Tuesday, June 30, 2009

Good News on the TARP Program

We've been watching the slow-motion payback of TARP funds for some time now, and finally, last week, some of the TARP money was repaid to the U.S. Treasury in significant amounts. Goldman Sachs, Morgan Stanley, Bank of New York, and six other instituions have now paid back a total of more than $66 billion.

The landscape looks so much brighter on this front that the Congressonal Budget Office now estimates that cost of the TARP program, after the banks are done paying back what they got from the Treasury, will amount to $159 billion. That's still an awful lot of money, but it doesn't look so bad considering that the initial TARP program involved a payout of $700 billion, and as recently as March, the CBO estimated that the program would result in an overall cost of $356 billion to the American taxpayer.

And a big chunk of the money that the CBO figures is lost for good is the money that didn't go to banks. The TARP program gave $55 billion to the American car industry, and the CBO expects the government to recoup only $15 billion of that. So all in all, this is good news for the banking sector, and good news for the American economy.

Monday, June 29, 2009

The Strength of America

As we reach the midpoint of 2009 and come upon our nation’s 233rd birthday, it’s easy to understand why some people’s faith in America’s strength has been a little shaken by recent events. We’ve been suffering through a recession for a year and a half now, and our markets are so beat down that many of us have nothing to show for the past ten years of investing.

But there are also plenty of reasons to reflect upon America’s greatness at this time in our history. This has been a global recession, and if anything, our nation has survived it much better than some other areas of the world.

To take one example, our stock markets have taken a beating in recent years, but despite the recent downturns, they still dwarf those of any other nation. America’s leading stock market, the New York Stock Exchange, boasts a market value of $9.5 trillion, more than triple the value of the next largest exchange, the Tokyo Stock Market. Our second-largest stock market, the Nasdaq, is nearly as big as the largest market in the rest of the world.

The markets are only one illustration of the core strength of the American economy. It's those core strengths that will help us emerge from this downturn, and confirm our place as the leading financial engine of the world.

Friday, June 26, 2009

Further on the Fed

To follow up on yesterday's discussion of the Fed meeting, there are of course other functions of the Federal Reserve in addition to the Federal funds rate. It also sets the discount rate, which is the interest rate that banks pay the Fed to borrow directly from it, commonly called the discount window. (The Fed funds rate, remember, is the rate at which banks borrow, short-term, from each other.) The discount rate is usually about 1 percent above the Federal funds rate; right now it's at 0.5 percent.

The Fed can also raise or lower requirements for the reserves that member banks have to keep on deposit. The more money a bank needs to keep in reserve, the less it has to lend out. One reason banks take advantage of these short-term lending policies is to meet their reserve requirements.

Those are the basic tools the Fed uses to manage the country's monetary policy, to spur on the business cycle, tamp down inflation, or whatever else it sees as necessary to our economy. In the past, it was also responsible for dealing with panics and runs on banks, which thankfully we haven't had to worry about lately.

The fact that they didn't deem it necessary to tinker with any of these policies at this point, as we said, is heartening.

Thursday, June 25, 2009

Back to Zero

As we surmised the other day, the Fed has decided to take a hands-off policy to further tinkering with interest rates, at least for the moment. After its two-day meeting, the Fed board announced that "the pace of economic contraction is slowing," and left the Fed Funds rate at zero.

What exactly is the Fed funds rate? One of the key ways the Federal Reserve System manages our monetary policy, the federal funds rate is the rate that banks are charged for overnight loans of federal funds, which are the reserves held by the Fed. With the Fed funds rate at zero, banks can borrow short-term money from the Federal Reserve at 0 percent interest. A rate that low makes it as easy as possible for banks to lend money and pump more funds into the economy. Loans for businesses to establish themselves or expand - if shellshocked banks are willing to offer them - should be available at very low rates.

The Fed dropped the rate to zero back in December 2008, and it's stayed there ever since. It's the first time in history that the rate has ever been at zero. The fact that the zero rate hasn't brought the economy roaring back to life shouldn't be taken as evidence that this policy was a failure; there's no telling how much worse things would be with a higher Fed funds rate.

Wednesday, June 24, 2009

Getting Your Goat

The long-suffering U.S. automotive industry has been searching for any possible way to get people buying American cars again. Car dealers in New Zealand have hit upon a novel way to get buyers into the dealership - but it might not work here.

Mitsubishi dealers down in New Zealand are offering, along with every Triton SUV they sell, a free goat. The marketing manager behind this brainstorm said goats and SUVs have a lot in common: they're both "hardy, versatile units which will integrate directly into existing farm operations."

That might make sense in New Zealand, but here in New Jersey, our economy isn't quite as goat-intensive as theirs. We sure like the out-of-the-box thinking, though. Or maybe that's out-of-the-barnyard thinking.

Tuesday, June 23, 2009

One Step Up, One Step Back

Just when we had started to see some positive signs of recovery around us, we had another difficult day on Monday. As the Federal Reserve board convened to hash out its strategy toward the U.S. economy, the World Bank released its own report, anticipating a worldwide economic contraction of 2.9 percent this year, more than 50 percent worse than its earlier prediction of a worldwide contraction of 1.7 percent.

The World Bank increased its forecast for the shrinking of the U.S. economy from a March estimate of 2.4 percent to its current estimate of 3 percent. News like this was part of what drove all the major indexes down on Monday, with the S&P 500 and Dow Jones erasing all the gains they had made so far on the year.

On the other hand, the International Monetary Fund also released a projection for the U.S. economy on Monday, and upgraded its outlook for the U.S. After earlier forecasting that our economy would shrink by 2.8 percent in 2009, the IMF now predicts a contraction of just 2.5 percent. We'd sure like the IMF forecast to be the true one, but after the sell-off on Monday, there's no doubt about whom the markets are listening to.

Monday, June 22, 2009

Waiting for Nothing?

The prime event to keep our eyes on this week is the two-day meeting of the Federal Reserve Board, which takes place Tuesday and Wednesday. And maybe the best thing that could emerge from that meeting is if Fed chairman Ben Bernanke comes out on Wednesday and says the Fed is not doing anything new.

There has been some speculation that the Fed will act to tamp down mortgage rates. A brief bit of optimism in the housing market has been dampened lately by rising interest rates, cutting off the growth in home sales. Concurrently, long-term interest rates have been rising, and some feel that the Fed would do well to take actions to reduce those interest rates, which may hinder the economic recovery down the road.

The Fed will review its options to do something about interest rates, but in the end, it is likely to keep things right where they are. The Fed Funds rate, the rate at which banks lend each other short-term money, is already at zero, and the Fed could think that keeping that rate right there is all the interest-rate fighting it needs to do.

That will mean that some of the smartest, most knowledgeable people in the nation spent two days looking at the economy and came out with the conclusion that we're on the right track. There's something to be said for that.

Thursday, June 18, 2009

Watching the Indicators

More signs that the recession may be ending: The index of U.S. leading economic indicators rose 1.2 percent in May, following a 1.1 percent gain in April. A Bloomberg News survey of economists had forecast the increase at 1 percent, which means the economy is now stronger than even the most seasoned watchers expected.

That 1.2 percent increase was the biggest gain since March 2004. Put together, the past two months have shown the biggest two-month rise in the indicators since 2001.

And what are those leading indicators? There are ten in all. Seven of them increased in May:

* Real money supply
* Building permits
* Interest rate spread
* Consumer expectations
* Stock prices
* Vendors' deliveries of supplies to companies
* Manufacturers' new orders for nondefense capital goods

Three of them declined in May:

* Claims for jobless aid
* Average weekly manufacturing hours
* Manufacturers' orders for consumer goods

So now you know.

The Other Side of Inflation

Wednesday's release of the Consumer Price Index, as I expected, didn't show any signs of mounting inflation. The monthly rise in consumer prices came in at 0.1 percent in May, after staying flat in April. That's about as close to static prices as you'll ever see.

In fact, looking at the year-to-year figures, the Consumer Price Index has fallen by 1.3 percent over the past twelve months. That's the largest decline in nearly 60 years. So rather than inflation, should we be living in fear of deflation?

In many ways, deflation is a bigger problem than inflation. Inflation tends to be an indication of the economy overheating, and causes terrible erosion in our purchasing power. But deflation is a sign of the economy contracting. Deflation causes businesses to get less for the products they sell, meaning they are able to pay fewer workers less money, meaning the economy can't get moving again. In many environments, inflation is the bigger problem. In an economic slowdown, deflation would probably be more hurtful.

Are we headed for deflation? As I said, the latest numbers show prices static rather than dropping. The Fed seems to agree. "The recent data on inflation shows that the risks of deflation, which entered the minds of many central banks around the world over the last 18 months," said Fed governor Kevin Warsh on Tuesday, "the risks seem to be significantly attenuated."

Wednesday, June 17, 2009

The Specter of Inflation

As if we don't have enough trouble to worry about these days, some financial pundits have raised the idea that we are due for a bout of rampant, Seventies-style inflation. The fear arises out of the fact that the government's heavy deficit spending, which the Obama administration felt necessary to pursue with its stimulus package, could end up devaluing the dollar by pumping so many more of them into the economy.

But recent figures show no such thing happening. In fact, on Tuesday, the Producer Price Index - the government's way of tracking wholesale prices - showed a jump of just 0.2 percent in May. So for now, economists don't see inflation looming in the near term. Today the government releases the Consumer Price Index, the measure of how much you and I pay for groceries and gasoline. Even though oil prices have been rising, food prices have been slipping a bit, so this measure probably won't show much threat of inflation either.

The real problem with inflation will come, if it does, when the economy snaps back to life. If the government is still pouring lots of deficit-spending dollars into the economy at that point, there's a chance that the economy could overheat and we might enter an inflationary period. But by definition, that would mean the recession had ended - and by that point, a little inflation might not look so bad.

Tuesday, June 16, 2009

Even the Mattress

We know this economic crisis has been harsh, but we thought the old trick of stuffing your money in your mattress was at least still safe. Not so. Even the mattress is suspect now.

An elderly woman in Israel had apparently been stuffing her mattress with money for years. She had put her whole life savings in there, a sum worth more than $1 million. The mattress had gotten so old, and presumably so lumpy, that the woman's daughter bought her a new one as a surprise.

Unaware of what was filling the old mattress, the woman's daughter threw it in the trash, and the garbagemen took it to the dump. The next thing you know, the two women are rummaging through three different landfill sites, frantically tearing through beat-up mattresses. They still haven't found the money.

I sincerely hope you aren't stuffing your savings in your mattress. Even in the current environment, I think we can find better places for it than your bedding.

Monday, June 15, 2009

Time to Pop the Corks?

We reached a milestone on Friday, when the Dow Jones Industrial Average climbed back to the point at which it started 2009, meaning all the losses of this spring have been erased. The Dow began the year at 8,776, but bottomed out on March 9 at 6,457. That was the index's lowest point in 12 years. In the three months since then, the Dow has gained 34 percent, finishing last week at 8,799.

That 34 percent gain has come over 68 trading days. We haven't seen the Dow rise that much in that short of a time since November 1982. At that point, we were coming out of the 1981-82 recession, an economic downturn that was in some ways even worse than what we've been seeing for the past 18 months. That runup in the Dow kicked off the bull market of the 1980s, which lasted for almost five years.

Now, no one is saying that we're destined for a rerun of the go-go Eighties. For one thing, the Dow recently got an artificial boost by dropping General Motors and Citigroup and replacing them with Cisco and Travelers. If GM were still part of the Dow, we wouldn't have reached those 2008 levels yet. And of course, the unemployment figures continue to be distressing. But we can take solace in the fact that the end of the recession is unfolding just as we expected, with the markets returning first, to be followed - at some point - by the jobs numbers and the housing market.

Friday, June 12, 2009

One Step Up, One Step Back

We've seen some stirrings of good news in the American economy lately, but that doesn't mean that all is rosy. The housing market, which is expected to be the last thing to actually recover when the economy comes back, suffered a setback in figures released this week: U.S. mortgage applications have fallen to their lowest level since last February.

The reason given: Rates on fixed mortgages also jumped to their highest level this year. Those mortgage rates increased because of some of the other improving signs of the economy. But the rising rates, in some ways good news, also made homebuyers more reluctant to buy, stalling out the recovery in the housing market.

All this is a further indication of how difficult it's going to be to get us fully extricated from this mess. Good news in one area can result in problems in another sector of the economy. Expect to see the recovery continue in fits and starts until we are finally back on our feet.

Thursday, June 11, 2009

Card Games

Here's another little story about how banks have lost their way: We've all had the experience of being deluged with credit card applications, as issuers tried to get consumers to roll up as many cards as possible. The indiscriminate nature of these mailings eventually got to a man in California named Gary More. He took one application from Chase and wrote across it "Never Waste a Tree," then sent it back in the prepaid envelope.

A couple of weeks later, Mr. More got his brand new Chase Visa - issued to "Never Waste Tree." He cut it up.

Wednesday, June 10, 2009

The Treasury Rally

More good news four our beleaguered economy, this time from the world of Treasury bonds: the spread between the 2-year and 10-year notes widened this week to 2.38 percent, or 238 basis points, marking its broadest since mid-November.

Why is that important? The difference between those two figures is the reward that investors get for putting their cash away for a longer period of time. When the spread between the two yields gets wider, it is a signal that people's long-term expectations for the economy are positive.

It's similar to the difference between money market accounts and the stock market. When people are nervous about the economy, they'll abandon the long-term returns of equities for the short-term safe havens of money markets. The same principle applies here. The fact that people have become more willing to make long-term investments is a very good sign indeed.

Monday, June 8, 2009

A Chance to Reassess

The turbulence in the markets for the past year or so has played havoc with just about everyone's portfolio. Savvy investors know that this means they need to go in and rebalance their portfolios to prevent being overweighted in those assets that have avoided serious declines.

But your portfolio is not the only thing that might need your attention. Have you considered how the market downturn might have affected your estate planning? Do you have assets set aside for your grandchildren's college tuition that might not cover that amount anymore? Perhaps you have a block of stock that is supposed to go to your church after your death. If that stock was in, say, General Motors, it's time to take a second look at that gift. Maybe your primary residence has been willed to one of your children, and your vacation home to the other. Has the crash in housing values put those gifts out of whack with each other?

We here at Echelon Wealth Strategies would be happy to help you reassess where your estate plans stand in light of the economic crisis. To answer any questions about the readiness of your estate plans or how to figure out if they're still set up to achieve what you want, feel free to give me a call at 908-647-6000.

Sunday, June 7, 2009

Are Car Sales Bouncing Back?

After a week in which General Motors declared bankruptcy, there was some surprising news on the automotive front: American sales of new cars actually rose in the month of May. Cars and light trucks moved out of the showroom at an annual pace of 9.9 million sold last month, up from a 9.3 million rate in April. They had bottomed out at a 9.1 million pace in February, the lowest level since December 1981.

The woes among American automakers might make those figures seem unlikely, but what seems to be happening is that people are flooding to their local Chrysler, GM and Ford dealers hoping to get a really sweet deal on a new car. They know Chrysler closed hundreds of dealerships and will need to liquidate thousands of cars, and that GM is desperate to get its sales moving again. That means bargains are to be had.

So it's not all good news; the automakers themselves are unlikely to reap a whole lot of long-term benefits from the bargain hunters. But on the other hand, anything that can help kickstart this economy is a good thing.

Friday, June 5, 2009

TARP Update

A while back we commented that several big banks had begun talking about returning their TARP funds to the government, and even conducted stock offerings to raise the money. Now some banks have gone even further and filed paperwork with the appropriate regulatory bodies to actually return the funds.

JP Morgan, Goldman Sachs Group Inc., Morgan Stanley, American Express and Bank of New York Mellon all have applied to repay the more than $50 billion they have received from the Treasury Department. Now, one of the obstacles standing in their way is the Fed, which wants to make sure the banks will be able to continue lending to creditworthy borrowers and that they can maintain minimum capital levels. The banks also must prove they will be able to meet funding obligations to business partners while "reducing reliance on government capital."

As I said before, the important thing here is to watch what the banks do, not what they say. It is a very healthy sign that many of our most important banks think they're ready to move forward on their own. It will be an even healthier sign when they actually do so.

Thursday, June 4, 2009

The Unemployment Figures

More bad economic news: In advance of a Labor Department report due out on Friday, the payroll firm ADP reported Wednesday that an estimated 532,000 workers had been dropped from American payrolls in May. ADP also reported that it was increasing its number of laid-off workers in April, from 491,000 to a new estimate of 545,000.

This is obviously not good news. At the same time, economists expect the recovery, when it comes, to happen in a certain order: The markets will come back first, followed by the employment numbers. Trailing all of that will be the housing market.

That makes some intuitive sense. The stock market is forward-looking, and prices will rise when people think the economy is headed in the right direction. We may be seeing the first stirrings of that already. The employment figures will be those rosy predictions taking hold in the here and now. And once people are back to work, they will go back to investing in the housing market.

Still, unemployment is perhaps the central issue in the recession. Until we start to see those numbers heading in the right direction, it will be hard to be optimistic about this economy.

Wednesday, June 3, 2009

No Parking

Why are banks having so many problems these days? Lack of personal service is far from their biggest issue, but their increasingly impersonal nature sure can be frustrating. Does anyone like talking to a phone tree?

A few years back, a Washington State man did a little something about his bank's deteriorating level of personal service. His name was John Barrier, and since part of his line of work was refurbishing rundown old buildings, he went to his bank one day in dirty work clothes.

Barrier parked outside the Old National Bank in Spokane and went in to cash a check for a hundred dollars. He then asked the cashier to validate his parking ticket, but was told that the bank only validated parking for people making transactions. Cashing a check wasn't considered a transaction.

"She said you have to make a deposit," Barrier told a local newspaper. "I told her I’m considered a substantial depositor and she looked at me like… well." The bank manager was called, but also refused to validate Barrier's parking ticket.

The bank personnel may have treated Barrier a little better if they'd realized he was a millionaire. "The next day I went over and the first amount I took out was $1 million," Barrier said. There was another bank in Spokane that was more than happy to have his seven-figure deposit - and to treat him like a valued human being.

"If you have $100 or $1 million," Barrier said, "I think they owe you the courtesy of stamping a ticket."

Tuesday, June 2, 2009

GM and the Dow

The bankruptcy of General Motors will certainly have plenty of ramifications for our economy, but there's one relatively trivial one that investors might want to take note of. Bankruptcy results in an automatic removal of a company from the Dow Jones Industrial Average. Since there are only 30 companies in the Dow, this might seem to be a fairly significant change.

And it's actually a switch of two companies. Dow Jones is taking the GM bankruptcy as an opportunity to remove the struggling Citigroup from the index as well. Cisco Systems will replace GM, and in an ironic move, Citigroup will be replaced by Travelers, which it had spun off seven years ago.

So can we expect a big jump in the Dow on June 8th, when the change will take effect? After all, GM is now priced at under a dollar, while Cisco has been trading around 20. But the Dow adjusts for this. The index is not simply the average of all 30 stocks included; the divisor is changed to reflect changes and keep an apples-to-apples comparison, even when the included companies get swapped around. So when this change takes effect next Monday, don't expect to notice any big disruptions in the Dow.