• Straight talk on mutual funds, bonds, real estate, and annuities
• Techniques for avoiding financial disasters
• Tools to help readers track their debt and create a plan for staying out of it
• Road maps to buying a home and saving for college and retirement

Today's Commentary: 07.18.05
Jamias Vu: Seeing the Market's Unseen Nature

Many people are familiar with the optical phenomenon of Deja vu, a feeling that you knew something beforehand. But few are familiar with another paramnesian event called Jamais vu, a corollary illusion that suggest something never seen. When you consider the past week's events and the suggestion that we should somehow be relieved or even astounded, it needs to be reckoned with immediately lest we all go crazy. Because we have never seen this before.

First up was the psuedo-celebration of a time-sensitive rise in the S&P 500 index to a four year high. For those who had the opportunity of watching this market get to that point in fits and starts, the accomplishment seems to be less of a milestone and more of an omen.

Several things are at play here besides the rise in equities not the least of which is the lack of inflation. The Producer Price Index numbers over the past week showed little or no change as companies supposedly have found new ways of increasing productivity to offset higher energy prices. Higher consumer sentiment numbers from the University of Michigan survey - which is sort of surprising considering the fact that the price at the pump remains costlier than it should be and the terrorists struck yet again with the markets and general populace reacting relatively nonplussed - makes the uptick of this reading seem almost an aberration. Add to that an increase in industrial production - which is more than a little suspect with the significant loss of jobs in the manufacturing sector with last month's employment numbers showing a loss of yet another 24,000 jobs.

This however is not reason enough for the new four year high in the most popular index. All but one major brokerage house is screaming "buy" this market but the hesitation remains strongest among the individual investor. According to Trim Tabs, much of the buying last week was done by corporate insiders, which they believe should point to the relative value of the market.

The thinking goes like this: if the CEO thinks his company stock is cheap and he is using huge portions of his salary to purchase the stock which would suggest that he thinks he should also authorize even larger portions of the company's cash reserves to the same end, this should instill confidence and that should by default show the individual investor that they are missing a good run.

So should the individual be worried that they are missing the boat? No because the individual investor, for all of their faults not the least of which is greed, finds the logic slightly suspect.

In a time when shareholders have been surprisingly quiet as top tier pay packages continue to grow unabated - and unchallenged, many of these execs are using that wealth to help their own cause. The problem with stock buybacks rest on liquidity and dividends. By removing huge chunks of available stock from the market using cash from lean production, low wages and in some instances, layoffs or restructuring instead of putting that available cash to work to grow the business, companies are actually admitting that the sustained growth everyone is talking about is not as good as it seems.

This works favorably in the earnings news as you might imagine. By diluting the previous number of shares available, some of which might carry dividend payments these companies can increase earnings.

And what of those earnings? Inventories have not increased and while this is considered a good thing, it could be interpreted as business quietly predicting a slower economy and they are doing so by keeping production at a sustained level. By taking autos and electrical production out of the production picture and coupling it with the lower inventory number, those levels become becomes much less exciting while becoming quite a bit more benign.

Lower inventories, less stock on the market, and sullen inflation do not point towards a robust economy. They do however allow earnings - much of which is already at lower guidance - to be met as expected.

Now as the stock market has gained ground for the last three weeks running, the yields in the bond market have also crept higher. That jump is credited to strong retail sales and what could be considered - by some and certainly not this column - strong manufacturing data. Which unfortunately leaves Greenspan with little else to do besides raise those short term interest rates yet again. His two and quarter point hikes so far have forced him to keep optimistic about the strength of the economy, wonder at the longevity of low long-term yields, and try to talk the housing bubble down without sounding like a guest on CNBC.

His success in the short term has been muted as most investors are just not finding the yields they seek in Treasuries as worth the attention. Corporate offerings, it should be noted were up last week and have continued to be bright spot for yield chasers as well as offering companies fertile grounds to tap.

Bond investors are still not convinced that all is well in the economy. The persistence of the consumer and the easy financing available to them have made it all seem increasing illusory. There is still a great deal of sensitivity to interest rates and that could bode badly for equities over the next several quarters.

Inflation will rise. The factors holding it back have already begun to show signs of wear and Greenspan will need to address not only that but the housing risk - a bubble of his own making but one he seems loathe to admit to.

Once long term rates begin to rise - and they will - expect a sudden change in sentiment as the monetary policy begins to constrict.

All of the old - and not to mention aforementioned - problems still can undermine this robust economy. Once we have housing begin to takes its toll on those incredibly ingenious financing deals, and once inflation pushed higher in the fall months by higher oil prices - since when did $58 a barrel sound like an acceptable price for crude - and once the consumer realizes that wages have not kept pace, the "run that could go on forever" will come to a screeching halt.

Far be it from me to throw water on the fire but we have not seen what needs to be seen. It is not Deja vu, the knowledge of beforehand - nor is it's other cousin Presque vu, something that is almost seen.

Instead what is on the horizon is something that has never been seen, a convergence of events that are at once global and local, that none of us wants to admit to having - not seen.

BlueMoney Report

The Blue Money Report
Financial Commentary covering a wide range of topics concerning money, investing, and how it effects the average investor and their financial health.

It is the World of Money and Investing Explained.

Our Publication
If you are interested in providing your readers with our syndicated column, you can request it here