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

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Today's Commentary: 04.04.03
The Next Cut: The Deepest
Unemployment numbers were released on Thursday from the Labor department that found, and no one should really act surprised, that the number jumped higher than consensus estimates.

The roads diverged in a yellow wood,
and sorry I could not travel both
and be one traveler, lone I stood
and looked down one as far a I could
to where it bent in the undergrowth;

The market barely moved on the news. That brings several questions to mind. For instance, is the bad news built in to the trading range we seemed trapped in? Or perhaps, just maybe, we have decided that this is all too confusing and by admiting that does not allow us a chance to make much sense of it all.

With the war commanding the attention of the world, investors included, Congress is making decisions that will alter the landscape of deficits for decades to come. We all knew about the cost of war. We can all hope for a speedy resolution with an even quicker occupation and rebuilding period. Either way, the costs to the average American is not even a consideration to those glued to their television sets. Not knowing is far more expensive than many of us realize.

Then took the other. As just as fair,
and having perhaps a better claim,
because it was grassy and wanted wear;
Though as for that the passing there
had worn them really about the same,

Mr. Bush kept himself busy while we watched with shock and awe as America advances on the Iraqi capital. His decision to keep the pressure on Congress to pass his budget while we were looking the other way, leaves one to wonder if this were as shrewdly calculated as our move into the Middle East under the guise of defense.

The very soldiers that are fighting his war (and Godspeed to everyone of them) are facing cuts to their benefits as veterans as they battle in a land far from their birth. Along with those cuts, folks with with student loans, the need for student lunches, health care, and food stamps are also in the crosshairs of the President's budget. As he stands before 15,000 cheering Marines on Thursday, many of whom are providing a paycheck to their families that falls 12-15% below civilian wages, the President put a cheery face on his leadership. The same commander-in-chief that promised on February 21, 2001 a $2.1 billion pay raise to these very troops, seeks to pass a budget that will keep these low paid employees of the government military poorer longer. Before I go on further, let me make the following clarification. I am well aware that the "pay gap" between the military and the civilian workforce contains some irregularities. In fact, there might not be a pay gap at all, according to some sources. Current entry level position pay is roughly $21,000 a year for a recruit right out of boot camp. Not bad if you are eighteen with a high school diploma. But suppose you are trying to support a family. The argument that many military families qualify for food stamps does not take into consideration the benefits the receive, according to many reports I have read. That said, the potential for increased pay grades does not often make it's way to the lower ranks nor do they act as incentive to stay. Many of the young currently fighting Mr. Bush's war sought employment with the nation's biggest and least discriminatory employer because there was no other work to be found. A sad byproduct of a staggered economy..

And both that morning equally lay
in leaves no step had trodden black.
Oh, I kept the first for another day!
Yet knowing how way leads on to way,
I doubted if I should ever come back.

So what about those entitlement programs that Mr. Bush's budget needs to trim in order to kick the plan through. It is all, it seems, based on percentages. The sum total of cuts to these incredibly important programs as proposed by the House is roughly $265 billion. Suggested cuts include trimming meal costs to 84 cents from a hefty 91 cents per meal. Emphasis on "per meal". Medical coverage would be eliminated for almost 14 million children. And all of this with an eye on keeping the President's mind bending tax package in tact with a budget totaling $2.2 trillion. Worried about the political implications of handing the President a defeat on his home turf, the House basically guaranteed a decade long promise of increased deficits with the war costs excluded, that the wealthiest Americans will get their $1.4 trillion relief package, and we will get little in the way on economic stimulus as a result. Admirably, the Senate allocated a $100 billion for the cost of war, a figure that is sure to prove laughable in the coming weeks while trimming Mr. Bush's gilded tax package to $626 billion.

But what does all of this mean for investors?

Adding up the score from the wide variety of plays set in motion over the past year or two and you have: a war of unknown duration and cost, a weak economy that shows no signs of improvement on any front, a wary and somewhat frightened consumer, and the chance that the next move you make, investment-wise will be the wrong one. Bonds are inflated they say, while stocks are a bargain. Stocks are still over valued while bonds are the only way corporations will be able to raise working capital. Bonds have seen better days, but may have better days ahead of them. Stocks have seen better days and are poised to see better days again.

We are faced with an Occam's razor. William of Occam suggested a simple solution to what we are faced with today as we survey the wide variety of available opinions and predictions of what will happen next. His theory, based on Aristotle's belief that "entities must not be multiplied beyond what is necessary" states that the simplest of two or more competing theories is preferable. An explanation for unknown phenomena should first be attempted in terms of what is already known.

I shall be telling this with a sigh
somewhere ages and ages hence:
Two roads diverged in a wood and I --
I took the road less traveled by.
And that has made the difference.
The Road Not Taken
Robert Frost

Today's Commentary: 04.01.03
Tea Leaves
Add 153 tea leaves in the bottom of the porcelain cup to the 376 that were left there from last week's brew and what you have is a cup full of useless crud. Do the same math for the Dow covering the last six days and much of what you have is of the same substance.

Fund Category/
First Quarter 2003 Trailing 13 weeks One Year

Domestic Stock -1.12% -22.65%

Convertibles 2.34% -6.51%

Domestic Hybrid -0.38% -10.62%

Large Blend -1.25% -23.46%

Large Growth 0.68% -25.21%

Large Value -2.90% -23.78%

Mid-Cap Blend -1.91% -21.94%

Mid-Cap Growth -0.15% -26.06%

Mid-Cap Value -2.99% -20.54%

Small Blend -3.96% -24.32%

Small Growth -3.09% -29.42%

Small Value -4.51% -21.65%

S & P 500 -0.86% -23.43%

S & P Mid-Cap 400 -2.79% -22.61%

Russell 2000 -10.96% -22.09%

Fund Category/
First Quarter 2003 Trailing 13 weeks One Year

Taxable Bond 1.98% 8.22%

Emerging Markets 7.53% 11.50%

High Yield 5.38% 2.42%

Intermediate Gov't 0.59% 9.55%

Intermediate-Term 1.27% 9.78%

International 2.36% 16.37%

Long Gov't 0.28% 15.02%

Long Term 1.72% 10.39%

Multisector 3.15% 9.09%

Short Gov't 0.52% 6.99%

Short Term 0.75% 5.99%

UltraShort 0.73% 2.84%

Lehman Bros.
Mortgage Backed 1.96% 7.50%

Lehman Bros.
Government 3.81% 11.26%

Lehman Bros.
Aggregate 3.57% 9.93%

Municipal 0.86% 7.78%

Lehman Bros.
Municipal 3.28% 7.67%

Folks read tea leaves I am told, to foretell the future. The careful delicate arrangement can divine some sort of future for the drinker. But the ability to read tea leaves that look as if they need to be dredged from the bottom of the cup might prove difficult for even the most experienced of fortune tellers. So what do the tea leaves of the past week, month, or quarter tell those that read these left over tidbits.

What is for certain, it seems, is our continued fixation on the war in Iraq. We had a long, slow build up to the notion and when the first attack began, we were almost convinced that the countdown clock that MSNBC humorously used based on Mr. Bush's ultimatum to Saddam & family, would almost be used like the 24 second shot clock in pro basketball. We expected quick and sure results that worked within our attention span.

Traders watched too. Stocks rose; bonds, oil, and gold fell. Analysts proclaimed war an economic "good thing" and encouraged folks to pile in the equity markets much the way Mr. Bush suggested we pile into our favorite shopping center post 9/11. In our perception of a relatively short time, we noticed that the war wasn't over. So stocks fell, oil rose again at Monday's close of $31.04 and those that panicked watching gold retreat have seen it regain some of it's luster in recent days pushing back to the $336.90 mark. Bonds also saw investors continue to arrive in droves, many making the same mistake they tend to make in equities. More on that later on.

War is not as good for the economy as most would have you think. This Friday, February unemployment numbers are expected to rise for another month. Flirting once again with the 6% mark, this is the underlying drag on the economy that the war is not likely to remedy. Following World War II, the economy recovered but not because of the war but perhaps in spite of it. Lower wages and increased productivity brought the country out of the Depression, not bombs over Germany or Japan. If the White House believes that their single-minded war agenda will ease Greenspan's geopolitical uncertainties, I would beg to differ.

This particular engagement has already seen more than a handful of industries suffer with many more likely to feel the repercussions. The travel industry is a given. The lack of shoppers may also be considered one of the unfortunate byproducts of overwhelming and constant news coverage. Skittish energy prices will have a longer term effect on companies than expected. Some firms recently decided that supplies (computer chips, routers, and other stuff any company would hoard during conflict) might become scarce should the war have a broader time horizon. So they bulked up their inventories somewhat. This got folks excited that maybe, just maybe, this was a sign that the economy was going to stage it's own little independent attack of the bears.

The consumer confidence reported last week was down significantly and everyone seemed surprised. Actually, the dismal numbers did little to reflect that consumers were in fact, confident that things will get worse before they will get better.

We are on the verge of earnings season once again and we can be confident that most companies will use the war or its build-up as the primary reason they have continued to underperform. In some ways they might be correct in their assumption. Looking for a blame as large as the war is too easy. Realizing that the economy is in worse shape than they care to admit is still a shift in the real culprit.

Looking back on other events, brings us back to the two old sages of the economy, Alan Greenspan and Warren buffet. Neither provided nervous investors with anything worth sinking their teeth into. Alan, with hints of underlying dissent from the Board, chose to remain ready to move should he realize that the war is not the reason the economy is shuffling along in wet mud. You'll recall that Mr. Greenspan thought that the economy was in good shape during the last conflict. That thinking cost Bush Sr. his job. Mr. Buffet suggested that the equity market lacks any real value. Prices are not a reflection of valuation and his letter to shareholders of Berkshire Hathaway made the markets stop and pause. At the quarter's close, many major indices are trading at levels reminiscent of 1998.

Looking ahead doesn't provide much in the way of optimism. At least not like the kind that leds us into the new year. Earnings will be shy of stated expectations. The economy will continue to grind forward slowly but that is better than not grinding at all. And lastly, investors will continue to view stocks in the short term.

Until the small investor begins to believe that his job is secure, his money is spendable, and his retirement plan, whether in a 401(k) or a company pension, is stable, there is little likelihood that next quarter will be better than this one keeping alive the possibility that the remainder of this year will not be much better last.