“Let the Games Begin…” November 20, 2009

This week has raised a lot of eyebrows about whether the recovery is sustainable…or even real. Here’s what we learned this week:

· Excluding the jump in car sales, retail sales are modest.

· Core producer prices are in sharp decline.

· Outside of energy, inflation in consumer prices is not happening.

· Industrial production has slipped to a slower pace.

· And most disappointing, new housing starts were way off from what was expected.

Not the kind of week we wanted prior to Thanksgiving. And not the kind of news that will boost confidence.

But there was one very interesting and positive news item that has a lot of potential for helping economic growth: Warren Buffet and Goldman Sachs have teamed up to boost financing and lending programs for underserved small business owners.

This is significant – for two reasons:

(1) Small businesses have been most affected by the credit crunch, and still find it very difficult to get loans.

(2) Although it is only a $500 million initiative, it is a private sector initiative not a government one.

Capitalism is about private initiative and entrepreneurship, not about government run businesses. Also, large corporations do not create the jobs; job creation comes from new and small businesses.

One of the world’s wealthiest and most successful individuals has combined with one of world’s wealthiest and most successful businesses to cast a loud vote for capitalism. This Buffet-Goldman initiative is a real example of real stimulus that could provide real help.

“A 10,000 Dow is Psychology…not Economics” - October 16, 2009

Like on weekend afternoons in the fall, all eyes will be on the scoreboard today to see if the market can close the week above the magic 10,000 mark. It’s not likely as news overnight was broadly disappointing.

• At the company level, GE reported lower-than-expected revenue and a big drop in profits, and Bank of America also reported greater-than-expected losses – two bell-weather stocks lots of people watch.
• Mortgage foreclosures continue to rise. They were up 23% in the third quarter compared to a year earlier and 5% worse than in the second quarter.
• And the latest industrial production numbers just out, although strong for the third quarter, were disappointing as they continued to slow over the course of the quarter.

So the Champaign corks that popped 10 years ago when the market first passed 10,000 aren’t happening this time.

They won’t pop – and the market will not be sustainable – until some fundamental foundations are shored up: there are 3 key ones:

(1) The big one is job growth…that’s not happening yet
(2) The second is personal income growth that follows
(3) The third is confidence…or consumer moods

Until all three of these show signs of sustained improvement, any flirting with the 10,000 mark will be just that…It will be fleeting.

"Demise or Not…the Dollar is Vulnerable” - October 6, 2009

A report out of the UK means that the phrase “the new world order” is happening faster than anticipated. The Independent newspaper is reporting a “game changer” – many Arab states along with China, Russia, Japan, France, and Brazil are planning to phase out the dollar as a basis for oil trading over the next 9 years.

The plan would be to replace the dollar with a basket of at least 5 currencies: (1) the Japanese yen, (2) the Chinese yuan, (3) the euro, (4) gold, and (5) a new unified currency for the major Middle East Gulf States.

This would be a serious departure from the present architecture of the modern international financial system that was put together after World War II – the Bretton Woods accords.

This is happening for a couple of reasons:

(1) Changing economic power in the world, particularly China’s extraordinary new financial power; and

(2) Anger over the crisis the United States caused in world financial markets in the past couple of years.

Two near-term implications are obvious:

(1) Gold will become very attractive in the near term, and
(2) Inflation of imported goods…including oil…will continue to occur as the dollar continues to weaken.
What’s important to note about “game changers” like this in capitalism, is not so much to worry about the new rules, but to understand them so that you can play by them and not be held hostage by the hope that it ain’t so.

“Early Fall Foliage and Economic Data…Both Dull” - October 1, 2009

One month ago today, I mentioned on this segment that the market was sending out a clear signal: it’s not convinced a recovery is here…And the same message holds true today...because the latest economic data continues to be about as dull as this year’s early fall foliage.

· This morning’s personal income results for August were disappointing and the small increase in spending was due only to government gimmicks like “cash for clunkers” and first-time homebuyer tax credits.

· Consumer confidence in September was down, with most people feeling worse about job prospects and income growth. Buying plans for both cars and homes are also down.

· Consumer prices have fallen for six straight months, clearly indicating a lack of demand.

· Although the revised GDP number yesterday showed the economy slowing by only 0.7% in the second quarter, the best performance in more than a year, it was not due to new fundamental strength.

Fed Chairman Ben Bernanke will be testifying this morning before a House Committee about financial market regulation. This is a long overdue discussion, particularly about derivatives trading and the dangerous credit default swaps.

Depending on what he has to say, this could be the best news of the week. And while it won’t make for a sustainable recovery, it could turn over a new leaf in making Wall Street more transparent. The upshot of this week’s data is simple: the New England foliage will be far more vivid than the economy for quite a while.

"The Buck Stops Here…” - September 2, 2009

The market lived up to history yesterday as it convincingly stumbled into September…which is typically a rough month in the stock market anyway.

This time, though, the plunge has more to do with the conviction that the market has raced ahead of the economic recovery…than pure calendar prophecy. Momentum based on speculation lasts only so long…and can’t make up for the lack of convincing evidence that the economic recovery is really here.

What the market needs at times like this are some points of certainty. One piece of speculation being talked about a lot that we can put to bed is that the dollar will not be replaced as the world currency any time in the near future.

Many world leaders are calling for the dollar to be replaced by a basket of world currencies…because what Wall Street caused in US financial markets had such a quick and colossal impact on economies around the world.

Despite the frustrations, though, and the fact that the dollar has lost some glitter, it won’t be removed from center stage:

· It would take an immense toll on many world economies that are closely tied to the dollar;
· It would devalue China’s immense dollar holdings; and
· It would raise US borrowing costs when the world cannot afford the implications.

Besides, it has been the currency of greatest political stability for 150 years. If you hold a note printed in 1934 or 1864, it’s still legal tender. That can’t be said even for the British pound. When in doubt, the world flocks to the dollar

The world will not pass the buck. The buck will stop here…and it will stay here as the world currency in the near future. No speculation!

“A Tale of Two Economies…” - September 1, 2009

The market yesterday and for the last several days is sending out a clear signal: it’s not convinced a recovery is here…In fact, it’s confused. And for good reason – we’re experiencing a Tale of Two Economies.

Consider the following:

· On the credit front, there is a gulf between those that can borrow and those that cannot. Big banks and big companies have easy access to credit. Small companies are finding it difficult to borrow…and face stiff terms to do so.

· On Main Street, there are those consumers with rock–solid jobs, but also an army of debt-strapped families struggling to make ends meet.

· Manufacturing is now growing…but more workers are still losing their jobs.

· Some consumers are buying…but only with incentives…like cash for clunkers, dollars for dishwashers or first-time homebuyer tax credits.

· The stock market rally of the past four months has been based on corporate cost cutting, not new revenue.

· The unemployment rate is still in the 9 ½% range – but the number of unemployed and underemployed is almost double, and many have already run out of benefits.

If there is about to be a party thrown to celebrate the end of the current economic crisis, someone forgot to invite two guests – U.S. workers and consumers. If a recovery is not balanced, it’s not sustainable.

Granted, at turning points, economic data can be mixed…but not muddled. If it’s confusing, it’s not convincing. And if it’s not convincing, then there is no confusion – there’s no broad-based recovery in sight. Convinced?

“The Looming National Debt…Only One Solution” - August 31,2009

This week is the last full week before the Labor Day holiday, and it should be relatively quiet in the stock markets…because it will be quiet on the data front – nothing likely to shake up the markets is due out this week.

But there is one looming topic that the markets are very concerned about and will be watching both Fed Chairman Bernanke as well as Congress to see how they intend on dealing with it…It’s the national debt.

The concern is big…because the arithmetic is shocking…as well as simple:

Last year the Federal Government spent over $450 billion on interest payments to holders of the National Debt…the 3rd largest expense item in the Federal budget. Compare that to $15 billion for NASA, $61 billion for Education, and $56 for the Department of Transportation.

· The last time the U.S. effectively had no debt was in the 1830s;
· It took 150 years for the national debt to reach $1 trillion …in 1981;
· And only one decade to triple it…to over $3 trillion in 1990;
· And it is now quadruple that…or $13 trillion this year….almost the same size as the overall economy.
· It will grow by over $1 trillion every year for the next decade.

How do you pay off this huge bill? New taxes? There are not enough people even at all income levels. There are only two ways to get rid of big debt…you earn more money to pay it off…or you default. This fall the markets will be watching Bernanke and Congress for some creative answers…not to spread the wealth…but to boost it.