Monday, July 06, 2009
July 1 Commentary From FGI
The following commentary appeared in the July issue of the Forbes Growth Investor, which was made available to subscribers on July 1.
By Vahan Janjigian - June was a bad month for celebrities. Ed McMahon, Farrah Fawcett, Michael Jackson, and Billy Mays all passed away. June was also a bad month for Federal Reserve Chairman Ben Bernanke; although he presumably is still in good health.
I have blamed the Fed in the past for many of the bubbles our economy experienced in recent years. Its easy monetary policy caused the technology bubble of the late 1990s, the housing bubble that peaked in 2006, and the commodities bubble that followed shortly thereafter. Nonetheless, I would also argue that Ben Bernanke has done an admirable job of responding to the financial crisis that began shortly after he took over as Fed chairman. Under Bernanke’s leadership, the Fed responded quickly and decisively by slashing interest rates and increasing the money supply. While these actions increase the risk of inflation and threaten to erode further the value of the U.S. dollar, I believe they were necessary to restore confidence and prevent a total collapse of the financial system.
However, Bernanke now finds himself in political hot water. Congress recently grilled him amid allegations that he coerced Bank of America CEO Ken Lewis to consummate the Merrill Lynch acquisition against his better judgment. Bernanke even stands accused of urging Lewis not to disclose the poor state of Merrill’s health to his shareholders. Democrats and Republicans attacked him with equal ferocity.
As I explain on my blog, I believe Bernanke’s days as Fed chairman are numbered. President Barack Obama appears reluctant to give him a strong endorsement. Obama recently said Bernanke is doing a “fine” job. When questioned during a press conference, he refused to say if he would reappoint Bernanke as chairman. Soon after Bernanke’s grilling in Congress, the White House issued a tepid statement saying it had “confidence” in Bernanke. As the nearby cartoon illustrates, when praise from your boss is this impassive, it’s time to shop your resume. Besides, I believe Larry Summers is hungry for Bernanke’s job and I believe Obama would like to give it to him.
As for the economy, I still see no evidence that things are getting better. At best, they are still getting worse, but at a slower pace. According to the S&P/Case-Shiller Index, housing prices fell 18% year-over-year in April. The good news, if you can call it that, is that prices are no longer falling at an accelerating rate on a nationwide basis. Unfortunately, price declines are accelerating in some key markets, which until recently had been holding up well. These include Charlotte and New York.
In addition, according to the Conference Board, after three consecutive monthly gains, the Consumer Confidence Index fell more than five points in May. Consumers became more pessimistic about their present situation. They also grew more wary about their near-term outlook for jobs and income. This is not what hard-hit retailers were hoping to hear.
Overall, I continue to believe there is a significant risk for a near-term sell-off in equities. Keep some cash on hand to take advantage of the sell-off when it occurs.