A Changing Picture 2/20/08

Today the minutes from the January 29th Federal Reserve meeting were made available. It showed that the Fed is worried that the economy is going to slow more than originally forecast, joblessness will be higher (5.2%-5.3%) and inflation could be a problem. Yesterday we saw oil hit more than $100 per barrel, the inflation rate for January go to 0.4% (or 4.8% anualized) and housing permits to build drop to the lowest level since 1991. All of this seems to indicate that we could have inflation and at the same time have a slowing of the economy. That being the case, it is possible that we will see longer term interest rates on bonds go up while equities do not do very well. This may present a buying opportunity for bonds. Ed

The Trend Continues

The S&P 500 dropped more than 3% today. With the information on the loss of jobs, for the first time in four years, released last week and the release today of the dramatic drop in the service sector, to a low not seen in seven years, indications are clear that we are nearing recession conditions. To be a recession the economy must undergo two quarters of decline. Adding to this contention is the fact that the Federal Reserve saw fit to drop the discount rate a total of 1.25% in a little over a week at the tail end of January while the President and Congress were working on pushing through a "stimulus package" in hopes of staving off a recession. It seems at this point supply outweighs demand creating deep downward moves in stock prices. On the other hand liquid assets such as money market funds, municipal bonds, U.S. Gov't fixed investments and high quality corporate bonds are doing OK. More about all of this is contained in my new Newsletter for February. Ed