The Blue Money Report - Current - Financial Commentary about Money, Investing, and Washington

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Today's Commentary: 03.05.03
Everybody's Talking

It begins to sound like financial pornography after a spell. Sure, there are some serious events happening around the world that have caused markets to scramble for cover. But to add to the cacophony, everybody seemed to have something to say. If the economy was standing on the ledge, these voices would be yelling, "jump!". Working from lesser to greater, let's look at their words.

U.S. Treasury Secretary John Snow needed a spokesman to clarify his remarks about the strength of the dollar. This newly hired spokesman for the administration needed an employee to try and smooth the bumps. The Group of Seven held a meeting last month in Paris. Since that meeting of finance ministers, the dollar has fallen to a new four year low. This new strength in the Euro brought questions about his position on the currencies strength. According to Reuters, he replied that he was "not particularly concerned about that".

Greenspan hit the satellite waves with remarks designed to add to his credibility as the guy who knows what is about to happen. He will not, it seems, allow the housing market to take a dive without calling the move first. His remarks to the Independent Community Bankers the day before his Beige Book report, suggested that there may actually be a bubble in housing and not just an extremely good run for the sector. The housing market has kept the economy on track but has proven unable to raise it from its doldrums. Folks still look at their equity balances as money in the bank. Greenspan calmly tried to prepare these optimists for a wake-up call. He simply pointed out that a correction in housing prices would be likely. After warning off the possibility of sharp declines, he said, "The frenetic pace of home equity extraction last year is likely to appreciably simmer down in 2003, possibly notably lessening support to household purchases of goods and services".

Continuing to stump for his Medicare overhaul, the President spoke to the American Medical Association, taking his $400 billion 10 year reform package with him. His plan has come under fire from Democrats, who referred to it as a placebo, and from his own party, who threatened yesterday to write their own.

Continuing his policy of choice, he offered three new ideas for seniors. To pay for prescriptions, plan one would subsidies prescription drugs with an additional $600 in subsidies. This help would come in the form of drug cards issued by private companies and would be good for 10% discounts. This plan would allow seniors to stay in Medicare, a plan that allows them to choose their own doctors with 80% of the costs covered by Uncle Sam.

"Enhanced Medicare", plan two, would push seniors in the less restrictive preferred provider arena or PPOs. This plan would offer incentives to seniors to choose certain doctors.

The last plan he threw out for consideration by this medical group appears to be based on the HMO model that charges basic fees with participants using designated hospitals and doctors.

None of these plans are setting well with seniors, who have been reluctant to move from the comfort of Medicare. Don't think the private insurers are too keen on the idea either. The government has been known in the past to provide to little money with their increased regulations. Seniors who live outside many of the boundary areas served by HMOs and PPOs would be left in the cold. More choices and better benefits might be an great way to start the conversation but not the right direction to travel. The President said that , ''Leaders of both political parties have talked for years about this issue. . . . The time for action is now". Not if Congress has anything to say about it.

And lastly, add another 'W' to the equation. It is now not just war and worry, it is also Warren. Mr. Buffet will make his letter available to most of us common folk on Saturday on the Berkshire Hathaway website, but his letter to his shareholders, always full of astute observations caught most markets by surprise. He now finds stocks only mildly interesting to him and suggested in some very pointed language that sitting on the sidelines is not only prudent but wise. If the second richest man is sitting there with you, it becomes all about the company you keep. In the letter, which was provided to me by my friend Jerry, who relies on Warren to protect his retirement money, Buffet said the following:

"Occasionally successful investing requires inactivity"
or
"That dismal fact is testimony to the insanity of valuations reached during The Great Bubble. Unfortunately, the hangover may prove to be proportional to the binge"
and
''Despite three years of falling prices, which have significantly improved the attractiveness of common stocks, we still find very few that even mildly interest us''
adding further,
''We continue to do very little in equities.''
and the clincher,
"We view them as time bombs, both for the parties that deal in them and the economic system" in reference to his opinion about derivatives, something he also views as economic weapons of financial mass destruction.

Those comments turned many heads yesterday and will continue to turn heads in the weeks to come. So where is Warren putting his money? Junk bonds. The attractiveness of these bonds is due mainly to the fact that many of these companies who issue this type of security have been less likely to default. It is only fair to note that Buffets investment company lost 13% of it's stock market value last year.

And lastly, Mike Silverstein, the WallStreetPoet offered this little verse about a hypothetical conversation with the President.

The President And I Discuss The Market - A Poem

"This market, Mr. President, is driving me to tears."
"Stay calm," our leader said to me, "there's no cause here for fears."
"Good sir," I cried, "my worth has shrunk, I've tapped my last reserve."
"He smiled reassuringly: "The strong don't lose their nerve."

I pointed to gold buying as a classic sign of panic,
And worries about oil that are making some folks manic.
The U.S. dollar's sinking and there¹s growing unemployment,
This ain't the economics that brings people much enjoyment."

And then I asked him (shyly) could war worries be the cause
Of the market's downward spiral and the rush to exit doors?
Could the upcoming invasion of Saddam and his Iraq,
Explain the Dow's predicament, the dive of the Nasdaq?

"My boy," the Chief Exec replied, "these worries are misplaced;
Your losses in a few weeks time will quickly be erased.
We'll trounce the boys in Baghdad and depose them in a flash,
And then investors like yourself will reap a flood of cash.

"There will not be an oil shock, the dollar will recover,
The nations that now think we're nuts, our wisdom will discover.
Consumers freed from terror's angst will shop like mad again,
And tax cuts I'm proposing will make stocks a gravy train."

Our top man I felt sure was not deliberately deceiving,
Alas, his thoughts about the market don't have me believing.
I see a rocky road ahead, a road that's hard and long‹
Let's hope that Mr. Bush is right and folks like me dead wrong.

Today's Commentary: 03.02.03
Look Both Ways

Weekly Index 02/28/03 Year ago

Fed Funds rate 1.38% 1.78%

Discount Rate 2.25% N/A

Prime Rate 4.25% 4.75%

3 month T-Bill 1.17% 1.74%

6 Month T-Bill 1.17% 1.85%

10 Yr. T-Inf. 1.71% 3.25%

10 Yr. T-note 3.69% 4.98%

30 Yr. T-Bond 4.67% 5.50%

Municipal Bonds 4.97% 5.27%

If you weren't careful to look both ways, the popular safety tip when crossing roads, you could have run into a head on collision with yourself. All kinds of information came out last week that would have given you pause to reconsider crossing or make a mad dash for the other side.

Numbers on new home sales were released this past week. The thought that the pace of this upwardly mobile number might be slowing down, would be worth a second glance. A great deal of emphasis has been placed on this sector of the economy. It is believed that the absence of economic sunshine from real estate might really show the softness in other sectors with limited growth. A builder I overheard spoke of supply exceeding demand by 33%. He also pointed out that builders are business people also. The war on Iraq, less than stellar economic growth, and the drop in lack of demand as potential buyers get skittish, have caused them to scale back their inventory. Not a lot, but some.

Those interest rates might be worth the gamble though. The thirty year rate fell yet again last week, marginally but still enticingly low for first time buyers. If employes get any hint of security on their jobs, then they will probably be willing to take the plunge.

At the same moment, the Fed, speaking through the person of Donald L. Kohn, suggested that what these sage observers of the economy saw in housing was still balanced enough not to create problems. This disregard of the bubble question comes at a time when Greenspan's retirement is being considered by a White House that was called on to practice fiscal discipline. Kohn's reassuring remarks were meant to give investors heart that there is no foreseeable meltdown in the market in the near future.

The decline in the new housing sales number may, according to some speculators, be a sign of a leaking bubble. The surge in housing sales and their prices was a direct result of lower interest rates. Although Fed policy doesn't directly effect the long term lending market, some believe that it helped orchestrate a future problem in the housing market. Kohn suggested otherwise saying that "housing remained quite affordable by historical standards."

March

March 3rd
Personal Income and Outlays
Consensus +0.3% in Jan 2003
Last 0.4% in December 2002
Our Est. 0.4%

March 5th
Beige Book
Regional Economic Data

March 7th
Employment Report
Consensus 5.8% in Feb 2003
Last 5.7% in Jan. 2002
Our Est. 6.0%

March 14th
Producer Price Index
Consensus N/A
Last +1.6% in Jan. 2003

March 18th
Federal Open Market Committee meeting

And then, as if we should have been surprised, consumer confidence came in much weaker than expected. Unemployment, an influence on how you feel generally, also showed weakness last week. Businesses continue to test new levels of leanness. This fact alone has made the market seem tight. Recently, the increase in jobs have been at the service level, which, while technically work, isn't exactly the work most folks were looking for. The unemployment number may be adjusted further because of a nasty spat of record setting weather across much of the densely populated part of the country.

But two things caught my eye were far more significant and less understood. The administration has now begun to downplay the best part of the tax plan. Now I don't usually come out in favor of anything the administration does economically. But his proposals concerning Lifetime Savings Accounts, employer sponsored retirement accounts, and retirement savings accounts, while possessing some secretive properties, was one of the best of the bunch of sweeping reforms that were proposed.

While I'll admit that the accounts did not allow a pre-tax deduction in income, it would allow your savings to grow tax free. Because these deposits were already taxed, the principle held the same tax free properties. The best aspect came in the form of collegiate savings. 529 Plans, while good for some, tend to make most individuals cash poor. Putting college savings in a Lifetime Account meant that money was not earmarked for anything special, could always be used for college. It would have been a toss-up decision in some states that allow the 529 plan to grow tax free but a godsend for those parents that are on the ropes watching junior while away his life playing video games. Knowing the money was still theirs would be a comfort in itself.

It had other hidden flip side attributes. The only problem I saw with them as a whole was the roll over penalties from your traditional IRAs, 401(k)s and the like. Something you could have just avoid by opening new accounts leaving the old ones in tact and future taxable. Once penalized (taxed for previously untaxed income), you could spread this tax burden over three years. The upside in the eyes of the Bush plan comes from the brief revenue pop it would have given the budget on the revenue side. It, however, would have been short lived.

The second piece of news was yet another turn in the administration's economic team. Glenn R. Hubbard was by far the closest thing Mr. Bush had as an ally in his economic camp. He was a supply side believer who believed that not only could the government give money back to the citizenry (in varying amounts) but the government would see growth in revenues as deficits grew. Pulling a page from former President Reagan's handbook, the supply side theory has run aground on the sharp words of criticism. But the policy stands in place.

And now, the White House has asked another economist, an open critic who will be asked to check his academic beliefs at the gate, to join the sales team. N. Gregory Mankiw's nomination comes as a bit of a shock. He is well known and openly in the record as an opponent to the notion that tax cuts across the board would raise revenues.

Now he will be part of the same group that is usually asked to give advice to the President. Only not this time. He will, more to the point, become the President's salesman. Like the addition of John Snow to the Treasury, this new breed of face in front of previously formulated policies is designed to give the look of an improved veneer. Add Mr. Friedman to the list of former opposition turned team member, and you have a "keep your enemies close" philosophy taking shape.

The one thing I can't comprehend is why Larry Kudlow hasn't been nominated for something. His outspoken belief that every policy the President announces is beneficial should at least get this man a front row seat somewhere in the White House.

Looking Ahead in Equities
While the NASDAQ remains in positive territory, the general mood in the market has remained dull. The Dow lost ground last week as it look like we will march forward into Iraq. An end of the week plea by the Arab League has shown another possibilty for resolution in the Middle East.

Mutual fund outflows continued last month and the money drifted into taxabale bond funds. This surprising shift comes as bonds are not looking as attractive as they once were. One gentleman I spoke with yesterday said that as long as stock looked cheap, they also looked as if something was wrong with them. This is typical of market sentiment, and he added that if they look too expensive, investors assume the bottom has yet to drop out of the company yet.

Looking ahead in Bonds
Oil prices continued to move up and my buddy Vince is still heartened by the fact the gold will go to $500 an ounce before all is said and done. Although this morning he was mumbling something about a German Bank having stock valuation issues. Gold he feels and I have to agree will rise in tandem with jitters and fall like a rock when things settle down. There is just no real reason for the heightened price especially when it is considered against it's qualities and uses. It is still best to play the metal across the board in a well positioned mutual fund. There are several other metals that will help make a diversified fund end the year on yet another high note, but gold may not be the primary mover. Silver and Platinum will have their collective say before year's end, with copper, the metal most likely to benefit from a sustained recovery. The later is still trading lower than most commodity guys think is fair.

Last week sure never gave any indication that folks were waiting it out in precious metals mutual funds. Money moved in droves to the investment grade bond funds ($3.76 B) and high yield funds ($1.54 B). The question is why? The quick answer is diminished risk. Companies who issue these high yield (the polite term for junk) have been defaulting less and less over the past year. But still there is caution even in this arena.

Treasuries will continue this week to see money drift their way. Nothing will have changed to cause any real difference in investor sentiment. Although investors in every market seem jittery, look hesitant and distrustful of what they can see, this has developed into a sort of routine. Even if the war takes off this week, inflation will still remain luke warm. But as they wallow in this semi-conscious state looking for average returns, they are probably passing up better than marginal gains in equities over the same time period.

Look both ways, but don't stand on the corner too long.