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

Here Comes Santa Claus!

First a little bad news: the government revised the third quarter GDP downward from 3.5% growth to 2.2% growth. Notice that it was still growth, and remember that in the second quarter we had negative 0.7% GDP. I believe we will have higher GDP growth reported for the fourth quarter. We have already seen the number of new people losing jobs diminish. Unemployment overall seems to be decreasing. Yesterday it was reported by the Bureau of Labor Statistics that the number of temporary workers being hired has surged. Last month, 52,000 temps were added, greater than the number of jobs created in any other category. This is usually a precursor to full-time hires. These jobs also take people off unemployment. Finally, it was reported today that in November previously-owned home sales rose to 7.4%. At this rate of sales, the country has a supply of about 6.5 months. Yes, the prices have dropped again but by the smallest amount in two years. Overall, the economy seems to be moving upwards. The loss of this past Saturday as a shopping day along the east coast is meaningful, but it may be made up in the aftermath, as consumers are buying. As we head into the end of the year and look to next year, the news seems to be getting brighter. Ed

Wondering and Waiting

As I look back at the past month I notice that the number of people who are losing their jobs is receding. The overall unemployment numbers are beginning to drop. Earnings reported for the third quarter by large corporations were reasonably good, even if it was through cost cutting and layoffs. The consumer seems to be a bit freer in their spending. While savings rates have dropped since the summer they are still above 4% which I also consider to be a good sign. Finally, banks and government are beginning to talk about loans for small businesses and General Electric Credit is actually advertising the availability of such loans. This is important since small businesses drive most of the jobs in the U.S. and they need a source of credit. All of these tidings seem to bode well for the economy going forward. Nothing appears to be jumping forward at a rapid rate but slow and steady can win the race. I am still waiting and wondering if all of this will hold and I am thankful for the signs we are seeing. Ed Mallon