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Today's Commentary: 09.28.04
Awaiting the Next Earnings Season
Money as far as the eye can see. Who could resist the idea of balancing the federal budget. Even better, suggest it make amendment status and then pass it quietly without much fanfare. If you were them you would be throwing your collective hats in the air in celebration about the news reported last week. Instead, most of us will ask as the deficits climbs to the trillion dollar mark faster than Ichiro can break a ninety year hitting record in baseball, what plan to balance the budget?
Apparently, we are going to balance the budget on the shoulders of war. That's right , war. Now for most of you, the thought of war conjures either one or the other emotion and I have also promised at great length not use it to make my own small economic points. But Congress, as only Congress can, decided to pass an amendment making a balance budget a law except when we are at war. And we all know what that means. Right?
But these elected officials also granted a Presidential wish to make his ill-conceived and largely narrow tax cuts permanent without offering any way to pay for either of these acts. How can they do this will be asked by future generations as we continue to become borrowers of record. Or is that record borrowers?
Adding further to the growing economic woes that we are facing as the third quarter ends, oil prices marched toward what is now considered the largely inevitable $50 mark. But now, the real concern seems to have been replaced with a sort of ennui that undercuts the usual raucousness of the trading pits. They know better than most that these prices are ridiculously high and are doing little for the world's economic growth. they also know, at these levels, the high price of oil lines the pockets of the oil producers around the world. Flush with cash, will these many-times-over-renewed billionaires turn around a purchase government debt?
And that is what the bond markets are pricing themselves for, as many investors begin to look the other way. Or at least with renewed interest at equities. Only a fool, it is commonly believed would tie any cash into the Two-year Treasury, currently trading at just three quarters a percentage point over the short term interest rate, a measured moment in time reached last week by the Federal Reserve.
Sometimes we must be reminded that lenders are not fond of low rates as we mostly focus on the borrower side of the equation. Its a common mistake that borrowers make. And the United states, with a fiscal quagmire developing stateside and without mention of what is brewing contentiously around the world, should know better than most. We like to borrow.
Lenders have turned bullish on the bond market sending prices up as the yield predictably falls. With the economic "soft patch" looking more resilient with each passing week's worth of economic reports and the continued exclusion of higher energy and food prices from the inflation index, it seems that more bond buyers have finally seen the light. That light unfortunately is falling on many an investor who was counting on short term bonds as a temporary hiding place.
What those investors have been hiding from has not gone away. The equities markets have scared a few investors this year as we watch in earnest as the Dow once again dips below 10,000. Not that we ascribe to the sanctity of that number, it does have psychological effects on investors. Those skittish investors are now scampering around in the broad daylight like so many, well, you know, running from the crushing foot of earnings season.
The end of the third quarter will not give these investors much in the way of reason to rejoice. Consider first why they ran into bonds. It was more than a flight to safety. Instead it was a growing fear that speculation along with over weighted P/Es had taken the equity markets and turned it into a so called "stock picker's market". Only experienced speculators like those environments and that fully eliminates many of the hard working folks that are often cited on television, radio and print as the investor nation.
But more specifically, it will be about comps. Not the kind that net you a free room in Las vegas but the comparables to last year. Even though best case scenarios have the Standard & Poors 500 index gaining almost 14% for the quarter, twice what is considered historical for the index, the focus on this gain will be lost because of a common mistake made by many who trade. The fact that the market was expected to slow down from its previous year's torrid pace is overlooked almost as much as the current year's absolute return will be as companies begin to report next week.
Last week saw a trickle of big name warnings that will most certainly follow with a slew of companies that met or beat expectations as they attempt to overshadow the ne'er-do-wells. But profits will be down significantly as reporting season begins and as analysts look to the future for some real fundamental change in growth. A popular bond trader suggested that when oil hits $40 a barrel, GDP could be counted on to be around 4%. Raise the price to $50, and the GDP drops to 3%.
Making the correlation of oil to GDP is not new. Looking to future earnings when the celebration should be about current accomplishments is nothing new. Watching traders and investors become skittish during times of turmoil is nothing new and quite frankly, is expected. Hoping that bonds will recover soon is also nothing new. But the belief that that the recovery is real has become as presumptive as saying "mission accomplished".
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.
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