At Arm's Length - A Daily Market Commentary - Before the Bell Rings Financial Commentary about Money, Investing, and How It Affects the Average Investor

At Arm's Length: 11.08.04

The China Syndrome

You never hear about the outsourcing of jobs to China. The reason is simple. It has never been identified as such but when the exports of country outpace its material imports - and that's not raw materials either - the jobs that produce those goods are essentially a value over their counterpart in the US. But does China does have an import fixation that unfortunately has begun to wane.

The reaction in Treasuries, as the fixed income market begins to absorb the news, will not be pleasant. The Bush administration has, for the most part played against itself. This quarter, we will have offered over $147 billion in new debt offerings. That is another record and goes to pay for spending that is already in the pipeline.

The presence of good exchange rates are important to our credit offerings. Those are beginning to show signs of wear as the dollar begins a predictable slide that could be quickly identified as a fall. Should the value of the dollar diminish considerably, this would make those expensive, low yield notes not as attractive.

Bond traders are worried about the current jobs number but not for the reasons you might suppose. Although they find faults with the just released numbers - more a result of the temporary construction in the storm devastated south and the overall "still behind the projected need" revisions - their real concern is the Fed reaction. This was supposed to be a number that would predict an end to tightening and a softening of language from the esteemed bankers. Instead they fear the worst. A continued rise in rates for the near future is almost a given now as well as a change, albeit subtle, in the language coming out of this week's meeting.

The Celebration Syndrome

Stocks love the new President and with good reason. The pre-election mumblings about reform to the Social Security program means a new and as yet untapped source of wealth for the markets and the companies who look to it for financing. The reaction was palpable as the Dow and its counterpart indexes celebrated the first majority victory Mr. Bush has received.

The influx of new investors to Wall Street courtesy of policy changes on the Beltway has yet to happen and most likely will take quite a while to gel, but when they do, it will be a bonfire of the vanities once again. How to fund such an undertaking worries Wall Street somewhat but they feel that it is a surmountable challenge.

Knowing that the 15% tax on dividends will stay in place was enough to make traders swoon. But I believe the reaction was bit a fast and assumptive. The tax cut will remain but what will not may be the interest of foreign investors into the market. Valuations are high and will remain so for the near future. This makes continued investment less likely in a market that has high prices without much in the way of returns.

Investors need to ask themselves what they really expect from the markets. Even with the dividends counted into the mix, expecting high single digit returns from a balanced portfolio might be looking for too much. That is not a carrot worth chasing especially if your money might be better spent in a more vibrate, less debt addled market.

Mr. Bush's tax cuts have not unleashed the economy in any noticeable way and that is likely to be the reason we will not have the same expansion as they hope when speaking of the Reagan era. Modeling their handling after his economic maneuverings will carry much more bite as a result of deficits, interest rates, and inflation that those heydays of the eighties.

Expect an first of the year adjustment that will make efforts in Social Security reform to languish in Congress.

The previous week's articles.

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