Financial Skeptic Bulletin, 2006

Prev | Contents | Next

2006

NEWS CONTENTS

Old News ;-)

December

[Dec 24, 2006] Equity ETFs Look Dangerous

It is easy to predict market decline two or even three year early then it actually happened (many predicted it for 1998), but it does not mean that there will be no market decline.

December 22, 2006 ( Forbes.com) Since midyear of 2006 the S&P 500 index and the per share price of SPY have increased by about 12%, or at a rate of over 27% per year. That is generally regarded as an unusually high, unsustainable rate. It makes professional investors concerned about losses from a possible market decline.

[Dec 21, 2006] Mid-Atlantic factory activity slumps in Dec.

Mid-Atlantic manufacturing is already in recession. Parts of the North-East might follow. South is still OK.

MSNBC.com

Factory activity in the Mid-Atlantic region fell in December after a modest gain the previous month, raising concerns about a slowing economy partly due to weakness in the manufacturing sector.

The Philadelphia Federal Reserve Bank said its business activity index fell to -4.3 in December from 5.1 in November. Wall Street analysts had forecast a gain of 4.0.

The index was negative for a third time in the past four months. A reading below zero indicates contraction in the region's manufacturing sector.

[Dec 16, 2006] FRB FOMC Minutes - December 16, 1997 (retrospective post)

M2 and M3 grew rapidly in November. For the year through November, M2 expanded at a rate slightly above the upper bound of its range for the year and M3 at a rate substantially above the upper bound of its range. Total domestic nonfinancial debt has expanded in recent months at a pace somewhat below the middle of its range.

[Dec 11, 2006] Mortgage Delinquencies -- a Rising Threat

New loan crisis ? Probably not until Iraq troupes withdrawal...

(Yahoo! Finance) Mortgage delinquency and foreclosure rates are on the rise, and the impact could be greatest on low-income families that took out higher-interest loans for risky borrowers, some experts said Monday.

... There have started to be "early signs of credit distress" in financial institutions' holdings of so-called "subprime" mortgages, especially in California, Richard Brown, chief economist for the Federal Deposit Insurance Corp., said at the conference.

William Longbrake, a senior policy adviser to the Financial Services Roundtable, an industry group, said he is among a minority of experts "who believe the worst is still ahead in the housing market" for home prices to continue to fall. "There is worse to come. ... The bottom is probably still many months ahead," Longbrake said. He noted that the rise in delinquencies and foreclosures in subprime mortgages particularly affects low-income families. Mortgage defaults could snowball in the coming months, a situation that bears close watching, he said.

...The percentage of mortgages that went into the first stages of the foreclosure process in the April-to-June quarter rose to 0.43 percent, up from 0.41 percent in the first quarter and the highest level in just over a year. Foreclosure rates were highest for subprime borrowers.

[Dec 7, 2007] If you can't predict the trends for 2007, it's really hard to pick the non-broad index funds that will make money because of those trends.

[Dec 7, 2007] Consumer borrowing plunged in October

(MSNBC.com) The Federal Reserve reported Thursday that borrowing declined at an annual rate of 0.6 percent in October following a revised 2 percent increase in September. It was the biggest drop since a 1 percent plunge in October 1992.

[Dec 7, 2007] World economy on track for another year of strong growth in 2007 - Turkish Daily News Dec 07, 2006

As The International Monetary Fund lowered its growth estimate for next year from its current prediction of 4.9 percent, its chief economist John Lipsky said that he sees "no obvious reason to be concerned."

[Dec 5, 2007] November layoffs rose 11%

(MSNBC.com) Planned U.S. layoffs rose 11 percent in November from the previous month, led by a heavy round of job cuts in the automotive industry

November

A testing time for Democrats by By Scott B MacDonald

Despite some degree of posturing by both the triumphant Democrats and defeated Republicans, we do not expect any major changes in US economic policies after the November 7 mid-term elections.

[Nov 25, 2006] Democrats to tackle the dollar

The Democrats' victory in the US mid-term elections could lead to policy changes resulting in a weaker dollar, intensifying trade disputes and lower US consumer demand, a combination that could produce a sharp slowdown in Asia's export and economic growth next year

[Nov 22, 2006] Index of Leading Economic Indicators rose 0.2 percent last month. The increase came in shy of analysts' consensus forecast for a rise of 0.3 percent. The index stood at 138.3 versus 139.1 in January - its peak so far this year. Index of leading economic indicators rises - Stocks & Economy - MSNBC.com

Six of the 10 indicators that make up the index rose in October - led by an increase in real money supply and improved consumer expectations - but a sharp decline in housing permits and weaker vendor performance partially offset those gains.

[Nov 22, 2006] US growth in 2007 is projected 2.9% [IMF] to 3.1% [White House] Economic growth forecast lowered - Stocks & Economy - MSNBC.com

[Nov 22, 2006] Blast from the past: if (date_reached(Google,$500) = date_reached(Yahoo= $100)) then forecast(2007) = forecast(2000).

Actually if you re-read Business Week December 1999 issue the natural reaction on forecast published would be: "What ? "

[Nov 20, 2006] Blast from the past: Dec. 5, 1996 Alan Greenspan muttered famous words about "irrational exuberance" that he helped to create and sustain until 2000.

With the Dow at the then-elevated level of 6,400, Fed Chairman Alan Greenspan warns of 'irrational exuberance.

[Nov 20, 2006] Keep you powder dry: Leveraged buyouts return

The 529 management-led buyouts announced globally so far in 2006 are worth a combined $133.1 billion, according to deal tracker Dealogic. Under the deals, management and a group of outside investors pool their money and usually take on debt to buy the shares of a public company, taking it private.

Private equity funds have become increasingly popular as a way for wealthy investors to get higher returns than the stock market offers. Leon Cooperman, who runs the $4 billion-plus Omega Fund has estimated that private equity funds have about $300 billion under management. [Wave of buyouts draws criticism - U.S. Business - MSNBC.com]

[Nov 19, 2006] Buttonwood The rich are different

Nov 16, 2006. (Economist) Is that an asset-price bubble or just the fizz of Dom Pérignon?

AN AUCTION on November 8th of impressionist and modern art in New York brings in a record $491m. A yet-to-be-completed Manhattan apartment block nets $1.4 billion in unit sales. The finest Bordeaux wines from 2005 sell for prices that are four to five times higher than those of the previous vintage.

Those stories look like the ingredients for a boom as heady as the roaring 1920s or the "greed is good" era of the 1980s. And where there is a boom, there is usually a bubble about to pop.

Recession in Housing.

Construction of new homes and apartments has declined, with construction activity in October down 27.4 percent from a year ago.

[Nov 14, 2006] Staying Safe from Financial Predators

Most of the people who were responsible for one of the biggest market crashes in history are still in the system today, doing many of the same things today that they were doing then.

So, as the Dow continues its upward march past 12,000, remember... the other characters who actually did run off with the money and never served a day or jail time.

Your mind is still your most important asset, so be careful who you take your advice from and what you believe is true. Remember that all financial markets are filled with good but not necessarily innocent people looking after their own self-interests before they look after yours.

America's Bubble Economy Profit When It Pops by Robert Wiedemer, Cindy Spitzer, Eric Janszen

Amazon.com

All That Glitters Is Not Gold, October 24, 2006

Reviewer:

Dante "Dante" (Coral Gables, FL) - See all my reviews

This could have been a really good book. The intelligent authors, the compelling subject matter, and the respected publisher which put out this book--apparently didn't give it their best. The editing is haphazard and uneven. Why? Maybe this book should be placed on the Mystery shelves at your local bookseller. Gold (the commodity) may shine in the future, but the presentation and editorial acumen on display here surely do not.

The authors blandly assert their operative assumptions without any footnote or appendix. The ostensible reason is not to overburden the easily distracted reader. But for the serious reader who makes decisions based on evidence, this book asks you to take it on faith--and that's a fatal flaw. The authors indulge in repetitive shilling for their own consulting services throughout the book, and ask you to visit their website.

At the very least, you don't want to shell out $20.00 to be told there are bubbles (but we could be wrong), go buy gold and Euros, and by the way, we do consulting! For a more credible treatment of bubbles that respects your intelligence, check out Rober Shiller's book, Irrational Exuberance, which has been newly revised to include analysis of the housing bubble.

P.S. Festina Lente. Make haste slowly.

As the bubble unwinds, housing related employment will fall and foreclosures will rise providing additional supply of homes in distressed market. Will that be enough to take the economy into recession? I don't know - we will see.

Bargain Network

"Florida's foreclosure rate was four times the national average with one new foreclosure filing for every 254 households. Foreclosures in the Sunshine State totaled 28,000, accounting for 27 percent of the overall nationwide foreclosure activity."

On Wednesday, Merrill Lynch warned clients that its "recession-risk indicator" is now pointing to a 51 percent chance of a recession in the next year, the highest such odds since the last recession in 2001.

RGE - The Coming 2007 Recession Has Already Started in Many Sectors of the Economy...

Recession fears are being reported as affecting the oil markets. Oil prices tumble over fears of US recession is typical.

Think of the national debt as the policy equivalent of steroids. It has so far managed to create a reasonably flattering picture of economic prosperity, much as steroid use in baseball has flattered the batting averages of some of game's stars during the past decade.

China has a clear plan to diversify its $1 trillion foreign exchange reserves and is considering various options to do so, central bank governor Zhou Xiaochuan said on Thursday. A shift away from dollar assets by China could put upward pressure on interest rates in the United States which has relied heavily on Asian purchases of its debt to finance its huge current account deficit. AsiaTimes, November 9, 2006

Q: ...What percentage of laid-off, unemployed 50- to 65-year-olds are able to increase their incomes when they do land a job? The years before retirement should be the highest earnings for Social Security benefits and retirement investment.-- Michael K. Long Beach, Calif.

• A: We were unable to find specific statistics on income gains or losses for workers over 50 who were laid off. (If you know of any, please let us know and we'll follow up next week.) But older workers are clearly making up a bigger share of the so-called "mass layoffs" tracked by the U.S. Bureau of Labor Statistics. In the second quarter of this year, workers 55 and older made up 22.5 percent of the large-scale layoffs tracked by the BLS - nearly double the first quarter of 2001

How are older, laid-off workers faring - Answer Desk - MSNBC.com

October

[Oct 30, 2006] The pay packages of U.S. chief executives are outpacing investor returns...

The survey conducted and reported by the Financial Times, which looked at compensation of chief execs of companies in the S&P 500 index, revealed that the median compensation for a CEO rose 20% to $5 million during the last fiscal year. ... compensation packages are increasing at a much faster pace than the pay of the average worker [probably providing statistical illusion of rising labor costs -- NNB] . CEO pay outpacing investor returns, paper reports Financial News - Yahoo! Finance[Oct 27, 2006] Mixed signals for October minibubble -- keep your powder dry -- stock growth at such pace as last two months might be unsustainable. U.S. economic growth slowed in 3rd quarter - Stocks & Economy - MSNBC.com:

• Of course nothing is impossible in financial markets and desire to meet their end-of the year projects might push asset managers to plow more money back into the stock market. So day of the reckoning might be postponed... The third quarter's 1.6% growth rate was the weakest since the first quarter of 2003
. We might be not seeing "a garbage truck crash in a slow motion" to borrow a catch phase from Sun's Scott McNealy book (if you think what percentage of GDP are unnecessary or even harmful for consumers goods and services, that might be not too stretched analogy :-), but still exuberance of stock market is a little bit suspicious.

Spending on equipment and software increased at a 6.4% pace in the third quarter (was it again Chinese orders to Boeing in the picture?) The bear is already in our house.

• Up to 4% of America's mortgaged homeowners might lose their homes to foreclosure in coming months, one of the nation's largest lenders predicted recently. First American Loan Performance, a mortgage-data company based in San Francisco, says overall the national foreclosure rate has climbed 27% from a year ago with an estimated $110 billion worth of homes expected to go into foreclosure. Rick Sharga, a vice-president at RealtyTrac, said recently "Over a trillion dollars is going to readjust in the next 15 months. We had almost 850,000 foreclosures last year and we are at 913,000 through September." He predicted that national foreclosures could hit 1.2 million to 1.3 million by the end of this year. The recent data showed a 17.4% annual fall in spending on new housing. The inventory of unsold homes was steady at 7.3 million units in September ( was 4.6 million units a year earlier). The Commerce Department said the median price for a new home sold in September was $217,100, down 9.7% from September 2005. But the median price holds well (fell to $220,000 from $225,000 reported in August and $225,000 in September 2005). September existing home sales were 6.16 million, down from 6.30 million in August and down from 7.20 million in September 2005. http://www.usatoday.com/money/economy/housing/2006-10-26-new-homesales_x.htm
Return of "Disposable American" . Companies again use massive layoffs to boost profitability (Intel, HP, GM, etc)

[Oct 25, 2006] Greenspan says dollar now sharing stage with euro - Yahoo! News

"We're beginning to see some move from the dollar to the euro, both from the private sector ... but also from monetary authorities and central banks," Greenspan told a conference sponsored by the Commercial Finance Association.

[Sep 28, 2006] Now could be good time to recycle your junk bonds into quality funds by John Waggoner

Is this a good time or not yet ?

"It's really turning out that there is no middle class. There's a poor class and there's a rich class, but there's very little middle class." Donald Trump [Feature- An Interview With Robert Kiyosaki and Donald Trump]

• Do you think the government is accurately measuring inflation? What a naive question :-)

[Oct 19, 2006] The Conference Board said its Index of Leading Economic Indicators edged up 0.1 percent to 137.7 last month.

The index had slipped 0.3 percent in July and 0.2 percent in August. The index is designed to predict economic activity three to six months in the future but is overloaded with junk like Consumer sentiment index. Economic predictor rises in September - Stocks & Economy - MSNBC.com

Stagflation? "The data continue to bear out the conflict between Fed's dual mandates," writes T.J. Marta, a fixed-income strategist at RBC Capital Markets in New York. "Inflation is at risk because core is not only above the Fed's comfort level but is also headed higher, while growth appears to be easing." Street.com/Gold Slumps as Dollar Rallies

[Oct 23, 2006] Greed Trumps Fear Nice headline :-)

Earnings will likely offer more fodder for the bulls this week, as many of the more volatile earnings reports appear to be out of the way. All in all, the bulls should enjoy a continuation of the uptrend.

The War Against Wages, by Paul Krugman, NY Times: The Dow is doing well largely because American employers are waging a successful war against wages ...

Economist's View Is the Housing Market Leveling Off Former Federal Reserve Chairman Alan Greenspan said the ''worst may well be over'' for the U.S. housing industry that's suffering its worst downturn in more than a decade.

"Don't short Feds inflation expectation" I listened Blumberg radio and learned that one Fed official at the meeting in NY said something like "Don't short Feds inflation expectation".

September

• Over the last 35 years...the increase in spending in the United States vastly exceeded the increase in spending in other countries, with no corresponding gains in outcomes. For example, while life expectancy increased by 5.9 years between 1970 and 2000 in the United States, it increased by 6.4 years in Canada. Over roughly the same period, Canada's per person health care spending went from 85% of the U.S. level in 1970 to 52% in 2003.... Maybe the benefits from our healthcare spending are worth the cost, but then everyone else in the world seems to be getting a really good deal. Media Views Permalink
  [Sep 28 2006] Some mutually contradicting signals
  So far, consumer spending and confidence seem to be holding up. Fire sell of inventory by home builders? Sales of new single-family homes increased by 4.1 percent last month to a seasonally adjusted annual rate of 1.05 million units, the Commerce Department reported Wednesday. It was the biggest increase since an 8 percent gain in March. New home sales rise as prices fall - Real Estate - MSNBC.comOrders placed with U.S. factories for durable goods unexpectedly dropped in August, signaling companies may be scaling back investment plans as the economy slows.Economic growth clocked in at a 2.6% pace in the spring, slower than previously thought.Health care costs in the United States have risen 7.7 percent between spring 2005 and spring 2006. Health insurance premiums went up an average of 87 percent since 2000, on a cumulative basis. During the same period, workers earnings have risen 20 percent and inflation has increased 18 percent overall. The average worker contributes $248 a month for family health care coverage, which is up from $129 a month in 1999, despite the total percentage of premiums paid by covered employees remaining at 27 percent. Health care costs skyrocket in United States, threatening to bankrupt national economy500,000 homeowners are projected to face foreclosure.

  Earlier this year, an analysis by First American Real Estate Solutions in Santa Ana, Calif., estimated that $368 billion in adjustable-rate mortgages originated in 2004 and 2005 are at risk of default because of this pattern. Many more borrowers with traditional ARM loans also face the prospect of rising interest rates, but of a more manageable magnitude.Risky mortgages threaten a squeeze csmonitor.com
  

  [Sep 27, 2006] Is Greenspan "Lady Macbeth of Federal Reserve" ? Ghost of Greenspan bubbles starts tormenting Bernanke.

  "In 2005, real disposable incomes of private households in the United States increased $93.8 billion, or 1.2%, while their debts grew $1,208.6 billion, or 11.7%. Total consumer spending on goods, services and new housing accounted for 92% of real GDP growth." Asia Times Online Asian news and current affairs - US housing bubble Economy in denial

  [Sep 26 2006] Open-ended national security and war expenditures, along with tax cuts that led to large budget deficits, could affect the country's status as a powerful economic force. FINANCE U.S. Warned on War Spending and Deficits

  September 26, (IPS) "With a low savings rate, record-high current account deficits and a worsening of the U.S.'s net debtor position, there is a non-negligible risk to both the country's overall competitiveness and, given the relative size of the U.S. economy, the future of the global economy," said Augusto Lopez-Claros, chief economist of the World Economic Forum's Global Competitiveness Network.

  The report says that the United States faces major institutional challenges because the quality of the country's public institutions fares worse than those of other rich nations in terms of transparency and efficiency, especially after the devastation wrought by Hurricane Katrina last year.

  The report did praise the U.S. higher education system and said that the country remains the world leader in innovation.
  

  [Sept 25, 2006] Mysterious market gains: is this a sucker rally?

  It might provide opportunity for fund managers to report a great 3d quarter. Also sharp drop in gas prices to $2 per gallon has all the characteristics of a conspiracy: $4-$5-per-gallon range ($1-$1.30 per liter) would ensure a Republican defeat in the mid-term elections. The savings to consumers have been sizable. American drivers save some $3.8 million a day for each penny in the drop of a gallon of gasoline, according to oil analyst Peter Beutel. That means consumers have saved more than $3 billion from falling pump prices in September alone.

  ... economy slumps, slows, dips, weakens. Why are consumers so confident, why are investors eagerly buying up stocks, while the rest of the indicators seem to warn them away? I've searched my brain for a creative answer, and can't discover one. What do you think? Dow, S&P near all-time highs while economy slumps. Why - Blogging Stocks

  Comment:

  It does not take a wizard to see the way the current administration can manipulate fuel and stock prices just before an election, we've seen it in the past and some people must believe in the tooth fairy if they think what you are seeing is real. Yes there are caps on Contributions to Candidates, but you can buy in on all the stocks and bonds you want or if you are in control of oil and gas set prices as you see fit, there by, changing the appearance of the economy. Wake up, cause you sure will after the elections.

  Since gasoline prices began their sharp decline in mid-August, many pundits have tried to account for the drop, but none have offered a completely convincing explanation, lending some plausibility to claims that the Bush administration and its long-term allies in the oil industry are manipulating prices behind the scenes.

  We may never know exactly what led the White House to shift course on Lebanon, but high oil prices - and expectations of worse to come - were surely a factor in administration calculations. When it became clear that the Israelis were facing far stiffer resistance than expected, and that the Iranians were capable of fomenting all manner of mischief (including, potentially, total havoc in the global oil market), wiser heads in the corporate wing of the Republican Party undoubtedly concluded that any further escalation or regionalization of the war would immediately push crude-oil prices over $100 per barrel. Asia Times Online - Cashing in on the fear factor

  [Sept 24, 2006] Predatory mortgage lending is currently costing Americans more than $9.1 billion each year.Housing Market Update - Your Money - Yahoo! Finance

  [Sept 26, 2006] Since 2000, health insurance premiums have gone up 78%; wages 20%.[Health insurance jumps twice inflation rate - Health Care - MSNBC.com]

  [Sept 22, 2006] Those lonely and expensive homes with a lot of TV sets:

  An average American home now has more television sets than people.

  That threshold was crossed within the past two years, according to Nielsen Media Research. There are 2.73 TV sets in the typical home and 2.55 people, the researchers said. CNN.com - Researchers: Homes have more TVs than people - Sep 22, 2006

  [Sept 22, 2006] The rich are getting an ever-bigger piece of the economic pie.

  In 2005, the richest 5 percent of households (average pretax income: $281,155) had 22.2 percent of total income, reports Census. In 1990, the share was 18.5 percent; in 1980, 16.5 percent. These figures exclude capital gains-profits on stocks and other assets-that have most benefited the richest 1 percent. With capital gains, their pretax income averaged about $1 million in 2003. That was about 20 times the average income of households in the middle of the economic distribution. In 1979, the ratio was 10 to 1. Samuelson Growing Economic Inequality Threatens U.S. Values - Newsweek Robert Samuelson - MSNBC.com

  [Sept 21, 2006] Coming recession ?

  Report from the Federal Reserve Bank of Philadelphia ... showed regional manufacturing activity fell to a negative reading for the first time since April 2003. Pessimism about economy dents stocks - Stocks & Economy - MSNBC.com

  [Sept 21, 2006] Index of Leading Economic Indicators edged 0.2 percent lower to 137.6 last month.

  The decline matched analysts' expectations. The index also fell 0.2 percent in July after edging up 0.1 percent in June. The index is designed to predict economic activity three to six months in the future. Leading indicators suggest economy is cooling - Stocks & Economy - MSNBC.com
  

  [Sept 21, 2006] "Stable Unstability": troubles can start if Bush loses Congress.

  The New York Times this morning in a CBS/New York Times poll stated that Congress has a 25% approval rating, worse than Bush's 36%. That's significant if you read further.

  [Sept 17, 2006] Extraction of equities from housing is baloney: the main driver of comsumer spendings are longer hours worked.

  [Sept 16, 2006] Billionaire goes muckraking for profit - MSN Money

  8/23/2006 (MSN Money) Dallas Mavericks owner Mark Cuban ... launched a Web site, Sharesleuth.com, and hired a financial journalist with the goal of rooting out unsavory business practices and misleading accounting by public companies.

  ..."All Mark Cuban has done is figure out a way to screw people legally, and that is what Wall Street is all about," says Gary Weiss, author of "Wall Street Versus America: The Rampant Greed and Dishonesty That Imperil Your Investments."
  

  [Sept 16, 2006] Suicide mortgages, card debt and absence of health insurances might one day come home to roost.

  • Two million or one in every 60 households filed a consumer bankruptcy in 2005, according to the American Bankruptcy Institute. In 2004, one of every 79 households filed; This year might be the record million filings.

    Courts now see an average of 2,000 new filings a day -- four times the number that were filed in November 2005 after the bankruptcy law went into effect, according to Chris Lundquist, founder of Lundquist Consulting, which tracks bankruptcy trends.

    If filings continue to rise at anything like this rate -- which is not a given, but certainly a possibility -- we could see close to 1 million filings by the end of the year.

    The Census Bureau counts 45 million uninsured, and a recent Commonwealth Fund study found 41% of
    moderate- to middle-income adults did not have health insurance for at least part of 2005, up from 28% in 2001. A Harvard University study found medical bills were a factor in half of consumer bankruptcies.[Bankruptcy filings soaring again - MSN Money]

    The Debtors' Prison. In their book The Two-Income Trap, Elizabeth Warren and Amelia Warren Tyagi use the term "house poor" to describe middle-class home­owners who stretch themselves too thin financially to buy the roof over their heads. They often become slaves to their mortgages because they over-borrow; worse, they're prone to default because they don't have enough savings to cushion the impact of a divorce or job loss-two fairly common occurrences. Reason The Politics of Sky-High House Prices How government jacks up the price of owning your home.
    

  [Sept. 15, 2006] Bloomberg.com Opinion By Caroline Baum

  Sept. 15 (Bloomberg) -- U.S. policy makers have long defended the practice of using a core inflation measure as a check on how they're doing. The public, of course, sees this as just another gimmick the government uses to pull the wool over its eyes.

  Sales of existing homes projected to fall 7.6% this year, worse than the 4.4% drop predicted in January. new-home sales are projected to fall 16% . Prices are still expected to rise above last year's highs, bu the next year prices are likely to cave in. A record 3.86 million homes are for sale - a 7.3-month supply. In many cases, buyers of new homes backed out because they couldn't sell their existing homes.
  

  Markets appear to be assuming that--with the Fed approaching the end of its rate tightening cycle--the worst is already over. In reality, Fed might need to go to 6% or higher. After Greenspan bloodbath did not even begin.
  

  More then 30% of Americans think that we are already in recession.
  

  Macjob proliferation under Bush administration. The nation's unemployment rate had edged down to 4.7 percent in August. A 4.7% unemployment rate lloks pretty good. The scary stuff is what the politicians don't tell you, or deliberately obscure – that these "subpar" new jobs are mostly low-wage and temporary, and that wages overall are falling in "after inflation" terms. Workers' average hourly earnings edged up to $16.79 in August, a tiny 0.1 percent increase from July. The average time that the 7.1 million unemployed spent searching for work in August was 17.4 weeks. That was the longest duration since February's 17.6 weeks. Jobless rate dips; economic fears ease - Stocks & Economy - MSNBC.com
  

  S&P500 is actually actively managed fund and it is a badly managed fund. Standard and Poor has stable tendency to include fashionable high fliers with exorbitant P/E ratio into it and then discard them when they became toasts (Yahoo is one well known example). For this reason and due to simulation, the replacement of S&P500 with Vanguard Total Market index might have more sense for 401K accounts.
  

  The second Greenspan bubble might be larger then the first: "...the total amount of residential housing wealth [read debt] in the US just about doubled between 1999 and 2006 up from $10.4 trillion to $20.4 trillion". Times Online. How it will play in the next five years remains to be seen. there is no shortage of doom and gloom scenarios, but that does not mean that we should believe them. Some precautions still might make sense.

August

• [Possible end of economic expansion cycle and start of contraction] Leading Economic Indicators fell 0.1 percent in July from June, following an increase of 0.1 percent in June and a 0.5 percent decline in May. Analysts had expected an increase of 0.1 percent. [Index of leading economic indicators falls - Stocks & Economy - MSNBC.com]
  [Possible end of credit expansion cycle ] Whether the Fed achieves the vaunted "soft landing"-an economic slowdown that reduces inflation without causing a recession-hinges heavily on how the credit boom of the past few years unwinds. This turn of the credit cycle could signal the end of the decades-long rise of personal debt in relation to income. It's unclear what will happen next. Already, housing starts have dropped in five of the past six months. Inventories of unsold new homes have gone from four months' supply a year ago to six months now. Homeowners had taken huge profits by selling their homes or borrowing against higher values; even slight drop in prices might disproportionally depress consumers' purchasing power. Debt service-interest and principal-is at a historic high, almost 19 percent of disposable income. Still polarization of society might help as upper classes will continue to spend as usual no matter what.

• [For the next seven years stock market returns can be on par with bonds or less] Stock market valuations continue to be a problem across the board. No market segment is particularly cheap. This situation is much different than when the market bottomed in September of 2002 as shown in this table [My 401K Account Quarterly Market Review]:
  

  Asset Class	Expected Long-Term Real Return	Estimated 7-Year Real Return Sept. 2002	Estimated 7-Year Real Return May 2006
  Large-Cap US Stocks	5.7%	1.9%	-0.6%
  Small-Cap US Stocks	6.2%	4.8%	-2.0%
  International Large-Cap Stocks	5.7%	7.5%	2.1%
  International Small-Cap Stocks	6.2%	8.6%	0.9%
  Emerging Market Stocks	6.7%	9.9%	3.2%
  US Bonds	6.7%	9.4%	-0.6%
  Money Market	2.9%	1.9%	2.3%

  [Possible end of economic expansion cycle and start of contraction] I accidentally noticed that in May Larry Kudlow published a blog entry "Economic Boom Continues" That significantly increase the probability that we are really close to recession ;-) [Kudlow's Money Politic$]
• [Possible end of economic expansion cycle and start of contraction] Did recession started in the third quarter? When growth is lower then inflation economy actually shrinks: According to the Commerce Department gross domestic product (GDP) grew at an annual rate of 2.5% in the three months to the end of June, compared to a 5.6% annual rate in the previous quarter. BBC NEWS Business Benefits 'pose risk to US growth' That's lower then inflation.
• [Possible end of economic expansion cycle and start of contraction] Sales of previously-owned homes were down 4% in July from a month before, a bigger fall than analysts had expected. BBC NEWS Business New sign of US housing slowdown
• Fish rots starting from the head. In May, Fanny May was fined a record $400 million in a civil settlement with the SEC. A report issued by OFHEO said Fannie Mae employees manipulated accounting to hit quarterly earnings targets so that senior executives could pocket hundreds of millions in bonuses from 1998 to 2004. USATODAY.com - Fannie Mae will not be prosecuted over accounting problems
  Statements about meager saving rate in the USA do not take into account the size of 401K and IRA/ROTH IRA accounts: About 47 million U.S. workers were active participants in 401(k) plans in 2005. The average account balance in workers' 401(k) plans rose to $102,014 at the end of 2005 from $67,785 at the end of 1999, a new study reported Thursday[Aug 22, 2006] The increase reflects both contributions and investment returns. The median account balance - half were lower, half higher - more than doubled over the period, to $54,591. Individuals in their 40s and 50s tend to save money, whereas many in their 60s and beyond are "dissavers," people who are spending the assets that they accumulated in their working years. A negative U.S. net household savings rate just implies that the saving of the savers is less than the dissavempany stock.
  War is still producing orders for equipment. That might help to avoid deep recession. Samuelson Facing Up to Inflation - Newsweek Robert Samuelson - MSNBC.com
  Much of the spectacular rise in corporate profits in recent years (and drop of R/E ratio for S&P 500 and other indexes) had been attributable to falling investment (and therefore lower depreciation), severe cuts in labor costs and reduced interest and taxes.Economists at Goldman Sachs accurately noted, "The most important contributor to higher profit margins over the past five years has been a decline in labor's share of national income." ... gaping class inequality cannot be blamed on the Bush administration alone, for this has been a bipartisan project, widening virtually without interruption since the mid-1970s, including during the Clinton-era boom [Sharon Smith Downward Mobility]
  MANY INVESTORS, wary about buying bonds directly, often opt instead for bond funds, thinking, perhaps, that there is safety in numbers. Big mistake. Bond funds can be even trickier than bonds themselves because -- unlike the implication in their name -- they are not really fixed-income investments. Even when a mutual fund's portfolio is composed entirely of bonds, the fund itself has neither a fixed yield nor a contractual obligation to give investors back their principal at some later maturity date -- the two key fixed characteristics of individual bonds. [Bond vs. Bond Funds (One Bond Strategy) SmartMoney.com]
  [Aug. 10, 2006] The tipping point for recession could be some supply disruption like last year's hurricanes, which crumpled oil rigs and platforms across the Gulf of Mexico. The heart of this year's hurricane season is upon us. Most economic forecasters project that the U.S. economy will grow by 2.5 percent to 3 percent for the rest of this year. But almost all these models assume oil prices of $75 a barrel or less. Should a natural disaster or a broader war in the Middle East strike, crude oil prices could race past $80 a barrel. The Fed would have to raise interest rates further to fight any resulting inflation. Recession could soon follow. [McClatchy Washington Bureau 08-10-2006 All signs point to an economic slowdown, and recession dangers are growing]
  The official CPI is intended for public consumption only, should be called Pravda-CPI. See interesting discussion Asia Times Online Asian news - Caution Inflation is higher than you think.
  

  "Consumers are reluctant to spend and businesses are reluctant to invest," said Charles Lieberman, chief investment officer at stockbrokers AG Edwards and Sons
  

  Christian E. Weller, the author of a recent Center for American Progress (CAP) report, 'Drowning in Debt,' says the middle class, specifically, is struggling. Wages have been stagnant and they're losing the battle to keep up with the cost of living.
  

  [Aug 6, 2006] SAP500 return for the period using dollar-cost averaging and starting from zero from 1996 to 2006 is less then stable bond return.

  [Aug 4, 2006] If the economy is slowing only modestly, as his words suggested, his relaxed attitude to inflation seems odd, especially after recent months' inflation figures. One possibility is that Mr Bernanke is less bullish than he lets on. The Fed has lowered its expectations for GDP growth in 2006 to 3.25-3.5%. That implies a sharp slowdown in the second half of the year, to a rate well below 3%. American monetary policy Making sense of Bernanke Economist.com

• [Aug 1, 2006] Dollar-cost averaging isn't the panacea it's made out to be. For example, if you had invested $100 a month in the Vanguard 500 Index fund for the past decade, you'd have had $15,437 in your account at the end of June, according to Lipper. You'd have invested $12,000 in the fund, so your total profit would be $3,761, or 31.3%. Any gain is good, but 31.3% is a far smaller gain than 122% - the S&P index's return in the past decade. What happened? In a word, bad timing. A variant of dollar-cost averaging, called value averaging, has shown some usefulness in improving returns. With value averaging, you set a dollar target for your investments - for example, that you want your account to rise by $1,000 a month. Let's say you invest $1,000, and the next month the account has fallen to $950. You contribute $1,000, plus another $50 to make up for the previous month's shortfall. [USATODAY.com - Dollar-cost averaging's not all it's cracked up to be]

July

• The next "boom" in bankruptcy restructurings when you finally see upheaval in the hedge-fund industry." [Drop in corporate bankruptcies - Stocks & Economy - MSNBC.com]
  Risk does not pay in bonds: The average for junk bonds have a spread of just 3.5% points over Treasuries in mid-July. [Drop in corporate bankruptcies - Stocks & Economy - MSNBC.com]
  The big worry is that home sales will fall so sharply that it could send shock waves through the economy, much as the bursting of the stock market bubble in 2000 contributed to the recession the next year.
  Folks are still waiting to see the major indices down 20% before wanting to say we're in a bear market. But several key indicators show the market's already behaving bearishly. We still can get rallies, and may even see another this week, but until the selling subsides and real buying begins, the general direction is down. [TheStreet.com's RealMoney]
  Vanguard short term bond fund (VFSTX) fools investors by overstating yield approximately by 0.5%: actual month yield for July, 2006 was 4.56%, while published 30 days yield was 5.11% (both in paper prospectus and on their WEB site). If you believe prospectus it looks like VFSTX is more attractive then Prime money market fund (VMMXX), while in reality its vise versa :-) Actually Yahoo has right yield on its site.

June

• [Dollar is still sinking] On Jul 21 rates on 30-year mortgages rose to the highest level (6.80%) since the spring of 2002 (6.81%). A year ago, 30-year mortgages averaged 5.73%, 15-year mortgages stood at 5.32%, one-year ARMs were at 4.42% and five-year ARMs averaged 5.26%. Rates on 15-year, fixed-rate mortgages, a popular choice for refinancing, increased to an average of 6.41% this week, from 6.37% last week.
• [Jun 10, 2006] Bonds funds might be close to temp low point in mid June and might raise from this level 3-5% depending on duration.
• Clissold noted that over the past several decades, stock markets have declined by a median of 4.9% in the six months after the Fed implements the final increase in a series of rate hikes. "We believe the Fed is making its usual error: tightening too long and too far," David Wyss and Beth Ann Bovino of Standard & Poor's Corp. suggested in a recent report. Is Fed tightrope leaning to hard fall Chicago Tribune
• Bernanke will never come to the dollar's rescue. The depreciation of the overvalued dollar should take place in an orderly fashion, as domestic investors are now rapidly moving their money to other countries. These outflows reached a record $1.4 trillion at an annual rate in the first quarter. Such hot money outflows are the harbinger of sharp currency declines, and could lead to wrenching changes in the economy," warns Scott. "If governments fail to control the required depreciation, markets could burst the dollar bubble." When the Fed began raising rates under then-Chairman Alan Greenspan in June 2004, the benchmark overnight lending rate was at 1 percent - its lowest level in nearly a half-century. It was Greenspan easy money that helped fuel the boom in housing and consumer spending on big-ticket items, and each quarter-percentage point increase seemed barely perceptible to most consumers and business executives.

Prev | Contents | Next