With economic woes dominating the headlines, we sometimes forget about all we have. As you sit down with your families tomorrow to celebrate Thanksgiving, try to put aside talk of recession/depression/deleveraging/credit crisis/reduced bonuses and recall all of the gifts in our lives.
On balance, most of us are fortunate to have what we have. We live in the best country in the world, where we are free to dissent with those in power and which just experienced a historical election. Most of us have decent jobs that allow us to provide shelter, food and a pretty nice lifestyle. We may not be making a ga-zillion bucks, but we are blessed. My advice for you as we enter the heart of the holiday season is to remember all that is good in your life, not what is lacking.
My Aunt H likes to recount the following prayer: "Thank you God (you can replace with goddess, energy force or just say thanks to the universe) for giving us every single thing we need and most of what we could ever want."
Believe me, it's how I feel on a daily basis.
Thanksgiving Blessings to you and all your loved ones.
This will be the last daily “StrategicPoint of View” column. Going forward we will be consolidating our written communications into a weekly investment analysis each Monday, which will be supplemented by special articles and updates as necessary.
Wednesday, November 26, 2008
Tuesday, November 25, 2008
Crying Like It’s 1931
Despite the last two trading days and the gains seen in stocks, here is a bit of sobering news: according to the Wall Street Journal’s Jason Zweig, over the last two weeks ending November 20, the Dow Jones Industrial Average fell 16%. Over the two weeks ended November 20, 1931, the Dow fell 16%. Over in the broader S&P 500, the news is worse: only twice before this year has the S&P 500 lost more than a third of its value in calendar year—both of those previous instances occurred during the Great Depression, down 41.9% in 1931 (there’s that year again!) and 38.6% in 1937.
With these kinds of statistics, it’s hard not to think that we are once again facing a Depression. More rational heads will point out that in 1931, the US economy, as measured by gross national product, plunged by 14.7%, while this year, the economy contracted by 0.5% in Q3 and then probably by something in the range of 3-4% in Q4, which is not good, but it sure is a far cry from losses in the teens. In 1931, one of every six Americans was unemployed, while today one out of sixteen is unemployed.
This is not to say that all is well. This is shaping up to be the worst recession since the nasty bugger in 1981-2. More jobs will be lost, companies will go out of business and some families will lose their homes. For those who look to capital markets to find a clue about the future, the news is not much better. The US bond market now expects that the world’s largest economy will suffer deflation for the next decade; as noted above, the S&P 500 is on pace to suffer its worst decline since 1931; and for the first time in 50 years, the dividend yield on the S&P 500 now exceeds the yield on the 10-year Treasury bonds. Of course, if you have a strong constitution and an even tougher stomach, you might note that when fear trumps greed to the extent that we can see at present, it often provides opportunities for contrarian investors to buy cheap.
Perhaps you do not trust global markets to guide you. If that’s the case, you may try a different indicator: a psychic. According to the New York Times (11/23/08), many investors are eschewing trading cards for tarot cards. “Psychics say their business is robust, as do astrologers and people who channel spirits, read palms and otherwise predict the future…after all, the nation’s supposed experts on the economy…have not exactly been reliable.”
Maybe the psychic won’t be able to tell you whether it’s 1931 all over again or not. Even without tarot cards the end of year period is likely to see more “deleveraging”, “disintermediation” and “forced selling”, meaning that as losses mount, investors or institutions that have borrowed money will sell to avoid further losses or even bankruptcy. Unfortunately, unleveraged, long-term investors (like most of the sane world) will continue to be forced to suffer through further mark-to-market losses, but will likely be rewarded over time as markets return to more normal behavior. 1931 may or may not come back to haunt us, but one factoid that drew my attention from the year: Frankenstein, starring Boris Karloff was the top grossing film of the year. Now that seems appropriate.
With these kinds of statistics, it’s hard not to think that we are once again facing a Depression. More rational heads will point out that in 1931, the US economy, as measured by gross national product, plunged by 14.7%, while this year, the economy contracted by 0.5% in Q3 and then probably by something in the range of 3-4% in Q4, which is not good, but it sure is a far cry from losses in the teens. In 1931, one of every six Americans was unemployed, while today one out of sixteen is unemployed.
This is not to say that all is well. This is shaping up to be the worst recession since the nasty bugger in 1981-2. More jobs will be lost, companies will go out of business and some families will lose their homes. For those who look to capital markets to find a clue about the future, the news is not much better. The US bond market now expects that the world’s largest economy will suffer deflation for the next decade; as noted above, the S&P 500 is on pace to suffer its worst decline since 1931; and for the first time in 50 years, the dividend yield on the S&P 500 now exceeds the yield on the 10-year Treasury bonds. Of course, if you have a strong constitution and an even tougher stomach, you might note that when fear trumps greed to the extent that we can see at present, it often provides opportunities for contrarian investors to buy cheap.
Perhaps you do not trust global markets to guide you. If that’s the case, you may try a different indicator: a psychic. According to the New York Times (11/23/08), many investors are eschewing trading cards for tarot cards. “Psychics say their business is robust, as do astrologers and people who channel spirits, read palms and otherwise predict the future…after all, the nation’s supposed experts on the economy…have not exactly been reliable.”
Maybe the psychic won’t be able to tell you whether it’s 1931 all over again or not. Even without tarot cards the end of year period is likely to see more “deleveraging”, “disintermediation” and “forced selling”, meaning that as losses mount, investors or institutions that have borrowed money will sell to avoid further losses or even bankruptcy. Unfortunately, unleveraged, long-term investors (like most of the sane world) will continue to be forced to suffer through further mark-to-market losses, but will likely be rewarded over time as markets return to more normal behavior. 1931 may or may not come back to haunt us, but one factoid that drew my attention from the year: Frankenstein, starring Boris Karloff was the top grossing film of the year. Now that seems appropriate.
Monday, November 24, 2008
A Rally for Andy
My friend Andy used to be completely obsessed with the stock market. He rode the dot-com bubble all the way up and felt the crushing blows on the way down. He found himself right back in the fray until a little over two years ago, when his 40 year old wife died suddenly. Since then Andy admits that he has become a much better investor.
How could such a tragedy transform his financial acumen? The answer lies in the deep emotional current that swirls in every investor’s mind and belly. In the past, Andy would watch each position, tick for tick. He would often experience a kind of euphoria when a trade went well, only to second-guess himself when it went sour. He knew that it was a debilitating cycle, but he could not get out of it.
Then the unimaginable occurred, putting him and his whole family through a nightmare. After his wife’s death, Andy did not have the same passion for investing. He stopped watching CNBC every day and monitoring his accounts on a minute-by-minute basis. Instead, he would call me every quarter or so to discuss the overall economy and asked for advice about general market trends. He no longer purchased individual securities, turning instead to index funds and even began to use bonds and commodities in the portfolio to help diversify some of the risk. Interestingly enough, his performance improved, both on the upside and the downside.
When we met for lunch on Friday, he said that he was not worried about the stock market or even the economy. “Of course it’s terrible for people to lose jobs and for families to suffer, but I am convinced that we’ll get through this period. This country has been through worse—heck, I have been through much worse and you know what I found out? That I can survive the worst and still wake up the next morning to see the sun shining and the world turning. Tell your blog readers, radio listeners and everyone on TV that Andy says that everything is going to be OK.”
It seemed fitting that when Andy and I were having lunch, the stock market was down a touch, but by the end of the day, it reversed course and experienced a powerful rally. The Dow closed 494.13 points higher, up 6.5%, at 8046.42 and the S&P 500 was up 6.3% to 800.03. Yes, it was a terrible week, but for at least one day, Andy was right: everything was OK. It’s not a bad lesson for the rest of us: a little distance might help everyone get through this with more of our wits about us.
How could such a tragedy transform his financial acumen? The answer lies in the deep emotional current that swirls in every investor’s mind and belly. In the past, Andy would watch each position, tick for tick. He would often experience a kind of euphoria when a trade went well, only to second-guess himself when it went sour. He knew that it was a debilitating cycle, but he could not get out of it.
Then the unimaginable occurred, putting him and his whole family through a nightmare. After his wife’s death, Andy did not have the same passion for investing. He stopped watching CNBC every day and monitoring his accounts on a minute-by-minute basis. Instead, he would call me every quarter or so to discuss the overall economy and asked for advice about general market trends. He no longer purchased individual securities, turning instead to index funds and even began to use bonds and commodities in the portfolio to help diversify some of the risk. Interestingly enough, his performance improved, both on the upside and the downside.
When we met for lunch on Friday, he said that he was not worried about the stock market or even the economy. “Of course it’s terrible for people to lose jobs and for families to suffer, but I am convinced that we’ll get through this period. This country has been through worse—heck, I have been through much worse and you know what I found out? That I can survive the worst and still wake up the next morning to see the sun shining and the world turning. Tell your blog readers, radio listeners and everyone on TV that Andy says that everything is going to be OK.”
It seemed fitting that when Andy and I were having lunch, the stock market was down a touch, but by the end of the day, it reversed course and experienced a powerful rally. The Dow closed 494.13 points higher, up 6.5%, at 8046.42 and the S&P 500 was up 6.3% to 800.03. Yes, it was a terrible week, but for at least one day, Andy was right: everything was OK. It’s not a bad lesson for the rest of us: a little distance might help everyone get through this with more of our wits about us.
Friday, November 21, 2008
1997 All Over Again
Ah 1997…it seems like only yesterday when Jewel was on the Billboard charts, Frasier dominated network television, the movie Titanic swept the Academy Awards and the dot-com bubble had not yet fully inflated. 1997 was also the last time that stocks were at these horrifying low levels. Yesterday investors continued to sell stocks as fears mounted that commercial real estate would be the next shoe to drop as the economic outlook darkens.
The S&P 500 plunged to its lowest level since 1997, sliding 6.7% to 752.44, under the low point of 776.76 reached during the bear market nadir in October, 2002. The index extended its 2008 year to date loss to 49% and is poised for the worst annual decline in its 80-year history. The Dow Jones Industrial Average sank 444.99 points, or 5.6%, to 7,552.29. The Nasdaq Composite decreased 5.1% to 1,316.12. Financial companies led the way again, with Citigroup down another 26% to $4.71 (yes, that’s Citi under a fin!), JPMorgan Chase lost 18% to $23.38, Bank of America tumbled 13.86% to $11.25 and Morgan Stanley was off 10.24% to $9.20.
Yesterday’s catalyst was more of the same—data that indicated that we are in a bruising recession. Weekly jobless claims approached the highest level since 1982; the index of leading economic indicators fell for a third time in four months; and the Federal Reserve said manufacturing in the Philadelphia area shrank at the fastest pace in 18 years. As investors rushed for the exits, they poured money into US Treasuries, driving prices to historic highs. The yield on the two-year note fell below 1% for the first time, while ten year yields fell to 3%...my friends, you can now lend the US government money for ten years and earn a whopping 3% for your troubles!
A client asked me, “How do you know when to just get out?” My answer is that when fear is shaking you to the core and it feels like all confidence is lost is usually when long term investors should be dipping their toes into the water. I am not suggesting that you sell the farm (how much could you actually get anyway?) and jump into stocks, but there are some compelling values out there. It is likely to remain pretty messy in this period, but that does not mean that you should throw in the towel on capitalism. Gather your thoughts, chug a little Pepto Bismol and don’t run for cover just yet.
The S&P 500 plunged to its lowest level since 1997, sliding 6.7% to 752.44, under the low point of 776.76 reached during the bear market nadir in October, 2002. The index extended its 2008 year to date loss to 49% and is poised for the worst annual decline in its 80-year history. The Dow Jones Industrial Average sank 444.99 points, or 5.6%, to 7,552.29. The Nasdaq Composite decreased 5.1% to 1,316.12. Financial companies led the way again, with Citigroup down another 26% to $4.71 (yes, that’s Citi under a fin!), JPMorgan Chase lost 18% to $23.38, Bank of America tumbled 13.86% to $11.25 and Morgan Stanley was off 10.24% to $9.20.
Yesterday’s catalyst was more of the same—data that indicated that we are in a bruising recession. Weekly jobless claims approached the highest level since 1982; the index of leading economic indicators fell for a third time in four months; and the Federal Reserve said manufacturing in the Philadelphia area shrank at the fastest pace in 18 years. As investors rushed for the exits, they poured money into US Treasuries, driving prices to historic highs. The yield on the two-year note fell below 1% for the first time, while ten year yields fell to 3%...my friends, you can now lend the US government money for ten years and earn a whopping 3% for your troubles!
A client asked me, “How do you know when to just get out?” My answer is that when fear is shaking you to the core and it feels like all confidence is lost is usually when long term investors should be dipping their toes into the water. I am not suggesting that you sell the farm (how much could you actually get anyway?) and jump into stocks, but there are some compelling values out there. It is likely to remain pretty messy in this period, but that does not mean that you should throw in the towel on capitalism. Gather your thoughts, chug a little Pepto Bismol and don’t run for cover just yet.
Thursday, November 20, 2008
Slip-Sliding Away
Remember when we thought the financial system was on the precipice of disaster? Well, fears of widespread systemic failure may have passed, but investors are now worried about the economy—big time. It seems that all of the TARPs, EESAs, rate reductions and bailout plans have left us exactly where we were a month ago—at the depths of market lows with little confidence that relief is coming.
Despite massive government interventions, stock prices fell to 5 1/2 year lows yesterday as fears of a deep recession plague the investment horizon. The Dow plummeted 427.47 points, or 5.1%, to 7997.28, the lowest close since March 31, 2003; the S&P fell 6.1% to end at 806.58, well-below this year’s previous low of 840 and on pace for its worst year since 1931; the NASDAQ was tumbled 6.5% at 1386.42; and the small-stock Russell 2000 fell 7.8% to 412.38. I don’t know how many days that I have written “ouch” in response to these types of numbers. Suffice to say that the pain is actually becoming less acute and more chronic, as we all get used to these massive sell-offs.
Some said deflation was the catalyst for the selling—the Consumer Price Index fell by 1% in October, the biggest one-day drop in the 61-year history of the index. I don’t buy the deflation explanation as the reason for the fall. I think that investors are realizing that things will not turn around any time quickly and as a result, many are throwing in the towel and waiting it out. Maybe that’s why Henry Paulson essentially took a mulligan on the TARP and will let the next administration play out the round.
It’s probably a safe bet that the government wishes that it could go back in time and save Lehman Brothers – indeed, it was that company’s failure that sparked the massive slide. Since then, the Dow has plunged 30%. Yesterday, selling in the financial sector once again led the way. Citigroup in particular ran into a brick wall, falling 23.4% to $6.40, a 13-year low, after announcing that it will purchase the final $17.4 billion of assets still in structured investment vehicles; Bank of America dropped $2.13, or 14%, to $13.06; and Goldman Sachs fell $6.85, or 11%, to $55.18, the lowest close since the company's initial public offering in 1999.
Additionally, there was selling pressure in some of the larger insurers, many of which are busy buying banks so that they can tap the TARP. Lincoln National plunged 40%, the steepest decline in the S&P 500, to $7.31, after saying that it expects a charge of as much as $300 million because of declining equity markets last month; Hartford Financial dropped 24%; and good ol’ AIG fell 15%. Adding market woes is the uncertain fate of the automakers -- GM fell 9.7% to its lowest price since the 1940s, while Ford lost 25%.
Here is what I think is going on: everyone is waiting for some good news and it’s just not there. Every time we turn around, there is more disappointing data about housing or retail sales or confidence. At some point, people are going to examine the valuations of companies and realize that not every single one of them should be tossed aside. Until then, we are slip-sliding away.
Despite massive government interventions, stock prices fell to 5 1/2 year lows yesterday as fears of a deep recession plague the investment horizon. The Dow plummeted 427.47 points, or 5.1%, to 7997.28, the lowest close since March 31, 2003; the S&P fell 6.1% to end at 806.58, well-below this year’s previous low of 840 and on pace for its worst year since 1931; the NASDAQ was tumbled 6.5% at 1386.42; and the small-stock Russell 2000 fell 7.8% to 412.38. I don’t know how many days that I have written “ouch” in response to these types of numbers. Suffice to say that the pain is actually becoming less acute and more chronic, as we all get used to these massive sell-offs.
Some said deflation was the catalyst for the selling—the Consumer Price Index fell by 1% in October, the biggest one-day drop in the 61-year history of the index. I don’t buy the deflation explanation as the reason for the fall. I think that investors are realizing that things will not turn around any time quickly and as a result, many are throwing in the towel and waiting it out. Maybe that’s why Henry Paulson essentially took a mulligan on the TARP and will let the next administration play out the round.
It’s probably a safe bet that the government wishes that it could go back in time and save Lehman Brothers – indeed, it was that company’s failure that sparked the massive slide. Since then, the Dow has plunged 30%. Yesterday, selling in the financial sector once again led the way. Citigroup in particular ran into a brick wall, falling 23.4% to $6.40, a 13-year low, after announcing that it will purchase the final $17.4 billion of assets still in structured investment vehicles; Bank of America dropped $2.13, or 14%, to $13.06; and Goldman Sachs fell $6.85, or 11%, to $55.18, the lowest close since the company's initial public offering in 1999.
Additionally, there was selling pressure in some of the larger insurers, many of which are busy buying banks so that they can tap the TARP. Lincoln National plunged 40%, the steepest decline in the S&P 500, to $7.31, after saying that it expects a charge of as much as $300 million because of declining equity markets last month; Hartford Financial dropped 24%; and good ol’ AIG fell 15%. Adding market woes is the uncertain fate of the automakers -- GM fell 9.7% to its lowest price since the 1940s, while Ford lost 25%.
Here is what I think is going on: everyone is waiting for some good news and it’s just not there. Every time we turn around, there is more disappointing data about housing or retail sales or confidence. At some point, people are going to examine the valuations of companies and realize that not every single one of them should be tossed aside. Until then, we are slip-sliding away.
Wednesday, November 19, 2008
Three Blind Mice
There they were yesterday, testifying before a Senate panel -- Ford's Alan Mulally, Chrysler's Robert Nardelli and GM's Richard Wagoner. They were on bent knees, arguing that without $25 billion, the US auto industry would die forever. As I watched them in their natty suits, crying the blues, I thought that they are our own version of “Three Blind Mice,” the leaders of an industry that seemed blind to improving innovation and the challenges of globalization.
Two of our mice say that their companies, GM and Chrysler, are on the brink of disaster and without government handouts, they will fail. Perhaps you are sick of hearing about corporate failures and their disastrous effect on the broader economy—I know that I am, but this is where we are -- no amount of wishing it weren’t so will get us out of this mess, so let’s talk about what we can do now.
The first question to ask is whether a bankruptcy might help the auto industry get its act together after 25 years of fighting the larger trends of globalization (which created enormous competition, especially in the form of cheaper labor) and fuel efficiency/smaller cars. The pro-bankruptcy camp cites the ability of the airline industry to file, reorganize and renegotiate long-term contracts (slashing pension plans and health benefits for the large union employee base). Many airlines successfully re-emerged from bankruptcy stronger and better able to compete. The bankruptcy advocates note that handing over $25 billion to the Three Blind Mice would lead to the same conclusion—bankruptcy, but in the bailout scenario, taxpayers lose $25 billion for the same outcome.
Those who support helping the automakers with government aid note that the industry is vital to the national interest as both an employer and as the base of the nation’s manufacturing sector. GM Chairman and Chief Executive Richard Wagoner said that "This is about much more than just Detroit, it's about saving the U.S. economy from a catastrophic collapse."
On this point, it is important to understand where we are in the economic cycle. In more normal circumstances (i.e. if we were simply experiencing a mild recession), I would probably be in the “let them fail” crowd, but these are not normal circumstances. The economy is fragile from the effects of the housing and credit busts and after already losing 1.2 million non-farm jobs this year, my concern is that the failure of GM and Chrysler (it looks like Ford is going to survive) may simply be too much for the economy and perhaps of greater importance, the national psyche, to handle.
It seems reasonable to help the Three Blind Mice see their way through for another couple of quarters, so that they can restructure accordingly. This may mean a government-orchestrated bankruptcy down the line, whereby the companies can reorganize and potentially survive. This middle ground might mitigate some of the obvious near-term economic ripple effects, while allowing the Three Blind Mice to see their way through the crisis.
Two of our mice say that their companies, GM and Chrysler, are on the brink of disaster and without government handouts, they will fail. Perhaps you are sick of hearing about corporate failures and their disastrous effect on the broader economy—I know that I am, but this is where we are -- no amount of wishing it weren’t so will get us out of this mess, so let’s talk about what we can do now.
The first question to ask is whether a bankruptcy might help the auto industry get its act together after 25 years of fighting the larger trends of globalization (which created enormous competition, especially in the form of cheaper labor) and fuel efficiency/smaller cars. The pro-bankruptcy camp cites the ability of the airline industry to file, reorganize and renegotiate long-term contracts (slashing pension plans and health benefits for the large union employee base). Many airlines successfully re-emerged from bankruptcy stronger and better able to compete. The bankruptcy advocates note that handing over $25 billion to the Three Blind Mice would lead to the same conclusion—bankruptcy, but in the bailout scenario, taxpayers lose $25 billion for the same outcome.
Those who support helping the automakers with government aid note that the industry is vital to the national interest as both an employer and as the base of the nation’s manufacturing sector. GM Chairman and Chief Executive Richard Wagoner said that "This is about much more than just Detroit, it's about saving the U.S. economy from a catastrophic collapse."
On this point, it is important to understand where we are in the economic cycle. In more normal circumstances (i.e. if we were simply experiencing a mild recession), I would probably be in the “let them fail” crowd, but these are not normal circumstances. The economy is fragile from the effects of the housing and credit busts and after already losing 1.2 million non-farm jobs this year, my concern is that the failure of GM and Chrysler (it looks like Ford is going to survive) may simply be too much for the economy and perhaps of greater importance, the national psyche, to handle.
It seems reasonable to help the Three Blind Mice see their way through for another couple of quarters, so that they can restructure accordingly. This may mean a government-orchestrated bankruptcy down the line, whereby the companies can reorganize and potentially survive. This middle ground might mitigate some of the obvious near-term economic ripple effects, while allowing the Three Blind Mice to see their way through the crisis.
Tuesday, November 18, 2008
Adios Carrie Bradshaw
Watching re-runs of “Sex and the City” seems so retro amid the financial melt-down of 2008. The program that debuted in 1998 and concluded in 2004, followed the lives of four single women in New York City, as they obsessed about men (well, that’s actually not retro, that is thoroughly now) and spent hundreds of dollars on shoes. The program that put shoemakers Manolo Blahnik and Jimmy Choo on the map (see Season 6, Episode 9: A Woman's Right to Shoes, original air date 8/17/03) now seems positively passé as Americans alter their spending patterns to meet the new reality of a recession.
Last week, the Commerce Department reported that retail sales fell by 2.8% in October, surpassing the old mark of a 2.65% drop in November 2001 in the wake of the terrorist attacks. It was the largest drop on record and the fourth consecutive monthly decline. The weakness in retail sales was led by a 5.5% plunge in autos, the biggest drop since August 2005. Carmakers said that last month was the worst in 17 years as potential buyers were spooked by the financial crisis and tightening credit conditions. Even without cars, sales of everything from furniture to clothing dropped off a cliff. Excluding autos, retail sales fell by 2.2%, also a record decline, underscoring the widespread weakness. Sales at general merchandise stores like Wal-Mart and large department stores fell by 0.4%, while sales at specialty clothing stores (the kinds that the women in “Sex and the City” used to frequent) were down a bigger 1.4%.
There were only slight glimmers in all of the gloomy data: mega-discounter Wal-Mart has fared better than most as its massive size allows it to pressure vendors for even cheaper prices. According to the International Council of Shopping Centers, for every dollar spent on goods other than cars in the US over the last twelve months, 8.2 cents went to Wal-Mart or its warehouse sister store, Sam’s Club. That is a staggering market share, but it’s certainly not surprising that with house prices in the toilet, the stock market down 40% and 1.2 million jobs lost in 2008, that consumers are in full-fledged retreat. These folks are seeking the cheapest possible alternatives and thus far, they are finding those values at Wal-Mart.
Here is another glimmer of hope: the data confirms that consumers have woken up from their drunken stupor and have FINALLY stopped spending. With all due respect to the characters on Sex and the City, one has to wonder how a struggling freelance writer like Carrie Bradshaw could afford the $495 pair of shoes. If Carrie were with us today, she would be paying down debt and saving money to rebuild her balance sheet. Of course that is not the stuff of a particularly entertaining series, but it would help curb the excesses of the past two decades and allow our start to take control over her financial destiny. The never-to-be-produced sequel to “Sex and the City” would be “Parsimony across America”…not too catchy, but indeed, the bitter medicine that will help cure the nation’s economy. Adios Carrie Bradshaw!
Last week, the Commerce Department reported that retail sales fell by 2.8% in October, surpassing the old mark of a 2.65% drop in November 2001 in the wake of the terrorist attacks. It was the largest drop on record and the fourth consecutive monthly decline. The weakness in retail sales was led by a 5.5% plunge in autos, the biggest drop since August 2005. Carmakers said that last month was the worst in 17 years as potential buyers were spooked by the financial crisis and tightening credit conditions. Even without cars, sales of everything from furniture to clothing dropped off a cliff. Excluding autos, retail sales fell by 2.2%, also a record decline, underscoring the widespread weakness. Sales at general merchandise stores like Wal-Mart and large department stores fell by 0.4%, while sales at specialty clothing stores (the kinds that the women in “Sex and the City” used to frequent) were down a bigger 1.4%.
There were only slight glimmers in all of the gloomy data: mega-discounter Wal-Mart has fared better than most as its massive size allows it to pressure vendors for even cheaper prices. According to the International Council of Shopping Centers, for every dollar spent on goods other than cars in the US over the last twelve months, 8.2 cents went to Wal-Mart or its warehouse sister store, Sam’s Club. That is a staggering market share, but it’s certainly not surprising that with house prices in the toilet, the stock market down 40% and 1.2 million jobs lost in 2008, that consumers are in full-fledged retreat. These folks are seeking the cheapest possible alternatives and thus far, they are finding those values at Wal-Mart.
Here is another glimmer of hope: the data confirms that consumers have woken up from their drunken stupor and have FINALLY stopped spending. With all due respect to the characters on Sex and the City, one has to wonder how a struggling freelance writer like Carrie Bradshaw could afford the $495 pair of shoes. If Carrie were with us today, she would be paying down debt and saving money to rebuild her balance sheet. Of course that is not the stuff of a particularly entertaining series, but it would help curb the excesses of the past two decades and allow our start to take control over her financial destiny. The never-to-be-produced sequel to “Sex and the City” would be “Parsimony across America”…not too catchy, but indeed, the bitter medicine that will help cure the nation’s economy. Adios Carrie Bradshaw!
Monday, November 17, 2008
Priority Number One
As the global recession gathers steam, pundits are opining how the Obama administration will address priority number one, the economy. Clearly over the next sixty-plus days before the inauguration, President-elect Obama and his advisors will be busying themselves with analyzing the economic options that lie ahead for the nation.
Some of Obama’s team from President Clinton’s tenure may be noting something that I have considered: perhaps in retrospect, the US economy has been in a bear market for over ten years, starting with the 1997 Asian crisis and exacerbated by a deflationary spiral. Considering that bear markets often have strong bull spikes along the way, this would not be a crazy notion. If so, then the 2008 credit crunch and asset sell-off does not constitute the beginning of the process, but the final salvo that puts an end to global deflation and asset bubbles. Additionally, it would also argue for a continuation of the unprecedented global government intervention that is occurring under President Bush.
Regardless of where we have been, one thing is clear: the American people want action, but what form might that take? It looks like a centrist tone will prevail as the new administration faces the giant hurdles of a rapidly deteriorating economy and the overwhelming effect of the previous administration’s actions on the nation’s balance sheet. The effect of both of these factors should focus the President-elect’s attention on addressing economic concerns and could impede or postpone progress on addressing other long-term goals, like education and health care.
If the revival of the US growth engine is numero uno, then we should expect a significant stimulus plan immediately. Some are talking about $200 billion set aside to satisfy Mr. Obama’s desire to provide the middle class with tax cuts. For high wage earners, expect that the top tax bracket will increase to 39.6% and that capital gains and dividend rates will return to 20% from the current 15% level. The additional revenue raised from these increases is likely to help cover Alternative Minimum tax relief. On the good news side of the ledger for wealthier individuals, the plan would also extend the 2009 rates for estate taxation ($3.5 million indexed per spouse exemption and a 45% top rate). Many are also proposing infrastructure investment and direct grants to states for foreclosure mitigation.
What’s all of this going to cost? Estimates are for deficits to run from $1.5-$2 trillion next year, or at least 10% of the nation’s GDP. For deficit hawks, some of whom are among Mr. Obama’s closest advisors, this number is staggering. The rationalization for the massive spending is that government issuance of debt to help recapitalize the shaky financial foundation, is not spending, but should be seen as a necessary and massive re-fi. That does not mean that longer term interest rates will react as such—expect them to rise in reaction to these kinds of deficits. In the economic triage that is occurring, there is not much time to worry about those issues right now as we muddle through this unchartered territory. Bottom line: be prepared for the economy to be the number one issue for quite some time.
Some of Obama’s team from President Clinton’s tenure may be noting something that I have considered: perhaps in retrospect, the US economy has been in a bear market for over ten years, starting with the 1997 Asian crisis and exacerbated by a deflationary spiral. Considering that bear markets often have strong bull spikes along the way, this would not be a crazy notion. If so, then the 2008 credit crunch and asset sell-off does not constitute the beginning of the process, but the final salvo that puts an end to global deflation and asset bubbles. Additionally, it would also argue for a continuation of the unprecedented global government intervention that is occurring under President Bush.
Regardless of where we have been, one thing is clear: the American people want action, but what form might that take? It looks like a centrist tone will prevail as the new administration faces the giant hurdles of a rapidly deteriorating economy and the overwhelming effect of the previous administration’s actions on the nation’s balance sheet. The effect of both of these factors should focus the President-elect’s attention on addressing economic concerns and could impede or postpone progress on addressing other long-term goals, like education and health care.
If the revival of the US growth engine is numero uno, then we should expect a significant stimulus plan immediately. Some are talking about $200 billion set aside to satisfy Mr. Obama’s desire to provide the middle class with tax cuts. For high wage earners, expect that the top tax bracket will increase to 39.6% and that capital gains and dividend rates will return to 20% from the current 15% level. The additional revenue raised from these increases is likely to help cover Alternative Minimum tax relief. On the good news side of the ledger for wealthier individuals, the plan would also extend the 2009 rates for estate taxation ($3.5 million indexed per spouse exemption and a 45% top rate). Many are also proposing infrastructure investment and direct grants to states for foreclosure mitigation.
What’s all of this going to cost? Estimates are for deficits to run from $1.5-$2 trillion next year, or at least 10% of the nation’s GDP. For deficit hawks, some of whom are among Mr. Obama’s closest advisors, this number is staggering. The rationalization for the massive spending is that government issuance of debt to help recapitalize the shaky financial foundation, is not spending, but should be seen as a necessary and massive re-fi. That does not mean that longer term interest rates will react as such—expect them to rise in reaction to these kinds of deficits. In the economic triage that is occurring, there is not much time to worry about those issues right now as we muddle through this unchartered territory. Bottom line: be prepared for the economy to be the number one issue for quite some time.
Friday, November 14, 2008
The Gurus Speak
For the past five years—before the housing and credit bubbles burst and everyone was making money—the so-called “Masters of the Universe” (aka Wall Street CEOs, Congressional leaders and federal regulators) fed us an almost daily helping of good news. Risk was nigh; profits were practically sure and if you did not join the party, well then you were a kill-joy. Now that the script has been re-written, the group as a whole seems to be among the most frightened of the current state of affairs.
Perhaps they should be, because while the growing economy allowed many participants to earn a decent buck, these guys were amassing fortunes. We need not recount the stories of airplanes, boats and “Lifestyles of the Rich and Famous” to know that these guys probably made a heck of a lot more money than any of their clients or shareholders. And so it was a grain of salt that I took their comments at this week’s Merrill Lynch Financial Services Conference.
The host of the conference, John Thain, Chairman and CEO of Merrill Lynch started it off with a not-so-reassuring assessment of the current economy. He noted that “This is not like '87, it's not like '98, it's not like 2001. The contraction that's going on is bigger than that. I think we will in fact look back all the way to the 1929 period to see the kind of slowdown we are experiencing now. And the great degree of uncertainty in the marketplace is how deep, how long and what are the governments around the world going to do to try to provide a stimulus to the environment." Hmmm…he skipped right over the 1981-2 recession and brought us to 1929—nice. Still, the 1929 environment creates “opportunities” for Merrill Lynch and Mr. Thain is “cautiously optimistic that things are starting to get better in financial services.” Does anyone else see inconsistencies in these statements?
Next up at the conference was Bank of New York’s Chairman & CEO Robert Kelly, who made this breakthrough statement: “We need a securitization market to get started again where you have simpler instruments, where you have stronger underwriting standards than the past.” That’s funny because I would bet that Mr. Kelly and his cohorts were not singing this tune a few years ago. In fact, most of these guys told us that the products that were being created were disseminating risk and that the counterparties all understood them, so no need for regulation.
And finally, the current Goldman Sachs wonder boy, CEO Lloyd Blankfein said that Goldman was not changing its long-term strategy and that he is happy with the current lines of business that Goldman has. Really? That’s not what the rest of us are seeing, but hey, you guys at Goldman are really different, aren’t you? At least that’s what you have told us, before this year convinced us that you were mere mortals.
In the end, the Gurus spoke and a day after their horrendously downbeat comments, the US stock market soared by over 6%. It was a wonderful reminder that the weight of the Gurus’ words must be diffused through a more realistic prism…it’s about time.
Perhaps they should be, because while the growing economy allowed many participants to earn a decent buck, these guys were amassing fortunes. We need not recount the stories of airplanes, boats and “Lifestyles of the Rich and Famous” to know that these guys probably made a heck of a lot more money than any of their clients or shareholders. And so it was a grain of salt that I took their comments at this week’s Merrill Lynch Financial Services Conference.
The host of the conference, John Thain, Chairman and CEO of Merrill Lynch started it off with a not-so-reassuring assessment of the current economy. He noted that “This is not like '87, it's not like '98, it's not like 2001. The contraction that's going on is bigger than that. I think we will in fact look back all the way to the 1929 period to see the kind of slowdown we are experiencing now. And the great degree of uncertainty in the marketplace is how deep, how long and what are the governments around the world going to do to try to provide a stimulus to the environment." Hmmm…he skipped right over the 1981-2 recession and brought us to 1929—nice. Still, the 1929 environment creates “opportunities” for Merrill Lynch and Mr. Thain is “cautiously optimistic that things are starting to get better in financial services.” Does anyone else see inconsistencies in these statements?
Next up at the conference was Bank of New York’s Chairman & CEO Robert Kelly, who made this breakthrough statement: “We need a securitization market to get started again where you have simpler instruments, where you have stronger underwriting standards than the past.” That’s funny because I would bet that Mr. Kelly and his cohorts were not singing this tune a few years ago. In fact, most of these guys told us that the products that were being created were disseminating risk and that the counterparties all understood them, so no need for regulation.
And finally, the current Goldman Sachs wonder boy, CEO Lloyd Blankfein said that Goldman was not changing its long-term strategy and that he is happy with the current lines of business that Goldman has. Really? That’s not what the rest of us are seeing, but hey, you guys at Goldman are really different, aren’t you? At least that’s what you have told us, before this year convinced us that you were mere mortals.
In the end, the Gurus spoke and a day after their horrendously downbeat comments, the US stock market soared by over 6%. It was a wonderful reminder that the weight of the Gurus’ words must be diffused through a more realistic prism…it’s about time.
Thursday, November 13, 2008
Best Bye-Bye?
This has been a sobering week for the nation’s retailers and only three trading days have passed! It started with a double-shot of grim news: Starbucks reported that its net income dropped 97% from a year ago and the Circuit City filed for Chapter 11 bankruptcy protection. Then yesterday, Best Buy’s Chief Executive Brad Anderson said
"Since mid-September, rapid, seismic changes in consumer behavior have created the most difficult climate we've ever seen." Ouch!
As everyone gears up for the 2008 holiday season—it is crazy to see the decorations appearing in the windows this early—the question is whether beleaguered consumers will dramatically reduce their spending as they face a serious economic downturn. The answer is likely to be a resounding yes and evidence is clear wherever you look—in the auto industry, where sales of new vehicles have dropped 32% in the third quarter or in surveys that indicate that consumer spending is likely to fall in 2009 for the first year since 1980. In fact, last week, retailers reported the worst monthly sales decline in over thirty years, prompting them to kick off the season earlier than usual and with more dramatic discounts than previously expected.
America’s Research Group (ARG)/UBS Christmas Survey asked consumers what they intend to do for the holidays and the results were rough: 40.1% of consumers interviewed said they will spend less this year than last and 35.3% said they will buy fewer gifts. ARG Chief Executive C. Britt Beemer predicts that retail sales will be negative compared to last year for the first time in 23 years of conducting these surveys.
Downbeat forward-looking data is prompting retailers like Best Buy to batten down the hatches and quickly. The nation’s largest consumer electronics chain warned that its revenues would suffer and lowered its future profits as it retools operations to adjust to the new consumer reality of tighter purses. Best Buy’s President and Chief Operating Officer Brian Dunn said, "In 42 years of retailing, we've never seen such difficult times for the consumer. People are making dramatic changes in how much they spend, and we're not immune from those forces."
There is some good news buried in the bad stuff. The first is that consumers will benefit from lower prices this season. If you are lucky enough to have a steady job and the money available to purchase a flat screen TV, the best bet is to shop around, compare prices and wait for the drastic mark-downs, because they are sure to come. The price pressure is likely to be intense, especially among electronic retailers because failures like those at Circuit City and Tweeter will create large inventory levels throughout the sector. The other interesting benefit of these bankruptcies is that the survivors like Best Buy and even Wal-Mart, should benefit from shoppers who want to purchase merchandise and gift cards from stores that they believe will survive the current downturn. For now, I am hopeful that Best Buy will not morph into Best Bye-Bye.
"Since mid-September, rapid, seismic changes in consumer behavior have created the most difficult climate we've ever seen." Ouch!
As everyone gears up for the 2008 holiday season—it is crazy to see the decorations appearing in the windows this early—the question is whether beleaguered consumers will dramatically reduce their spending as they face a serious economic downturn. The answer is likely to be a resounding yes and evidence is clear wherever you look—in the auto industry, where sales of new vehicles have dropped 32% in the third quarter or in surveys that indicate that consumer spending is likely to fall in 2009 for the first year since 1980. In fact, last week, retailers reported the worst monthly sales decline in over thirty years, prompting them to kick off the season earlier than usual and with more dramatic discounts than previously expected.
America’s Research Group (ARG)/UBS Christmas Survey asked consumers what they intend to do for the holidays and the results were rough: 40.1% of consumers interviewed said they will spend less this year than last and 35.3% said they will buy fewer gifts. ARG Chief Executive C. Britt Beemer predicts that retail sales will be negative compared to last year for the first time in 23 years of conducting these surveys.
Downbeat forward-looking data is prompting retailers like Best Buy to batten down the hatches and quickly. The nation’s largest consumer electronics chain warned that its revenues would suffer and lowered its future profits as it retools operations to adjust to the new consumer reality of tighter purses. Best Buy’s President and Chief Operating Officer Brian Dunn said, "In 42 years of retailing, we've never seen such difficult times for the consumer. People are making dramatic changes in how much they spend, and we're not immune from those forces."
There is some good news buried in the bad stuff. The first is that consumers will benefit from lower prices this season. If you are lucky enough to have a steady job and the money available to purchase a flat screen TV, the best bet is to shop around, compare prices and wait for the drastic mark-downs, because they are sure to come. The price pressure is likely to be intense, especially among electronic retailers because failures like those at Circuit City and Tweeter will create large inventory levels throughout the sector. The other interesting benefit of these bankruptcies is that the survivors like Best Buy and even Wal-Mart, should benefit from shoppers who want to purchase merchandise and gift cards from stores that they believe will survive the current downturn. For now, I am hopeful that Best Buy will not morph into Best Bye-Bye.
Wednesday, November 12, 2008
I Heart Sheila Bair
My love of regulators is newly found. After all, I work in an industry that is often at odds with the folks who are supposed to oversee us. I have been frustrated in the past because sometimes these folks make a huge deal out of something pretty puny, but then miss the elephant in the room. Not so with my most favorite regulator of all, Sheila Bair, the Chairman of the Federal Deposit Insurance Corp (FDIC). Ms. Bair is the cream of the crop and I want to be the first to say it in public: I heart Sheila Bair.
My infatuation developed when she spoke articulately about what she perceived as the problem with TARP: it did not go to the root of the problem at hand, that is, the collapsing real estate market and the rapid advance of foreclosures. She noted in an interview with the Wall Street Journal (10/22/08) that she was frustrated that the government was providing “massive assistance at the institutional level” to the lenders (i.e. the financial institutions) but not enough help to the borrowers who were in trouble and potentially facing foreclosure. Ms. Bair had hoped for relief to come in the form of how she managed the loans that failed IndyMac Bancorp Inc. held. After the FDIC took over that bank in July, Ms. Bair said it would halt foreclosures on the mortgages it owned and would try to modify loans for struggling homeowners.
Well it only took four months, but it looks like there are others who are seeing the wisdom in Ms. Bair’s approach. Yesterday Fannie Mae and Freddie Mac, along with U.S. officials, announced plans to modify hundreds of thousands of loans held by the massive entities in order to prevent foreclosures. The effort will be available to those borrowers who meet certain criteria: the homes must be owner-occupied, escrows for real estate taxes and insurance must be established, the loans must be 90 days or more past due; the borrowers would need to owe 90 percent or more than the home is currently worth; and they would have to provide a statement or affidavit showing that they have encountered some sort of hardship that has impacted their ability to pay their mortgage. The program would only apply to loans made on or before Jan. 1, 2008, and borrowers will be disqualified if they file for bankruptcy.
The goal of the program is to reduce the ratio of mortgage payments for these homeowners to 38% of their income by modifying interest rates, extending the life of the loan and in some cases forgiving portions of principal debt. While officials did
not have an estimate of how many people would qualify, estimates range in the hundreds of thousands. According to the most recent data from the Mortgage Bankers Association at the end of June, more than 4 million American homeowners, or 9% of mortgagees were either behind on their payments or in foreclosure.
The Fannie/Freddie program would augment similar plans announced by Citigroup, JP Morgan Chase and Bank of America. Citigroup plans to not only renegotiate loans that have already reached a critical point, the bank also plans to contact 500,000 homeowners, or 1/3 of all mortgages that it owns, who are on the verge of falling behind. The bank will create a team of 600 salespeople to assist the targeted borrowers by adjusting their rates, reducing principal or increasing the term of the loan. Late last month, JPMorgan Chase & Co expanded its mortgage modification program to an estimated $70 billion in loans, which could aid as many as 400,000 customers and Bank of America, meanwhile, has said that starting Dec. 1, it will modify an estimated 400,000 loans held by newly acquired Countrywide Financial Corp. as part of an $8.4 billion legal settlement reached with 11 states last month.
It looks like the industry has caught on and realized that Ms. Bair was right on in her assessment of what needs to get done. Yes, it was important to secure the financial system, but it is equally important to focus on where the problems began and address them head on. The world is catching on to my great admiration of Ms. Bair—on Monday, the Wall Street Journal named Bair the Number One Woman to Watch in 2008. I think that I speak for the WSJ when I say that we all heart Sheila Bair!
My infatuation developed when she spoke articulately about what she perceived as the problem with TARP: it did not go to the root of the problem at hand, that is, the collapsing real estate market and the rapid advance of foreclosures. She noted in an interview with the Wall Street Journal (10/22/08) that she was frustrated that the government was providing “massive assistance at the institutional level” to the lenders (i.e. the financial institutions) but not enough help to the borrowers who were in trouble and potentially facing foreclosure. Ms. Bair had hoped for relief to come in the form of how she managed the loans that failed IndyMac Bancorp Inc. held. After the FDIC took over that bank in July, Ms. Bair said it would halt foreclosures on the mortgages it owned and would try to modify loans for struggling homeowners.
Well it only took four months, but it looks like there are others who are seeing the wisdom in Ms. Bair’s approach. Yesterday Fannie Mae and Freddie Mac, along with U.S. officials, announced plans to modify hundreds of thousands of loans held by the massive entities in order to prevent foreclosures. The effort will be available to those borrowers who meet certain criteria: the homes must be owner-occupied, escrows for real estate taxes and insurance must be established, the loans must be 90 days or more past due; the borrowers would need to owe 90 percent or more than the home is currently worth; and they would have to provide a statement or affidavit showing that they have encountered some sort of hardship that has impacted their ability to pay their mortgage. The program would only apply to loans made on or before Jan. 1, 2008, and borrowers will be disqualified if they file for bankruptcy.
The goal of the program is to reduce the ratio of mortgage payments for these homeowners to 38% of their income by modifying interest rates, extending the life of the loan and in some cases forgiving portions of principal debt. While officials did
not have an estimate of how many people would qualify, estimates range in the hundreds of thousands. According to the most recent data from the Mortgage Bankers Association at the end of June, more than 4 million American homeowners, or 9% of mortgagees were either behind on their payments or in foreclosure.
The Fannie/Freddie program would augment similar plans announced by Citigroup, JP Morgan Chase and Bank of America. Citigroup plans to not only renegotiate loans that have already reached a critical point, the bank also plans to contact 500,000 homeowners, or 1/3 of all mortgages that it owns, who are on the verge of falling behind. The bank will create a team of 600 salespeople to assist the targeted borrowers by adjusting their rates, reducing principal or increasing the term of the loan. Late last month, JPMorgan Chase & Co expanded its mortgage modification program to an estimated $70 billion in loans, which could aid as many as 400,000 customers and Bank of America, meanwhile, has said that starting Dec. 1, it will modify an estimated 400,000 loans held by newly acquired Countrywide Financial Corp. as part of an $8.4 billion legal settlement reached with 11 states last month.
It looks like the industry has caught on and realized that Ms. Bair was right on in her assessment of what needs to get done. Yes, it was important to secure the financial system, but it is equally important to focus on where the problems began and address them head on. The world is catching on to my great admiration of Ms. Bair—on Monday, the Wall Street Journal named Bair the Number One Woman to Watch in 2008. I think that I speak for the WSJ when I say that we all heart Sheila Bair!
Tuesday, November 11, 2008
Ninety Years Later
With the election over, we are now left with a certain feeling that I can only describe as emptiness—gone are the cool graphics and techno-maps of red and blue, not to mention the nightly parsing of each of the four candidates’ days. All of the sudden, there is no distraction from the plain truth: the global economy is feeling a world of hurt.
Proof of the damage was seen yesterday in the action of General Motors. Analysts at both Deutsche Bank and Barclays set a downbeat tone when they cut their target prices and investment ratings on the stock-Barclays is anticipating that the company will trade at a buck, while the more dour Deutsche Bank thinks that GM is heading out of business quickly due to the fact the company is burning over $2 billion month. The two reports drove down the price of the US automaker 23% to $3.36, after hitting a 62-year low of $3.02 in the trading session.
Did you catch that? We are talking 1946—the year that “It’s a Wonderful Life” lost the Academy Award to “The Best Years of our Lives”. I know that you may be thinking that life just doesn’t seem so wonderful right now. Well, don’t tell that to anyone who actually lived through the year 1946 and the ten or fifteen years that preceded it. While we obsess about the gyrations of the stock market and the problems in the economy, which are of course serious and significant, I fear that we may forget about an important milestone: today is Veteran’s Day.
World War I, known as “The Great War” or “War to End all Wars,” officially ended when the Treaty of Versailles was signed on June 28, 1919, in the Palace of Versailles in France. However, fighting ceased seven months earlier when an armistice (a temporary cessation of hostilities) between the Allied nations and Germany went into effect on the eleventh hour of the eleventh day of the eleventh month. For that reason, November 11, 1918, is generally regarded as the end of the war. As a result, President Woodrow Wilson proclaimed November 11 as the first commemoration of Armistice Day with the following words: “To us in America, the reflections of Armistice Day will be filled with solemn pride in the heroism of those who died in the country’s service and with gratitude for the victory, both because of the thing from which it has freed us and because of the opportunity it has given America to show her sympathy with peace and justice in the councils of the nations…"
The purpose of Veterans Day was to set aside a day to honor America's veterans for their patriotism, love of country, and willingness to serve and sacrifice for the common good. Ninety years later, as the United States fights wars in Iraq and Afghanistan, today is a reminder that we owe our soldiers a debt of gratitude. And so for just a moment today, please take the time to put aside your concerns about your 401(k) account or the value of your house and send a blessing to our servicemen and women who are currently serving and who have served our country so honorably.
Proof of the damage was seen yesterday in the action of General Motors. Analysts at both Deutsche Bank and Barclays set a downbeat tone when they cut their target prices and investment ratings on the stock-Barclays is anticipating that the company will trade at a buck, while the more dour Deutsche Bank thinks that GM is heading out of business quickly due to the fact the company is burning over $2 billion month. The two reports drove down the price of the US automaker 23% to $3.36, after hitting a 62-year low of $3.02 in the trading session.
Did you catch that? We are talking 1946—the year that “It’s a Wonderful Life” lost the Academy Award to “The Best Years of our Lives”. I know that you may be thinking that life just doesn’t seem so wonderful right now. Well, don’t tell that to anyone who actually lived through the year 1946 and the ten or fifteen years that preceded it. While we obsess about the gyrations of the stock market and the problems in the economy, which are of course serious and significant, I fear that we may forget about an important milestone: today is Veteran’s Day.
World War I, known as “The Great War” or “War to End all Wars,” officially ended when the Treaty of Versailles was signed on June 28, 1919, in the Palace of Versailles in France. However, fighting ceased seven months earlier when an armistice (a temporary cessation of hostilities) between the Allied nations and Germany went into effect on the eleventh hour of the eleventh day of the eleventh month. For that reason, November 11, 1918, is generally regarded as the end of the war. As a result, President Woodrow Wilson proclaimed November 11 as the first commemoration of Armistice Day with the following words: “To us in America, the reflections of Armistice Day will be filled with solemn pride in the heroism of those who died in the country’s service and with gratitude for the victory, both because of the thing from which it has freed us and because of the opportunity it has given America to show her sympathy with peace and justice in the councils of the nations…"
The purpose of Veterans Day was to set aside a day to honor America's veterans for their patriotism, love of country, and willingness to serve and sacrifice for the common good. Ninety years later, as the United States fights wars in Iraq and Afghanistan, today is a reminder that we owe our soldiers a debt of gratitude. And so for just a moment today, please take the time to put aside your concerns about your 401(k) account or the value of your house and send a blessing to our servicemen and women who are currently serving and who have served our country so honorably.
Monday, November 10, 2008
Obamarkets
Before the election, someone argued that one of the reasons that stocks had lifted from the October 10th lows was that it was becoming clearer that the President would be Barack Obama. I countered that despite the excitement about the election on both sides I did not think that the stock market was trading on politics. Others contended that if McCain were to pull out a come-from-behind victory, that there would be anarchy, an idea that frankly demeans the American people.
Now that we have elected Mr. Obama, I am more convinced than ever that while traders like to know presidential outcomes, last week’s action did not jibe with the clarity of the Presidential and Congressional victories. Indeed, the biggest Election Day rally ever faded quickly, as the subsequent two-day drubbing supplanted “yes we can” with, “maybe we can’t”. Was it disappointment with the Obama victory or a more visceral reaction to the dour economic news and massive hedge fund redemptions? I put my vote on the latter.
In addition to a new president, last week saw additional proof that the economy has continued to deteriorate. This fact was confirmed by retailers whose October same-store sales fell more than they have any time in this decade; the Institute for Supply Management, whose index dropped to its lowest level since 1980; the auto industry which reported that sales skidded to their worst pace since February 1983; and the Labor Department which said that the jobless rate spiked to a 14-year high of 6.5% in October, and another 240,000 jobs were lost, bringing the total number of jobs lost to 1.2 million for the year. It is likely that the convergence of bad news rather than the election spurred net selling on the week for stocks, with all of the major indexes closing down approximately 4% for the five trading sessions.
I am sorry to say that the outcome of the election will probably not calm markets any time soon, rather the antidote to the extreme moves is likely to be found in something simpler: sheer exhaustion could set in. As the excellent Jason Zweig noted in the Wall Street Journal over the weekend, “In the 10 years ended Dec. 31, 2007, the Dow never once swung by more than 9% during the course of a trading day. So far in 2008, with less than eight weeks to go, there have been six such giant swings. Over the entire decade through the end of last year, the Dow bounced around by more than 5% in a single day a total of 14 times. So far this year, that has happened 20 times; what used to take place barely more than annually has occurred once every 11 trading days in 2008.”
Zweig notes that there have been previous times of extreme price movement, but US stocks have not “been this volatile, day after day, since the 1930s.” Like a winded ballplayer, markets will need to take a break from the action to recover. Clearly the election was not the much-needed half-time show.
Now that we have elected Mr. Obama, I am more convinced than ever that while traders like to know presidential outcomes, last week’s action did not jibe with the clarity of the Presidential and Congressional victories. Indeed, the biggest Election Day rally ever faded quickly, as the subsequent two-day drubbing supplanted “yes we can” with, “maybe we can’t”. Was it disappointment with the Obama victory or a more visceral reaction to the dour economic news and massive hedge fund redemptions? I put my vote on the latter.
In addition to a new president, last week saw additional proof that the economy has continued to deteriorate. This fact was confirmed by retailers whose October same-store sales fell more than they have any time in this decade; the Institute for Supply Management, whose index dropped to its lowest level since 1980; the auto industry which reported that sales skidded to their worst pace since February 1983; and the Labor Department which said that the jobless rate spiked to a 14-year high of 6.5% in October, and another 240,000 jobs were lost, bringing the total number of jobs lost to 1.2 million for the year. It is likely that the convergence of bad news rather than the election spurred net selling on the week for stocks, with all of the major indexes closing down approximately 4% for the five trading sessions.
I am sorry to say that the outcome of the election will probably not calm markets any time soon, rather the antidote to the extreme moves is likely to be found in something simpler: sheer exhaustion could set in. As the excellent Jason Zweig noted in the Wall Street Journal over the weekend, “In the 10 years ended Dec. 31, 2007, the Dow never once swung by more than 9% during the course of a trading day. So far in 2008, with less than eight weeks to go, there have been six such giant swings. Over the entire decade through the end of last year, the Dow bounced around by more than 5% in a single day a total of 14 times. So far this year, that has happened 20 times; what used to take place barely more than annually has occurred once every 11 trading days in 2008.”
Zweig notes that there have been previous times of extreme price movement, but US stocks have not “been this volatile, day after day, since the 1930s.” Like a winded ballplayer, markets will need to take a break from the action to recover. Clearly the election was not the much-needed half-time show.
Friday, November 7, 2008
The Governor’s Economic Forum
On a rainy day in New England while stocks were falling on Wall Street, something great happened. Over one hundred politicians, union leaders, businesspeople, non-profit employees and academics gathered for one reason: to help the state in which they all live. I was lucky enough to serve as the moderator of Rhode Island Governor Donald L. Carcieri’s Economic Forum and it was truly inspiring.
The guests listened to three speakers who provided an excellent backdrop to the current RI economy. John Rhodes, the Senior Principal of Moran, Stahl and Moyer helped us understand what variables are weighed by companies that are undergoing site selection, Professor Paul Harrington of Northeastern University provided illuminating data with regard to the state’s labor force and Jim Eads, the Executive Director of the Federation of Tax Administration discussed the intersection of tax policy and economic development.
The speakers warmed up the room for the main event: an open exchange of ideas to help the state navigate the financial crisis at hand. To introduce participants to the process, I began with two quotes:
1) “You meet your destiny on the road you take to avoid it.” Psychiatrist Carl Jung was talking about the human psyche, but the application to our current financial crisis is particularly apt. How each individual, business, organization and municipality faces the current economic challenges can define future success. I urged participants not to avoid hard truths and instead to confront the situation with candor and create solutions that would help the state achieve its goals.
2) "It is not necessary to change. Survival is not mandatory." W. Edwards Deming, a statistician who is known as the father of the Japanese post-war industrial revival was a man who understood that if nothing changes…then nothing changes. The Governor, as well as all of the participants, recognized that the state and the nation face tremendous challenges. Those who are creative will not only survive, but thrive when the eventual recovery takes place.
To that end, the Governor asked participants to consider three relatively simple (but not easy) questions:
1) What can be done to stimulate the RI economy in the short term?
2) What can be done to stimulate the RI economy in the long term?
3) What are the obstacles to economic development in the state?
After one hour of thoughtful consideration, the participants delivered insightful and interesting ideas to the Governor, who will synthesize the information so that he can adjust the 2009 economic and growth plan for the state. The Forum was community at its best—no mess, no politics, just hard work. I was truly honored to be part of the day.
The guests listened to three speakers who provided an excellent backdrop to the current RI economy. John Rhodes, the Senior Principal of Moran, Stahl and Moyer helped us understand what variables are weighed by companies that are undergoing site selection, Professor Paul Harrington of Northeastern University provided illuminating data with regard to the state’s labor force and Jim Eads, the Executive Director of the Federation of Tax Administration discussed the intersection of tax policy and economic development.
The speakers warmed up the room for the main event: an open exchange of ideas to help the state navigate the financial crisis at hand. To introduce participants to the process, I began with two quotes:
1) “You meet your destiny on the road you take to avoid it.” Psychiatrist Carl Jung was talking about the human psyche, but the application to our current financial crisis is particularly apt. How each individual, business, organization and municipality faces the current economic challenges can define future success. I urged participants not to avoid hard truths and instead to confront the situation with candor and create solutions that would help the state achieve its goals.
2) "It is not necessary to change. Survival is not mandatory." W. Edwards Deming, a statistician who is known as the father of the Japanese post-war industrial revival was a man who understood that if nothing changes…then nothing changes. The Governor, as well as all of the participants, recognized that the state and the nation face tremendous challenges. Those who are creative will not only survive, but thrive when the eventual recovery takes place.
To that end, the Governor asked participants to consider three relatively simple (but not easy) questions:
1) What can be done to stimulate the RI economy in the short term?
2) What can be done to stimulate the RI economy in the long term?
3) What are the obstacles to economic development in the state?
After one hour of thoughtful consideration, the participants delivered insightful and interesting ideas to the Governor, who will synthesize the information so that he can adjust the 2009 economic and growth plan for the state. The Forum was community at its best—no mess, no politics, just hard work. I was truly honored to be part of the day.
Thursday, November 6, 2008
That was quick
Yesterday both Democrats and Republicans alike were savoring the fruits of democracy. I knew this election was going to be different when a close family friend who used to work for the ultra conservative Heritage Foundation confided to me that he not only planned to vote for Barack Obama, he had also given money to the campaign. And so, for the first time ever, the United States will have a black president.
That was all well and good until the stock market opened at 9:30 and suddenly, the post-election afterglow faded quickly. That sure was quick! After enjoying a strong Election Day rally, stocks gave back the previous day’s gains and then some. With the results of the election set in stone, investors were reminded that the economy is still in a precarious state. Data indicated that the service sector contracted and a weekly employment report portended at least a 200,000 job loss when Friday’s employment report is released.
The damage was broad-based: the Dow Jones Industrial Average, which had spiked 305 points on Election Day, fell 486.01 points, or 5.1%, to 9139.27. It was the biggest one-day loss for blue chips since Oct. 22, the twelfth worst point loss in history and the lowest close since Oct. 29. The S&P 500 fell 5.3% to 952.77, led down by the financial sector, which fell 9.2%. The Nasdaq Composite Index snapped a six-day winning streak, finishing down 5.5%, at 1681.64.
Of course we all knew that one day, one election, even a historic one, could not change what we know: the globe continues to be plagued by deleveraging and a widespread economic slowdown driven by lower consumption, investment and trade flows. Investors continue to wrestle with the right prices for stocks amid what could be the most significant recession since the early 1980’s. The depth and length of the recession will determine fair value, but of course it will only be known in retrospect.
For that reason, it is imperative for investors not to get too caught up in either the high-highs or the low-lows over the next few weeks or even months. This is going to take some time to work out and you might drive yourself crazy if you get sucked into the daily movements. If you do sucked in, remember that any extreme feeling is likely to fade when the next day starts…and you just might find yourself thinking, “Gee, that sure was quick…”
That was all well and good until the stock market opened at 9:30 and suddenly, the post-election afterglow faded quickly. That sure was quick! After enjoying a strong Election Day rally, stocks gave back the previous day’s gains and then some. With the results of the election set in stone, investors were reminded that the economy is still in a precarious state. Data indicated that the service sector contracted and a weekly employment report portended at least a 200,000 job loss when Friday’s employment report is released.
The damage was broad-based: the Dow Jones Industrial Average, which had spiked 305 points on Election Day, fell 486.01 points, or 5.1%, to 9139.27. It was the biggest one-day loss for blue chips since Oct. 22, the twelfth worst point loss in history and the lowest close since Oct. 29. The S&P 500 fell 5.3% to 952.77, led down by the financial sector, which fell 9.2%. The Nasdaq Composite Index snapped a six-day winning streak, finishing down 5.5%, at 1681.64.
Of course we all knew that one day, one election, even a historic one, could not change what we know: the globe continues to be plagued by deleveraging and a widespread economic slowdown driven by lower consumption, investment and trade flows. Investors continue to wrestle with the right prices for stocks amid what could be the most significant recession since the early 1980’s. The depth and length of the recession will determine fair value, but of course it will only be known in retrospect.
For that reason, it is imperative for investors not to get too caught up in either the high-highs or the low-lows over the next few weeks or even months. This is going to take some time to work out and you might drive yourself crazy if you get sucked into the daily movements. If you do sucked in, remember that any extreme feeling is likely to fade when the next day starts…and you just might find yourself thinking, “Gee, that sure was quick…”
Tuesday, November 4, 2008
Finally Here
It has been an exhausting two-year campaign and today it will finally end. Two months ago, before the financial system nearly collapsed, the race felt different. We were all concerned about taxes and the economy, but there were other issues as well. Today the polls tell us what we already know: it’s the economy stupid!
Last week underscored the main issues that voters are confronting: the US economy finally went negative in terms of GDP and is likely to get worse, the housing market continued to contract and the stock market closed out a horrible month (October was the worst month for the Dow since August, 1998 and the worst month for the S&P 500 since October, 1987 -- yes, the October of the 22% one-day crash).
During the month, there were panic-driven sell-offs amid fears of a total systemic melt-down. The stomach-churning gyrations pushed stock indexes in massive swaths from day to day as the collapse of investment grade financial companies triggered a run on the financial system. In normal times, swings of more than 4% in a day are rare (there were 3 such days throughout the 1950’s, 2 in the 1960’s and none from 2003-2007), but in the month of October alone, there were nine. Until last month, September, 1932 held the record for the most days with big moves at eight.
And so the voting public starts today knowing that stock prices are at higher levels than the October lows, but they are not likely in a better frame of mind when it comes to considering the global economy. Many have already made up their minds as to which candidate is better equipped to navigate these treacherous times, but even to those, there is an understanding that we have never been here before.
The Wall Street Journal noted yesterday that there “are two relatively recent historical precedents for the current election, where a new president will take office amid a serious financial crisis. Whether John McCain or Barack Obama is elected, he will confront ugly economic challenges like Franklin D. Roosevelt did after his 1932 victory and Ronald Reagan did in 1980… the market posted big gains during their overall tenures, though it is unclear whether the main cause was their policies or the steep declines the market suffered before they took office.”
And that’s probably the most confounding issue for any voter: we can’t truly know which candidate will be better, or lucky or unlucky. The best we can do is gather the information and make the most informed decision possible when we enter the voting booth. Of course no matter what, the darned thing will be over and we can get back to obsessing about our investment accounts or future economic data. Yes, it is finally here.
Last week underscored the main issues that voters are confronting: the US economy finally went negative in terms of GDP and is likely to get worse, the housing market continued to contract and the stock market closed out a horrible month (October was the worst month for the Dow since August, 1998 and the worst month for the S&P 500 since October, 1987 -- yes, the October of the 22% one-day crash).
During the month, there were panic-driven sell-offs amid fears of a total systemic melt-down. The stomach-churning gyrations pushed stock indexes in massive swaths from day to day as the collapse of investment grade financial companies triggered a run on the financial system. In normal times, swings of more than 4% in a day are rare (there were 3 such days throughout the 1950’s, 2 in the 1960’s and none from 2003-2007), but in the month of October alone, there were nine. Until last month, September, 1932 held the record for the most days with big moves at eight.
And so the voting public starts today knowing that stock prices are at higher levels than the October lows, but they are not likely in a better frame of mind when it comes to considering the global economy. Many have already made up their minds as to which candidate is better equipped to navigate these treacherous times, but even to those, there is an understanding that we have never been here before.
The Wall Street Journal noted yesterday that there “are two relatively recent historical precedents for the current election, where a new president will take office amid a serious financial crisis. Whether John McCain or Barack Obama is elected, he will confront ugly economic challenges like Franklin D. Roosevelt did after his 1932 victory and Ronald Reagan did in 1980… the market posted big gains during their overall tenures, though it is unclear whether the main cause was their policies or the steep declines the market suffered before they took office.”
And that’s probably the most confounding issue for any voter: we can’t truly know which candidate will be better, or lucky or unlucky. The best we can do is gather the information and make the most informed decision possible when we enter the voting booth. Of course no matter what, the darned thing will be over and we can get back to obsessing about our investment accounts or future economic data. Yes, it is finally here.
Friday, October 31, 2008
Carry On
The sky is clearing and the night
Has cried enough
The sun, he come, the world
to soften up
Rejoice, rejoice, we have no choice but
To carry on
-Crosby, Stills, Nash and Young
Well maybe rejoice is not tops on investors’ minds, but one thing is certain: they sure have had enough of the carry trade. The carry trade was simple: borrow money from a country with low interest rates and reinvest the proceeds to one which provides a higher yield. Seems simple enough, so hedge funds and trading desks around the world put the trade on—specifically, they borrowed from the Japanese, who kept interest rates close to zero for some time, and invested the money into emerging markets where returns were dizzying.
And so we enter the next phase of the financial crisis: the moment when the music stops playing and everyone scrambles for an empty chair. In this case, managers were busy unwinding the carry trade at an aggressive pace. As the process started, it then triggered margin calls on traders, amplifying the pressures on them to sell. Add to this fact the underlying flight to quality amid market turmoil and you can see how a massive trade that had taken years to build up (some say there was $500 billion tied up in the carry trade), could unwind in a matter of months.
As a result, the Japanese yen has soared in value—up approximately 30% against the euro over the past month (a 6-year high). While these kinds of moves may have become the norm for stock and commodity markets, they can wreak havoc when they occur in currency markets, because it becomes nearly impossible to price exports or imports. Additionally, investors have to unwind both sides of the trade, which means that as they are re-purchasing yen, they need to sell those assets that were intended to deliver the outsized returns. In this case, the deleveraging and panic that has caused the Japanese, as well as many emerging markets, significant damage. Earlier this week, Japan’s Nikkei index was at its lowest since 1982 and the MSCI index of non-Japanese Asian stocks was down 33% in October. To stop the currency panic, there could be government intervention on the horizon.
The good news out of all of this is that ultimately, the currency revaluation process should lead to a more solid system. It is likely we will hear calls for intervention and oversight of currency trading, but for now, if you are getting gloomy, just hum a few of those lyrics noted above…Rejoice, rejoice, we have no choice but To carry on…”
Has cried enough
The sun, he come, the world
to soften up
Rejoice, rejoice, we have no choice but
To carry on
-Crosby, Stills, Nash and Young
Well maybe rejoice is not tops on investors’ minds, but one thing is certain: they sure have had enough of the carry trade. The carry trade was simple: borrow money from a country with low interest rates and reinvest the proceeds to one which provides a higher yield. Seems simple enough, so hedge funds and trading desks around the world put the trade on—specifically, they borrowed from the Japanese, who kept interest rates close to zero for some time, and invested the money into emerging markets where returns were dizzying.
And so we enter the next phase of the financial crisis: the moment when the music stops playing and everyone scrambles for an empty chair. In this case, managers were busy unwinding the carry trade at an aggressive pace. As the process started, it then triggered margin calls on traders, amplifying the pressures on them to sell. Add to this fact the underlying flight to quality amid market turmoil and you can see how a massive trade that had taken years to build up (some say there was $500 billion tied up in the carry trade), could unwind in a matter of months.
As a result, the Japanese yen has soared in value—up approximately 30% against the euro over the past month (a 6-year high). While these kinds of moves may have become the norm for stock and commodity markets, they can wreak havoc when they occur in currency markets, because it becomes nearly impossible to price exports or imports. Additionally, investors have to unwind both sides of the trade, which means that as they are re-purchasing yen, they need to sell those assets that were intended to deliver the outsized returns. In this case, the deleveraging and panic that has caused the Japanese, as well as many emerging markets, significant damage. Earlier this week, Japan’s Nikkei index was at its lowest since 1982 and the MSCI index of non-Japanese Asian stocks was down 33% in October. To stop the currency panic, there could be government intervention on the horizon.
The good news out of all of this is that ultimately, the currency revaluation process should lead to a more solid system. It is likely we will hear calls for intervention and oversight of currency trading, but for now, if you are getting gloomy, just hum a few of those lyrics noted above…Rejoice, rejoice, we have no choice but To carry on…”
Thursday, October 30, 2008
Deflation Formation
After more than a year into the rate cut cycle, the Federal Reserve announced that it was cutting short-term interest rates again yesterday. The US central bank pushed its benchmark federal funds rate down half a percentage point to 1% and signaled that more rate cuts are a possibility, noting that "downside risks to growth remain." Joining the Fed in the action was China, which cut rates for the third time in six weeks, amid a worsening growth outlook for its export-dependent economy and Norway, which cut its benchmark interest rate for the second time in two weeks. The European Central Bank and the Bank of England are expected to follow next week and Japanese authorities signaled they too might cut rates from ½ point to ¼ point.
Now that US rates are at levels not seen since 2002, fears are re-emerging that deflation will haunt the economy and keep us buried in a stagnant state for years to come. Simply stated, deflation occurs when consumer prices fall broadly. The problem with deflation is that it can lead to a vicious cycle: falling prices diminish corporate profits, which can lead corporations to reduce headcount. When consumers are worried about the job market, they are less likely to spend, which hurts profits once again. The most recent example of deflation was seen in Japan in the 1990’s. After that country’s real estate and stock market boom and bust, its economy ground to a halt. While the Japanese central bank lowered interest rates to zero and held the rate there, the economy still did not respond. In fact, only when officials there recapitalized banks, did the economy revive.
According to a number of analysts, the chances that the US will avoid deflation are pretty good. The primary reason is that the Fed is on the case much more aggressively than the central bank in Japan was. In addition to cutting short-term rates, the Fed has an arsenal ready to deploy in order to fight potential deflation. It can conduct operations to bring Treasury or private securities’ rates down, they can finance fiscal stimulus and they can undertake “quantitative easing” of monetary policy, which simply means that the central bank floods the system with liquidity. So while it is true that the Fed can only cut short term rates to zero, it is not constrained in how much it can increase its own balance sheet by making loans or acquiring assets. It can create new bank reserves at will and use those reserves to make loans itself or take on distressed assets.
Other reasons to believe that deflation may not be coming on the horizon include: while home and commodity prices are in fact falling, the current decline represents a reversal of the major spike that occurred leading up to this time; companies will quickly cut capacity to balance supply and demand; and some of the emerging global declines in goods prices are declines in relative prices, not prices generally. This is not to say that the credit crunch is not deflationary in nature or that prices are not coming down. Nor does this line of reasoning rule out the idea that deflation could envelop the US economy, but at this stage, it seems less likely to occur in the near term.
Now that US rates are at levels not seen since 2002, fears are re-emerging that deflation will haunt the economy and keep us buried in a stagnant state for years to come. Simply stated, deflation occurs when consumer prices fall broadly. The problem with deflation is that it can lead to a vicious cycle: falling prices diminish corporate profits, which can lead corporations to reduce headcount. When consumers are worried about the job market, they are less likely to spend, which hurts profits once again. The most recent example of deflation was seen in Japan in the 1990’s. After that country’s real estate and stock market boom and bust, its economy ground to a halt. While the Japanese central bank lowered interest rates to zero and held the rate there, the economy still did not respond. In fact, only when officials there recapitalized banks, did the economy revive.
According to a number of analysts, the chances that the US will avoid deflation are pretty good. The primary reason is that the Fed is on the case much more aggressively than the central bank in Japan was. In addition to cutting short-term rates, the Fed has an arsenal ready to deploy in order to fight potential deflation. It can conduct operations to bring Treasury or private securities’ rates down, they can finance fiscal stimulus and they can undertake “quantitative easing” of monetary policy, which simply means that the central bank floods the system with liquidity. So while it is true that the Fed can only cut short term rates to zero, it is not constrained in how much it can increase its own balance sheet by making loans or acquiring assets. It can create new bank reserves at will and use those reserves to make loans itself or take on distressed assets.
Other reasons to believe that deflation may not be coming on the horizon include: while home and commodity prices are in fact falling, the current decline represents a reversal of the major spike that occurred leading up to this time; companies will quickly cut capacity to balance supply and demand; and some of the emerging global declines in goods prices are declines in relative prices, not prices generally. This is not to say that the credit crunch is not deflationary in nature or that prices are not coming down. Nor does this line of reasoning rule out the idea that deflation could envelop the US economy, but at this stage, it seems less likely to occur in the near term.
Wednesday, October 29, 2008
Confidence, the Julie Andrews Way
I have confidence in sunshine
I have confidence in rain
I have confidence that spring will come again
Besides which you see I have confidence in me
-Rodgers & Hammerstein in “The Sound of Music”
I know that I have used this lyric previously, but any chance to hum along to “The Sound of Music” is fine with me, especially amid the tumultuous economic times in which we live. With that said, there is a connection between Broadway and Wall Street, which parenthetically, do actually physically intersect in lower Manhattan.
Yesterday, the Conference Board, a not-for-profit organization that provides and disseminates research, released its monthly survey of consumer confidence. Like many of its peers, this index attempts to gauge consumer attitudes on present economic conditions and expectations of future conditions. In other words, they want to know how we feel. The answer as of October 21 from the 5,000 people surveyed is that they feel glum. The Conference Board reported that last month’s index fell to a historic low level of 38.0, down from 61.4 in September and far worse than the average forecast of 51.5 (the index is measured against a bogey of 100, which was the 1985 level).
Why were market-watchers initially fretting about these results? The answer is that consumer spending accounts for more than two-thirds of the economy, so investors want to know what consumers are up to and how they might behave in the near future. The more confident consumers are about the economy and their own personal finances, the more likely they are to spend—and in the current state of the dismal economy, the opposite is also true. With this in mind, it's easy to see how this index of consumer attitudes gives insight to the direction of the economy and potentially, to the stock and bond markets. There is a caveat (isn’t there always?!). While the level of consumer confidence is associated with consumer spending, the two do not move in tandem each and every month -- sometimes people say one thing, and do another.
By the end of the day, investors had decided that the confidence measure was not as bad as thought. After all, don’t we already know that people feel rotten? In fact, the reasoning goes, the stock market is in the process of discounting all of that negative stuff, which is why stock prices have dropped off of a cliff in October. You could almost hear people convince themselves of this fact throughout the day as stock prices increased. The final hour was crazy as the buying reached a frenzied pace. When it was over, the Dow and S&P 500 had soared nearly 11%, while the NASDAQ surged by 9.5%.
In other words, as of yesterday, investors were clear that while they were confident in the Conference Board’s results, they were less sure that the horrible numbers indicated anything new and trade-able.
I have confidence in rain
I have confidence that spring will come again
Besides which you see I have confidence in me
-Rodgers & Hammerstein in “The Sound of Music”
I know that I have used this lyric previously, but any chance to hum along to “The Sound of Music” is fine with me, especially amid the tumultuous economic times in which we live. With that said, there is a connection between Broadway and Wall Street, which parenthetically, do actually physically intersect in lower Manhattan.
Yesterday, the Conference Board, a not-for-profit organization that provides and disseminates research, released its monthly survey of consumer confidence. Like many of its peers, this index attempts to gauge consumer attitudes on present economic conditions and expectations of future conditions. In other words, they want to know how we feel. The answer as of October 21 from the 5,000 people surveyed is that they feel glum. The Conference Board reported that last month’s index fell to a historic low level of 38.0, down from 61.4 in September and far worse than the average forecast of 51.5 (the index is measured against a bogey of 100, which was the 1985 level).
Why were market-watchers initially fretting about these results? The answer is that consumer spending accounts for more than two-thirds of the economy, so investors want to know what consumers are up to and how they might behave in the near future. The more confident consumers are about the economy and their own personal finances, the more likely they are to spend—and in the current state of the dismal economy, the opposite is also true. With this in mind, it's easy to see how this index of consumer attitudes gives insight to the direction of the economy and potentially, to the stock and bond markets. There is a caveat (isn’t there always?!). While the level of consumer confidence is associated with consumer spending, the two do not move in tandem each and every month -- sometimes people say one thing, and do another.
By the end of the day, investors had decided that the confidence measure was not as bad as thought. After all, don’t we already know that people feel rotten? In fact, the reasoning goes, the stock market is in the process of discounting all of that negative stuff, which is why stock prices have dropped off of a cliff in October. You could almost hear people convince themselves of this fact throughout the day as stock prices increased. The final hour was crazy as the buying reached a frenzied pace. When it was over, the Dow and S&P 500 had soared nearly 11%, while the NASDAQ surged by 9.5%.
In other words, as of yesterday, investors were clear that while they were confident in the Conference Board’s results, they were less sure that the horrible numbers indicated anything new and trade-able.
Monday, October 27, 2008
Tips for Surviving the Unstable Job Market
The housing market is in the tank, the stock market was soon to follow—what’s next, you ask? Look no further than the jobs market. Although the unemployment rate stands at 6.1% nationally, the figure is likely to increase. Some economists believe that the rate will increase to nearly 8% before this is all over, while others believe that we are headed much higher.
Currently, the state with the highest unemployment rate is none other than little Rhody—that is, Rhode Island, whose 8.8% rate puts it atop of a most dubious list. Meanwhile at the epicenter of the housing crisis, California, the rate is 7.7%. These numbers pale in comparison to the Great Depression, when unemployment reached a staggering 25%. Even as the decade of the thirties was ending, the rate was still close to 15%. Since then, the highest unemployment rate nationally was seen in November and December of 1982, when it reached 10.8%.
These are sobering facts and if you have a job, you are indeed fortunate. But everyone should take his or her job with a grain of salt right now and instead prepare for the worst. To that end, here are seven tips for surviving the unstable job market that the nation faces.
1. Stockpile cash: In normal economic times, financial planners recommend maintaining 3-6 months of your general living expenses. These are obviously not “normal” times and in fact, we are facing a nasty recession ahead, therefore, it is preferable to have 6-12 months of cash available in cash equivalents, like savings and checking accounts, short-term CDs or money market accounts.
2. Create Cash flow: Although it would be great to always know what you spend, it is even more important to create a detailed analysis of your expenses and to identify what can be cut or reduced. Considering that everyone feels out of control right now, the simple technique of identifying what is coming in and what is going out can help you come up with short, intermediate and long term game plans. The process is hard, but well worth the effort.
3. Explore a home equity line of credit or a re-finance while you still have a job. As you probably know, it is easier to qualify for a loan when you have an income. This is only possible if you have a high credit score.
4. Health Insurance: review your current benefits and explore your alternatives. It would also be advisable to understand the rules of COBRA (you can pay for 18 months of extended coverage) and you should use any deferred money that you have set aside.
5. Review your company policy on unused personal, sick and vacation days.
6. Prepare your resume, update your contact list and learn how to use the web for networking.
7. Print out any personal documents that may be on your work computer and take home personal papers from the office.
Currently, the state with the highest unemployment rate is none other than little Rhody—that is, Rhode Island, whose 8.8% rate puts it atop of a most dubious list. Meanwhile at the epicenter of the housing crisis, California, the rate is 7.7%. These numbers pale in comparison to the Great Depression, when unemployment reached a staggering 25%. Even as the decade of the thirties was ending, the rate was still close to 15%. Since then, the highest unemployment rate nationally was seen in November and December of 1982, when it reached 10.8%.
These are sobering facts and if you have a job, you are indeed fortunate. But everyone should take his or her job with a grain of salt right now and instead prepare for the worst. To that end, here are seven tips for surviving the unstable job market that the nation faces.
1. Stockpile cash: In normal economic times, financial planners recommend maintaining 3-6 months of your general living expenses. These are obviously not “normal” times and in fact, we are facing a nasty recession ahead, therefore, it is preferable to have 6-12 months of cash available in cash equivalents, like savings and checking accounts, short-term CDs or money market accounts.
2. Create Cash flow: Although it would be great to always know what you spend, it is even more important to create a detailed analysis of your expenses and to identify what can be cut or reduced. Considering that everyone feels out of control right now, the simple technique of identifying what is coming in and what is going out can help you come up with short, intermediate and long term game plans. The process is hard, but well worth the effort.
3. Explore a home equity line of credit or a re-finance while you still have a job. As you probably know, it is easier to qualify for a loan when you have an income. This is only possible if you have a high credit score.
4. Health Insurance: review your current benefits and explore your alternatives. It would also be advisable to understand the rules of COBRA (you can pay for 18 months of extended coverage) and you should use any deferred money that you have set aside.
5. Review your company policy on unused personal, sick and vacation days.
6. Prepare your resume, update your contact list and learn how to use the web for networking.
7. Print out any personal documents that may be on your work computer and take home personal papers from the office.
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