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

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Today's Commentary: 05.25.03
Quick Sand
My wife was unfazed by the announcement of the latest invitation from Washington to join the party. Always the pragmatist, she sees the only part of the new bill, the increase in the child credit which will refund us the hefty sum of $400, as already eaten by the increased tax burden recently passed in my county to keep the schools open and operating for the next three years. That four hundred dollars I might add will come just short of the actual costs we will incur because of our states revenue shortfall, largely because she is also a small business owner. This makes her eligible, Mr. Bush, for a double taxation.

Her only optimistic outlook comes from the fact that none of her clients have been badly hurt by the economy's steady struggle in quick sand. But the problems of getting stuck in this sandy muck, the struggle to get out, and the lack of a helping hand holding a long stick tend to be far away from the actual party celebrations on the Beltway. When did those dour Republicans, haters of big spending and lovers of the tax cut change into record spenders, defenders of deep deficits, and tax cutters whose plan is only partially revealed and mostly veiled?

So effectively, and unbeknownst to many Americans, the tax cut will not have any positive effect on our day-to-day activities. Our work week, those of us who still have a full one, will continue to exist, providing us with less, instead of more disposable income.

My next door neighbor dropped by recently to ask me what I thought of the tax cut. He was inquiring about, and I have become very good at discerning the real question behind the question, whether I still believed in the equity markets. He has been surrounded, he told me, in an office filled with nay sayers who tell him that this market is a simple case of throwing good money after bad. The irony of this, and the point wasn't lost, was the fact that these pessimistic investors are the very group who will probably stand to benefit from the current attempt by the folks in Washington to help. Their lack of faith was not surprising. Their lack of Republican optimism is.

In case you failed to notice, there is a party in Washington these days. The heady moment when the Veep is needed to pass a bill that promises more jobs and more growth but really will do much of the opposite, has got to be as contagious as any other viral leap. If deadly contagions can jump from exotic animals like the civet, then surely the well-to-do should be able to see that living with sunsets is a good thing. To further clarify, the civet, a small tree dwelling relation to the mongoose has been labeled as the possible beginning to the economically crippling SARS virus. Sunsets, not the ones we look for at the end of the day, are special provisions built into the tax bill that could allow the bill $330 billion price tag to explode into something worth over $800 billion. No wonder the President was smiling.

As we step gingerly through the sand, which by no means is a comparison to the economy and its ability to be both corrosive and shifty, we watch for spots where the sand combines with water in sufficient amounts to drag us down into its depths. This tax bill, the growing deficit, the weak dollar, and insouciant markets are not a long enough stick to help us. As the party goers raise the noise levels, drowning out our attempts to shout for rescue, I want to leave you with the most accurate observation of how the tax cut will find its way into the economy.

Garrison Keillor, host of Prairie Home Companion suggested in his most recent broadcast that the wealthy will indeed spend their tax cut. And it will, he so eloquently pointed out, will trickle down to us in the form of tips.

The Week Ahead in Equities
Ho hum reactions from a week's worth of ho hum news left most investors wondering if the summer will be much more tepid that it usually is. With the vacation season now officially here, the big market movers have grabbed their beach chairs and sun screen and left town. Last week it seemed as if they were all finalizing their plans, cleaning up there desks, and bidding their employees to keep the plants watered. In other words, looking for a signal from the now departed heads of finance will become the latest barbecue game this season.

Is it any wonder why there is a lack of direction? Can we really find any real reason to invest? Certainly not the because the dividend tax cut is in place. This portion of the bill passed by Congress has little to do with the average investor.

"Additional tax demands on consumers will worsen the disposable income squeeze they are already facing, and they will have difficulty maintaining current spending habits."

~ Inferential Focus

If you are a long term holder of stocks, and investing in mutual funds generally doesn't qualify you for this moniker, chances are you have held them in the hopes that the price will rise. When that happens, the yield that dividends provides will drop in relation to the increased price of the share. Dividends are a share of the profit that most investors feel entitled to receive. But those that do pay dividends are more concerned about their stock price than the amount of money old school investors receive, forcing many companies to pursue further share buy backs plans already in place. Removing liquidity is the best way to look good quickly. And looking good, not dividends, is the main concern on Wall Street.

Inferential Focus, a research group begun 20 years ago by Bennett Goodspeed and Charlie Hess, according to their website, has " developed a service for investors that relied on "Inference Reading" to look for events and anomalies that suggested imminent change for companies and markets." These guys, using Nobel Prize winning research on whole brain thinking pioneered by Dr. Roger Speary believed that the could take readily available information, filter it using their mind mapping techniques, and make predictions about marketplace happenings. To their credit, they accurately predicted the terrorism that hit this country on 9/11 a full year before the event, the demise of broadband in the fall of 1999, and the successful identification of the internet as an important business market in 1996.

Their latest think tank research doesn't bode well for the average investor. They predict that the squeeze currently being applied from both corporate entities in the form of lowered retirement obligations, loss of jobs, and the lack of spending coupled with individual states raising taxes at the same time they cut services, will have a long term disastrous effect on the economy.

The Week Ahead in Bonds
With the topic of the "never ending" tax cut on so many people's minds, it is easy to understand how some things can be pushed to the back burner.

Weekly Index 05/24/03 Year ago

Fed Funds rate 1.25% 1.72%

Discount Rate 2.25% N/A

Prime Rate 4.25% 4.75%

3 month T-Bill 1.01% 1.73%

6 Month T-Bill 1.05% 1.89%

10 Yr. T-Inf. 1.64% 3.06%

10 Yr. T-note 3.33% 5.13%

30 Yr. T-Bond 4.26% 5.66%

Municipal Bonds 4.52% 5.41%

Mr. Greenspan spoke this past week making the fear that deflation could play a significant part of in the upcoming months and years, as less likely than he may have previously implied. Deflation is a slow strangulation of the open markets putting pressure on prices in a downward motion. It works quite simply. If consumers believe that prices will go down further or companies believe that consumers are not going to spend because of the current prices, the net effect is a further reduction. This reduction of prices negatively effects the companies bottom line which negatively effects employment which creates a slow winding spiral of lowered interest rates, the most common combative technique available. These lower rates are designed to create liquidity, which is basically is the ability of borrowers to find readily available cash. But suppose these borrowers don't want any money. Suppose they don't want to carry any additional debt on their books for fear that investors will shy away.

This is not just an American problem either. Europe, with its focus on stability, has been slow to lower their prime lending rates, leading many top economist to predict that the first victim of deflation in this century will be Germany. With Japan successfully holding the crown for their slow reactions in the last century, the threat that this could wash over onto our soil is very real.

The fixed income market is beginning to resemble an overpriced investment. Junk bonds may be the first indication that there is trouble ahead. For the first time in 12 weeks, money flowed out of this arena. This outflow compared to inflows over that period amounts to a mere trickle, but the warning signs are there. This kind of trouble may prove more ominous in the coming months.

Municipal bonds are faced with a lower credit rating problem that will further hurt states and municipalities dependent on them for revenue shortfalls.

The yield on the ten year Treasury note fell to a 45 year low this past week. This was due largely because of the continued fall of mortgage rates. While new home loans are not what they were a year ago, the refinancers are back at it suggesting that Americans believe in the roof over the heads as the best place to put their available money. This refi boom has pushed holders of mortgage backed securities to look to non-callable T-notes to help with early loan redemptions. That pushed the price of these up even higher.

Those long term low rates may, according to some experts, allow Alan and company to keep another rate reduction in the holster. They are running out of room in which to maneuver. And with the dollar's continue drift downward, the Treasury departments lack of commitment to a strong dollar policy, and the diminishing outlook for growth for the year, Mr. Greenspan can rest assured that his lack of reaction might be the best thing.