What a Week

What a Week! This past week saw the Dow go down 3.39%, the S&P down 2.83%. This was in part a response to economic events that were reported during and at the end of the week. On Tuesday, Standard & Poor’s/Case –Schiller’s national home price index fell 14.1% in the first quarter. On Friday, the government announced that the unemployment rate rose by an unexpected 0.5% to 5.5%. Oil futures hit $138.54 per barrel on Friday, and an investment banking firm on Wall Street said they thought it could hit $150 by summer. A consensus was building that the US economy is either in or going into a recession. The outlook for Europe is not good either. Wow! What does all of this mean? Having money in cash or cash equivalents certainly seems to make sense. Having money in investment-grade and high-yield corporate and municipal bonds paying interest seems to make sense. With the dollar on the decline, even international investments make some sense. For example: even with the worst earthquake in 32 years China’s passenger-car sales grew 16% last month. Global growth seems to be unabated. How about commodities? Commodities tend to move in the opposite direction of the dollar. This would include oil, gold, silver, etc. The commodity markets indicate that there is widespread speculation occurring presently. The head of the Federal Reserve, Ben Bernanke, is talking about a strengthening dollar. This could mean the federal government is about to get serious about reversing the dollar’s direction. Such a move would likely not be good for commodities. Could the bubble burst and the price of oil tumble? Some say world demand is such that, when coupled with flat output, this could not happen. I don’t believe it! I lived through the period when the Hunt Brothers tried to corner the market on silver. From $1.95/oz. in 1973, silver skyrocketed to $54/oz. Ordinary people were buying silver with the expectation that it would just keep rising. Bang! Down went silver prices. From 1980 through 1987, silver prices dropped to about $10/oz. Today silver is priced at about $17/oz. (More recently, Americans were sure that real estate would just keep on rising! Ugh!) Is the same now true with oil? Ed’s pendulum theory says: “Every investment market swings from being underpriced, relative to the norm, to being overpriced!” In this process it is possible for an investment market to establish a new “norm” but it will be within the range of over- and under-pricing. This is not to say that an individual investment within that market will outperform or underperform. But, the overall market, such as the market for oil, must go through this process. With commodities like oil, it is often thought that there is a finite amount of something and therefore its price can go up with no end in sight. In fact, it appears that when a particular commodity becomes overpriced, a new substitute will either be found or it will become cost-efficient to utilize a competing commodity. The question in my head now is: “Are we ready to become Green as a society and invent new ways of living?” Ed Mallon

Prices Soar!

The federal government in releases yesterday and today gave initial indications of how the economy did in March. The picture was subdued as the government concentrated on the “good news” that “core” inflation was only growing at a 0.2% rate for the month or an annual rate of 2.4%. This is considered to be within the government’s targeted rate for “core” inflation. The “core” rate does not include food increases or the rise in fuel costs. For March, energy prices were up 2.9%, the biggest increase since November. Even this percentage seems out of line since they also report that heating oil was up 13.1% and diesel fuel, used by truckers to get your goods to the local store, was up 15.3%. Food prices for the month were up 1.2% (this would be 14.4% annualized), reflecting the increases in cost for vegetables, rice and beef. Anyone going to the grocery store or buying gas for their car is seeing the jump in prices on almost a daily basis. The question that must be asked is: will this lead to a jump in longer term inflation or is it simply a factor of the cost of oil as it passes thru the various parts of our economy? We also must remember that as the value of the dollar has been going down, against other world currencies, the cost of oil is bound to go up in dollar terms. The Federal Reserve Board (Fed) which has been lowering the Fed discount rate to stimulate the economy must now consider how big a problem inflation is and where it might be going in the future. The lower discount rate also has a negative impact on the value of the dollar in world markets. The former head of the Fed believed that fighting inflation was job one for the Fed. Thus far it appears the new chairman has been more concerned with the economy than inflation. At the last meeting we saw the first decent in many years with some Fed members beginning to question the sharp reduction in interest rates as inflation seems to be accelerating. Raising the Fed discount rate tends to slow or moderate the inflation rate. Will the rate be lowered (help the economy), left the same (no clear decision) or raised (moderate inflation and perhaps help the dollar)?

2008 How’s it going so far?

As I am writing this, on Friday April 11, 2008, the market has just made another one of its downturns. After having gone through a succession of downturns from the beginning of the year until the middle of March it seemed to have taken an upward beat and perhaps it is now ready to start downward again. Since I believe we are in a Bear Market this would be a classic Bear Market event. Times of upward movement in the market tend to give hope followed by declines. The Lowry Service, which is an organization we use for technical information, has been indicating that even when the market has moved up it has done so on less supply (fewer stocks being offered and less volume) rather than real strength in the market. The Boston Globe, in the April 6, 2008, business section noted that the average diversified US equity fund lost 11% in the first quarter, according to Morningstar Inc., while Asian stock funds, excluding Japan, fell 20% and technology funds fell 16%. The Dow Jones Industrial average, of 30 stocks, by comparison was down only 8%. As noted above it seems most of the losses for the quarter occurred before the middle of March when the market moved up a bit. With money market funds and CD’s getting less and less interest it seems a shift into investment grade bonds is inevitable. For our clients where we have taken a defensive position we are moving more of the funds into intermediate investment grade bonds with just a splash of high yield bonds to give us a higher overall yield. In these cases we are keeping the exposure to equities rather limited for the foreseeable future.

Market Stimulus 3/19/08

This has been an eventful week with the Federal Reserve having done a lot to increase liquidity in the markets, by both lowering the Federal Funds rate and the Discount rate, while also feeding more funds into the economy thru banks in investment firms. The impetus for this seems to have been the fear that Bear Stearns would go under and that other investment banking firms might follow. With the help of the Federal Reserve's finances J.P. Morgan bought the venerable old firm, cheap! The initial reaction to all of this activity was to see the stock market hold its own on Monday and go roaring up on Tuesday! This was followed today, Wednesday, with another downturn in the stock market. All and all it would seem that there are still more sellers than buyers in the market. We have not reached the bargain basement yet! The Federal Reserve seems to have restored the sense of adequate liquidity to the fixed markets and municipal bond markets in particular, that went through a very difficult period from the middle of February up until about a week ago. In my opinion, the changes that the Federal Reserve has made will take time to go through the economy before they have the desired effect. Generally such changes take anywhere from three to six months after implementation before they make the desired positive change. The changes made by the Federal Reserve at the end of January have not fully been realized! My thinking remains that the economy is in a recession, that there are currently some opportunities in fixed securities (bonds) and that stocks will either be lack luster or down until mid year. I also believe that the much-maligned U.S. Dollar is going to see a rebound during this period, which makes me hesitant to venture too much investment money into international stocks or bonds. The one overriding concern that I have is inflation. With the monetary policy of the Federal Reserve focused on the economy and making money readily available it may lead to higher levels of inflation. Time will tell.

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

In Tune with the Stock Market - January 2007

It has been said that "the trend is your friend!" If that is the case, with stocks having been going down since the high in October, the trend is not a friend to stocks! It has been our position for this past year that a defensive strategy for individuals who are near retirement or are retired makes a great deal of sense. This has been a good time to be in liquid fixed investments, especially municipal bonds. We have seen a flight to high quality and more liquidity as the market has continued down. Times change and the market will change too. We are waiting to see what the Federal Reserve does on January 29th and 30th.