Daily Journal of Commerce Archives - Page 18 of 20 • Rutherford Investment

Economic Growth Slows; Bernanke Takes Congress To Task

Published September 9, 2011
After rolling through Labor Day, we continue to have high unemployment. It’s at 9.1 percent, and even President Obama says it will remain high through 2012. If so, Republicans are salivating over the opportunity to retire the president after only one term.

The pundits already are expecting Republicans to gain enough seats to take control of the Senate. Because of Democrats’ large victory in 2006, they have about twice as many seats to defend as Republicans. This gives the Republicans a big advantage going into the elections, so it is their election to lose.

As if high unemployment wasn’t enough bad news, housing starts have been moribund, the Philly Fed index fell to its lowest level since March 2009 – the recent market bottom. The consumer confidence index tumbled as well, to its lowest level since April 2009; the drop was far bigger than anticipated. As the global economy slows, and fears of the European debt crisis continue, worries over another
recession have put a damper on the markets. According to David Kelly, chief market strategist at JP
Morgan Funds, “… the market is an engine flooded with liquidity but without a spark.”

Economic growth is surely slowing not only in the U.S. but globally as well. Economic forecasters are
expecting GDP to grow from 1.5 percent to 2.9 percent next year. At 1.5 percent, we are not in a
recession; however, it will feel a lot like one. Employment really needs GDP growth of 2.5 percent to
reduce unemployment.

What will the market do between now and the end of 2011? As always, the pundits are divided. While
the case can be made for the S&P of […]

September 14th, 2011|Categories: Daily Journal of Commerce|Tags: consumer confidence index, debt crisis, global economy, jp morgan funds, recession|Comments Off

US Congress Reveals Itself A Circus

Published August 5, 2011
“You can always count on Americans to do the right thing – after they’ve tried everything else.” –
Winston Churchill

All eyes have been on the U.S. Congress … unfortunately. The world has lost confidence in our ability to manage and pass laws. As we crawfished toward a resolution of the debt ceiling crisis, we no longer looked like a country with strong leadership, but rather like a banana republic.

As David E. Sanger wrote in the New York Times on Aug. 1, “… the brush with default has added a new dimension. It has left America’s creditors and allies alike wondering what had changed in American politics that a significant part of the country’s political elite was suddenly willing to risk the nation’s reputation as the safest place for the rest of the world to invest.

“It raised questions about whether the United States now faces brinkmanship over a variety of issues
between an emboldened conservative movement and a president whose authority is under challenge,”
Sanger continued. “And for all the talk on the right about ‘American exceptionalism,’ especially among
members of the Tea Party, it put doubts in the minds of many about whether America’s military and
economic dominance is something the country is still willing to pay for – and will always survive.
“The new head of the International Monetary Fund, Christine Lagarde, seemed to give voice to that
concern when she noted on CNN that in the past there was always ‘a positive bias towards the United
States of America, towards Treasury bills.’ The events of the past few weeks, she said delicately, are
‘probably chipping into that very positive bias.’ ”

Democrats […]

September 14th, 2011|Categories: Daily Journal of Commerce|Tags: american politics, conservative movement, treasury bills, winston churchill|Comments Off

June Swoon? Is Sell In May And Go Away Still Applicable?

Published June 10, 2011
May was a bad month for stocks. The S&P dropped 1.4 percent for its worst loss in nine months. Since World War II, June has been flat as often as it has been up, making it the third worst month of the year.

So, should investors sell and go away? Should they find better returns somewhere else? Can they find better returns somewhere else? What about risk? These are all questions investors should be asking themselves.

Why is the market behaving so badly? Or is it? Through June 3, the S&P was up 3.4 percent year to date, and up 22 percent on a trailing 12 months. To be sure, the market was up more in the first quarter of this year based on year-to-date numbers, but gave back some of its gain in the second quarter. The market did the same thing last year.

Earnings season is over, so people tend to worry about the next season. Besides, after such a run-up,
it is not unusual to have a pullback.

Data revealed weakness for the first quarter this year, as it did last year. Weakness reappeared relating to jobs, construction and manufacturing. Commodity prices were elevated. Higher prices for gasoline and groceries have slowed consumer spending, and confidence. Private-sector job growth was weak, and state and local governments now have slashed about 850,000 jobs so far this year. In addition, the market has had to absorb uprisings in the Middle East and the impact on oil prices. Then there is concern over sovereign debt in Europe, our own debt crisis and the earthquake and tsunami in Japan with its resultant effect on our […]

June 15th, 2011|Categories: Daily Journal of Commerce|Comments Off

Verdict On Bernanke’s First Press Conference

Published May 6, 2011
When I published “Who Shot Goldilocks?” in 2004, I recommended that the Federal Reserve announce rate decisions by communicating in plain English at a press conference where the chairman could be asked questions. This was because of Alan Greenspan’s notoriously obfuscatory pattern. Seven years later, on April 27, Chairman Ben Bernanke held such a press conference.

Bernanke first read from a prepared statement and then took questions from reporters. As befits the U.S. Federal Reserve, reporters from around the world were in attendance. Questions were asked by reporters from the U.K., France and Japan. It was an event that Americans can be proud of as our central bank chairman set new standards for openness and transparency … with the entire world watching and participating.

Among the policy matters that the chairman discussed was the end of Quantitative Easing II, which will be completed by June 30. There will be no change in the present policy of reinvesting matured debt and interest into new purchases. But the $600 billion program of bond purchases by the Fed will come to an end.

Bernanke defended QE II in a strong statement. He said that at the time the program was begun, the U.S. was looking at a double dip recession and that it was on the cusp of deflation. It was necessary, he said, and it worked. The program triggered significant changes in the financial markets, and the easing financial conditions led to a stronger economy, just as the first quantitative easing effort had done in March 2009.

The chairman said there would be no change to the target range for the federal funds rate at 0 to […]

May 10th, 2011|Categories: Daily Journal of Commerce|Tags: Bernanke, double dip recession, inflation expectations|Comments Off

The Teflon Market

Published April 11, 2011

Stocks recently enjoyed their best first quarter since 1998, and begin April on an upbeat note. For the first quarter of 2011, the Dow closed up 6.9 percent, the S&P 500 was up 5.95 percent, and the NASDAQ was up 5.15 percent. Those are strong showings in the face of continued uprisings in the Middle East, rising prices for oil and commodities, and the Japanese earthquake and tsunami. The market, dubbed by some as “the Teflon market,” just kept rising in the face of bad news. Volume was steady, if not spectacular – a sign that the market had not entered a frothy stage. Indeed, retail investors have not yet become excited about the market, which reached its highest levels in three
years.

Traders are unwilling to bet against the market. Short sellers had the lowest level of loans against stocks sold short in five years. The ratio of long bets on the market to short bets is near a six-year high. Hedge funds are less willing to take the short side against a rising tide. Bond funds continued to experience outflows, while some bond funds slipped into negative territory for the year to date. Readers and clients know that I have been encouraging the reduction of exposure to bonds for some time. I see no reason to change that position, particularly as Fed futures are betting on a rate rise by the end of the year.

Surely the massive intervention in the markets by the Federal Reserve not only stemmed the downward trend, but aided in the recovery. Quantitative easing – an effort by the Fed to buy bonds, and keep interest […]

April 12th, 2011|Categories: Daily Journal of Commerce|Tags: bond funds, federal reserve, japanese earthquake, low interest rates, retail investors, short sellers|Comments Off

Just When We Thought It Was Safe To Go Out In The Woods…

Published March 11, 2011

Recent indicators show the world economy is strong. The U.S. Institute for Supply Management index just hit a seven-year high. Aided by U.S. workers dropping out of the workforce, according to government numbers, U.S. unemployment dropped to below 9 percent as about 225,000 jobs were added in the private, nonfarm sector. German unemployment reached a new post-reunification low. Swedish gross domestic product growth hit 7.3 percent in the fourth quarter, and China is working to throttle back its growth.

Companies are sitting on huge amounts of cash. Merger and acquisition activity has picked up, as have initial public offerings. Growth seemingly has returned.

But just when the outlook is starting to look brighter, storm clouds gather on the horizon. Uprisings in the Middle East have added uncertainty to the strength of the recovery. Certainly tyrants in power for decades felt the sting, but so did oil markets. And what about U.S. foreign policy? Is the U.S. a net winner or loser? What are the economic effects?
Politically, we should be concerned about our feeble response to the various crises. Our policy seems to be to take a passive position and let events unfold. President Obama may occasionally comment that some person should go, but it is hard to see that we had much impact on events.

In spite of our passivity, Egyptians seemed to be very angry with the U.S. Bahrain, meanwhile, seems to be angry with the U.S. because of its passivity. And is the House of Saud immune from the kind of unrest that is spreading in the Middle East? And what about our strong men in Iraq and Afghanistan? […]

March 16th, 2011|Categories: Daily Journal of Commerce|Tags: acquisition activity, gaddafi, management index, merger and acquisition|Comments Off

Slow Economic Recovery Yields Few Jobs

Published February 11, 2011

The stock market is often regarded as a leading indicator of the economy. If so, the market is forecasting a bright future. The underlying economy has shown growth in profits with most S&P 500 companies beating estimates and raising profits. Industrial production is up. Consumer confidence is up. Retail spending and income are up. Confidence, spending and income are especially important because the consumer represents about 70 percent of the economy. Companies are sitting on large caches of money that can be expected to be redeployed through mergers and acquisitions, stock buybacks and dividends. IPO activity is picking up.

Even banks have begun to cooperate with the government in the effort to stimulate the economy by lending money to small and midsize businesses. Fed futures suggest that the Federal Reserve will not increase interest rates until the end of 2011.

Money has been leaving bond funds and flowing into stock funds in a reversal of past flows. Until the recent crisis in Egypt, money was also flowing into emerging economies because they are expected to grow faster than the U.S. economy, and because they don’t have a housing crisis. However, the trouble in Egypt reminds all investors of the political risk in sinking money into emerging countries.

The catalyst for the market’s rise has been the Federal Reserve buying bonds via so-called quantitative easing, a loose money policy, low interest rates, and rigorous belt tightening by companies. The Fed has been aided by a low rate of inflation.

The first round of quantitative easing began on May 9, 2009, after the markets rose about 80 percent from lows of March 9, 2009. When […]

February 17th, 2011|Categories: Daily Journal of Commerce|Tags: consumer confidence, economy companies, emerging economies, lending money, mergers and acquisitions, midsize businesses, retail spending|Comments Off

Low Job Growth Casts Doubt On Recovery

Published December 10, 2010

The U.S. economy added fewer jobs than expected in November. The weakness in the jobs report 17 months after the recession officially ended is a vivid reminder that we have a long way to go before a full-fledged recovery. The unemployment rate has been above 9 percent for 19 months, the longest period for such an elevated level since World War II.

Retailers are becoming more cautious with the combination of weak job numbers and the extension of jobless benefits in doubt. Congress could deliver a double whammy to Christmas if it fails to extend unemployment benefits and fails to deliver an extension of tax cuts. The air could go out from what started as a robust holiday season.

Private-sector employers added only 50,000 jobs last month, significantly fewer than the 250,000 needed just to accommodate workforce growth. The jobless rate rose to 9.8 percent, the highest level since April. Economists had expected a growth rate of 144,000 jobs and a jobless rate of 9.6 percent.
Retail shed jobs going into the Christmas season. Manufacturing lost 13,000 jobs, the fourth decline in
a row. Government shed 11,000 jobs, mostly at local levels where tight budgets have caused
problems.

The weak numbers caused Vice President Joe Biden to say there is no denying the numbers were
disappointing. Ben Bernanke recently said that job creation is the most important job the government
faces; this was the motivation behind the Fed’s latest bond purchase program. Bernanke said the
jobless rate could grow if the economy continues to grow at its sluggish rate. He is particularly
concerned about those who have been out of work for an extended time.

The broader measure of unemployment, which includes […]

December 14th, 2010|Categories: Daily Journal of Commerce|Tags: average hourly earnings, household consumption, tight budgets, unemployment benefits, unemployment rate, workforce growth|Comments Off

Victory Leads GOP To House Control

Published November 5, 2010
See original article

In the 2008 election, Independent voters supported Democrats by an 18 percent margin. In the recent midterm elections, they favored Republicans by 15 percent, and with that shift, the Democrat coalition crumbled. Democrats lost ground among women, middle-income workers, whites and seniors. Driving the shift was a broad concern over the economy and doubt about big government.

President Obama was elected in 2008 as the standard bearer for hope and change. He brought change, but not the kind that voters were looking for. He also let congressional Democrats define his agenda and determine what hope and change looked like. Those were big mistakes, and his naturally cerebral approach to problem solving also disconnected him from voters.

Obama failed to notice that the economy remained weak and that getting people back to work was his number one priority. He should have take a page from the playbook of fellow Democrat James Carville, the “Ragin Cajun” who famously said, “It’s the economy, stupid.” Unemployment remained stubbornly high at about 9.6 percent, and will likely remain around 9 percent going into the presidential election cycle, which portends the loss of the White House to the Republicans. The idea that the supremely charismatic president suddenly might be a one term president became not only thinkable, but possible. Even chastened Senate Majority Leader Harry Reid, D-Nev., promised that his number one job was to create jobs. “The only thing that is going to solve our economic problems in this country is jobs,” Reid said. Unfortunately, many Democrats arrived at this conclusion much too late.

In the end, the election became a referendum on the president […]

November 6th, 2010|Categories: Daily Journal of Commerce|Comments Off

After The Best September For Equity Markets In 71 Years, What’s Next?

Fear lingers as worry of a double dip fades. What can the Federal Reserve do?
The past quarter brought numerous gloomy headlines. The specter of a double-dip recession, a
depression or inflation loomed.

Each day seemed to bring more negative news and reason for gloom. Not surprisingly, markets
reacted, and after a strong July, equity markets dipped in August to an overall minus number for the
year. It did not help that investors withdrew about $34 billion from equity mutual funds for the year
and placed $32 billion into international and emerging market funds, or that the “flash crash” of May 6
caused many investors to wonder if they were playing with a stacked deck.

Job losses continued to mount last month with the unemployment rate hitting 9.6 percent. The Obama
administration took solace in the fact that the private sector in August added 67,000 jobs – about one fourth
of the number needed to provide jobs for new entrants into the workforce.

The question the market seems to be wrestling with is: Are we about to experience a “new normal” for
growth in the U.S.?

Historically, on average, the U.S. economy has grown about 3 percent per year – also about the rate
of inflation. Bonds have historically returned the rate of inflation plus 3 percent, for a total of 6
percent. Equities have historically returned about 9 percent.

As every investor knows, the last 10 years have been anything but normal, and the U.S. economy
seems to be growing less than normal. Is this the “new normal”? Should we expect less than 3
percent growth, or even none? Is the structural growth rate of the U.S. economy lower now than
historically? The answer has big implications for investors.

Both […]

October 13th, 2010|Categories: Daily Journal of Commerce|Comments Off