Positive Vibes!

With a new year approaching, it is time to reflect briefly on this past year and look ahead. Let’s first consider bonds and how they reacted during the year. With a drive to reduce interest rates by the Federal Reserve Board (FRB), we saw short-term interest rates approach 0% and longer-term rates drop to new 30-year lows, thereby increasing the value of bonds. This situation dominated for most of the year until the FRB decided that they wanted to see a higher rate of inflation and began dumping money into the economy in November. This has resulted in interest rates rising and the value of bonds decreasing in value. Assuming that the FRB continues in this vein, moving more fixed investments into shorter duration positions--where the risk of inflation is lower but the returns are also lower--will be necessary. This will be good news to stock prices that should advance in 2011, as investors look for higher returns and leave bonds to invest in stocks. Stocks also have the attribute of tending to move, over time, up with inflation. In 2010, stocks made progress in price increases, but with a great deal of volatility. If we look at the gain in the S&P 500 from the close on January 4, 2010 until the close on December 20th, we see the index move from 1144.98 to 1247.08, or about 6.3% gain for the year. Not great, but not bad either. Stomaching what was happening during the year was difficult. With the S&P falling from the beginning of the year to 1022.58 at the close on June 28, or a drop of about 10.7%, some investors found it difficult to hang in during such a large correction! Currently, the stock market has been moving up and is likely overbought (prices too high). A small correction in the range of perhaps 2% is likely over the short run, but we are in a bull market that still appears to have a long way to go. In summary, it appears that investing in bonds with maturities that go out more than 5 years could be a bad idea in 2011 if inflation increases, but investing in stocks will likely be a good idea, assuming that we do not have any major domestic or international incidents. Many investors became frightened during 2007 through 2009 and went very conservative with their portfolios. During 2009 and again in 2010, the conservative investor did well, as bonds reached new 30 year lows. It appears that this will not be the case in 2011 as the bonds may lose value or achieve small gains. Investors need to review their willingness to take risks and consider reevaluating their risk profiles. I would like to take this opportunity to wish you a healthy and invigorating New Year! Ed Mallon

To Tax or Not to Tax?

The burning question in Washington, currently, is about the Bush-era tax cuts. Some say continue for all, others say continue for all but the rich, and others say don’t continue any of the cuts. We are spending about $1.2 trillion a year more than the federal government is taking in from taxes. I may not have my calculations correct, but I believe that, by letting the Bush tax cuts expire, we will generate about $200 billion of added revenue each year. That still leaves us will a $1 trillion shortfall, which suggests that spending must be cut substantially as well. The reason we hear most often for not allowing the tax cuts to expire is that spending by consumers would be cut (less money to spend) and the economy could slow down. The same rationale is given for extending the federal job loss benefits for an additional 13 months, which is another big expense. Recent studies have pointed out that some of the increasing joblessness is caused by the continued extension of jobless benefits, which has allowed people to hold off getting a job for a lengthy period of time, and during that time, their job skills erode. As I look at the substantial sacrifices that the people in Greece, Ireland, Spain, and Portugal are having to make to get their countries back to financial stability, I keep thinking that we need to move quickly to avoid taking draconian measures later! None of us likes taxes or cutbacks on entitlements, but without financial stability, life as we know it in the U.S. will change significantly. In looking at the suggestions of the bipartisan deficit reduction committee that was established by President Obama, it seemed to me the entire document should be adopted! My burning question is: can the politicians put politics aside and do what is necessary for the long-term economic health of our country? Our founding fathers sacrificed to put us on the road to greatness. Let’s not exit that road now. Ed Mallon

Gratitude!

I was looking at the last section of the Wall Street Journal this morning and on the front page of section D they had an article about Grateful People. They indicated that grateful people are happier and healthier. Further it indicated that they have more energy, are more optimistic, less likely to be depressed, earn more money, sleep soundly and have greater resistance to viral infections. Wow! First, it made me stop and think of the past two years. In November of 2008 it seemed like the world was in a melt down and everything was off track. By November of 2009 things had improved and we didn’t have that feeling of panic of the prior year but were still very worried and troubled. This November it seems people are finally coming out of their shells, looking around and feeling a bit more normal. It seems “normal” has changed though. People are more careful with their spending and don’t want to take on more debt. Many people are still out of work and for them it is difficult to feel grateful. What I think we all can feel this Thanksgiving is gratitude. Gratitude for living in this country, having friends and family, for the food we eat, for the roof over our head and the clothing we wear. Sometimes we get carried away and think that what we “want” is what we “need”. The vast majority of us can be grateful that our daily needs are met. If we stay away from envy and desire we can truly be grateful for what we have. We can show gratitude by sharing what we do have with others and that too will make us happy. Thanksgiving to me is about gratitude and sharing. I am grateful for all of my family, friends and clients. Thank you all for letting me be a part of your lives. Happy Thanksgiving! Ed Mallon

Correction!

It appears to me at this time that a correction in the stock market is imminent. The condition I believe we are seeing is similar to the mid-March to mid-April period this year. At that time, the market seemed to be overbought and ahead of where it should have been. That correction, in hindsight, appears to have been a mid-bull-market correction, which is usually a correction of 10% or more, as was that correction. It also lasted about four months. The coming type of correction is usually more of a modest correction of 2% to 5%. I would not be surprised to see the S&P 500 drop to the 1160 range. It should be short-lived. This is a healthy event for the market, as the correction should lead to a longer-term healthy market advance in an ongoing bull market. All and all the skeptics are still worried about the direction of the economy, but it seems to me to be advancing, though modestly. Ed Mallon

It's a Fright!

Yes, it's that time of year when the ghosts and goblins come out and scare us. You turn on the TV and there they are, looking right out at you with terrifying faces. The scary stuff you get in the mail isn't so bad because you can just look at it, know what it is and throw it out. Underlying all of this are people who are likely quite ordinary, and in normal times are probably not that scary. But here we are with a week until election day and the airwaves and mail is dominated by negative ads. As a nation, we have historically been optimists, looking forward to good things in the future. If you really believe all the negative ads, then none of the candidates for any office is any good! Have we become such pessimists with negative attitudes that we have brought this frightful development on ourselves? I don't know, but I assume the negative ads work to bring in votes. Early on, I decided personally that if a candidate did negative advertising, I would just not vote for them! Well, if I stuck to my decision, I would not be able to vote for anyone who is running. To me, it is scary that election day is only two days after Halloween. Could a candidate win public office by simply stating their position on issues? A friend of mine ran for public office a couple of years ago. His advertising was positive, explaining why he was running and for what he stood. He did not attack his opponent and spent a great deal of time going out and meeting the people. Near the election, I received an attack ad against my friend’s opponent in the mail. I was surprised and asked him about it. He had not seen the ad but had several calls about the ad. Apparently, the state party under which he was running did the ad. Because it is not legal to coordinate such advertising with the candidate, they just did the negative ad and sent it out. He called his opponent and apologized, but the damage was done. For the record, I don't like nasty and would like it stopped! Ed Mallon

News from the Front

Today was the big day when the U.S. jobs report for September came out. Rampant speculation led up to today on the level of job creation or lack thereof in the economy. As part of the report, the Labor Department reported that they had overstated the jobs created from April 2009 through March of 2010 by 366,000. This is a remarkable admission in itself, because even with these numbers, job creation looked dismal. The consensus leading up to the announcement was that, net, no new jobs would have been created. The report indicated that for the fourth month in a row, the economy shed jobs. While this is not good, much is to be blamed on federal and local governments that shed 159,000 jobs, about 77,000 of which were temporary jobs for the decennial census. The good news to me was the fact that the private services sector employment figures rose by 86,000 after rising 83,000 in August. In addition, temporary help services, a good gauge of permanent hiring, rose 16,900 after a rise in August of 17,700. On another front yesterday, the Labor Department announced that the initial claims figure for state unemployment benefits was 445,000, a drop of 11,000 from the previous week. The four-week average of new jobless claims fell 3,000 to 455,750. The trend here is good, with new claims under 450,000, but the four-week average is still over 450,000, and that needs to drop. Clearly, the major issue facing the U.S. at this time is jobs. This is not a harbinger of good things for the Democrats in the House or Senate. Lack of jobs means more pain and less consumer confidence. The Federal Reserve, because of the jobs report, will likely begin a stimulus program of their own. Back in December of 2008, the Fed dropped the overnight interest rate to near zero. Since then, it has pumped about $1.7 trillion into the economy by buying mortgage-related and government bonds. It seems likely now that they will add an addition $500 billion of purchases. The Fed next meets on Election Day, strange as that may seem. It appears that the idea of stimulus from the Fed sits well with Wall Street and has been driving the stock market up for the last number of weeks. Had the jobs report been better, the Fed would not be likely to increase the stimulus and the market would have retreated. Like Alice might see in Wonderland, a good jobs report is bad and a bad jobs report is good! I think we are moving up a long hill, even if it is slowly. Ed Mallon

The BK Index

Shock…that is all I felt when I saw the BK index soar last week. As background, I must remind you that the government indicated last week that, during the month of August, “core inflation” (accounting by the U.S. Government that does not include food or energy costs, but is used to calculate the COLA benefits for things like Social Security) was flat during the month. They did indicate that the “inflation rate” went up by 0.3% for an annualized rate of 3.6%. At the time, I didn’t think much about the statement because everything I had been reading indicated that inflation was “under control” and the worry was about possible deflation. Now back to the BK Index. I am a creature of habit, as my wife will tell anyone. When I leave my Denver office to come home I always stop at a Burger King on the way to the airport. I always buy a Whopper Junior with cheese, no pickle, at this same Burger King where they give me a free soda (no age disclosure). The cost of this meal has always been $1.35 ($1.25 for the meal plus 10 cents tax). Last week I went into my Burger King, ordered my Whopper Junior with cheese and was told my bill was $1.72! What? There must be a mistake! No mistake, I was told. The week before, prices had been raised at BK, and the Whopper Junior, which had been a mere $1 meal, was now $1.29, to add cheese was now 30 cents instead of 25 cents, and to make matters worse, the tax on my meal had gone up from 10 cents to 13 cents! As you read this I know what you are thinking: it’s only a burger and it’s only an additional 37 cents and he is still getting his free soda. True enough, but it is an increase of 27%. For the state of Colorado, it is an increase of 30%. I was truly shocked and began to wonder if something was happening in September that was being missed by everyone else. To go to the other end of the spectrum, I looked at the MB Index (Mercedes Benz) and discovered that the price on their bread and butter E 350 had gone up by 3.3% for the 2011 model year. Finally, in desperation, I checked the BB Index (Brooks Brothers). They always send me 25% off coupons to buy at their outlet store in Kittery, Maine. Not so for the latest coupons, which are only 15% off. That means the dress shirt that was $37.50 before would now cost me $42.50 or an increase of 13%. So I ask you, is inflation beginning to creep up on us, or am I being too selective? Personally, I think it is time for the Federal Reserve to signal that they are going to start inching up the Fed Funds rate 0.25% at each of their next meetings and get it up to at least 1%. Being careful and signaling what they are doing will have a mild effect on the economy, but will help them be in a better position if inflation heats up. Ed Mallon

Hey, Wait for Me!

You might be wondering where the stock market is going these days. As of the close on September 13th, the DJIA had gained 5.3% since August 31st while the S&P 500 was up 7% and the NASDAQ was up 8.1%. My, what is going on? Let's start by understanding that August was a very poor month for the market. To put it in perspective, the S&P 500 was down 6.8% in August. What we have seen, therefore, is a move back to where the market was at the beginning of August. This is not a bad thing; it’s just that you need to remember we don't have a runaway train on our hands! The news has been good. The private sector added about 67,000 new jobs in August. New unemployment claims last week were 451,000 vs. 472,000 the week before (we are looking for that number to go below 450,000 and will be happier at 400,000 or lower). The economy appears to have grown by about 2.85% from the end of September 2009, which is not great, but it is growth. Today, retail sales were reported to be up, which was totally unexpected. In addition, the winds of positive tax reform appear to be blowing in the right direction. The possible large increase in taxes in 2011 has weighed heavily on the markets. The idea of 100% write-off of new plant and equipment investment through next year sits well with me. I think its biggest impact is on large corporations that have lots of surplus cash to spend. The trickle down of this to smaller businesses, which will manufacture all or parts of the plant and equipment, is good. The one bone of contention seems to be taxes on those who earn more than $250,000 each year. The implication is that these are the "fat cats" but history shows us the "fat cats" can always figure a way out of paying taxes. The real burden of this measure once again falls on small business owners who have been massacred during this downturn with little or no help from the government. All in all, the economy is looking better, consumer confidence may be gaining, and the likelihood of a "double dip" is looking far less likely. So how do I feel about the market? Short term, I think it is too high. September is notoriously a bad month for the stock market as investors start to worry about the all-important third quarter earnings. I think that, between now and the middle of October, we may hit a rough spot or two. Looking out to the mid term and long term, I think we are still in a bull market that is going through a correction. Ed Mallon

Jobs, Jobs, Jobs! Revisited

In my April 5, 2010 blog, I indicated that the jobs picture seemed to be turning around. At that time, the new jobless claims had dropped below the magical 450,000 count and a trend downward seemed to be developing. In addition, my expectation was that job creation would pick up substantially during the second quarter in a manner similar to that of the second quarter of 1975. To put it mildly, this did not happen. The new claims for the past week exceeded 500,000. The trend that had been favorable in April and early May has been reversed and is not looking very good. New jobs formation that was very strong in April petered out in May and has not recovered any meaningful strength. This decline can be attributed to a number of reasons. The first is the sovereign debt problem that began with Greece in the later part of April and then spread to Spain, Portugal, Ireland, and others. As thought, the “other shoe” had been dropped and liquidity in the markets began to dry up. A flight to high quality, such as U.S. Treasury Bills, followed. While the U.S. House of Representatives was able to pass a jobs bill, the Senate has not addressed the bill and is unable to get much of anything done. Increasingly, the likelihood of Congress not acting on tax reform is looming large. Without corrective action the tax rates will return to the higher levels of 2001. In particular, the increase in taxes for dividends and capital gains is weighing heavily on business. It is difficult to tell what the “deal” is since Washington is giving no clear direction. Small banks that traditionally fund small businesses are reluctant to make business loans. Small businesses, even if loans were available, are reluctant to expand because they cannot figure out what the “deal” is on taxes. A small business is a business with fewer than 500 employees. In 2004 the Small Business Administration, Office of Advocacy, indicated that there were 17,000 large businesses, while 24.7 million small businesses represented 99.9% of all the businesses in the United States. While these numbers seem impressive, it should be noted that only 5.7 million small businesses actually had employees. Imagine if each of the small businesses with employees added one more person! I think small business, not large business, needs to be the target to create jobs and get the economy moving again. Ed Mallon

What are American's Buying?

The Commerce Department reported today that retail sales, spending by consumers, dropped 0.5% in June. On the surface, this might appear to be bad news. As with many things in the economy, it depends on how you count the numbers. If you exclude autos (down 2.3%) and gasoline (where the price dropped, creating less spending on the same volume of sales) then retail sales grew by 0.1%. This is not the growth rate we would like to see, but it is growth. So where are Americans spending? Department store sales went up 1.1%, appliance sales up 1.3% and specialty store sales up 0.6%. Now add to this more upbeat view the International Council of Shopping Centers' Index (this is comprised of the largest retailers) which showed a 3% gain in sales for the month, compared to the same month a year ago, and you might not be quite as concerned as the initial report would indicate. The Federal Reserve along with the IMF have indicated that they expect the growth in the second half of the year to be slower than the first half (3% vs. 3.5%). Instead of using percentages, let's see what happens using real money. If you had sales last year of $100 monthly, then your sales in the first half of the year averaged 101.75 followed by an average of $103.53, would you say this is progress? It appears to me that the economy is growing, albeit slower than we would like. In order to get faster growth, the federal government could be clearer about what they are doing so that small businesses and consumers feel more confident. This does not mean spending lots of money, but being clearer on tax, estate and business policies, all of which are unclear at this time. If small businesses understood the "deal" they might begin hiring, which in turn would lead to fewer unemployed, which would lead to consumer confidence. Making banking credit available to small businesses so they don't have to use their credit cards, at high interest rates, to fund their cash flow needs would also be helpful. Ed Mallon

Uncertainty

It seems that the stock market, the bond market and the world are going through a period of uncertainty. Recently, we have seen a new flight to US government bonds as a safe haven for money from around the world. It is reassuring that the world feels the US is a safe place to have money. The problem seems to be that we who live in the US don’t have the same confidence in our economy. As the second quarter ends, there is uncertainty as to how the economy has performed overall. We have heard this week that consumer spending is up. Corporate spending is up. Productivity is up. On the other hand this Friday we will find out what is happening with unemployment, which has not improved of late, and perhaps get some preliminary numbers on new job creation for June. The uncertainty stems from an attempt to discern if the economy is moving forward with greater profits from companies and more confidence from the consumer, or is stumbling. As of yesterday, the multiple on one year forward earnings for the S&P 500 was 13, where normal would be 18. This discrepancy gives us a clear sign of how uncertain the feeling is about the coming year. We will know a lot more as earnings are reported over the next several weeks. Ed

Flag Day

Each year we have Flag Day and it falls on June 14th. I don’t know why, but I always seem to remember Flag Day. Flag Day commemorates the adoption of the United States Flag on June 14, 1777. I’m not a big history buff, but I do remember this piece of history. It tends to make me remember all of the men and women who have gone before us and have done so much to grow and preserve our freedom and way of life. Most of us, or our families, originally came to the U.S. as foreigners. This has been and remains a land of opportunity. As I read about the turmoil in the world and the economic problems, I can’t help but think how lucky we are to be living in the United States. Yes, we too have our problems, but by comparison we have so much more opportunity, coupled with freedom, than anywhere else in the world. It is up to us to take advantage of this opportunity and freedom and use it wisely. This past month and a half have been difficult, with unemployment continuing its march upward, the oil spill in the Gulf, the turbulence in the stock market, and many other issues. Even so, most of us still go to bed at night well fed and feeling secure. What do you think the expectations of our founding fathers were, back on June 14, 1777? Ed

Dow Drops 376.36!

Yesterday, the DJIA had a major drop in value, as did all of the other exchanges. I generally like to use the S&P 500 as the base for reviewing market activity. Yesterday it was down the most of all the exchanges, with a 3.9% drop to 1071.59. What is interesting is that the S&P 500 has dropped from its peak, on April 23, about 12%. What does all of this mean? For the short run it likely means the markets will move up for the next 2 to 7 days as that is what generally happens after a 90+% down day for stocks. Because the volume yesterday on the NYSE was 8.5 billion and the market moved down dramatically it means there was an ample supply of sellers who were likely doing some profit taking. It also means the market, at some future time, will test these lows. Given all of this data what does it mean long term? First of all, I believe this is the correction that I've been anticipating since the middle of March as the market was becoming overbought. I don't think this is a return to a Bear market. By mid April it was very apparent to anyone with an understanding of the market that it was overbought and a correction was coming sooner or later. The actual reason for the correction generally is meaningless in my opinion. In the early part of yesterday the drop was being blamed on the falling euro but the euro climbed from 1.21 to 1.25 so that was not it. Then it was the job data that came out showing new layoffs of over 470,000 instead of the 440,000 that was anticipated. Good story, but I don't think it holds long-term weight since the new job creation in April was 290,000 while what was anticipated was 180,000. Earnings data for corporations look good, consumer spending is OK and inflation does not seem to be an issue. The stock market is a leading indicator. This blip downward would indicate that the rosy picture that Wall Street saw in mid-March is being reevaluated. While the economy is improving it will take some time before it is sound again. In 1990, when we had a recession, the big reason was the failing productivity level in the US. It took the US five years to get back on top of worldwide productivity but it did what was necessary. The darkest cloud over the US currently is the government’s interference with the entrepreneurial spirit of this country. There are over 25 million small businesses in America and they are the heart of the economy. They have to have confidence in the economy, government spending and legislation in order to be willing to expand. Some of the new legislation intended for large corporations is falling on the small businesses both in regulation and more so in taxes proposed in the new tax bill. If this continues it could stall the economy and change the direction of the stock market. Ed Mallon

A Market Correction or a New Bear Market?

After the events of the past two years, it is understandable that the markets are so volatile. As I have indicated previously, the expectation of a market correction has been in the works since the latter part of March and most certainly after mid-April. My own expectation was for a brief correction of about 7%. When the markets get to a point where they are overbought, then a correction eventually comes. The question is when something will happen and what will trigger the change. In this case, the debt of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) was the catalyst worldwide to bring about a rapid descent. At the beginning of 2010, the S&P 500 opened at 1117 and by April 23rd it had reached 1217, up 100 points or almost 10%. Between April 24th and May 7th,the market went down to 1111 for a drop of about 8.7% and below the opening at the beginning of the year. The bond market acted in a similar fashion with interest rates decreasing until the scare from the PIIGS moved interest rates up and the value of bonds down. The action over the weekend to bolster the euro, with a commitment of $1 trillion, was a bold and needed move to keep the financial markets and economies of the world moving away from the recession. The impact worldwide has been dramatic and good. But how about the fundamentals? So far, 381 companies that make up the S&P 500 have reported earnings, and of these 77% have topped estimates. The S&P 500 index is trading at 13.5 times forecasts for earnings during the next four quarters while the long term average for this multiple is 16.4%. This would imply that there is still room for stock price growth. All of this was before Friday's meltdown. If the PIIGS situation remains stable, then it is likely the markets will resume their path higher. I am not complacent at this time because we in the US need to do something about our own Federal red ink! I am hopeful that we will see the light and move to reduce the deficit spending once the broad economy is out of the woods. For now, we continue on a positive path with very large job creation in April (I was thinking 200,000 but instead it was 290,000), inventories being replenished and businesses increasing spending. The signs for a recovery are looking good! Ed

Giddy Yap!

In my recent newsletter I had indicated that I thought the picture for unemployment would improve. I think this is good news: the state unemployment benefit claims fell by 40,000 this past week, and the Federal claims fell by 500,000. This means, based on my calculations, the following: the unemployment based on state claims fell from 9.7% to 9.6% and, more meaningful, the federal claims fell from 12.5% to 11.3%. Overall, the jobless rate, while still very high, moved from over 22% to 20.9%. I will be happy to see this continue. In another bold move, housing sales were up 27% in March, the highest in 47 years. It is likely that April will also see housing sales rise, because the requirement to have an executed sales contract, to get the federal tax credit for a home purchase, expires at the end of this month. It appears we are moving forward. Ed

Jobs, Jobs, Jobs!

Back in my November 3, 2009 blog, I indicated that I thought this recession (depression is more like it for the number of people out of work … but more on that later) was very similar in some ways to the period of 1973-74, followed by the recovery of 1975. My remark was specific to my belief that we would not see a lowering of job losses and increasing jobs creation until March of 2010. At the beginning of March, I again commented on my belief as the Labor Department reported the four-week rolling average of job losses was 470,750. It now appears that March was a turning point. The four-week rolling average of job losses, as of Thursday April 1st, was 447,250, just below the 450,000 that most economists were seeking. More importantly, the number of new jobs created, according to the Labor Department, was 162,000. This was the biggest gain since December of 2007. What I like is that, according to their report, private employers created most of these jobs. I must say, however, on a negative note, that while unemployment remains at 9.7% as the government counts the data, I count it somewhat differently. The 9.7% represents 4.66 million people who are receiving state benefits, but not the 6 million people who are on extended federal benefits that add up to an additional 73 weeks. My math says that the additional 6 million people represent 12.5% in addition to the 9.7%, or over 22% unemployment. This is a big number and most of us know at least one person, or many more, who are currently out of work! Is there hope for the unemployed? I think so. As I’ve also mentioned on several occasions, this recession seems somewhat like the one in the ‘70s. In May of 1975, hiring picked up pace very quickly and expectations of a long period of unemployment were proven wrong. We shall see as this unfolds. Ed Mallon

The Federal Reserve Rules!

It has been interesting to be able to look back on the economic collapse we have experienced in the past couple of years. While the central government of the U.S. rattled cages, set out on a journey of legislation, and argued about bailout funding the Federal Reserve (Fed) took action. Not only, as it turns out, did they take action, but they took it quickly and decisively. The Fed dramatically lowered short-term interest rates and washed the country with money supply. Last week it was reported that because of their actions, the economy was saved! As far as the bailout money was concerned, even after it was approved, the government was slow at spending it. It helped the economy, but the Fed saved the day! Only a couple of months ago, Congress was on the case of the Fed with the idea of curtailing its power. Now, interestingly, Senator Dodd is proposing financial reform legislation that would give the Fed oversight for the financial markets and instruments not currently regulated by any other part of the government (such as the derivatives that help create this mess). The Fed is not perfect. In making interest-free money available to banks and investment banks during this period, these giants were given the ability to take money from the Fed, paying no interest, and to invest it at interest. The difference, known as the spread, is the profit that the big banks and investment banks were allowed to keep. The nasty part of all of this is that instead of plowing this back into their companies, much of this money was given in the form of outlandish bonuses for the year 2009 and likely will be followed by even more extravagant bonuses in 2010! The Fed is aware of this and is gradually reducing the money supply and charging a modest interest rate. It is the old story that, for the betterment of the country, the big guys will get rich! Long term, we must remember that the people who are on the Fed wield a great deal of power and these are appointed positions still subject to political whims. Ed

Mixed News

It appears the economy is giving us some very mixed signals these days. Consumer confidence seems to be going down, the Federal Reserve says the economy is edging up but at a very slow rate and Congress still has done nothing with employment legislation. The initial claims for unemployment insurance, which was widely anticipated, showed a drop of 29,000 from the prior week to a seasonally adjusted 469,000. This reversed the big rises of the past two weeks. Still the four week average is 470,750 where it had been down to about 450,000 a couple of months ago. Back in November I had anticipated that we would see a marked decrease in initial claims beginning in March since this is what has happened in the past. We will see as the month progresses. With productivity rising, according to the Department of Labor, in the fourth quarter of last year by 6.9%, it would seem that fewer workers are working more hours. At some point we would expect that with the addition of part time, tempoary and over worked workers companies would once again begin to hire full time employees. In the meantime, the consumer is watchful and curtailing spending and thereby keeping inflation down. The overall economic trend appears to be moving up at a slow pace. Ed

Inflation and Bonds

Bonds do not generally work well in an inflationary environment. When inflation rises, interest rates also tend to rise. Unfortunately, rising interest rates mean that existing bond values decline. This occurs because an investor can now get a higher interest rate on a new bond than on an older bond. To offset this difference, old bond prices are discounted (reduced) to give investors the same basic rate of return on either old or new bonds. The longer the time to the maturity of the bond, the greater the discount tends to be in the reduction of the bond’s price. This is an area that I have been watching carefully for the past year. In 2009, we were fortunate that interest rates decreased and the value of the bonds increased. This year, it has been a bit of a seesaw, with interest rates fluctuating within a fairly narrow range. In this environment, we have been looking toward moving from very short maturities (60 days to two years) with very low interest to the higher interest on longer-term bonds (average maturity of 4 to 5 years). My confidence in this position comes from seeing core inflation remaining reasonable and consistent. This consistency in the inflation rate should lead to consistent interest rates on longer-term bonds for the next several quarters. The bad news is that the current control of inflation appears to be in large measure because of continuing unemployment and growing layoffs. Overall, the bond market likes stability, and even with the massive federal bond offerings, bonds do seem to be stable. Ed Mallon

Weekly Unemployment Up!

The weekly number of new people filing claims for unemployment rose today, which was not good news. In many respects, what is worse is the fact that the rolling four-week number has been moving upwards steadily for the past several weeks. On the other hand, productivity was reported today to be up, as employers try to get the max with the least! From past periods when we have had high unemployment, we have generally seen the unemployment rate rise during the first couple of months of the year before beginning a more favorable decline in March. I think that also will be the case this year. The stock market, however, is not showing much foresight these days and is reacting to what I consider to be yesterday’s news about unemployment. Once again, we shall see what we shall see. Ed

What's Happening to the Stock Market?

I think it is interesting that the recent stock market downturn is being attributed to (take your pick): poor earnings reported for the first quarter? high unemployment? or President Obama’s harsh talk about Wall Street and the banks? I am sure there are more opinions, depending on what news or internet service you happen to listen to. I think the simple truth is that the market is scared! When the stock market doesn’t know what is happening, it gets scared. Short-term reports seem to bode ill for the economy. A longer view, however, reveals evidence to the contrary. Some reports say that early earnings reports are not so good. Today GE, which is considered to be a bellwether company in viewing the overall economy, was expected to post no more than 26 cents per share earnings for the fourth quarter, but instead reported 28 cents per share earnings! Yes, that is a big deal. Most companies have not reported yet and many won’t until sometime in February. As for the unemployment rate, it has been clear for more than six months that the unemployment rate would go to 10% plus and stay there, in all likelihood, for most of 2010. This is not news. The weekly jobless rate went up last week to over 460,000. The best measure of the unemployment rate, however, is the four-week average, which smoothes out the weekly fluctuations. That was 440,450. Illustrating its 19th straight drop, and the lowest four-week average since August 2008. Okay, then, some people think the downturn must be due to President Obama and his hard line talk. Yes, the administration is reeling from the election in Massachusetts this past week and the loss of the 60th Senate seat. But our President is a bright man and knows he has got to get something going on the economic and job fronts. You can’t blame him for tossing some blame at Wall Street, Big Banks and Washington itself since most of the country is disgusted with all three; or for talking about job creation and getting off of the health care legislation that ate up most of his first year in office and didn’t seem to sit well with the populace. What’s important is that he is not changing the way investors invest. My opinion? This is a stock market correction and I think it is but a short stop. The economy continues to improve though more slowly than most of us would like. Ed Mallon