Daily Journal of Commerce Archives - Page 19 of 20 • Rutherford Investment

Global Economy In Second Quarter Not So Good

What a difference a month makes.
The market experienced a healthy start this year. The first quarter showed the S&P with a credible, 4.9 percent gain. A global recovery seemed in the offing.
Then problems began to occur. The sovereign debt crisis in Europe threatened to sink the euro and pull the eurozone apart. Iran seemed more likely to be developing nuclear weapons. The U.S. experienced a “flash crash” such as the market had never seen before, shattering investor confidence. The BP oil spill triggered a gulf crisis, and President Obama suffered his very own Katrina moment and unnerved the whole country. Then the jobmarket went into a stall. Consumer confidence waned.

Suddenly the global outlook was not so optimistic. Eighty percent of economists polled said the economy was slowing. Talk of a double dip recession became common. Nobel laureate Paul Krugman warned of a third depression. After the market peaked on April 23, the S&P
500 stock index slumped 16 percent to nearly meet the definition of a bear market. Gloom spread.

Volatility surfaced once again. The flash crash demonstrated the pain that volatility can evoke. For instance, investors who used stop-loss orders to protect their holdings found themselves with enormous losses as their “insurance” failed. The flash crash did demonstrate that volatility can take prices to irrationally low levels.

Many investors fled the markets after the flash crash. Morgan Stanley reported that clients withdrew billions of dollars. We did not lose any clients as a result of market instability. Some saw it as a chance to move back into equities.

Surveys of individual investors pointed to an unusually swift eruption of bearishness among those investors. Fears of […]

August 11th, 2010|Categories: Daily Journal of Commerce|Comments Off

A Third Depression?

In a recent article in The New York Times, Nobel laureate Paul Krugman raised the specter of a third
depression for the United States. A Nobel Memorial Prize in Economic Sciences is a strong credential,
and Krugman makes a strong case.

Krugman’s thesis is that the U.S. and Europe are now doing what the American government
notoriously did to create and prolong the Great Depression. He also refers to the years of deflation and
instability that followed the panic of 1873 as the “Long Depression.” In both cases the government
followed a policy of austerity and balanced budgets, which Krugman says exacerbated the financial
woes. Krugman believes we are either in a depression comparable to the 19th century model or about
to be in one comparable to the 20th century model.

Joining the debate is Robert Prechter, an advocate of the Elliott Wave theory who forecasts a long
slide bigger than either of the earlier depressions. He believes the Dow will fall to well below 1,000, in
a crash larger than the South Sea Bubble of 1720.

It is tough to argue with them. First, my credentials don’t begin to match either of theirs. My
education was in history and economics, and the law. I have been a businessman most of my life, but
also a lawyer and a public servant elected to statewide office. I have not won any prizes for any of
these – well, Rutherford Investment Management has received a five-star rating from Morningstar, but
nothing rivaling a Nobel Prize. They also have a lot of factual support for their point of view. My
college economics professor would have agreed with them.

In support of the Krugman thesis, housing prices have plunged in the U.S., and the […]

July 12th, 2010|Categories: Daily Journal of Commerce|Tags: Daily Journal of Commerce, economics and the law, financial woes, robert prechter|Comments Off

What Caused The Crash Of 2:45 PM

On May 6, at 2:45 p.m., the equity markets in the U.S. crashed without warning. During a unique 17- minute period, the market suffered the largest intraday decline in market history. Stock prices fell about 9 percent only to recover much of the loss moments later. Shares in Procter & Gamble, one of the most liquid stocks on the exchange, fell 35 percent in moments. Accenture slid from $40 to a penny. With a cascade of sell orders coming in, traders, specialists and even computers stood aside as prices plummeted. Many stocks, including Procter & Gamble, did not trade for several minutes. This has become known as the “flash crash.”

While it is unknown exactly what caused the crash, some people believe that a large, $12 billion sell order in mini S&P futures, entered by a Midwestern brokerage firm, may have been the catalyst.

About 70 percent of the orders on the New York Stock Exchange are now done by computers in what is known as flash or high-frequency trading (I wrote about this previously in an August 2009 column for the Daily Journal of Commerce). When the computers saw this huge trade, they instantly sold and started the crash. The NYSE shifted into “slow mode,” which caused incoming orders to shift to humans (specialists charged with maintaining an orderly market) and to other exchanges. (There are more than fifty other exchanges.)

Both the specialists and the other exchanges were swamped. Floor traders at first thought a large European bank must have failed, but then realized that was not true. But the specialists and the computers did get out of the way. Their action […]

June 15th, 2010|Categories: Daily Journal of Commerce|Tags: Daily Journal of Commerce, flash crash, new york stock exchange, william rutherford|Comments Off

A Slow Economic Recovery Puts More Focus On Elections

Last month’s column, “Is there any good news among the grim?,” cited several instances of progress on the economic front. April has brought more good news, among still grim employment numbers.

The gross domestic product increased 3.2 percent last quarter. Though positive, the number was smaller than expected and barely maintained the jobs necessary to keep unemployment at current levels. GDP needs to grow at least 5 percent to make a dent in unemployment. But even as unemployment remained stubbornly high, new applications for unemployment declined. President Obama said the economy must create more jobs.

The GDP rate is growing slower than after previous recessions. The increase in GDP was largely due more to restoring inventory balances than end-point sales.

The Conference Board’s Leading Economic Index increased for the third straight month. Ken Goldstein,
economist at The Conference Board, said, “The indicators point to a slow recovery that should continue over
the next few months. The leading, coincident and lagging series are rising. Strength of demand remains the big question going forward.” Also, the Conference Board’s Consumer Confidence Index, which had rebounded in March, continued to increase in April.

Inflation remained subdued. The Federal Open Market Committee kept interest rates low and indicated that
they would remain low for an extended period. Clearly the Fed believes that any recovery we are seeing needs more time to gather strength.

The housing market sputtered after an uptick resulting from federal tax credits for new home purchases. As
soon as the credit expired, the market slumped.

The FDIC says that only 200 banks will fail this year, down from their earlier forecast of 300 bank failures.

Equity markets showed strength for the year to date, even […]

May 11th, 2010|Categories: Daily Journal of Commerce|Tags: bank failures, consumer confidence index, economic index, employment numbers, federal tax credits|Comments Off

A Perversely Optimistic Future

With unemployment at a stubbornly high rate, home foreclosures still proliferating and commercial loans (especially for real estate) teetering, is there reason for optimism? Sometimes adversity is reason for optimism, and sometimes in a perverse way.
For starters, the economic news is not all bad. Consumer confidence is firming. Manufacturing is firming. Inventories are low and will have to be restocked. We just came off a decent quarter for earnings in the S&P. The retail sector has added jobs for three months in a row. The market, generally considered a precursor of the economy, has risen robustly. The Dow was up 4.1 percent and the S&P was up 4.9 percent for the first quarter of 2010. The equity markets were up for the fourth straight quarter.
With interest rates low for an extended period of time, money has sought a more comfortable home.
Money goes where it is treated best, and so it has found its way back into the equity markets and the
credit markets. Credit spreads have tightened, and indeed the credit markets have become more liquid.
Just a year ago banks were reluctant to lend to each other. Companies were struggling to roll over
commercial paper even with very short maturities. Companies were beginning to wonder how they would
have enough cash to meet payrolls and payables. Now, credit markets are absorbing bond sales, especially
massive U.S. government bond sales. The high-yield market is absorbing corporate debt at a record pace
and the great lump of corporate debt that needed to be refinanced is being sold. The high-yield markets
are working on repaying debt not due until 2013 and 2014, with 2010 and 2011 and much of 2012 […]

April 22nd, 2010|Categories: Daily Journal of Commerce|Tags: commercial loans, consumer confidence, credit markets, economic news, rising interest rates|Comments Off

Will Obama Keep On Truckin’ With Agenda?

While president focuses on health care, voters’ actions suggest they’re more concerned with the economy

Nearly a year ago, Vice President Joe Biden notoriously asked, “Why are we focusing on health care when the economy is the problem?” Apparently Obama didn’t get the memo.

In the Scott heard around the world, previously unknown Massachusetts state Rep. Scott Brown (R-Mass.) drove his dusty, old pickup truck to victory in knocking off the Democratic nominee for the U.S. Senate seat previously held by Ted Kennedy. Elected in the bluest of the blue states, Brown is the first Republican elected to the U.S. Senate from Massachusetts in 38 years. German news source Der Spiegel pronounced: “The World Bids Farewell to Obama.” Elected just a year ago in a stunning victory, President Barack Obama now finds himself facing declining approval ratings and upheaval. He promised change, but voters did not like what they perceived as European style socialism. With the nation suffering through the worst economic conditions since the Great Depression, exit polls from his presidential election showed that two-thirds of the voters cited the economy as their number one concern, and fewer than 10 percent mentioned health care. Since taking office, Obama has focused on health care. Obama, in his first year in office, gave 158 interviews and 411 speeches – more than any other U.S. president; perhaps more than all of them put together. Yet the Democrats have now lost the governorships of Virginia and New Jersey, and a Senate seat in Massachusetts.

In the meantime, the Brookings Institution says the largest and fastest growing population of poor people in the U.S. is in the suburbs. […]

April 6th, 2010|Categories: Daily Journal of Commerce|Tags: economy, great depression, poverty level, recession, Rutherford Investment Management, william rutherford|Comments Off

Joblessness Will Be Long, Severe

by William Rutherford
Published: March 5th, 2010

“…The social legacies of the Great Recession are still being written, but
their breadth and depth are immense. …We are living through a slow motion
social catastrophe, one that could strain our culture and
weaken our nation for many, many years to come,”
stated Don Peck, deputy managing editor of The Atlantic Magazine.

“Millions of unemployed face years without jobs” was the headline for a New York Times story by Peter S. Goodman on Feb. 21. “(Bank) lending falls at an epic pace” headlined another New York Times story, from Feb. 24, in which Michael R. Crittenden and Marshall Eckblad reported that bank lending has posted its steepest decline since Germany invaded Poland and Japan attacked Pearl Harbor.

The Great Recession promises a long period of joblessness in the U.S. Economists estimate that we need to create about 125,000 new jobs per month simply to absorb entrants into the workforce. We have to create 10 million jobs just to get back to a 5-percent unemployment rate. If we were to create jobs at the rate of 600,000 per month, more than double the pace of the mid- to late 1990s, it would take two years to dig out of our hole.

The recession has fallen hardest on men because male dominated industries, construction, manufacturing and finance, have been hit particularly hard. In November 2009, 19.4 percent of men in their prime working years, ages 25 to 54, did not have jobs. That was the highest figure since the Bureau of Labor Statistics began tracking the number in 1948. It appears that soon women will have most of the jobs in the U.S. But […]

April 5th, 2010|Categories: Daily Journal of Commerce|Comments Off

The Lost Decade And Beyond

Much has been written about the lost decade of Japan, which has now become two decades. Now the United States has lost a decade of its own, which hopefully will not also become two decades. In the 1980s the Japanese economy became overheated: the Nikkei index reached nearly 40,000 but eventually collapsed. Today it stands at about 11,000. The low point of the Nikkei of the last 20 years was about 7,500. In spite of massive spending efforts by the government and near-zero interest rates, Japan has never recovered. Even now, the Japanese economy appears to be headed lower, and deflation seems more likely than inflation.

In the 1990s, the U.S. economy became overheated gyrating from highs to lows to highs under the Greenspan Federal Reserve. Finally, the bubble burst and the economy suffered its greatest setback since the Great Depression. The response of the Federal Reserve was to keep interest rates very low for a very long time. The Fed feared deflation, and Greenspan wanted more than anything to be renamed Federal Reserve Chairman. With interest rates low, every segment of the economy took on leverage. With a government policy that wanted everyone to be a homeowner, housing was inflated. With very little supervision, toxic financial instruments grew to enormous proportions along with spurious banking
practices.
For its part, Japanese borrowing by 2008 reached 172 percent of its GDP, according to the CIA, as the government sold bonds to finance giant stimulus programs. The borrowing percentage is even higher today. Interest rates continue to be nearly zero. These are the conditions in the U.S. today. Will we fare any better than Japan?

The decade of the […]

April 4th, 2010|Categories: Daily Journal of Commerce|Tags: dow jones industrial average, financial instruments, great depression, japanese economy|Comments Off

Economic Data Suggest Reasons For Optimism

As I have stated before, the economy won’t hit the bottom until housing prices stabilize. Recent reports show that single-family home prices in the U.S. posted a slight 0.2-percent increase in the third quarter. This was the first quarterly gain in two years. The biggest increases were in the West, despite California, Arizona and Nevada being some of the most troubled states. Sales of new homes unexpectedly increased in October.

Sales of new single-family homes increased 6.2 percent. Sales of existing homes increased 3.7 percent. All of these reports augur well for the economy.

Also, job losses in November slowed to 11,000, the fewest since this recession began, and the unemployment rate fell unexpectedly, indicating that the economy is in a healing process. Unemployment remains stubbornly high, at around 10 percent, although most believe the real level is much higher. Nevertheless, payroll data reflect a notable improvement in the jobs market. Some think that firings have been too aggressive and that firms will have to start hiring in the next few months. There is a long way to go, however; nearly 8 million people have lost their jobs since the start of the recession.

Average hourly earnings rose a penny in November and the average workweek expanded by 0.2 hours.
Another report showed U.S. factory orders rose for the sixth time in seven months in October, posting a larger-than-expected gain of 0.6 percent. In the third quarter, the U.S. economy grew 2.8 percent, expanding for the first time in more than a year.

The economy still faces stiff headwinds, including higher taxes and more regulation. But perhaps the strongest is banks’ reluctance to lend. Banks have taken billions […]

March 18th, 2010|Categories: Daily Journal of Commerce|Tags: money supply, Rutherford Investment Management, unemployment rate, william rutherford|Comments Off

It’s Uncle Sam’s Investment Club

U.S. government has become irreversibly involved in many businesses’ affairs

One day in the not-too distant past, seemingly eons ago, top executives of Lehman Brothers met with Federal Reserve and Treasury officials at the Federal Reserve offices in New York. At issue was what to do about Lehman. A top Lehman executive reportedly told government officials that Lehman had no idea of the amount of risk on their books in credit default swaps, and then said, “Neither do you.” It’s astonishing that a top official of a major investment bank would not know the amount of risk that the firm had on its books, but it simply reveals the state of affairs at the time. The Fed did not have any idea about the size or scope of the market, because Alan Greenspan had refused to regulate it even when advised to do so.

Even now, firms are still learning of the risk they have undertaken. This conversation may have been the basis for the decision by Treasury Secretary Hank Paulson to let Lehman file for bankruptcy. Paulson has said that Lehman did not have adequate collateral for a government loan. Based on subsequent events it probably is a decision that he would like back. […]

November 10th, 2008|Categories: Daily Journal of Commerce|Tags: alan greenspan, bailout package, federal reserve, federal reserve offices, government loan, investment bank, lehman brothers, treasury officials, treasury secretary|Comments Off