To understand the Fed, one has to understand their “dual mandate.” They are charged with minimizing both inflation AND unemployment. What could be wrong with that? This dual mandate came about when Keynesian economics was the dominant school of thought. One Keynesian principle is something called the “Phillips Curve,” which looks like this: You can see that the inflation rate falls as the unemployment rate goes…
Yesterday, the Dow rose 254 points. It was a perfect storm of sorts. The early morning economic report on consumer spending was surprisingly strong. There was breaking news that three Greek banks were merging, thinking that they would have better access to the market. (Today, they will look more like three drunks trying to hold each other up.) By the afternoon, there was a totally…
Years ago, when I was thinking about retiring from banking and starting my own investment advisory business, a good friend and client suggested I spend some time at her cabin high in the mountains of Wintergreen. Unfortunately, the weather was not great. There was a low ceiling, and we found ourselves inside the cloud, literally. I could not see the other side of the 8 foot deck! I thought that…
Today, Wall Street waited and prayed that Bernanke would save us from another recession by announcing another round of quantitative easing or QE3. He disappointed us, and the Dow promptly dropped over 200 points. But, then somebody wondered why he refused to do anything else to help us and noticed it was because we don’t need anymore help. He believes the economy is better than…
For the first three days of this week, the stock market coasted serenely past earnings surprises, merger announcements, and economic reports. We were secure in the knowledge that “Uncle Ben” Bernanke would once again preserve our economy, as he has done since the Global Financial Crisis in 2007. Yesterday, the realization began to sink in that even Uncle Ben has only a finite list of…
When a deal falls apart after the handshakes, you can usually blame the lawyers. You may have thought the Greek bailout was behind you, and Europe was now focused on the bigger problem of Eurobonds to bailout the whole of Europe. You would be wrong, unfortunately. The bailout of Greece will NOT happen, and the fault goes to the Tea Party of Finland. Enraged that the…
While I don’t like Goldman Sachs, I do respect their research. Reading their latest “Market Pulse” is always interesting. They expect our GDP growth will slow to 2-2.5% through the end of 2012 but still expect the S&P to reach 1400 by year-end, which would require one raging bull very quickly. They believe the stock market has already priced-in a recession, that has only a 1 in…
World markets were mixed overnight but generally calm. The Dow will probably open up about 80 points this morning. Despite the good news out of Libya, oil is not reacting strongly. Only gold is showing any drama, back up to $1,880 again. On the calendar, the most important item this week is Bernanke’s speech at Jackson Hole on Friday. Bernanke has used this annual retreat…
Accepting the premise that “he who has the gold makes the rules,” I’ve been thinking about the most likely end-game for the European crisis. The Euro zone is not the United States of Europe. We have one monetary policy and one fiscal policy. They also have one monetary policy but twelve fiscal policies. A unified monetary policy was key to the development of the Euro, replacing…
Warren Buffett once said he would rather be the broker than the partner of anybody who thinks they can predict the market. That’s good advice! Yesterday, John Bollinger, who is a highly respected market technician and developer of the Bollinger Bands, predicted we are now putting in the bottom of this bear market. Also, Rick Santelli, CNBC expert on bond markets and intellectual firebrand of…
At 3:00 AM this morning, I was watching Bloomberg as the European markets opened and heard “stocks slide around the world as the U.S. slips into recession.” Talk about a rude awakening! The U.S. may slip into another recession, especially if Europe cannot get its act together, but the odds are no worse than 1-in-3. While the Philly Index yesterday was surprisingly bad, GDP growth…
Normally, we talk about commodities as a single asset class, as they have the common characteristics of benefiting from both growth and inflation. In other words, they’re normally good to own during the expansion part of the cycle but not the contraction part of the cycle. They’re also reasonably good inflation hedges. But, take a look at the dis-similar recent behavior of gold and oil. Gold just…
Gold barrelled thru $1,800 an ounce again today, setting yet another new record. Gold has long been considered a safe haven during tumultuous times, which these times certainly are. Gold has long been considered a hedge against inflation (see blog earlier today). With the continuing depreciation of the dollar and the downgrade of the U.S. credit, central banks around the world have been adding more gold but fewer…
What went wrong overnight in Europe to cause such a major sell-off? First, there was concern that the Greek bailout could fall apart, if Finland requires additional collateral from Greece. More importantly, there is a rumor that some bank had to borrow $500 million from the ECB overnight, paying a high 1.1%, compared to the normal cost of 0.7%. That strongly suggests some bank is in…
Today, we learned that core consumer prices (CPI) have risen 3.6% over the last twelve months, way above the Fed’s stated goal of 1.5% to 2.0%. Tuesday, we learned that core wholesale prices (PPI) have risen 7.2% over the last twelve months. Monday, we learned that import prices have risen 14% over the last twelve months. Looks like a lot of inflation in the pipeline .…
It looks like Europe will trash the U.S. stock market again today, with futures indicating a loss of about 190 points on the Dow at the open. All their markets are down substantially, with banks hammered the worst. (Banks are the largest holders of sovereign debt of European countries.) If you feel anger toward the Europeans for doing this to us, just remember that we…
There is no 12-Step Program for Wall Street junkies! Therefore, it is good to simply get away from it occasionally. Over the weekend, I remembered what I’ve been missing, i.e., the interplay between economics and investment strategy. A change in the Index of Leading Economic Indicators tells me something. So does a change in inventory levels or the Beige Book or M2 or . . . Recent economic…
As I was scrambling to make a quick road trip last Thursday, I was contacted by a reporter for Inside Business about the impact of the U.S. credit downgrade on commercial real estate. When I got home late last night, it was amusing to see I was quoted so extensively. For your snoozing pleasure, you can read the article by clicking on this link: http://www.insidebiz.com/news/sp-downgrade-will-hit-home
After four historic, horrifying days of at least 400 point moves, the week ended down an insignificant 1.5%. When you try to estimate how many millions of people lost how many billion minutes of sleep over the week, you must remember the post-traumatic impact of 2008. Investors looked death in the eye three years ago and still remain terrified. In the end, did it really matter? Next…
Since 1900, there have been 26 major stock market corrections ( at least 15% loss) or once every 4.3 years. The vast majority (62%) dropped less than 40% and lasted less than 400 days, increasing to 78% since 1950. The trend is clearly toward more frequent but less severe and less lengthy market corrections. So, this one is not so bad. What are you complaining…
Today, the Dow closed UP 423 points. This is the first time the market has moved more than 400 points in each of four consecutive days. It is somewhat exciting but even more exhausting! So, does it give us any indication of where the market is going? There are three related dynamics playing out in the market right now. First, the U.S. economy is growing slowly, as is typical after…
This is no fun! Here is the Dow over the last seven trading days: August 2nd . . . . down 265 August 3rd . . . . up 29 August 4th . . . . down 512 August 5th . . . . up 60 August 8th . . . . down 634 August 9th . . . . …
European authorities are considering a ban on the short-selling of financial stocks, just as U.S. authorities did in 2008. Short selling is the practice of selling stocks you don’t own at today’s price, with the expectation you can buy the stocks at a cheaper price on the delivery date, putting the difference in your pocket. Although it is very dangerous and definitely not recommended, it is…
I just read the latest economic commentary from Wells Fargo. While the tone was somewhat downbeat, expecting the economy to grow slowly and inflation to rise slowly, they still expect GDP growth this quarter will increase to 2.2% from 1.4% last quarter. They also chastise the complainers. Finding somebody to blame for our economic mess is not helpful. Wells Fargo describes our current situation as a…
I’ve been reading Fed announcements for decades but found yesterday’s to be as inscrutable as any. They recognized the economy is weaker than they expected. They said they were still expecting greater growth. They didn’t raise interest rates. They didn’t promise any more quantitative easing. They didn’t promise anything, other than to keep interest rates low until mid-2013. That made interest rates drop immediately, as…
The Dow is down 390 points as I write this. It is normal that the market falls the day after a big rally, as some investors are always waiting to “sell into a rally.” After such a roaring rally at the close yesterday, a rumor hit the market in the wee hours that the French banks were being downgraded. It was a rude reminder that…
The market started off strongly this morning, then stabilized and drifted down in anticipation of the Fed announcement at 2:15PM. The Fed announcement was largely a non-event, in that they didn’t announce any new measures to stimulate the economy or the stock market. The market immediately tanked, losing over 200 points, before recovering and finishing up 429 points, with a “rip-your-face-off” rush of the bulls…
Imagine standing on your garage, holding a dead cat, which you then toss onto the driveway. It will likely hit the concrete and bounce up slightly. That does not mean the cat is alive. It just means the dead cat bounced. That tasteless old Wall Street adage describes that situation where the market is dead but suddenly bounces up . . . like today. So,…
According to Investopedia, capitulation occurs “when investors give up any previous gains in stock price by selling equities in an effort to get out of the market and into less risky investments. True capitulation involves extremely high volume and sharp declines. It usually is indicated by panic selling.” Going further, it says “after capitulation selling, it is thought that there are great bargains to be…
Admittedly, I know nothing about advertising, but I do think the S&P downgrade of our short-term credit was a brilliant marketing move! There are three primary bond-rating agencies, i.e., S&P, Moody’s, and Fitch. All three did a miserable job of rating bonds secured by sub-prime mortgage bonds. Last year’s financial re-regulation bill aimed to correct some of their worst abuses but is now mired by lobbyists in writing…
Everybody agrees that we need economic growth. Originally, the Austrian or Classical school of economics argued that profligate spending by governments depresses growth. Following the Great Depression, conventional wisdom found that the deficit spending of Keynesians really helped end the ten-year depression. Following the stagflation in the late 1970s, Supply-siders successfully created some economic growth by cutting taxes. Once again, we are in desperate need of…
Do you remember Mr. Spock, the Vulcan on the original Star Trek TV series long ago? He prided himself on being entirely rational and devoid of human emotion. Being an investment advisor, I’ve always tried to emulate that thought process. However, his dirty little secret is that he sometimes felt those emotions, and so do I. Tonight, Standard & Poor’s downgraded the credit rating of the…
What a day! Before the market opened, the Jobs Report was unexpectedly strong, and the Dow went up 172 points. As the morning passed, that euphoria also passed as the mounting fears of European sovereign debt increased. The Dow lost all 172 points and then lost another 245 on top of that, a spread of 417 points. At mid-day, the European Central Bank (ECB) announced…