

In the meantime, let's just be proud of our boys . . . especially those in Special Forces!

Tuesday, May 3, 2011

America is Better than Wall Street

Yesterday's market was fascinating to watch, as I do all day, everyday on CNBC, FBN, or Bloomberg.  In the early morning, there was euphoria over the killing of bin Laden.  By the time the market opened, the realization that another terrorist attack was now inevitable had began to weigh on the market.

Then, super-Reaganite, David Stockman who was head of the Congressional Budget Office for President Reagan, rained on the parade by pointing out the U.S. debt was a much bigger threat to the United States than a bunch of fanatic cave-dwellers.  Although a lifelong Republican, he accused them of senseless spinning on the issue of taxes and thought the new Ryan tax plan was a serious mistake, as it just "riled up" the Seniors by attacking Medicare.

Almost on cue, Treasury Secretary Geithner then told us that deadline for raising the debt ceiling could be moved from May 16th to August 2nd.  Hopefully, this would buy enough time for the elected-children of Congress to stop spinning their "philosophical points" and grow up.  Of course, I cannot imagine this will help as we just get closer to elections with every passing day.

With Stockman's cold-water reminder of the real problem and with Geithner's reminder of the difficulty in solving that problem, the market started drifting down.  Very quickly, it became Osama Who?

While America is luxuriating in the afterglow of killing bin Laden, Wall Street remains ego-centric and focused on the reality of numbers.  It's a pity, as they don't know what they're missing . . .

Monday, May 2, 2011

The Cost of Evil . . . The Minimum Cost

Maybe, not a trillion dollars but the world stock markets were certainly up hundreds of billions overnight;  all in reaction to the news that Osama bin Laden had finally been killed.  The whole world breathed easier and markets rose!  Futures are now predicting the Dow will be up 70 points within minutes of it's 9:30 AM opening.

But, that is minimum cost of bin Laden's evil.  A few years ago, Nobel-prize-winning economist Joseph Stiglitz estimated the cost to America for the War on Terror at three trillion dollars.  That amount would have been available to pay for improved medical care, or increased defense spending, or increased entitlement spending, or even increased tax cuts for rich taxpayers.  The point is:  that huge sum of money was wasted because of bin Laden and could have done so many good things!

Just as Reagan bankrupted the Soviet Union with an arms race, bin Laden has been bankrupting America with a War on Terror.  And, it cost him very little to do so.

According to Wikipedia, "evil is the intention or effect of causing harm or destruction, usually specifically from the perception of deliberately violating some moral code."  While bin Laden thought he was upholding his radical Islamist moral code, he happily violated the moral code of the world.  He was evil.  I am glad he is finally dead.  My only regret is that his death was not as terrible as the deaths of his victims.

As usual, the market is over-reacting.  The impact of bin Laden's death on the market today will be euphoric, but we can expect bin Laden's followers to stage another terrorist attack in the near future.  When that happens, the market will again over-react but go down.  For now, enjoy the emotion, enjoy watching the bulls run on Wall Street, and remember the world today is a less evil place than it was just yesterday.

Sunday, May 1, 2011

Spring Flower ?

After months of geo-political turmoil and natural disasters, the stock market threw caution to the wind and rose 4% in the month of April.  If all twelve months were as good, we'd enjoy better than a 48% growth over a year.  That will not happen, and that's a good thing.  Unsustainable increases experience sudden, dramatic reversals!

First quarter earnings were good, beating expectations a whopping 73% of the time.  Fed Head Ben Bernanke promised to keep the money flowing thru the end of June.  And, who cares about the price of oil anyway?

In his press conference last Wednesday, the word most uttered by Bernanke was inflation.  At least, he is paying attention to it.  He realizes that the greatest threat to the improving corporate earnings is cost increases, creating "cost-push" inflation.

At this point, the stock of large companies are only 10% of their all-time high in October of 2007.  The stock of small companies has already reached it's all-time high.  One leading strategist has declared we are not seeing a recovery but an expansion, meaning we are fully recovered from the Global Financial Crisis and are now growing.  I hope he is right but doubt it, not with fourteen million people jobless.