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

Happy Thanksgiving News!

Just in time for Thanksgiving, the Labor Department has given us some good news by announcing that the weekly jobless claims for last week fell to the lowest since the first week of January. The jobless claims dropped to 466,000. As I indicated in my November 13 blog, the number needs to get to about 400,000 to signal a real turning point, but it was a surprise to see the number go below 500,000 for the first time since early January. Another seemingly positive sign is that the number of payroll cuts expected in November is about 145,000 vs. about 190,000 in October. These seem to be trends that are going the right way. Consumer spending also appears to be increasing with the savings rate dropping from 4.6% in September to 4.4% in October. The only issue is that spending is outpacing income growth. Can this be sustained? All and all, it is nice to see positive news even if it is not conclusive.

Unemployed!

“What is your job?” “Unemployed!” Imagine having to say that for more than a year. Millions of Americans are in this unenviable position. They are waiting for someone--government, big business, anyone-- to do something so they can have jobs. No job often means no health care insurance along with many other issues. How do you feel about yourself when you’re unemployed? For many, it leads to serious depression. The latest statistics say that the unemployment rate is now at 10.2%. This is, of course, misleading because it only includes those individuals who are on state unemployment. If you count Federal unemployment payments, people who have stopped looking and those who have taken lesser positions just to put food on the table, the number is more like 21%. These are just numbers, and are not personal. To the people who are out of work, it is very personal! It hurts! What it all means to me is that we have a lot of hurting Americans. We need to get a jobs program going. For the past month, the Obama administration has become more publicly vocal about the situation and seems to have acknowledged that job creation is now necessary. Congress for now seems mired in the Health Insurance Plan. It must be very frustrating to be unemployed at this time and listening to advisors and economists saying that this may be a “jobless” recovery. It seems to me that the idea that was broached by President Obama several weeks ago, of a tax credit for small and medium sized businesses for hiring people, makes sense. Doing something for the unemployed makes more sense than just preserving jobs. My next concern is with the jobs that have been “preserved” with stimulus money that will not be there in the future. Ultimately we need growth! My belief is that if Americans see job creation, a lowering of the unemployment numbers and a drop to below 400,000 in new weekly unemployment numbers, confidence would begin to be restored and we would move forward at a faster rate that in turn would create jobs. I think the next several weeks will be an important time in finding out about the willingness of consumers to spend money during the holidays. If they spend equal to or greater than last year, we may be headed in the right direction with the economy but not necessarily with jobs. Ed Mallon