David Wessel wrote an excellent article in today's Wall Street Journal about the need to stimulate the economy. While everyone agrees that the economy is slowing and needs a boost, Wessel wonders if it is better for the Fed to continue cutting interest rates, or if a tax cut would be more effective. He pretty much rules out hope for a tax cut arguing that Congress is unlikely to agree to one.
That's too bad because the Fed cannot realistically cut rates anymore, and because tax cuts are indeed much more effective in stimulating economies. Even former Clinton-era Treasury Secretary Lawrence Summers is now pushing for tax cuts.
Why can't the Fed cut rates? Because inflation is rising. Since September, the Fed dropped both the discount rate and the fed funds rate by a hundred basis points each. Although it takes time for interest rate cuts to stimulate the economy, these recent cuts appear to be having little (if any) effect. They have, however, helped to trash the dollar. While U.S. exports have risen, which is certainly a good thing, so has the level of inflation. Higher inflation makes it very unlikely that the Fed will keep cutting rates.
Many economists are hoping that lower interest rates will soon revive the housing market. But the Fed's actions have not lowered mortgage rates. Furthermore, the housing market will remain in the doldrums for quite some time. There is simply too much inventory on the market. And no rational person would buy a house if he expects the price to keep falling--even if he could get a zero percent mortgage.
That brings us back to tax cuts, which of course are not popular with the liberal set. Liberals argue that tax cuts typically benefit only the wealthy. Yet if tax cuts must be implemented, liberals would rather see those in the lower income brackets get the cuts.
But how is that possible? After all, by definition tax cuts only benefit those who actually pay taxes. Because our income tax code is so progressive, those in the lower income brackets hardly pay any tax at all. How many Americans realize that the bottom 50% (by income) of our population pay only 3% of all individual income taxes? How could Congress possibly deliver a meaningful tax cut to this group? The only way to truly help those in lower income brackets is to implement policies that stimulate economic growth and create opportunities for all members of society.
For many working Americans, the tax burden is much too heavy. The combination of federal income taxes, state income taxes, property taxes, sales taxes, and all those other hidden taxes can easily eat up more than one-half of income. Property taxes, in particular, have literally gone through the roof in many parts of the country. If politicians really want to stimulate the housing market, the most effective way would be to immediately cut property taxes and limit how high they could go in the future.
Thursday, December 20, 2007
Friday, December 14, 2007
Brain-Enhancing Drug Scandal
On the heels of Senator George Mitchell's report on the abuse of performance enhancing drugs in baseball, comes word that the phenomenon had been quite common outside the world of sports as well. New rumors have surfaced out of Sweden alleging that at least one-fourth of all Nobel laureates had at one time or another used brain-enhancing drugs to boost their intellectual capabilities. Critics claim their Nobel prizes were unearned and should be rescinded. One disgruntled scientist said, "These findings are truly unfair to all of us scientists with lower IQs who played by the rules. I think the world should immediately stop using whatever inventions those cheaters created!"
Tuesday, December 11, 2007
Ominous Warnings From the Fed
Today's Fed statement was filled with ominous warnings. It made references to slowing economic growth, the housing correction, softer business and consumer spending, strains in financial markets, elevated energy and commodity prices, inflation risks, and increased uncertainty. In other words, there is no good news to report.
Although the Fed cut the fed funds rate and the discount rate by a quarter point each, the market was strongly disappointed. Many investors were hoping for bolder action, perhaps a half-point cut in both rates. At the very least, investors were expecting more clarity from the statement. They exhibited their disappointment by selling stocks. Almost immediately, the Dow shed more than 200 points.
The Fed's comments make it clear that the probability of recession is much higher than many economists (including those at the Fed) had been forecasting. Yet with higher food prices, and with oil prices still flirting with the $90 per barrel level, the Fed knows it cannot focus solely on core inflation numbers anymore. The Fed knows that high food and energy prices will inevitably work their way into the core figures.
The Fed is truly between a rock and a hard place, officiating a game of tug-of-war between slowing growth and inflation. My view is that the Fed did the right thing by cutting the fed funds rate by just a quarter point. A steeper cut would have contributed to the dollar's weakness. However, I believe the Fed could have been a more aggressive with the discount rate. Given the slowing economy and the real potential for recession, there is no need to keep the discount rate a half-point above the fed funds rate.
Although the Fed cut the fed funds rate and the discount rate by a quarter point each, the market was strongly disappointed. Many investors were hoping for bolder action, perhaps a half-point cut in both rates. At the very least, investors were expecting more clarity from the statement. They exhibited their disappointment by selling stocks. Almost immediately, the Dow shed more than 200 points.
The Fed's comments make it clear that the probability of recession is much higher than many economists (including those at the Fed) had been forecasting. Yet with higher food prices, and with oil prices still flirting with the $90 per barrel level, the Fed knows it cannot focus solely on core inflation numbers anymore. The Fed knows that high food and energy prices will inevitably work their way into the core figures.
The Fed is truly between a rock and a hard place, officiating a game of tug-of-war between slowing growth and inflation. My view is that the Fed did the right thing by cutting the fed funds rate by just a quarter point. A steeper cut would have contributed to the dollar's weakness. However, I believe the Fed could have been a more aggressive with the discount rate. Given the slowing economy and the real potential for recession, there is no need to keep the discount rate a half-point above the fed funds rate.
Friday, December 07, 2007
Cruisn' For an Economic Bruisin'
Because I have been swamped, I haven't had an opportunity to post to my blog lately. I arrived home early this morning from the 12th Forbes Cruise for Investors, which went through the Panama Canal. A cruise, of course, is lots of fun. But it was also work for me and the other speakers. We started in Costa Rica on Nov. 30, went through the Canal, and stopped to visit St. Lucia. I disembarked in Antigua. The cruise is still proceeding on its was to Miami where it will end in a few days.
On my half of the cruise were Steve Forbes, Gary Shilling, Bob McTeer, Pete du Pont, and John Goodman. Rich Karlgaard served as the host. Gary, who has been right about the housing market all along, is still bearish on the economy and stocks. It was good to be around someone who is more bearish than myself. It made me feel like a good guy. The other speakers were more optimistic.
While on the ship, I learned about the Bush adminstration's plans to freeze certain subprime mortgage resets. Clearly, there are obvious moral hazard problems with doing something like this. It will be seen as a bailout of those who made imprudent decisions. Even so, I don't believe that even this measure will prevent housing prices from falling further. Freezing monthly payments may slow foreclosure rates modestly, but it won't solve the problem.
Given the continuing troubles in the housing market, I am posting below my comments from the December issue of the Forbes Growth Investor. This commentary was released to our subscribers several days ago:
It is not a pleasant topic, but the time has come to talk about recession. Although the probability of recession has obviously risen by a significant amount in recent months, most economists, including those at the Federal Reserve, are still betting the U.S. will be able to avoid one. Yet almost all economists, even those at the Fed, have lowered their projections for growth.
Minutes from the Fed’s Oct. 30-31 meeting reveal the new thinking. Most notably, the Fed is now projecting that economic growth will range from 1.6% to 2.6% for 2008, down from the 2.5% to 3% projection made just four months earlier. It is important to realize that the Fed is predicting anemic growth, but not recession. This, however, does not provide much comfort.
Not long ago, the so-called real estate experts claimed that housing prices never fall on a national basis. Those who said things were different this time were ridiculed. That argument is now settled. Not only have prices fallen; they are still plunging. The quarterly S&P/Case-Shiller U.S. National Home Price Index fell 1.7% sequentially in the third quarter, the biggest drop in its 21-year history. This index is down 4.5% year-over-year, and the rate of decrease has accelerated. This means that more than $11,000 of value has been erased from a home that was worth $250,000 a year ago. Of course, in some parts of the country, the story is much worse. In Tampa, you can now fetch just $222,250 for a house that was worth $250,000 a year ago.
Given losses of this magnitude, it is no surprise that foreclosures are up. Particularly hard hit have been homes financed with subprime adjustable-rate mortgages. The Fed estimates that monthly payments on more than two million such mortgages will be reset by the end of 2008. We will see many more foreclosures between now and then.
The real estate market is in a downward spiral. Falling property values contribute to foreclosures, and rising foreclosures contribute to falling property values. When a house is foreclosed, all the houses in that neighborhood lose value. In fact, Global Insight, an economic consultancy, recently estimated that property values will fall by $1.2 trillion in 2008. Foreclosures are being blamed for about half that amount.
In recent years, local governments have reaped a windfall in revenues by taxing all those inflated properties. That game will come to an end as homeowners demand that assessments be brought down to more realistic levels. Financial institutions are just starting to write down the values of their securitized subprime mortgage portfolios. Citigroup provides just one example of how devastating this can be for stockholders. The stock started the year at $55 per share. It is currently the biggest loser in the Dow Jones Industrial Average year-to-date.
Given the extent of the housing debacle, and a stock market that could potentially go much lower, why wouldn’t the economy go into recession? The Fed’s lowered growth projections are still too rosy. Perhaps the Fed is betting that the shrinking dollar will cause a huge boost in exports. We are certainly seeing some of that already. While it is true that a weak dollar can help prop up the economy in the short run, over the long run the U.S. is better off having a currency that everyone wants to hold. It's time for Treasury officials to do more than just give lip service to a strong dollar policy.
On my half of the cruise were Steve Forbes, Gary Shilling, Bob McTeer, Pete du Pont, and John Goodman. Rich Karlgaard served as the host. Gary, who has been right about the housing market all along, is still bearish on the economy and stocks. It was good to be around someone who is more bearish than myself. It made me feel like a good guy. The other speakers were more optimistic.
While on the ship, I learned about the Bush adminstration's plans to freeze certain subprime mortgage resets. Clearly, there are obvious moral hazard problems with doing something like this. It will be seen as a bailout of those who made imprudent decisions. Even so, I don't believe that even this measure will prevent housing prices from falling further. Freezing monthly payments may slow foreclosure rates modestly, but it won't solve the problem.
Given the continuing troubles in the housing market, I am posting below my comments from the December issue of the Forbes Growth Investor. This commentary was released to our subscribers several days ago:
It is not a pleasant topic, but the time has come to talk about recession. Although the probability of recession has obviously risen by a significant amount in recent months, most economists, including those at the Federal Reserve, are still betting the U.S. will be able to avoid one. Yet almost all economists, even those at the Fed, have lowered their projections for growth.
Minutes from the Fed’s Oct. 30-31 meeting reveal the new thinking. Most notably, the Fed is now projecting that economic growth will range from 1.6% to 2.6% for 2008, down from the 2.5% to 3% projection made just four months earlier. It is important to realize that the Fed is predicting anemic growth, but not recession. This, however, does not provide much comfort.
Not long ago, the so-called real estate experts claimed that housing prices never fall on a national basis. Those who said things were different this time were ridiculed. That argument is now settled. Not only have prices fallen; they are still plunging. The quarterly S&P/Case-Shiller U.S. National Home Price Index fell 1.7% sequentially in the third quarter, the biggest drop in its 21-year history. This index is down 4.5% year-over-year, and the rate of decrease has accelerated. This means that more than $11,000 of value has been erased from a home that was worth $250,000 a year ago. Of course, in some parts of the country, the story is much worse. In Tampa, you can now fetch just $222,250 for a house that was worth $250,000 a year ago.
Given losses of this magnitude, it is no surprise that foreclosures are up. Particularly hard hit have been homes financed with subprime adjustable-rate mortgages. The Fed estimates that monthly payments on more than two million such mortgages will be reset by the end of 2008. We will see many more foreclosures between now and then.
The real estate market is in a downward spiral. Falling property values contribute to foreclosures, and rising foreclosures contribute to falling property values. When a house is foreclosed, all the houses in that neighborhood lose value. In fact, Global Insight, an economic consultancy, recently estimated that property values will fall by $1.2 trillion in 2008. Foreclosures are being blamed for about half that amount.
In recent years, local governments have reaped a windfall in revenues by taxing all those inflated properties. That game will come to an end as homeowners demand that assessments be brought down to more realistic levels. Financial institutions are just starting to write down the values of their securitized subprime mortgage portfolios. Citigroup provides just one example of how devastating this can be for stockholders. The stock started the year at $55 per share. It is currently the biggest loser in the Dow Jones Industrial Average year-to-date.
Given the extent of the housing debacle, and a stock market that could potentially go much lower, why wouldn’t the economy go into recession? The Fed’s lowered growth projections are still too rosy. Perhaps the Fed is betting that the shrinking dollar will cause a huge boost in exports. We are certainly seeing some of that already. While it is true that a weak dollar can help prop up the economy in the short run, over the long run the U.S. is better off having a currency that everyone wants to hold. It's time for Treasury officials to do more than just give lip service to a strong dollar policy.
Monday, November 19, 2007
Shorting Starbucks Paid Off Big. Time to Cover?
Regular readers of this blog know that I have been bearish on Starbucks (SBUX) for quite some time. Here is what I said in August 2006:
Perhaps the latest Starbucks report is a harbinger of things to come. Starbucks reported disappointing growth and the stock took a big hit. Management blamed it on too much demand for blended drinks that take a long time to prepare. That's unique. Growth slowed because demand was too strong. With gasoline prices pushing north of $3 per gallon, I suspect the real story is that consumers are wondering how much sense it makes to pay $16 a gallon or more for coffee.
In October of that year I said:
Starbucks is another stock that appears overvalued. It is selling for 51 times expected earnings, almost 4 times sales, and 11 times book value. That seems like a lot to pay for what amounts to a chain of restaurants. Of course, Starbucks has tremendous growth prospects, but that doesn't warrant buying the stock at any price.
In May 2007 when gasoline prices broke above $3.20 per gallon, I said:
Companies like Starbucks and Whole Foods that sell overpriced and unnecessary goods might find that growth will slow. These two stocks have already fallen well off their highs. Chances are they will go lower still.
And in July 2007, after Starbucks announced a price increase that came out to nine cents per cup on average, I warned:
There seems to be little skepticism on Wall Street about Starbucks' recently announced price increase. The company admitted again that higher costs are pinching profits. It is struggling with higher dairy prices, higher fuel prices, and higher energy prices.
Well last week Starbucks announced earnings and the stock got hammered. Although the company continues to make good money, growth is slowing. Worse, store traffic actually fell. It seems that even Starbucks addicts are not able to cope with the latest price increase.
This company is caught between a rock and a hard place. Does it raise prices to protect margins at the risk of lower volumes? Or does it hold the line, absorb higher costs, and watch margins shrink? Of course, if dairy or energy prices were to start falling, Starbucks would become a buy once again. But it's not yet time to start buying the stock. However, if you shorted Starbucks at much higher levels, you may want to start thinking about covering at least part of your position.
Perhaps the latest Starbucks report is a harbinger of things to come. Starbucks reported disappointing growth and the stock took a big hit. Management blamed it on too much demand for blended drinks that take a long time to prepare. That's unique. Growth slowed because demand was too strong. With gasoline prices pushing north of $3 per gallon, I suspect the real story is that consumers are wondering how much sense it makes to pay $16 a gallon or more for coffee.
In October of that year I said:
Starbucks is another stock that appears overvalued. It is selling for 51 times expected earnings, almost 4 times sales, and 11 times book value. That seems like a lot to pay for what amounts to a chain of restaurants. Of course, Starbucks has tremendous growth prospects, but that doesn't warrant buying the stock at any price.
In May 2007 when gasoline prices broke above $3.20 per gallon, I said:
Companies like Starbucks and Whole Foods that sell overpriced and unnecessary goods might find that growth will slow. These two stocks have already fallen well off their highs. Chances are they will go lower still.
And in July 2007, after Starbucks announced a price increase that came out to nine cents per cup on average, I warned:
There seems to be little skepticism on Wall Street about Starbucks' recently announced price increase. The company admitted again that higher costs are pinching profits. It is struggling with higher dairy prices, higher fuel prices, and higher energy prices.
Well last week Starbucks announced earnings and the stock got hammered. Although the company continues to make good money, growth is slowing. Worse, store traffic actually fell. It seems that even Starbucks addicts are not able to cope with the latest price increase.
This company is caught between a rock and a hard place. Does it raise prices to protect margins at the risk of lower volumes? Or does it hold the line, absorb higher costs, and watch margins shrink? Of course, if dairy or energy prices were to start falling, Starbucks would become a buy once again. But it's not yet time to start buying the stock. However, if you shorted Starbucks at much higher levels, you may want to start thinking about covering at least part of your position.
Wednesday, November 14, 2007
The Pro-Tax Buffett
The Pro-Tax Buffett is the title of the ninth chapter of my new book, Even Buffett Isn't Perfect, which is due for release in May 2008. Warren Buffett's Congressional testimony delivered today convinces me that the title of the chapter is apropros.
Buffett favors higher taxes on the so-called rich. He favors both higher income taxes and higher death taxes. Estate taxes take their biggest toll on those whose estates are not very liquid. This group includes small farmers, ranchers, and business owners. These individuals typically oppose the estate tax because it often means that heirs must kill the business to pay the tax. Yet many of the mega-rich including Buffett favor this tax. Perhaps it is because they feel a little guilty about being so rich. Perhaps it is because they are convinced that charities would suffer if there was no estate tax and no loophole available to escape it. Yet, as a number of conservative commentators have pointed out, even if there is no tax, anyone who feels strongly about leaving his money to the government is free to do so. However, they should not force others to do the same thing. Furthermore, if they really believe this tax is a good thing, they should not take advantage of loopholes to escape it.
Prior to the Bush tax reforms, estates that were valued above $675,000 were taxed. The federal tax rate reached as high as 60% on large estates. Under the current law, this non-taxable limitation escalates to $3.5 million by 2009. Estates above $3.5 million will be taxed at 45% in that year. In 2010 the estate tax will be completely repealed. There will be no estate tax in 2010. However, in 2011 it comes back with a vengeance, hitting estates worth more than $1 million.
Just imagine the kinds of discussions that are underway in law offices across the country as wealthy clients try to plan their futures. Pity the old and sick. Their heirs are praying they hang on until 2010, but they may also be hoping they kick the bucket before 2011.
Chances are good that Congress will once again tinker with estate taxes sometime in the near future. Most Americans would not object to an estate tax that was reasonable and fair. However, taxing estates above $1 million at rates approaching 50% hardly seems reasonable. Some have suggested a 15% tax on estates above $10 million. Liberals think this is inadequate. Conservatives think even this is too much. Regardless of which party controls Congress and who sits in the White House, we can only hope that our politicians reach some sort of reasonable compromise on this issue before too long.
Buffett favors higher taxes on the so-called rich. He favors both higher income taxes and higher death taxes. Estate taxes take their biggest toll on those whose estates are not very liquid. This group includes small farmers, ranchers, and business owners. These individuals typically oppose the estate tax because it often means that heirs must kill the business to pay the tax. Yet many of the mega-rich including Buffett favor this tax. Perhaps it is because they feel a little guilty about being so rich. Perhaps it is because they are convinced that charities would suffer if there was no estate tax and no loophole available to escape it. Yet, as a number of conservative commentators have pointed out, even if there is no tax, anyone who feels strongly about leaving his money to the government is free to do so. However, they should not force others to do the same thing. Furthermore, if they really believe this tax is a good thing, they should not take advantage of loopholes to escape it.
Prior to the Bush tax reforms, estates that were valued above $675,000 were taxed. The federal tax rate reached as high as 60% on large estates. Under the current law, this non-taxable limitation escalates to $3.5 million by 2009. Estates above $3.5 million will be taxed at 45% in that year. In 2010 the estate tax will be completely repealed. There will be no estate tax in 2010. However, in 2011 it comes back with a vengeance, hitting estates worth more than $1 million.
Just imagine the kinds of discussions that are underway in law offices across the country as wealthy clients try to plan their futures. Pity the old and sick. Their heirs are praying they hang on until 2010, but they may also be hoping they kick the bucket before 2011.
Chances are good that Congress will once again tinker with estate taxes sometime in the near future. Most Americans would not object to an estate tax that was reasonable and fair. However, taxing estates above $1 million at rates approaching 50% hardly seems reasonable. Some have suggested a 15% tax on estates above $10 million. Liberals think this is inadequate. Conservatives think even this is too much. Regardless of which party controls Congress and who sits in the White House, we can only hope that our politicians reach some sort of reasonable compromise on this issue before too long.
Tuesday, November 13, 2007
Today's Rally May Be Short-Lived
The Dow rallied 320 points today. Most analysts are crediting the rally to Wal-Mart's better-than-expected earnings, and comments out of Goldman Sachs saying it won't be posting any significant writedowns. Other analysts are saying the market rallied simply because it was short-term oversold. In other words, stocks went up today because they had gone down in previous days.
I am happy to see today's rally in Wal-Mart because the stock is on my recommeded list in the Special Situation Survey. I'm also happy to see the nice rebound in Citigroup because I started buying it just a few days ago (see Can Citi Maintain the Dividend). Yet I remain cautious on stocks overall. We will be seeing more mortgage-related writedowns. Yestereday's announcement from E*Trade won't be the last. Furthermore, problems could soon arise with securitized credit card obligations.
Although oil prices backed off more than $3 per barrel today, they remain extraordinarily high. This means gasoline prices will be going up significantly from current levels--just in time for the holiday shopping season. With consumer spending likely to slow, the weak dollar may be the only thing keeping our economy out of recession.
I would use strong rallies like today's to hedge positions. The UltraShort ProShares ETFs are a good way to accomplish this.
I am happy to see today's rally in Wal-Mart because the stock is on my recommeded list in the Special Situation Survey. I'm also happy to see the nice rebound in Citigroup because I started buying it just a few days ago (see Can Citi Maintain the Dividend). Yet I remain cautious on stocks overall. We will be seeing more mortgage-related writedowns. Yestereday's announcement from E*Trade won't be the last. Furthermore, problems could soon arise with securitized credit card obligations.
Although oil prices backed off more than $3 per barrel today, they remain extraordinarily high. This means gasoline prices will be going up significantly from current levels--just in time for the holiday shopping season. With consumer spending likely to slow, the weak dollar may be the only thing keeping our economy out of recession.
I would use strong rallies like today's to hedge positions. The UltraShort ProShares ETFs are a good way to accomplish this.
Thursday, November 08, 2007
Can Citi Maintain the Dividend?
Citigroup's dividend yield keeps rising as the stock keeps falling. A month ago, the yield was about 4.5%. At last look, it had reached 6.8% as the stock fell below $32 per share. The initial sell-off in the stock had to do with news that the company would write-off an additional $8-11 billion in sub-prime CDOs. But the stock has continued to fall because many investors are betting that the dividend will have to be cut in order to shore up capital.
So far at least, the board has indicated that the dividend will be maintained. But suppose it is cut? Will that drive the stock price lower? It may, but I doubt it will go much lower. In fact, investors may view a dividend reduction as good news. It could signal the board's determination to get serious about the company's financial problems.
My view is that Citigroup has reached a low enough level to justify the risk of buying some shares. That's exactly what I just started doing. My investment will likely be dead money for a while, but taking a page from Warren Buffett's book, it should pay off handsomely in the years ahead.
So far at least, the board has indicated that the dividend will be maintained. But suppose it is cut? Will that drive the stock price lower? It may, but I doubt it will go much lower. In fact, investors may view a dividend reduction as good news. It could signal the board's determination to get serious about the company's financial problems.
My view is that Citigroup has reached a low enough level to justify the risk of buying some shares. That's exactly what I just started doing. My investment will likely be dead money for a while, but taking a page from Warren Buffett's book, it should pay off handsomely in the years ahead.
Thursday, November 01, 2007
Fed Rate Cuts Imperil the Dollar
The Federal Reserve is on a mission. By slashing interest rates, you may get the impression the Fed is out to save the economy. Instead, it is trashing the dollar.
It now costs almost $1.45 to buy one euro. It costs $2.08 to buy a British pound. Gold is $800 per ounce, and oil, which is denominated in dollars, costs more than $95 per barrel. There seems little doubt that we will soon break the dreaded $100 mark. One hundred dollars is exactly the price Osama bin Laden suggested the West should be paying for a barrel of oil soon after he attacked America on Sept. 11, 2001.
Investors, however, are cheering as the Fed devalues our currency. The Dow rallied 138 points in response to the latest interest rate cuts. The Fed reduced the discount rate by a quarter point to 5%. At the same time, it reduced the fed funds rate by a quarter point to 4.5%. With oil and gold prices near record levels, you might think that reasonable people would expect stocks to be struggling a bit. Reason, however, seems to be in short supply on Wall Street.
The Fed justified its latest rate cut by saying that economic expansion is likely to slow in part due to the housing correction. Furthermore, it said core inflation readings have improved. Apparently, no one at the Fed drives a car, buys food, or heats his home.
Those who have mortgages that are about to adjust to higher levels might want to send the Fed a thank you card. The Fed has given them an opportunity to switch into fixed-rate loans. Unless significant penalties are involved, refinancing in this manner should payoff over the long term.
The Fed’s action came the same day the Department of Commerce released its advance estimate for third quarter GDP. Although the figure is subject to revision, growth was a much stronger-than-expected 3.9%. It is no surprise that exports contributed to this growth. They surged 16.2% because the weak dollar makes American goods cheap abroad.
With growth near 4% it seems odd that the Fed would risk inflation by cutting interest rates. Core inflation may be tame, but headline inflation is not. The Fed is obviously looking ahead, and apparently it does not like what it sees. It may be worried that the sub-prime mortgage mess has not fully settled. It may also be concerned that consumer spending will eventually take a hit. Consumers, however, are weathering the housing bust and high oil prices fairly well.
But consumers don’t buy crude oil. They buy gasoline and heating oil. Despite high crude prices, gasoline prices have remained well off their spring highs. But how much longer can that last? Either gasoline prices must rise, or oil prices must fall. Gasoline inventories may fall in coming weeks as refiners start producing more heating oil. And with Thanksgiving just around the corner, demand for gasoline is likely to rise. Don’t be surprised if gasoline prices surge 20 to 30 cents per gallon by the end of this month.
It now costs almost $1.45 to buy one euro. It costs $2.08 to buy a British pound. Gold is $800 per ounce, and oil, which is denominated in dollars, costs more than $95 per barrel. There seems little doubt that we will soon break the dreaded $100 mark. One hundred dollars is exactly the price Osama bin Laden suggested the West should be paying for a barrel of oil soon after he attacked America on Sept. 11, 2001.
Investors, however, are cheering as the Fed devalues our currency. The Dow rallied 138 points in response to the latest interest rate cuts. The Fed reduced the discount rate by a quarter point to 5%. At the same time, it reduced the fed funds rate by a quarter point to 4.5%. With oil and gold prices near record levels, you might think that reasonable people would expect stocks to be struggling a bit. Reason, however, seems to be in short supply on Wall Street.
The Fed justified its latest rate cut by saying that economic expansion is likely to slow in part due to the housing correction. Furthermore, it said core inflation readings have improved. Apparently, no one at the Fed drives a car, buys food, or heats his home.
Those who have mortgages that are about to adjust to higher levels might want to send the Fed a thank you card. The Fed has given them an opportunity to switch into fixed-rate loans. Unless significant penalties are involved, refinancing in this manner should payoff over the long term.
The Fed’s action came the same day the Department of Commerce released its advance estimate for third quarter GDP. Although the figure is subject to revision, growth was a much stronger-than-expected 3.9%. It is no surprise that exports contributed to this growth. They surged 16.2% because the weak dollar makes American goods cheap abroad.
With growth near 4% it seems odd that the Fed would risk inflation by cutting interest rates. Core inflation may be tame, but headline inflation is not. The Fed is obviously looking ahead, and apparently it does not like what it sees. It may be worried that the sub-prime mortgage mess has not fully settled. It may also be concerned that consumer spending will eventually take a hit. Consumers, however, are weathering the housing bust and high oil prices fairly well.
But consumers don’t buy crude oil. They buy gasoline and heating oil. Despite high crude prices, gasoline prices have remained well off their spring highs. But how much longer can that last? Either gasoline prices must rise, or oil prices must fall. Gasoline inventories may fall in coming weeks as refiners start producing more heating oil. And with Thanksgiving just around the corner, demand for gasoline is likely to rise. Don’t be surprised if gasoline prices surge 20 to 30 cents per gallon by the end of this month.
Wednesday, October 31, 2007
Top 100 Companies in Muslim World
It is not surprising that some of the biggest companies in the Muslim world are found in the oil and gas industries. After all, Islamic countries sit on about two-thirds of the world's proven oil reserves, and oil prices are at all-time nominal highs.
What is surprising, however, is the diversity of businesses represented. I recently interviewed Rafi-uddin Shikoh, editor of DinarStandard, an online publication that tracks business in the Muslim world. His website lists all kinds of interesting information including top brands and top scientifically productive countries.
You can watch this MoneyMasters interview starting tomorrow (Thursday) morning.
What is surprising, however, is the diversity of businesses represented. I recently interviewed Rafi-uddin Shikoh, editor of DinarStandard, an online publication that tracks business in the Muslim world. His website lists all kinds of interesting information including top brands and top scientifically productive countries.
You can watch this MoneyMasters interview starting tomorrow (Thursday) morning.
Monday, October 29, 2007
Here & Now Interview
Oil prices are going through the roof, yet stocks are rising, too. Contrary to popular opinion, one has little to do with the other. Nonetheless, it is common to hear reporters blame a sell-off in stocks on rising energy prices. They often say things like "Stocks fell today because oil went up $2 a barrel." The truth, however, is that the two are not negatively correlated over the long term.
Yet rising commodity prices are a cause for worry. The two commodities that get much of the attention are oil and gold. Both are near all-time highs. Both may be telling us to expect higher inflation.
So far, gasoline prices have not budged much. Given the recent surge in oil prices, this is a bit surprising. It probably won't last. Either gasoline prices will rise, or oil prices will fall.
To hear more about the recent rise in oil, listen to my recent interview on Here & Now, a radio program broadcast out of Boston.
Yet rising commodity prices are a cause for worry. The two commodities that get much of the attention are oil and gold. Both are near all-time highs. Both may be telling us to expect higher inflation.
So far, gasoline prices have not budged much. Given the recent surge in oil prices, this is a bit surprising. It probably won't last. Either gasoline prices will rise, or oil prices will fall.
To hear more about the recent rise in oil, listen to my recent interview on Here & Now, a radio program broadcast out of Boston.
Thursday, October 25, 2007
Ian Bremmer on MoneyMasters Discusses Political Risk
China has the world's fastest growing major economy. It surged 11.5% in the third quarter. But China's economy still pales in size compared to the U.S. Even though China's population is more than four times larger than America's, it's economy is only about one-fifth as large. In fact, with a gross domestic product of more than $13 trillion, the U.S. economy is about four times larger than Japan's, which has the world's second-largest economy. The U.S. accounts for about one-fourth of total world GDP.
This is why an economic slowdown in the U.S. could have dire consequences for the entire planet. California's economy alone accounts for about 13% of U.S. GDP. California, of course, is literally on fire. According to the latest accounts, the wildfires are finally under control, but the damage to the economy has yet to be fully assessed. About a million people have been displaced and approximately 3,000 homes have been destroyed or damaged. I doubt, however, that even the home builders thought this was a good way to get rid of excess inventory.
Most forecasts for U.S. growth are still positive, but they are shrinking. It is becoming increasingly difficult for economists to argue that the U.S. will avoid an economic recession. Investors are still hoping the Fed will come to the rescue. In fact, stocks rallied yesterday on rumors that the Fed was about to cut the discount rate once again. I'm not betting on it. And I'm not betting on a Halloween rate cut either. I continue to expect poor returns for U.S. equities for the near future. While investing abroad may seem riskier, investors should keep a healthy exposure to foreign stocks. The lower correlations should provide diversification benefits.
For a more in depth discussion of some of the world's hot spots, watch Pricing Political Risk. It's a short interview with Ian Bremmer of the Eurasia Group, a leading political risk consultancy that caters to many of Wall Street's top investment banks and hedge funds.
This is why an economic slowdown in the U.S. could have dire consequences for the entire planet. California's economy alone accounts for about 13% of U.S. GDP. California, of course, is literally on fire. According to the latest accounts, the wildfires are finally under control, but the damage to the economy has yet to be fully assessed. About a million people have been displaced and approximately 3,000 homes have been destroyed or damaged. I doubt, however, that even the home builders thought this was a good way to get rid of excess inventory.
Most forecasts for U.S. growth are still positive, but they are shrinking. It is becoming increasingly difficult for economists to argue that the U.S. will avoid an economic recession. Investors are still hoping the Fed will come to the rescue. In fact, stocks rallied yesterday on rumors that the Fed was about to cut the discount rate once again. I'm not betting on it. And I'm not betting on a Halloween rate cut either. I continue to expect poor returns for U.S. equities for the near future. While investing abroad may seem riskier, investors should keep a healthy exposure to foreign stocks. The lower correlations should provide diversification benefits.
For a more in depth discussion of some of the world's hot spots, watch Pricing Political Risk. It's a short interview with Ian Bremmer of the Eurasia Group, a leading political risk consultancy that caters to many of Wall Street's top investment banks and hedge funds.
Tuesday, October 16, 2007
Double Standards
China is extremely upset that the Dalai Lama will be awarded a Congressional Gold Medal. The White House is in favor of this award. It brushed aside China's objections. President Bush plans to attend the ceremony to honor one of the world's greatest spiritual leaders.
Turkey is extremely upset that the House Foreign Affairs Committee passed a resolution condemning the Armenian Genocide. The White House is almost as upset as the Turks. Before the vote, President Bush went on national television begging the committee not to vote on this non-binding resolution. Now that the resolution has passed, Bush is begging Speaker Nancy Pelosi to prevent it from reaching the floor of the House for a full vote.
Let me see if I've got this straight. The White House does not care how China feels, but it is bending over backwards to please Turkey. The White House is not arguing that the Armenians did not suffer a genocide. It just thinks that recognizing genocide is less important than hurting Turkey's feelings.
Armenians are being told that this is not a good time to vote on this measure. So when exactly is a good time? Armenians have been waiting for almost 100 years. Before the fall of Communism, they were told that Turkey was too important to upset because it bordered the Soviet Union. During the Clinton administration they were told that Turkey was too important to upset because it was a key ally that was friendly with Israel and supported our efforts in the Middle East. Now they are being told that Turkey is too important to upset because it borders Iraq.
To make its displeasure known, Turkey has threatened to invade Iraq and cut off U.S. supplies. Instead of reminding the Turks that we give them billions of dollars in foreign aid every year to buy their cooperation, the White House is begging Turkey for forgiveness. As for China, it couldn't care less.
Turkey is extremely upset that the House Foreign Affairs Committee passed a resolution condemning the Armenian Genocide. The White House is almost as upset as the Turks. Before the vote, President Bush went on national television begging the committee not to vote on this non-binding resolution. Now that the resolution has passed, Bush is begging Speaker Nancy Pelosi to prevent it from reaching the floor of the House for a full vote.
Let me see if I've got this straight. The White House does not care how China feels, but it is bending over backwards to please Turkey. The White House is not arguing that the Armenians did not suffer a genocide. It just thinks that recognizing genocide is less important than hurting Turkey's feelings.
Armenians are being told that this is not a good time to vote on this measure. So when exactly is a good time? Armenians have been waiting for almost 100 years. Before the fall of Communism, they were told that Turkey was too important to upset because it bordered the Soviet Union. During the Clinton administration they were told that Turkey was too important to upset because it was a key ally that was friendly with Israel and supported our efforts in the Middle East. Now they are being told that Turkey is too important to upset because it borders Iraq.
To make its displeasure known, Turkey has threatened to invade Iraq and cut off U.S. supplies. Instead of reminding the Turks that we give them billions of dollars in foreign aid every year to buy their cooperation, the White House is begging Turkey for forgiveness. As for China, it couldn't care less.
Tuesday, October 09, 2007
A Shock to the Economic System
Today's release of the Fed's minutes from the Sept. 18 meeting gives us a better understanding of what the FOMC members were thinking when they decided to slash interest rates by 50 basis points.
For starters, the Fed "marked down" its estimate for fourth quarter GDP growth. It also "trimmed" its growth forecast for 2008. It raised its forecast for unemployment. And because business executives are growing cautious, the Fed now expects capital spending to be scaled back. Finally, the Fed trimmed expectations for both core and headline inflation.
All in all, the Fed was very concerned about the outlook for economic activity, and less concerned about inflation. The housing market deteriorated much faster and further than the Fed expected. The minutes said subprime mortgages are "essentially unavailable," that there is "little activity" in nonprime mortgages, and that borrowers of prime jumbo mortgages "faced higher rates and tighter lending standards."
But the Fed is not entirely ignoring inflation. It expressed concern about rising benefit costs and labor costs and said the weakening dollar had the potential to heighten inflation risks.
It appears that the Fed was hoping to shock the markets with a large one-time interest rate reduction. Given the strong rally in stocks ever since those cuts were made, it looks like the Fed succeeded. However, the remarks in the minutes of the Sept. 18 meeting also indicate that those who are expecting additional interest rate cuts are likely to be disappointed.
For starters, the Fed "marked down" its estimate for fourth quarter GDP growth. It also "trimmed" its growth forecast for 2008. It raised its forecast for unemployment. And because business executives are growing cautious, the Fed now expects capital spending to be scaled back. Finally, the Fed trimmed expectations for both core and headline inflation.
All in all, the Fed was very concerned about the outlook for economic activity, and less concerned about inflation. The housing market deteriorated much faster and further than the Fed expected. The minutes said subprime mortgages are "essentially unavailable," that there is "little activity" in nonprime mortgages, and that borrowers of prime jumbo mortgages "faced higher rates and tighter lending standards."
But the Fed is not entirely ignoring inflation. It expressed concern about rising benefit costs and labor costs and said the weakening dollar had the potential to heighten inflation risks.
It appears that the Fed was hoping to shock the markets with a large one-time interest rate reduction. Given the strong rally in stocks ever since those cuts were made, it looks like the Fed succeeded. However, the remarks in the minutes of the Sept. 18 meeting also indicate that those who are expecting additional interest rate cuts are likely to be disappointed.
Friday, October 05, 2007
Can We Trust the Data?
Today's jobs report was certainly encouraging, but it raises an important question. Why does the government bother to release preliminary results if they are so unreliable?
The Bureau of Labor Statistics, which is responsible for tracking the data, said a month ago that August non-farm payrolls fell by 4,000. This spooked the markets. It convinced many economists that the economy was slowing much faster than they had anticipated. Most economists said the loss of jobs increased the probability of recession. It also put tremendous pressure on the Fed to cut interest rates. Because the jobs number was so weak, the Fed slashed both the fed funds rate and the discount rate by 50 basis points.
But today, the August figure was revised. It turns out that the economy did not lose 4,000 jobs after all. Instead, it actually created jobs. In fact, according to the most recent data, non-farm payrolls increased by 89,000 in August. Had the Fed known that, it may not have cut rates at all. In any case, it is now evident that the Fed went overboard.
Yet it must also be pointed out that even the 89,000 figure is not final. It will be revised one more time. We won't know until a month from now exactly how many jobs were created (or lost) in August.
In any case, today's data makes it much less likely that the Fed will lower rates again at its next meeting at the very end of this month. Given Chairman Bernanke's concerns about inflation, further rate cuts are highly unlikely.
The Bureau of Labor Statistics, which is responsible for tracking the data, said a month ago that August non-farm payrolls fell by 4,000. This spooked the markets. It convinced many economists that the economy was slowing much faster than they had anticipated. Most economists said the loss of jobs increased the probability of recession. It also put tremendous pressure on the Fed to cut interest rates. Because the jobs number was so weak, the Fed slashed both the fed funds rate and the discount rate by 50 basis points.
But today, the August figure was revised. It turns out that the economy did not lose 4,000 jobs after all. Instead, it actually created jobs. In fact, according to the most recent data, non-farm payrolls increased by 89,000 in August. Had the Fed known that, it may not have cut rates at all. In any case, it is now evident that the Fed went overboard.
Yet it must also be pointed out that even the 89,000 figure is not final. It will be revised one more time. We won't know until a month from now exactly how many jobs were created (or lost) in August.
In any case, today's data makes it much less likely that the Fed will lower rates again at its next meeting at the very end of this month. Given Chairman Bernanke's concerns about inflation, further rate cuts are highly unlikely.
Wednesday, September 19, 2007
The Fed Comes to Rescue After Saying It Won't
First of all, I apologize for not posting in a while and thank those of you who have noticed. The fact is that I've been incredibly busy. On top of everything else I normally do, I'm in the process of putting the finishing touches on a book I have been writing. That process is now near completion so I hope to be posting again on a regular basis relatively soon. However, yesterday's interest rate cuts by the Fed were so over the top, I had to make some comment.
Last Friday on Kudlow & Co. I predicted the Fed would cut the fed funds rate by 25 basis points and would leave the discount rate alone. Larry was calling for much bigger cuts in both. He was right. Yesterday, the Fed announced 50 basis point cuts in both interest rates.
My take on all this is that we can now officially change the name of the "Greenspan Put" to the "Bernanke Put." This aggressive action goes a long way in convincing investors that the Fed will always come to the rescue no matter how many times it says it won't. No one cares anymore that only about a month ago Bernanke warned that the Fed would not bail out investors when they make bad financial choices. He just proved that the Fed will do exactly that.
Furthermore, the Fed would not have taken such bold action unless it was absolutely convinced that the probability of recession has risen dramatically. It is interesting to note that not one member of the FOMC dissented. The decision to cut rates received unanimous support.
Today's disappointing housing numbers indicate that recession may be nearer than we thought. The CPI indicates that inflation is under control. But the CPI is likely to jump next month especially when energy prices are taken into account. Even though gasoline prices are well off their highs, oil prices keep setting new records. This divergence can't last. Either oil prices must come down or gasoline must rise. I'm betting that in the near term the latter is more likely. In any case, I'm sure at least a few hedge fund managers are buying gasoline and shorting oil.
While it was nice to see that the rate cuts caused a strong rally in stocks, you might want to take advantage of the opportunity to trim your long positions. I suspect we are going to give up all of the recent advance.
Last Friday on Kudlow & Co. I predicted the Fed would cut the fed funds rate by 25 basis points and would leave the discount rate alone. Larry was calling for much bigger cuts in both. He was right. Yesterday, the Fed announced 50 basis point cuts in both interest rates.
My take on all this is that we can now officially change the name of the "Greenspan Put" to the "Bernanke Put." This aggressive action goes a long way in convincing investors that the Fed will always come to the rescue no matter how many times it says it won't. No one cares anymore that only about a month ago Bernanke warned that the Fed would not bail out investors when they make bad financial choices. He just proved that the Fed will do exactly that.
Furthermore, the Fed would not have taken such bold action unless it was absolutely convinced that the probability of recession has risen dramatically. It is interesting to note that not one member of the FOMC dissented. The decision to cut rates received unanimous support.
Today's disappointing housing numbers indicate that recession may be nearer than we thought. The CPI indicates that inflation is under control. But the CPI is likely to jump next month especially when energy prices are taken into account. Even though gasoline prices are well off their highs, oil prices keep setting new records. This divergence can't last. Either oil prices must come down or gasoline must rise. I'm betting that in the near term the latter is more likely. In any case, I'm sure at least a few hedge fund managers are buying gasoline and shorting oil.
While it was nice to see that the rate cuts caused a strong rally in stocks, you might want to take advantage of the opportunity to trim your long positions. I suspect we are going to give up all of the recent advance.
Monday, August 27, 2007
Rove + Gonzales = Trouble for Republicans
A professor once joked that the best way to turn a Democrat into a Republican was to let him graduate, get a job, and see how much he has to pay in taxes. Indeed, when I was in college, most of my classmates had Democratic leanings. I preferred to remain independent. But as time went on I noticed I had more in common with Republicans, and that is the way I usually voted.
Many years later I took a job in Massachusetts. Almost everyone in the state was a registered Democrat, so I decided to register as a Republican. I did so just in time to help elect William Weld, a Republican, governor. I have been a registered Republican ever since.
This is why it pains me to see the Republican party struggling so much in recent months. The Bush administration, in particular, is falling apart. A number of high-ranking officials have resigned. Karl Rove and Alberto Gonzales are only the most recent.
It is becoming more and more difficult for me to believe that the Republicans will be able to hold on to the White House in 2008. There does not appear to be a single Republican candidate who can energize the core of the party and at the same time attract a critical mass of Democrats.
The Democratic candidates have many flaws, yet their constituents appear quite satisfied with them. In my opinion, unless the Democrats completely blow it, this election belongs to them, which of course makes me all the more bearish on stocks. I believe a Democrat in the While House, along with a Democratic Congress, spells higher taxes. I expect stocks to go lower as more and more investors reach the same conclusion.
Many years later I took a job in Massachusetts. Almost everyone in the state was a registered Democrat, so I decided to register as a Republican. I did so just in time to help elect William Weld, a Republican, governor. I have been a registered Republican ever since.
This is why it pains me to see the Republican party struggling so much in recent months. The Bush administration, in particular, is falling apart. A number of high-ranking officials have resigned. Karl Rove and Alberto Gonzales are only the most recent.
It is becoming more and more difficult for me to believe that the Republicans will be able to hold on to the White House in 2008. There does not appear to be a single Republican candidate who can energize the core of the party and at the same time attract a critical mass of Democrats.
The Democratic candidates have many flaws, yet their constituents appear quite satisfied with them. In my opinion, unless the Democrats completely blow it, this election belongs to them, which of course makes me all the more bearish on stocks. I believe a Democrat in the While House, along with a Democratic Congress, spells higher taxes. I expect stocks to go lower as more and more investors reach the same conclusion.
Friday, August 10, 2007
2% Growth is Bullish?
Brian Wesbury wrote an especially amusing op-ed in yesterday's Wall Street Journal. He argued that the business media are giving too much time to those who are bearish. Citing numerous surveys, he claimed that the vast majority of economists are bullish. Therefore, according to Wesbury, by giving bears and bulls an equal amount of time, viewers are getting the incorrect impression that economists are torn about economic growth.
I found this amusing for a couple of reasons. First, his definition of a bull is one who is forecasting at least 2% GDP growth. Not too long ago, 2% would have been considered bearish. In fact, I've been portrayed as the bear on a number of television debates because I was forecasting less than 3% growth.
Furthermore, he ignores the fact that almost all economists have been ratcheting down their forecasts. They may still be predicting growth, but they are getting less and less optimistic.
He also ignores the fact that it rarely pays for forecasters to disagree with the masses. They want to make sure their forecast is not too far off from the average forecast. This way, if they are wrong, they can simply shrug their shoulders and say, "Hey, that's what everybody was expecting."
As for me, I still think the probability of recession is rather low. I think 2% GDP growth is still a reasonable estimate. So why am I a bear? It is not because I expect a recession. It is because I expect stocks to go lower. Despite the recent sell-offs we've been seeing in the markets, I think there is still a ways to go before we hit bottom.
I found this amusing for a couple of reasons. First, his definition of a bull is one who is forecasting at least 2% GDP growth. Not too long ago, 2% would have been considered bearish. In fact, I've been portrayed as the bear on a number of television debates because I was forecasting less than 3% growth.
Furthermore, he ignores the fact that almost all economists have been ratcheting down their forecasts. They may still be predicting growth, but they are getting less and less optimistic.
He also ignores the fact that it rarely pays for forecasters to disagree with the masses. They want to make sure their forecast is not too far off from the average forecast. This way, if they are wrong, they can simply shrug their shoulders and say, "Hey, that's what everybody was expecting."
As for me, I still think the probability of recession is rather low. I think 2% GDP growth is still a reasonable estimate. So why am I a bear? It is not because I expect a recession. It is because I expect stocks to go lower. Despite the recent sell-offs we've been seeing in the markets, I think there is still a ways to go before we hit bottom.
Saturday, August 04, 2007
Rising Volatility Means Stocks Can Go Lower
Given the sell-off in stocks we are now seeing, I decided to post my recent comments from the Forbes Growth Investor:
Volatility is back on Wall Street. There were 21 trading days in July. The range between the Dow’s high and low exceeded 100 points on 13 of those days. It exceeded 200 points on six days.
The CBOE Market Volatility Index is another way to monitor volatility. This index measures implied volatility from the prices traders are willing to pay for stock options. Implied volatility was rather low during the second half of 2006. It started rising in late February 2007, breaking through its 200-day moving average. It has now reached its highest levels since 2003. Traders love this kind of market. It gives them plenty of opportunity to make quick profits by jumping in and out of stocks. Long term buy-and-hold investors, however, may not pay much attention. They should. Rising volatility can sometimes signal a major turning point in the market. In 2003 it signaled the start of a bull market. Today, it may be telling us just the opposite.
Rising volatility means investors are getting nervous. They no longer feel confident about the market’s overall direction. Of course, much of the current volatility is being blamed on woes in the sub-prime mortgage market and on worries that those problems will spread to higher quality mortgages. Yet even today, there are those who seem to be completely discounting the deterioration in housing. They seem convinced that the housing market is about to bottom and that any further problems—if they do occur—will have only a minimal impact on consumer spending.
Economists will debate exactly how much investors should worry, but one thing is for
sure: This bull market is getting old. As a result, many investors are sitting on sizable gains. When they see stock prices gyrate excessively, they can’t help but think about taking profits. They probably should take some money off the table.
It’s likely that housing prices will continue to fall. In fact, the 10-city S&P Case/Shiller Home Price Index recently posted its biggest drop since 1991. Furthermore, oil is trading for more than $78 per barrel and some analysts predict it will hit $100 within a year. Yet so many otherwise meticulous market watchers are simply overlooking the price of this indispensable commodity. To them, the price of
oil does not matter—until, of course, when it does.
Despite seemingly strong GDP growth in the second quarter, stocks are likely to go lower. Those who are truly worried about further declines, but for tax purposes are reluctant to realize gains, should consider hedging their portfolios. One good way to do this is by buying one or more of the UltraShort ETFs. These move opposite in direction to the corresponding index, but by twice as much. For example, the DXD will rise 10% in value if the Dow falls 5%. The SDS provides a similar hedge against the S&P 500. Readers can learn more about these products at ProShares.com.
Volatility is back on Wall Street. There were 21 trading days in July. The range between the Dow’s high and low exceeded 100 points on 13 of those days. It exceeded 200 points on six days.
The CBOE Market Volatility Index is another way to monitor volatility. This index measures implied volatility from the prices traders are willing to pay for stock options. Implied volatility was rather low during the second half of 2006. It started rising in late February 2007, breaking through its 200-day moving average. It has now reached its highest levels since 2003. Traders love this kind of market. It gives them plenty of opportunity to make quick profits by jumping in and out of stocks. Long term buy-and-hold investors, however, may not pay much attention. They should. Rising volatility can sometimes signal a major turning point in the market. In 2003 it signaled the start of a bull market. Today, it may be telling us just the opposite.
Rising volatility means investors are getting nervous. They no longer feel confident about the market’s overall direction. Of course, much of the current volatility is being blamed on woes in the sub-prime mortgage market and on worries that those problems will spread to higher quality mortgages. Yet even today, there are those who seem to be completely discounting the deterioration in housing. They seem convinced that the housing market is about to bottom and that any further problems—if they do occur—will have only a minimal impact on consumer spending.
Economists will debate exactly how much investors should worry, but one thing is for
sure: This bull market is getting old. As a result, many investors are sitting on sizable gains. When they see stock prices gyrate excessively, they can’t help but think about taking profits. They probably should take some money off the table.
It’s likely that housing prices will continue to fall. In fact, the 10-city S&P Case/Shiller Home Price Index recently posted its biggest drop since 1991. Furthermore, oil is trading for more than $78 per barrel and some analysts predict it will hit $100 within a year. Yet so many otherwise meticulous market watchers are simply overlooking the price of this indispensable commodity. To them, the price of
oil does not matter—until, of course, when it does.
Despite seemingly strong GDP growth in the second quarter, stocks are likely to go lower. Those who are truly worried about further declines, but for tax purposes are reluctant to realize gains, should consider hedging their portfolios. One good way to do this is by buying one or more of the UltraShort ETFs. These move opposite in direction to the corresponding index, but by twice as much. For example, the DXD will rise 10% in value if the Dow falls 5%. The SDS provides a similar hedge against the S&P 500. Readers can learn more about these products at ProShares.com.
Wednesday, August 01, 2007
Taking a Gamble on Hooper Holmes
Several years ago, my wife and I decided to buy some life insurance. The insurance company sent a couple of paramedics over to our house to do a basic medical exam and take samples of blood and urine. These paramedics were employed by a company called Hooper Holmes (HH). Unfortunately, the company hasn't been doing so well. It has no profits and revenues are falling. The stock has been falling, too. It has fallen steadily for about seven years and currently sells for $2.65 per share.
Despite all these problems, I recently started accumulating shares of the company. New management took over more than a year ago and I'm betting the worst is over. The gross profit margin is already showing signs of recovery and there is hope that the revenue decline will moderate. Furthermore, the company has no debt outstanding.
This is not a growth story. HH is not operating in a particularly complicated industry. In fact, it's a rather boring business. It's the kind of stuff Warren Buffett might appreciate. There is nothing high tech about it. It should be relatively easy for this kind of company to make some money. Most importantly, HH needs to get expenses under control and bring them down to a level that is appropriate for the reduced amount of revenue it is now generating. At the same time, it needs to find ways to stem the revenue decline.
The company will probably announce second quarter results in about a week or so. I'm not expecting anything spectacular. If it can simply break even and show that revenues are holding steady, that will be enough to attract some buyers.
Despite all these problems, I recently started accumulating shares of the company. New management took over more than a year ago and I'm betting the worst is over. The gross profit margin is already showing signs of recovery and there is hope that the revenue decline will moderate. Furthermore, the company has no debt outstanding.
This is not a growth story. HH is not operating in a particularly complicated industry. In fact, it's a rather boring business. It's the kind of stuff Warren Buffett might appreciate. There is nothing high tech about it. It should be relatively easy for this kind of company to make some money. Most importantly, HH needs to get expenses under control and bring them down to a level that is appropriate for the reduced amount of revenue it is now generating. At the same time, it needs to find ways to stem the revenue decline.
The company will probably announce second quarter results in about a week or so. I'm not expecting anything spectacular. If it can simply break even and show that revenues are holding steady, that will be enough to attract some buyers.
Subscribe to:
Posts (Atom)