BLUE BEAR
i am and have been very "un"constructive on the economy and the equity markets for some time now. in fact, i believe we are in the 2-3rd year of what will be looked back on as the "2nd great depression" that could last for a other 3-7 years. the good news is i was bearish starting from the end of 2001, so i was correct and did well for quite sometime. the bad news is i have remained bearish during the recent surge and it hasnt been fun or profitable.
so heres my current connundrum. it seems very obvious to me that nothing much has changed in the "real" economy for most people/businesses, and in fact many of the "critical" issues, i.e pension problems, over-capacity in almost every industry, high corporate and personal debt levels, record high default/bankruptcy rates, airline industry distress, auto industry problems, weak int'l economies (germany, france, italy and one other are in technicalrecessions), high energy costs (oil $31/brl & natural gas $5/btu), employment declines continuing as we export jobs to china & india...now even including white collar jobs, dis- or deflation, ballooning FED deficit, growing trade deficit, baby boom retirement wave wave upon us, war in iraq, afghanistan, & on terror, etc, etc, have not improved at all.
even with numerous band-aides and anesthetics prescribed by the FED and the president, none of the underlying issues have been resolved, and the negative consequences have only been postponed for a later date, presumably sometime after bush gets re-elected.
in fact, much of the recent "good mood" has been a direct result of the stock market rally. which i guess should have been obvious as every single strategist and economist called the turn in such perfect harmony. that would include the recent surge in M&A activity, investor sentiment, consumer sentiment, retail spending, smiley faces, more cautiously optimistic CEO's. unfortunately, i thought fundamentals and reality stilled mattered but i was proven very wrong. my guess is that i won't be wrong for very much longer.
whats also obvious is that the stock market cannot hold this all together just by being UP. the whole thing smacks of "manipulation" coordinated by the federal government. They "reflate" and throw all this "liquidity" at the economy. force banks to lend regardless of risk, return or return of capital, and HOPE that time heals all wounds of the bubble and the broken economy.
its hard not to sound disgruntled but as a bear, i am that way alot. you know the deal, nobody likes a bear. i feel like there is a conspiracy going on. everybody wants stocks to go up and wall street and the government are just fine with that. up is good and down is bad. yet we all should remeber this.
all great bear markets have equally sensational rallies that 'reconvince' the masses to believe again. its just part of the cycle of fear and greed. its now pretty obvious that too much, got too good, too fast.
they'll call it a correction. they'll tell you it had to pullback after such a strong rally. the gurus on the stock market infomercials will hail it as a great buying oppportunity in the newly started bull market. don't believe them and take back your capital. if you don't the market will swallow it up again in a continuation of the greatest bear market in history.
have a grateful day!
larry
Friday, August 22, 2003
Thursday, August 14, 2003
FED likes rates unchanged...MARKET don't!
(mini-me likes chocolate...scottie don't!)
the federal reserve left interest rates unchanged at 1% after their last meeting. since that meeting ended, interest rates have risen by about 0.25%. in fact, since the meeting they held in june when they lowered interest rates by 0.25% to the current 1% level, interest rates on the 10 year treasury have risen from 3.10% to 4.55% or 1.45% in absolute terms and by almost 50% in relative terms. talk about the law of unintended consequences.
the FED has gone to great stakes to assure the markets that they will leave interest rates at the current low levels until the economic recovery has firmly taken hold. its clear that they feel it is important to keep an accomodative monetary stance in order to allow the economy to get back on a growth path that is robust and sustainable.
measuring by the back-up in rates, the bond market doesn't feel the same way. and if the market is not cooperative, it seems clear that the FED has lost its power and the market forces are in firm control of where interest rates will be. there are a number of reasons that could be the cause of this disparity, but the only thing that really matters is that rates are higher which will slow growth just as we start to take hold of the economic recovery.
the FED seemed to feel that rates needed to remain low in order to sustain the economic stability. so why are the markets challenging that? this is a question that will be answered over the next few weeks or months.
have a grateful day!
larry
(mini-me likes chocolate...scottie don't!)
the federal reserve left interest rates unchanged at 1% after their last meeting. since that meeting ended, interest rates have risen by about 0.25%. in fact, since the meeting they held in june when they lowered interest rates by 0.25% to the current 1% level, interest rates on the 10 year treasury have risen from 3.10% to 4.55% or 1.45% in absolute terms and by almost 50% in relative terms. talk about the law of unintended consequences.
the FED has gone to great stakes to assure the markets that they will leave interest rates at the current low levels until the economic recovery has firmly taken hold. its clear that they feel it is important to keep an accomodative monetary stance in order to allow the economy to get back on a growth path that is robust and sustainable.
measuring by the back-up in rates, the bond market doesn't feel the same way. and if the market is not cooperative, it seems clear that the FED has lost its power and the market forces are in firm control of where interest rates will be. there are a number of reasons that could be the cause of this disparity, but the only thing that really matters is that rates are higher which will slow growth just as we start to take hold of the economic recovery.
the FED seemed to feel that rates needed to remain low in order to sustain the economic stability. so why are the markets challenging that? this is a question that will be answered over the next few weeks or months.
have a grateful day!
larry
Wednesday, August 13, 2003
UNDERSTANDING THE FEDERAL RESERVE STATEMENTS
today, the federal reserve open market committee met to discuss the state of the economy and to decide if they needed to adjust their stance with regards to monetary policy. interest rates are the key to the whole thing yet what they say, in their all important statement, is much more important than what they do. in fact, the interpretation of what they say or do is even more important than what they actually say or do. FED 101 would be a great course on college campuses. i'm not sure if it would be a business course or an english course, but nontheless a great pre-requisite for anyone who needs to understand the economy or the english language.
with that as the intro to this blog, i'll do my best to decipher exactly what they said and did.
the easy part is that they did not change the FED funds rate of interest charged to banks for overnight lending. easy enough to understand and no interpretation necessary. except for the fact that the FED funds rate is at 45 year lows and has been steadily lowered over the past few years in order to 'prop' up the economy and prevent a deeper economic slowdown or crisis. please note that as many as two of the rate reductions were self proclaimed 'emergency' inter-meeting moves &/or 'insurance' moves to make sure that the economy wouldn't fall back into recession. thus, by leaving rates unchanged, they must feel that the economy continues to need its current accomodative policy stance in order to sustain its recent activity level.
interpretations would vary but its clear that the FED felt that the interest rates needed to be held at the current low level in order to allow the recovery to proceed. other interpretations might be that the FED is continuing to see uncertainties and has concerns about the recovery, so they need to keep money easy. a final interpretation could be that they still don't feel that the economy could handle higher rates and would jeopardize the recovery if rates got rose to normalized levels.
then theres the verbatim statement issued by the FED. this is where it gets complicated. what i will try to do is unravel each sentence in order to break it down into bits of information that a non-fed pro can understand.
it starts with one sentence stating that the FOMC decided to keep its target for the federal funds rate at 1%. simple enough.
the next paragraph states that the committee believes that their "accomodative stance and still robust underlying growth in productivity, is providing important ongoing support to economic activity". it continues by stating that "the evidence accumulated over the intermeeting period shows that spending is firming". that sentence is modified by an evaluation of the labor market, stating that "labor market indicators are mixed". i'm not sure why they modify the spending evaluation with the labor issues, but its probably got something to do with the fact that if people don't have jobs, they spend less. the paragraph ends with the FED pointing out that "business pricing power and increases in core consumer prices remain muted". not knowing exactly what a muted price is i looked up what muted means. encarta had the following definition...understated: subdued and understated rather than forceful or enthusiastic. my take is that businesses cannot raise prices due to fierce competition, which normally is not a good thing.
ready for the 2nd paragraph? "the committe perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal". interpretation...no call, it could go either way, we just don't know. so these geniuses, with much more information than the other geniuses out there, just don't know if the economy is recovering or not. thats what they said. not me, them!
they continue by stating that "in contrast, the probability, though minor, of an unwelcome fall in inflation exceeds that of a rise in inflation from its already low level". wow. thats some sentence. lets analyze together. 1st paragraph they state that the upside and downside risks to sustainable growth are roughly equal". then they state that in contrast, there is a minor probability for an unwelcome fall in inflation. aside from the fact that it seems like a double negative of sorts, how can there be a fall in an indicator that measures something that goes up? not to get bogged down in semantics, the whole sentence is uninterpretable. but please be advised that they state very clearly, as unusual as it may be, that inflation is already at a low level. and by the way, thats something that the FED has strived to achieve for many years! now they are worried that its a bad thing!!!! are they serious?
the last part of the paragraph states that "the committee judges that, on balance, the risk of inflation becoming undesirably low is likely to be the predominant concern for the forseeable future. in these circumstances, the committee believes that policy accommodation can be maintained for a considerablew period". enough said. they won't raise rates till they can be sure that inflation isn't too "muted" and that the recovery has taken hold...firmly. feel better now?
i know that seems like alot, and i'm sure that is exactly what their intention is, but it does little to explain what is really going on in the most vibrant and resiliant economy in the world. which by the way, is vital to the world economic recovery that is forecast for the second half of this year. by the way, the FED statement is subject to your own interpretation.
have a great day!
larry
today, the federal reserve open market committee met to discuss the state of the economy and to decide if they needed to adjust their stance with regards to monetary policy. interest rates are the key to the whole thing yet what they say, in their all important statement, is much more important than what they do. in fact, the interpretation of what they say or do is even more important than what they actually say or do. FED 101 would be a great course on college campuses. i'm not sure if it would be a business course or an english course, but nontheless a great pre-requisite for anyone who needs to understand the economy or the english language.
with that as the intro to this blog, i'll do my best to decipher exactly what they said and did.
the easy part is that they did not change the FED funds rate of interest charged to banks for overnight lending. easy enough to understand and no interpretation necessary. except for the fact that the FED funds rate is at 45 year lows and has been steadily lowered over the past few years in order to 'prop' up the economy and prevent a deeper economic slowdown or crisis. please note that as many as two of the rate reductions were self proclaimed 'emergency' inter-meeting moves &/or 'insurance' moves to make sure that the economy wouldn't fall back into recession. thus, by leaving rates unchanged, they must feel that the economy continues to need its current accomodative policy stance in order to sustain its recent activity level.
interpretations would vary but its clear that the FED felt that the interest rates needed to be held at the current low level in order to allow the recovery to proceed. other interpretations might be that the FED is continuing to see uncertainties and has concerns about the recovery, so they need to keep money easy. a final interpretation could be that they still don't feel that the economy could handle higher rates and would jeopardize the recovery if rates got rose to normalized levels.
then theres the verbatim statement issued by the FED. this is where it gets complicated. what i will try to do is unravel each sentence in order to break it down into bits of information that a non-fed pro can understand.
it starts with one sentence stating that the FOMC decided to keep its target for the federal funds rate at 1%. simple enough.
the next paragraph states that the committee believes that their "accomodative stance and still robust underlying growth in productivity, is providing important ongoing support to economic activity". it continues by stating that "the evidence accumulated over the intermeeting period shows that spending is firming". that sentence is modified by an evaluation of the labor market, stating that "labor market indicators are mixed". i'm not sure why they modify the spending evaluation with the labor issues, but its probably got something to do with the fact that if people don't have jobs, they spend less. the paragraph ends with the FED pointing out that "business pricing power and increases in core consumer prices remain muted". not knowing exactly what a muted price is i looked up what muted means. encarta had the following definition...understated: subdued and understated rather than forceful or enthusiastic. my take is that businesses cannot raise prices due to fierce competition, which normally is not a good thing.
ready for the 2nd paragraph? "the committe perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal". interpretation...no call, it could go either way, we just don't know. so these geniuses, with much more information than the other geniuses out there, just don't know if the economy is recovering or not. thats what they said. not me, them!
they continue by stating that "in contrast, the probability, though minor, of an unwelcome fall in inflation exceeds that of a rise in inflation from its already low level". wow. thats some sentence. lets analyze together. 1st paragraph they state that the upside and downside risks to sustainable growth are roughly equal". then they state that in contrast, there is a minor probability for an unwelcome fall in inflation. aside from the fact that it seems like a double negative of sorts, how can there be a fall in an indicator that measures something that goes up? not to get bogged down in semantics, the whole sentence is uninterpretable. but please be advised that they state very clearly, as unusual as it may be, that inflation is already at a low level. and by the way, thats something that the FED has strived to achieve for many years! now they are worried that its a bad thing!!!! are they serious?
the last part of the paragraph states that "the committee judges that, on balance, the risk of inflation becoming undesirably low is likely to be the predominant concern for the forseeable future. in these circumstances, the committee believes that policy accommodation can be maintained for a considerablew period". enough said. they won't raise rates till they can be sure that inflation isn't too "muted" and that the recovery has taken hold...firmly. feel better now?
i know that seems like alot, and i'm sure that is exactly what their intention is, but it does little to explain what is really going on in the most vibrant and resiliant economy in the world. which by the way, is vital to the world economic recovery that is forecast for the second half of this year. by the way, the FED statement is subject to your own interpretation.
have a great day!
larry
Wednesday, August 06, 2003
THE NEXT BIG ECONOMIC STORY...OIL IS STILL EXPENSIVE!
one of the major benefits that was touted as a result of overthrowing & taking over iraq was that OIL would drop back to $20/brl. getting control of iraqs vast oil reserves would allow the US to better control the flow of oil from the middle east and that would be an economic positive for the US economy.
we are now some 3 months into the re-building of iraq and oil is $32/brl. some may credit this to stronger demand for oil due to a strengthening economy or the fact that OPEC left output quotas unch at their last meeting. regardless of the reason, $32 oil is not a positive for the economy. it acts as a tax on businesses and consumers.
businesses in every industry have discussed high energy costs as contributing to the challenging business enviroment and the cause for higher operating costs, lower margins & lower eps. consumers will no doubt be adversely effected by higher gas prices, especially with the proliferation of low gas mileage vehicles, i.e. SUV's, hummers, etc.
one good note on the energy front is the fact that natural gas has dropped back to $4.50/btu, which is much lower than the $7+ it peaked at a few months ago. still considerably higher than the $2.50-3.00/btu it has averaged for the last few years. greenspan discussed natural gas at a few of his recent hearings and the FED also discussed its implications for the economy, so if natural gas starts to rise again due to spikes in demand or otherwise that would be an incremental energy negative.
back to oil. if oil prices remain at current levels or goes higher, the economy will be effected in a negative way. the implications are widespread, but suffice to say that business energy costs will remain high and consumers will have less money to spend on "stuff", which will hurt business revenues. double negative for earnings. any company that has benefitted from lower energy prices, or the prospect of lower energy prices, will have to be re-evaluated based on more expensive energy. regardless of what our government says about iraqi oil.
have a grateful day!
larry
one of the major benefits that was touted as a result of overthrowing & taking over iraq was that OIL would drop back to $20/brl. getting control of iraqs vast oil reserves would allow the US to better control the flow of oil from the middle east and that would be an economic positive for the US economy.
we are now some 3 months into the re-building of iraq and oil is $32/brl. some may credit this to stronger demand for oil due to a strengthening economy or the fact that OPEC left output quotas unch at their last meeting. regardless of the reason, $32 oil is not a positive for the economy. it acts as a tax on businesses and consumers.
businesses in every industry have discussed high energy costs as contributing to the challenging business enviroment and the cause for higher operating costs, lower margins & lower eps. consumers will no doubt be adversely effected by higher gas prices, especially with the proliferation of low gas mileage vehicles, i.e. SUV's, hummers, etc.
one good note on the energy front is the fact that natural gas has dropped back to $4.50/btu, which is much lower than the $7+ it peaked at a few months ago. still considerably higher than the $2.50-3.00/btu it has averaged for the last few years. greenspan discussed natural gas at a few of his recent hearings and the FED also discussed its implications for the economy, so if natural gas starts to rise again due to spikes in demand or otherwise that would be an incremental energy negative.
back to oil. if oil prices remain at current levels or goes higher, the economy will be effected in a negative way. the implications are widespread, but suffice to say that business energy costs will remain high and consumers will have less money to spend on "stuff", which will hurt business revenues. double negative for earnings. any company that has benefitted from lower energy prices, or the prospect of lower energy prices, will have to be re-evaluated based on more expensive energy. regardless of what our government says about iraqi oil.
have a grateful day!
larry
HOW DO YOU FEEL ABOUT YOUR FINANCES?
the following survey might make you feel better. than again it might not. according to the survey, even the wealthy are feeling the pain of the currently ending economic slowdown and stock bear market.
WASHINGTON (Dow Jones)--Wealthy people are generally more pessimistic about their financial future today than they were a year ago, according to the 2003 Phoenix/Harris Interactive Wealth Survey.
The survey, which polled 1,496 people who had a net worth of at least $1 million, excluding the value of their primary home, showed that 22% of the respondents are somewhat pessimistic or very pessimistic about their financial future, versus 12% in 2002, 7% in 2001 and 5% in 2000. The respondents were polled in March, and the survey has a margin of error of plus or minus three percentage points.
The majority of those polled, 63%, say they believe the worst is over for the economy; 20% feel the U.S. will remain in a prolonged economic downturn for the next two years; 13% said the worst is yet to come before a rebound; and 4% had no opinion. The same question wasn't asked in previous years' polls.
Of those surveyed, 37% feel slightly to very pessimistic about the U.S. economy for the next one to two years; 12% say they are neither optimistic or pessimistic; and 51% are slightly to very optimistic. Again, results weren't comparable to past years.
A rising percentage - 39% versus 34% in 2002 - are very concerned about outliving their money, with similar upturns in the percentage of people who feel they don't invest the time they should to manage their finance and who prefer to deal with several financial advisors rather than one.
A rising proportion of wealthy people also consider themselves more as savers than investors, with 43% describing themselves that way, compared to 35% in previous years. In addition, 40% said they either didn't rely on financial advisors or didn't find them helpful in achieving their wealth; 40% found them somewhat helpful; 18% found them very helpful; and 2% found them vital.
Overall, the largest contingent of those surveyed, 62%, estimated they had lost between 15% and 40% of their investment portfolio in the past three years, with the largest subsection, 18%, estimating their losses at 30%. As a result, 60% said they have rebalanced their portfolios; of those who didn't rebalance, only 14% say they plan to this year, and 71% said they didn't think it was necessary to rebalance. The majority of those who did rebalance or plan to rebalance - 65% - said they decided on their own that they needed to, but 62% said they have used or will use a financial advisor to do the actual task of rebalancing.
so if you're feeling a bit less wealthy, at least you are not alone. what is that saying, "misery loves company"... well, at least you're in good company!
have a grateful day!
larry
the following survey might make you feel better. than again it might not. according to the survey, even the wealthy are feeling the pain of the currently ending economic slowdown and stock bear market.
WASHINGTON (Dow Jones)--Wealthy people are generally more pessimistic about their financial future today than they were a year ago, according to the 2003 Phoenix/Harris Interactive Wealth Survey.
The survey, which polled 1,496 people who had a net worth of at least $1 million, excluding the value of their primary home, showed that 22% of the respondents are somewhat pessimistic or very pessimistic about their financial future, versus 12% in 2002, 7% in 2001 and 5% in 2000. The respondents were polled in March, and the survey has a margin of error of plus or minus three percentage points.
The majority of those polled, 63%, say they believe the worst is over for the economy; 20% feel the U.S. will remain in a prolonged economic downturn for the next two years; 13% said the worst is yet to come before a rebound; and 4% had no opinion. The same question wasn't asked in previous years' polls.
Of those surveyed, 37% feel slightly to very pessimistic about the U.S. economy for the next one to two years; 12% say they are neither optimistic or pessimistic; and 51% are slightly to very optimistic. Again, results weren't comparable to past years.
A rising percentage - 39% versus 34% in 2002 - are very concerned about outliving their money, with similar upturns in the percentage of people who feel they don't invest the time they should to manage their finance and who prefer to deal with several financial advisors rather than one.
A rising proportion of wealthy people also consider themselves more as savers than investors, with 43% describing themselves that way, compared to 35% in previous years. In addition, 40% said they either didn't rely on financial advisors or didn't find them helpful in achieving their wealth; 40% found them somewhat helpful; 18% found them very helpful; and 2% found them vital.
Overall, the largest contingent of those surveyed, 62%, estimated they had lost between 15% and 40% of their investment portfolio in the past three years, with the largest subsection, 18%, estimating their losses at 30%. As a result, 60% said they have rebalanced their portfolios; of those who didn't rebalance, only 14% say they plan to this year, and 71% said they didn't think it was necessary to rebalance. The majority of those who did rebalance or plan to rebalance - 65% - said they decided on their own that they needed to, but 62% said they have used or will use a financial advisor to do the actual task of rebalancing.
so if you're feeling a bit less wealthy, at least you are not alone. what is that saying, "misery loves company"... well, at least you're in good company!
have a grateful day!
larry
THE REFINANCE BOOM LIVES ON
the refinance boom has not ended...at least not yet. the federal government has proved that in the last few days by coming to market with some $60billion worth of 3, 5, and 10 year treasury notes, in order to refinance its own debt. the government is doing exactly what all of us have been doing for the last few years. with revenues falling and huge demands spending side, the US government is in the process of refinancing the nations debt. and just like we all did, its getting a "cash out" refi. with the latest refunding of some $60billion it is repaying $47billion of debt and taking an additional $13billion in debt to fund the war on iraq and all the other extra expenditures.
the good news is that the government was able to sell all the bonds and therefore has the money it needs to do what it wants. the bad news is that the government has no plans to payback the money, or stop borrowing so aggressively, anytime soon. just like you and i, the federal government is just fine with pushing out the obligations to sometime in the future, probably the distant future. in fact, our children and grandchildren will be talking about what this administration did when they are dealing with the repercussions of todays actions.
no doubt the economic team is aware of whats its doing, yet it has no alternatives but to hope for a better economy which will lessen the consequences of todays actions. if the economy doesnt do what they hope, then the consequences will be bad and will last a very long time.
academics and economists have lots of different opinions and thesis on the national debt and what it will do to interest rates, the dollar, the economy, the trade deficit, future generations, and all sorts of other things that will be affected by this american habit of leveraging the future. our current leaders have one mind on the subject. we need to spend this money so we need to borrow it. we will deal with the consequences later.
have a grateful day!
larry
the refinance boom has not ended...at least not yet. the federal government has proved that in the last few days by coming to market with some $60billion worth of 3, 5, and 10 year treasury notes, in order to refinance its own debt. the government is doing exactly what all of us have been doing for the last few years. with revenues falling and huge demands spending side, the US government is in the process of refinancing the nations debt. and just like we all did, its getting a "cash out" refi. with the latest refunding of some $60billion it is repaying $47billion of debt and taking an additional $13billion in debt to fund the war on iraq and all the other extra expenditures.
the good news is that the government was able to sell all the bonds and therefore has the money it needs to do what it wants. the bad news is that the government has no plans to payback the money, or stop borrowing so aggressively, anytime soon. just like you and i, the federal government is just fine with pushing out the obligations to sometime in the future, probably the distant future. in fact, our children and grandchildren will be talking about what this administration did when they are dealing with the repercussions of todays actions.
no doubt the economic team is aware of whats its doing, yet it has no alternatives but to hope for a better economy which will lessen the consequences of todays actions. if the economy doesnt do what they hope, then the consequences will be bad and will last a very long time.
academics and economists have lots of different opinions and thesis on the national debt and what it will do to interest rates, the dollar, the economy, the trade deficit, future generations, and all sorts of other things that will be affected by this american habit of leveraging the future. our current leaders have one mind on the subject. we need to spend this money so we need to borrow it. we will deal with the consequences later.
have a grateful day!
larry