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Factoids from Business & Investment News News, columns, analysis, forecasts, data, and occasional serendipity |
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The sad thing about Europe now is that it seems to have accepted high unemployment as a virtually permanent thing. The conventional wisdom is that unemployment is high because of structural problems like high wages and laws making it difficult for employers to hire and fire at will, and that a stimulative monetary policy would only revive inflation without doing much for growth. Robert Solow, the Nobel Prize-winning economist, has suggested that idea is simply wrong. 'Suppose there is a tendency for prolonged cyclical unemployment to turn into something that looks like structural unemployment. Central banks wrongly convinced themselves that high unemployment was there to stay and the banks could not afford to expand aggregate demand by loosening monetary policy.' The euro has been weak because investors have viewed the rapidly growing US as a much more attractive place to put money. The euro is cheap, and will recover eventually. But efforts to slow European growth are not going to help the beleaguered currency. Related: Caroline Baum, Bloomberg 6-8-2000 Alas, the ECB can only do what it can do, given the hand it was dealt. It can't affect structural unemployment - the kind that exists because it's too expensive for firms to hire the marginal worker. It can't do anything about the tax structure. And it can't do anything about other regulations, which create economic inefficiencies. What it can do is accept the things it cannot change, change the things it can, and recognize the difference. The ECB has a target for growth in its preferred monetary aggregate, M3. Unlike the Fed, it tries to hit it. The president of the European Central Bank, Wim Duisenberg, pointed to the 6.3% annualized growth rate of M3 in the last three months, well above the 4.5% target, as a sign of generous liquidity provision and rapid credit expansion. Related: William Pesek, Barrons 6-5-2000 The euro's weakness is keeping it from taking market share from the dollar, the world's reserve currency. In 1999, a net $160 billion of investment left the euro zone. Meanwhile, issuance of bonds denominated in euros is down sharply this year from 1999's level. And since many global portfolio managers are overweighted in euros and have sustained massive losses, it's hard to say where buyers would come from. In order to keep the currency from plunging further against the dollar and to avoid import-led inflation, the ECB has been raising interest rates and is likely to continue to do so. [But] tight monetary policy may hamper Europe's budding recovery. At the same time, governments haven't yet done the heavy lifting needed to reform Europe's uncompetitive labor markets and establish more pro-business tax regimes to allow the euro zone to compete globally. So markets are paying attention to economic trends in Europe, not ignoring them. Vitally necessary changes in Europe's tax and employment policies eventually will make monetary policy pressures look almost trivial, warns Carl Weinberg of High Frequency Economics. In fact, the weak euro seems to be causing complacency. The currency's declines have boosted European exports, allowing some governments to coast along and delay reforms. Indeed, key euro-zone nations like Germany, France and Italy have a long way to go toward replacing the failed welfare-state policies of the past with market-friendly strategies that could boost the euro over the long term. Germany, for example, needs sharp tax reductions to be globally competitive. It also must figure out how to increase employment, while enacting pension and welfare reforms. There are other potential landmines down the road. One is Denmark's September referendum on whether to adopt the euro. A "no" vote would be a disaster for the currency. But it's the longer-term problems, some of which aren't yet on the radar screen, that pose the biggest challenge. One that is getting attention is the risk posed by EMU expansion. Greece's bid to become the 12th euro-zone member next year already is causing soul-searching in Frankfurt. Greece would carry the lowest credit rating in the euro region (it's rated single-A-minus by Standard & Poor's). And if the ECB is having trouble finding the right policy mix for 11 economies, adding another so soon could complicate things. And after Greece is dealt with, Eastern Europe wants in. Demographic changes may be the most daunting test of all. In the March/April issue of the journal Foreign Affairs, economists Niall Ferguson and Laurence Kotlikoff paint a graphic picture of how euroization could be destroyed by demographic problems. Entitled 'The Degeneration of EMU,' the article argues that, to assure 'generational balance,' whereby future generations don't pay more in taxes than the current one, nations will have to either boost taxes sharply or enact drastic spending cuts. Considering the political weakness of national governments in Europe, the reality, Ferguson and Kotlikoff warn, 'suggests that EMU could degenerate, not overnight, but within the next decade.' Related: WSJ 6-7-2000 Where are the macro hedge funds when you need them? No amount of good news about euro-area fundamentals - low inflation, surging economic growth, tax reform, corporate restructuring - seems to alter market sentiment. Not just the dollar rules but, even more annoying to Europeans, so does the yen. In the past, what might have changed this scenario is a big directional bet by a macro hedge fund, one of those big-money outfits that traditionally moved left when the rest of the market moved too far to the right. Indeed, currency markets move on sentiment and psychology as well as fundamentals. And the waning of the big macro hedge funds removes one factor that could affect those intangibles. Contrarian investing, the hallmark of hedge funds, is out; trend-betting is in. Big hedge funds buying or selling a currency can push others off the fence. The euro's recent moves "could be bigger" if big funds were in the market, says Alfred Schorno, global head of foreign exchange at Commerzbank AG in Frankfurt. That pool of once-feared capital is shrinking. [But even hedge fund bets' on the euro would be swimming upstream because ..] since the euro's inception in January 1999, $155 billion has flowed into the US through acquisitions by European companies, according to Thomson Financial Securities Data, financial-research firm. Less than one-third of that sum has gone in the other direction.
The first of these is that, contrary to what you may have thought, the trade deficit really reflects America's economic strength, not any inability to compete. This year, Americans are buying in excess of $300 billion more from foreigners than they will buy from the US, so the argument goes, because this nation is so much better off than the rest of the world. If only foreign economies were as strong as America's. Then their companies and consumers would buy more American goods. But, if foreign consumers and investors suddenly bought another $300 billion from the US, Americans companies could not handle it. Labor markets are tight and business is already running full out, so an increase in production of roughly 3% of the nation's economic output would be inflationary. An increase in foreign demand would have to be matched by a comparable decrease in consumption by Americans. Secondly, we are told that the trade deficit merely reflects America's record low savings rate. When Americans save so little, the nation must attract enormous sums of capital from overseas to fuel investment. Foreigners are willing to lend a lot of money to the US, as well as buy American stocks. This helps keep the value of the dollar high, which stimulates imports by pushing prices down and restrains exports by driving their prices up. According to this reasoning, the trade deficit is simply a trivial side effect. But it does not follow from this that all the US needs to do is to raise its savings rate and everything would be fine. If the savings rates were to sharply improve, consumers would spend much less. The lower spending, in turn, would substantially reduce output and employment in the economy, running the risk of outright recession. Low savings rate or high, Americans like to buy imports more than foreigners like to buy American products. So the trade deficit does to some extent reflect how internationally competitive American companies are. An unusually high dollar, which the Clinton administration has favored because it simultaneously restrains inflation and attracts foreign investment, only makes these matters worse. It reduces incentives to invest in export-producing companies by keeping prices for these goods unduly high to foreigners. It also reduces incentives to invest in American companies that compete with imports by keeping those prices low. If the economy does indeed begin to slow even moderately, foreign (and domestic) investors may want to rebalance their portfolios in favor of the securities of other countries. This would place downward pressure on the dollar and stock prices, and there is no telling when a small outflow of funds could turn into a run, especially given the stock market's anxious condition.
There is nothing in the quantitative numbers - either the bank credit data, reported by the Federal Reserve every Friday afternoon in the H.8 report, or in the weekly Mortgage Bankers Association's weekly purchase index - to support the notion of an extreme drop-off in credit demand. Commercial and industrial loans rose at an annualized 18% pace in the 13 weeks ended May 24, the Fed reported Friday. That's the fastest since the end of 1998, when companies were forced to tap bank credit lines because of adverse credit market conditions (they were closed). John Ryding, senior economist at Bear, Stearns, says `Non-financial commercial paper, another source of short-term financing, is rising at a 24% year-over-year pace and is up 30% in the first five months [of 2000].' Real estate loans were rising at a 25% pace (13-week annualized) in mid-December, the fastest in at least a decade. The rate of increase slowed to 12.5% at the end of March and accelerated to 16.8% in the latest 13-week period. Using the MBA new purchase index, loan demand for new home purchases is accelerating, according to Ian Shepherdson, chief US economist at High Frequency Economics. `The 4-week moving average was 265 at the end of December, 297 at the end of March and 312 in the latest week,' Shepherdson says.
Consider: Banks will take stock assets as collateral if you're short of cash, and they'll accept 3% down, or in some cases even 0% down, rather than the usual 10% to 20% mortgage down payment. Fannie Mae alone purchased $4 billion of 3%-down loans last year, up from $100 million in 1990. Never mind that stock assets can evaporate fast, or that loans with 3% down foreclose four times as often as loans with 10% down - and that's in a strong economy. At the same time, lenders are pushing into the subprime market, which includes borrowers who have credit problems. Lenders made $150 billion of subprime loans in 1998, up from just $20 billion in 1993, according to HUD. The secondary mortgage market has soared to $2.84 trillion (Fannie Mae and Freddie Mac handle about $2.5 trillion) from $989 billion in 1989. That year, the secondary market bought just $3 billion in subprime loans. By 1998, the figure was $84 billion. That appetite gives lenders an outlet for loans they used to be loath to make. The argument in favor of a vast secondary market is that it disperses risk among the investors. The market's growth also has helped families that might not have been able to get loans to qualify. That has helped boost home ownership to a record 70.1 million people. Even so, some economists wonder how much of a good thing is too much. After all, there's a reason many of the newest homeowners didn't have homes before: They're riskier borrowers. Moreover, a larger secondary market doesn't eliminate risk, it just transfers it from one player to another, from banks to investment funds or other private investors, or mortgage insurers. Banks still keep many loans on their own books, encouraged by capital regulations that let them hold less capital against mortgages than other loans. At the same time, they carry an unprecedented amount of debt issued by Fannie Mae and Freddie Mac; if one or both of the so-called government-sponsored enterprises ever get into trouble, and the value of their debt plummets, banks could be big losers. A slowdown could persuade banks to curb their lending and investors to buy fewer high-risk loans. But prudence might not prevail, and the situation might even worsen. 'What's already been done might not be the real danger,' says Diane Swonk, chief economist for Bank One in Chicago. If interest rates keep rising, banks could be pressured to offer even more gimmicks and incentives to keep lending. And that, she says, is a 'recipe for higher risk.'
The economy added 15.5 million jobs in 1989-99, fewer than the 17.7 million put on in 1979-89. The number of jobs in the Bureau of Labor Statistics category known as "executive, administrative and managerial" jumped 33.9%, from 11.95 million in 1989 to 16.0 million in '99. There were 33.757 million people in the "middle earnings group" in '99, compared with 33.362 million in '89, a rise of only 1.2%. In 1999, the "administrative support, including clerical" category accounted for 17.874 million people, or about the same number as in 1989, when it stood 17.768 million. Similarly, manufacturing work, which also falls disproportionately in the "middle earnings group," has shed 1.423 million jobs over this period, down from 20.831 million in 1989 to 19.408 million in '99. Since there were virtually no new jobs created in the "middle earnings group," where did new jobs get created? Answer: Most of them ended up at the high end. The data show that the low end added 5.44 million workers over this period (up 15.9%), the middle 395,000 (up 1.2%), and the top 9.653 million (up 26.9%). If we assume that all three groups would have grown proportionately, it's clear that the top garnered most of the gains that would have gone to the middle. Median weekly earnings for the high end rose 10% over this 10-year period, for the low end, a well-deserved 15.2%, and for the middle a mere 6.0%. Related: Scott Burns DMN 6-4-2000 The Distribution of Wealth, by Age Group (dollar figures in thousands, for households, not individuals)
Are there any messages here? First, regardless of wealth level, all show net worth rising rapidly from the twenties through the forties--- but peaking in the sixties. After that, wealth declines. Second, the decline in wealth can be pretty steep. Those in their eighties, for instance, have less than half of the wealth of those in their sixties - if they were in the top 10% of households or higher. Affluent older people give assets away as they age. Third, the wealth mountain is very steep. Multiply your net worth six-fold and you will vault from the 50th percentile to the top 10 percentile, a change of 40 percentiles. To move into the top 1%, however, youÌll need multiply it six-fold once more for a much smaller change. Fourth, if you want to run with the big dogs, youÌre going to need a lot of money. This is a very, very wealthy country with literal millions of millionaires. Even so, only one household in twenty has a shot at millionaire status. Fifth, it doesnÌt take much to be in the race. Many of todayÌs workers will accumulate assets that will put them firmly in the top 5 or 10% of households simply by maxing out on their 401(k) plan.
This is the rate investors require to compensate them for the risk in equity investments, and it should remain relatively constant over the long term [.. an argument that would deny that increased information about investments - which has happened in recent decades - has reduced that risk, and thus the risk premium]. But what if it turns out that we've all been too optimistic about the expected return of stocks? Well, two of this country's most influential finance professors, Eugene Fama of the University of Chicago and Ken French of MIT, have just completed research showing that the expected return from stocks is more than five percentage points a year lower than previously thought. Determining stocks' expected return isn't easy, since it requires viewing the markets over extremely long periods. Professors Fama and French focused on US stocks over the last 130 or so years. In particular, they observed that the stock market's average annual return from 1950 through 1999, at 14.8%, was about 6 percentage points higher than it was from 1872 through 1949, when it was 8.8%. The key question: Which period represents the rule and which the exception? The professors are confident that the last 50 years constitute the exception. That means we're on shaky ground if we extrapolate recent decades' stellar returns into the future. One of their more compelling points is based on the fact that corporate America's average annual return on equity over the last 50 years has been 11.9%, nearly three percentage points lower than the stock market's average return over that period. This, the professors say, all but proves that stocks' expected return should be below what their historical return has been over the past five decades. [But the 11.9% ROE is noticably higher than the 8.8% market return from 1872-1949. The prof's don't explain that!] Why is that? If the market's expected return is greater than a company's return on equity, the rational thing for the company to do is close up shop and invest its assets in the stock market. Alert balance sheet readers will note that, because the market's expected return is also the rate at which a company's future income stream is discounted for valuation purposes, the present value of such a company's future earnings would be negative. In other words, if you believe that stocks' historical return over the last 50 years reflects their genuine expected return, then, in effect, you must also believe that corporate America on balance has been unprofitable on a discounted valuation basis over the past 50 years [ . . if the risk premium has not diminished]. The professors' point is that corporate America's returns on equity, on average, cannot have trailed the market's true expected return for five full decades. So investors have been overestimating the expected return from stocks: It should be no higher than their underlying companies' returns on equity, or three percentage points a year less than the equity market's annual return over the past 50 years. Moreover, returns on equity are widely assumed to be upwardly biased because they are based on artificially low book values. So even this overstates expected return. Why then have stocks bested what might be called their true expected return for 50 years? Likely, it is because they have benefited from some unexpected good news. The professors don't discuss what that good news was, but it undoubtedly includes America's emergence after World War II as an economic and political superpower and its winning of the cold war. The professors note that unexpected good news is just that - unexpected - and its salutary effect on past returns should not be extrapolated into the future. They don't predict a bear market, but argue that we need to cut our expectations of future stock market performance, not just for the next few years but in perpetuity. [One last Editors note: The arguments against the prof's findings are weakest against old economy stocks/strongest against the new. In a world where a large portion of the dot coms may die this year, an argument against a reduced risk premium falls short. But dot com valuation's are still high. Lower risk old economy stocks are not. So if the above arguments are valid, they are selectively valid.]
The Goldilocks economy - not too strong, not too weak - grudgingly gave way last year to the three bears: an economy that was too strong and generating inflationary pressures. If today's employment report, along with signs of softening in housing, manufacturing and consumer spending, turns out to be an accurate reflection of a more temperate pace of growth, then the Fed may be off the hook. What next? Soss sees two possible scenarios: one, a reversal of fortune in the dollar, as foreigners opt for investment opportunities elsewhere; and two, a hard landing for the US economy. The former would be bad for US asset markets, Soss says. The latter would be good for bonds but bad for stocks. In rallying, bonds have a 50-50 shot at getting it right. Stocks, on the other hand, seem to have decided that the promised land of slower growth and no more rate increases won't hurt corporate profits. While they were at it, they nixed the notion of a weaker dollar and a hard landing. Judging from the price action, these forward-looking markets have seen the future... and rewritten it to suit their fancy. Related: CNBC Poll 6-2-2000 Economists now expect Federal Reserve policy makers to hold interest rates steady when they next meet, on June 27-28, according to a new CNBC.com survey. Seven of 10 economists polled believe the Fed will keep the overnight federal funds rate at 6.50 percent at this month's meeting. In our last survey, half of the respondents had expected another rate hike.
Related: Kenneth Gilpin, Times 6-4-2000 Christine Callies, chief US market strategist at Credit Suisse First Boston, says 'We see two more tightenings of one-quarter percentage point apiece, the first later this month and another in August. Then we think the Fed will be on hold.' Recently, the stock market has assumed a bigger slowdown than is coming, a slowdown that will cause the Fed to ease. But we may be waiting for a while before we know for sure that the Fed has moved to neutral. The fact that every region of the world is in a reasonably healthy recovery mode will place some demand on the supply of goods and services. The Fed is therefore operating in a situation where global growth is reinforcing itself. That will put a floor under global inflation, albeit at a low level. We maintain this is potentially good news, because if the Fed is in a gradualist monetary mode that means it might tolerate a little inflation without going overboard. Related: Tom Petruno, LA Times 6-4-2000 It's obviously dangerous to underestimate [the fed]. In the last credit-tightening cycle, which began in 1994, the Fed raised rates seven times. The last increase in that cycle was a half-point boost in the benchmark federal funds rate, to 6%, on Feb. 1, 1995. That turned out to be the final increase of that cycle. But it surprised many analysts, who noted at the time that there were already signs that the U.S. economy was slowing. What's more, the Fed's series of rate increases in 1994 had helped precipitate a crash in many smaller foreign stock markets, the Orange County investment-portfolio debacle, and, in part, the Mexican peso's collapse. But none of that deterred the Fed from raising its key rate again at its first meeting of 1995. This is a central bank that likes to get the job done. And if getting the job done indeed means a much weaker economy lies ahead, it's not at all clear the stock market will remain as ebullient as it was last week--especially if there are no signs the Fed will get back into rate-cutting mode any time soon. Related: Alan Abelson, Barrons 6-5-2000 Even if the economy is slowing, inflation isn't, and unless its charter has been secretly changed, inflation remains the bottom line for the Fed.
Related: NY Times 6-2-2000 The Labor Department reported Friday that nonfarm payrolls, a broad measure of employers' new hires, rose a far-smaller-than-expected 231,000 in May (despite a recent spate of temporary hires for Census 2000. Stripped of census workers [up 357,000], payrolls actually declined by 126,000 in May), and the unemployment rate rose to 4.1%. [WSJ 6-5: But total government employment overall was down 111,000, according to another measure.]That compares with an upwardly revised gain of 414,000 payrolls in April, which brought the unemployment rate for that month to a 30-year low of 3.9%. [WSJ 6-5: At retail establishments, employment shrank by 67,000 jobs during the month.] Related: NY Times 6-7-2000 Productivity was 3.7% higher in Q1 compared with figures in the corresponding period a year earlier, the Labor Department said. That was the largest year-over-year increase since a 4.2% gain in the final three months of 1992. Unit labor costs rose 0.6% from those in the quarter a year earlier. That matched the fourth-quarter's year-over-year pace and was the smallest since a gain of 0.5% in Q3-96. When compared with figures in the fourth quarter of last year, labor costs increased at a 1.6% annual rate. Related: William Pesek, Barrons 6-5-2000 The economy's slowing, but probably not to the degree last week's numbers suggested. Much of the recent weakness, notes Daiwa Securities chief economist Michael Moran, could well be payback for unusual strength in the prior three quarters. A slower quarter after such a growth sprint shouldn't be surprising. It's unclear, then, that the Fed's 175 basis points of tightening to date will keep strong underlying trends from reasserting themselves as the year wears on. That would put the Fed back in tightening mode. Related: Robert Brusca, CNBC 6-4-2000 There are reasons to wonder about the abrupt slowing in May. First of all, it is just so darn abrupt and out of the blue! There have been only about seven episodes since 1980 of severe swings in the three-month growth rates of hours worked in the factory sector, such as we saw in May (compared to April). These episodes of extreme swings in momentum since 1980 all fell between January and June. Three of seven produced their outsized swings in May while three others produced the swing in June. Count on the Census as being an issue. The government sector is 19% of total employment, but it has taken up 44% of all job growth this year. Total government-sector job growth was 347,000 in May alone! With a tight labor market, you donÌt think the government sector is taking jobs from the private sector? Was May a fluke? Betting on a slowdown is putting all your eggs in MayÌs basket. Confining our view to the jobs report for now, the notion of a slowdown is almost totally based on the May numbers. Related: Donald Ratajczak, AJC 6-11-2000 There are three factors that suggest the May employment report is more fancy than reality. First, job data are accumulated on the week containing the 12th. As it turns out, that was unusually early this May. As a result, less than a full month elapsed between the employment surveys. Next month, more than a full month will have elapsed, which could lead to an unusually strong gain in employment in the private sector. Second, the May report contained the revised employment estimates established from revised benchmarks used to estimate employment gains from the monthly sampling of jobs reports. Only once a year does the Labor Department do a full enumeration of employment. In between these actual counts, guesses are made about the number of establishments that are created but not counted because they are not included in the sample. Sometimes, these revisions alter estimated growth of employment in the month the revisions are included in the report. This could have happened this May. Third, after new estimates of employment are created, seasonal factors are re-estimated. Depending upon when summer jobs begin, the seasonal factors may understate or overstate employment in May and then reverse the seasonal bias in June. While the seasonal factors try to adjust for these factors, they sometimes can miss the actual timing of seasonal factors. As a result, activity might be understated in one month, especially if summer jobs occur later than normal (or the survey week is earlier than normal so that fewer college students are actually working when that survey is taken). Then the change in employment becomes overstated the next month. [WSJ 6-5: Tom Nardone, chief of the Labor Department's division of labor-force statistics, acknowledged the numbers reflect the difficulty of adjusting for seasonal variations. For example, eating and drinking establishments, a component of the retail sector, had unadjusted growth of a little more than 200,000 jobs in April, and another 150,000 or so in May. 'The way that showed up in the seasonally adjusted data was up 98,000 in April and then down 33,000 in May,' Mr. Nardone says. 'Seasonally adjusting data can be tough. You have to be very cautious about reading too much into one month's estimate.'] Related: Robert Brusca, CNBC 6-7-2000 The supposed weakness [in the employment report] is not so clear cut, and there are three distinct reasons for seeing the size of the stock market's [upward] reaction to this data as unmerited. First, the slowdown was only in the lower range of general trends suggested by other data reports and not a complete reversal of trends as many have concluded. A general slowdown was already foreseeable. Second, the negative profit effects [of a slowing economy] would eventually swamp positive interest rate effects, and a decided bear market in stocks is more likely than a continuation of the recent rally. Third, almost any way one cuts it, speculation surrounding any data release that may affect Fed policy is on the rise and given that this economic expansion is also at risk of overheating, stock market investing is becoming all the more dicey. If the market continues to focus on employment data, the next employment release could easily reverse last week's gains. The May employment data do show signs of a slowdown in private hiring, but it is also true that the level of measurement uncertainty, especially with respect to expected seasonal patterns, is in the same order of magnitude (i.e., the 100,000 to 200,000 jobs range) as the reported 116,000 decrease in private employment. Different cuts of the data and calculations of three-month averages, which provide the best signal of either a change in or lack of change in trends, show that it is far from certain that a significant hiring slowdown is in the works. For example, despite total net hiring coming in more than 100,000 less than expectations for May, upward revisions to March and April's numbers kept the three-month average on track to show an almost 400,000 monthly increase in total employment.
Historically, the summer months have been marked by low trading volume and mediocre to negative market performance world-wide. Yet investors note that global markets have ignored the traditional seasonal trends so far this year. The anticipated "January rally" actually arrived in late November. Similarly, the typical summer slump appears to have been pushed forward to the spring, setting the stage for a potential June or July rally. European stocks may be best positioned to shine if US interest rates are near their peak, but investors in Asian markets are also optimistic. They suggest that steadier U.S. markets would calm recently erratic Asian performance and lure more money into these markets.
Guess again. So far this year, Hong Kong is off 24% in dollar terms, while Singapore sports a 32% bruising, while Indonesia, Thailand and the Philippines have plunged by between 33% and 47%, while South Africa, Colombia and South Korea have sunk 20% to 27%. Elsewhere, Peru, Chile, Argentina, Brazil and Mexico have fallen 6% to 16%. In emerging Europe, Poland's down 2.4%, Hungary 5.5%. The rah-rah squad blew it; they either forgot to tell you the Fed would squeeze the you-know-what out of US inflation, or they underestimated the central bank's determination. And it ain't over yet -- not with many economists predicting the Fed funds to rise another 0.75 to 1.25 percentage points from its current 6.5%. As inflation-adjusted interest rates rise in the US, 'a lot of sensitive markets will be hit,' warns David Abramson of the Bank Credit Analyst Research Group. 'There are lots of assets outside the US that are more vulnerable to Fed tightening than are the sectors of the U.S. that the Fed wants to slow; and the more sensitive an asset is to the U.S., the more it will suffer. Rising US rates can hit emerging countries in several ways. 'Those markets that depend on foreign capital financing to sustain growth and are running sizable current-account deficits are those most likely to suffer,' says Bob McKee, chief economist at consultants Independent Strategy in London. That spells Latin America. It also spells those countries with banking systems weakened by the Asian crisis. Try Thailand, Korea and the Philippines. Although their stock markets may already reflect much of the anticipated Fed tightening, their 'currencies are at risk,' says Mr. Abramson. 'These countries can't afford to hike rates [in line with the U.S.].' Then there's the possibility of a US economic slowdown, which would slam the Asian exporters and many Latins, particularly Mexico. Next on the injured list: two dollar-pegged economies, Argentina and Hong Kong. Argentina, with external debt equal to about 60% of its GDP and 500% of its exports, 'is particularly vulnerable,' says Mr. McKee. Ditto for Hong Kong.
Online shopping and Web surfing seem like opportunities for companies to bombard users with advertising. Furthermore, users are overwhelmed by irrelevant information while useful content on the Web is hard to come by. Harvard President Neil Rudenstine said online learning has enhanced traditional education, but added that the Internet will not replace in-person learning. Despite the disillusionment expressed at the conference, some attendees, such as Web pioneer Tim Berners-Lee and ICANN's Esther Dyson, took an optimistic view of the Internet's future. While conceding that the Web has many irrelevant sites, Berners-Lee and Dyson suggested that users need to find the many high-quality sites that also exist.
Just the Facts Some scary statistics on Japan's debt burden by two research fellows at MIT's Japan Program: More than 65% of government tax revenue after transfers to local governments will go toward debt service, authors David Asher and Robert Dugger claim. When one considers the debt-ridden municipalities, total public debt is twice the size of Japan's economy, far exceeding that of any industrialized country. Is there a chance that Japan can grow its way out? The authors aren't optimistic. (Caroline Baum, Bloomberg 6-9) The flow of new money into index funds is slowing. Index funds attracted $10.39 billion of net flows during the first four months of the year, or 11.9% of total mutual fund flows, according to the most recent data from Boston-based Financial Research Corp. By comparison, index funds captured $26.75 billion, or 46% of net fund flows, in the first four months of 1999. (WSJ 6-7) The cost of enforcing and complying with federal corporate and personal income taxes will be about $115 billion in the year ending Sept. 30, estimates Joel B. Slemrod, director of the Office of Tax Policy Research at the University of Michigan Business School. He says this includes such factors as how much people and businesses spend on tax help and compliance, the value of the time individuals put into their tax affairs, and the budgetary costs of tax-law administration. (WSJ 6-7) James Bianco of Bianco Research notes that Treasuries have done better than spread products [meaning other types of higher yielding bonds] year-to-date, over the last 12 months, and during the last three years. Strangely, many of the explanations for the underperformance of spread products-Treasury buybacks, potential regulatory changes for government-sponsored enterprises, and the volatile stock market-address only the last three months. For most of the 'Nineties, swap spreads and interest rates moved in lockstep with one another. Starting about three years ago, the correlation between interest rates and swap spreads started to weaken. And despite the roaring economy, the link hasn't returned. The reason, according to Bianco, is an overriding fear of systemic or credit risk in the economy. And that's why Treasuries, the highest-quality securities in the world, have been the best performing US fixed-income class. (William Pesek, Barrons 6-5) Who said anything about [the Fed] easing [interest rates]? That's what folks heard last week, or wanted to hear or expect to hear in the near future, sending stocks and bonds soaring following Friday's ultra-weak employment report for May. This cycle has yet to see its last rate increase. And as for any stimulation - for the stock market or the economy - from rate cuts, short of an unforeseen event, it ain't happening this year. (Caroline Baum, Bloomberg 6-5) The onset of Fed easing follows the end of Fed tightening as night follows day. In the last four cycles, easing has followed tightening within six months, according to Tim Hayes, global equity strategist at Ned Davis Research. Hays identified nine major tightening cycles going back to 1953. `In only two of them was there more than a year between end of tightening and start of easing,' he says. `You need to have two rate cuts before stocks really take off,' Hayes says. `It's the `two tumbles and a jump rule.' (Caroline Baum, Bloomberg 6-5) I think the most impressive news of the last two weeks was that on consumer spending, released May 26. It showed very sharp downward revisions of spending and further sluggish spending growth in April. The data now indicate a sharp deceleration in consumer goods spending in place through the last four months. From September through December 1999, consumption of goods excluding motor vehicles rose at a blistering 14.6% pace. Since December, this aggregate has grown at only a 3.2% rate. Meanwhile, consumer spending on motor vehicles dropped at a -25.4% annual rate between February and April 2000, after having jumped at a 44.6% pace between October 1999 and February. (And carmakers announced sales declines in May.) Vehicles data are extremely volatile from month to month, which is why I focused on non-vehicle spending. However, the recent data indicate sharp decelerations in both aspects of goods consumption. I think the recent slowing will continue, as restrictive Fed policy, slower income growth and a more earthbound stock market impede spending. (Michael Bazdarich, CBS MarketWatch 6-5) In April, the dollar amount of redemptions from stock funds rose to 23.5% of the assets in those funds, up from 20.8% a year earlier and rates as low as 16.7% in late 1997, according to ICI. We're not referring here to net redemptions; on an all-in basis, new money is still being funneled into stock funds at a good clip. At the same time, however, almost one of every four dollars in assets in funds is being removed. Charles Bevis of Boston fund consultants Financial Research, keeps a close eye on redemptions as a percentage of gross fund sales, which offers a stark image of the phenomenon. So far this year, redemptions have amounted to 81% of new fund sales. That's actually down a bit from the 85% rate of 1999, but remains well above the 75% pace seen in 1998. And prior to 1998, rates in the 50%-65% range were more common. (Michael Santoli, Barrons 6-5) it isn't entirely clear whom the ETFs appeal to - those who would ordinarily invest in mutual funds, or those who otherwise would buy stocks. There is a lot of evidence that the latter are among the biggest holders of the Nasdaq-100 stock. Exhibit No. 1: The average holding period for an investor is a mere three days, according to numbers crunched by Bogle Financial Markets Research Center. Investors hold on to other tradable funds (ex: SPDRs) a little longer, at least 10 to 30 days, according to Amex officials. (WSJ 6-5) Was that the sound of a bell ringing? Probably not, says veteran stock market watcher Al Goldman of A.G. Edwards. 'There's an old but true market bromide: They don't ring a bell at the bottom,' he says, meaning that just as nobody can predict the top of a bull market, nobody can predict the bottom of a bear market. That might be worth remembering as investors try to digest last week's string of reports indicating some slowing of US economic growth - just what Wall Street has been waiting for. (Tom Walker, AJC 6-4) As Bob Stovall once pointed out, look at a stock chart spanning the summer months. You pick the year. You can point to a lower point in the front end of the chart and a higher point sometime later in the chart. What you don't necessarily have is a true rally that takes your stocks a lot higher on a quasi-permanent basis. In many cases, you see a blip that temporarily improved prices. Hey, that happens almost every day. Let's purge 'summer rally' from the lexicon. (Greg Heberlein, Seattle Times 6-4) EPredict.com is a small company in Redmond that polls investors daily to determine stock favorites. Here's how ePredict works. Anyone can register for free at http://www.epredict.com. At 1 p.m. each day, registrants are given a list of stocks and asked to rank them by how well they like them. There might be a general list of 10 to 15 well-known stocks, and perhaps a list of tech-only, or consumer, or some other specialty group. EPredict then tracks user performance. Between October and April, the popular ePredict stocks returned 62% while the S&P 500 returned 11%. In technology, ePredict's group won, 155% to 30% for the Nasdaq. In April, ePredict showed double-digit gains. Indexes lost single-digit percentages. EPredict does not charge consumers. It intends to make money through advertising and products for special audiences. (Greg Heberlein, Seattle Times 6-4) Treasuries are facing stiff competition from non-government debt for investor dollars. The 30-year Treasury has returned almost 4.5% in the past four weeks, including accrued interest. Corporate and other non-Treasury debt has lagged by comparison. As Treasuries rose the past month, the difference in yield between A-rated 10-year corporate debt and 10-year government notes jumped more than 20 basis points to 2.01 percentage points, putting their yields well above 8%. The yield gap is up from 1.25 percentage points at the start of the year, according to Merrill Lynch indexes. Newfound expectations that the Fed won't be overzealous in raising rates also improved the corporate bond outlook as profits won't be pinched, analysts said. (Bloomberg 6-2) The average US stock fund lost money in May, with technology funds hardest hit. The 6,404 open-end US stock funds Bloomberg Fund Performance tracks lost an average of 3.41% in May, with the average technology fund losing 12.11% and the average natural resources fund gaining 7.27%. Tech's May decline was less than the 19.10% drop the funds averaged in April. Natural resources was one of only five of the 21 stock sector categories Bloomberg tracks that posted gains in May. Precious metals funds gained 1.62%, real estate and property funds were up 1.08%; health and biotech funds, up 1.03%; and sector and misc. funds, up 0.62%. (Bloomberg 6-1) Companies sold $1.8 billion of junk bonds in May, the fewest in more than five years as rising short-term interest rates and slack demand shut out many riskier borrowers. Companies paid yields of about 13%, on average, the highest in eight years, and about half had to include equity warrants to lure buyers. The spread between junk bonds and benchmark US Treasuries has grown more than 1.6 percentage points this year to 6.3 percentage points, a Merrill Lynch index shows. (AJC 6-1) The National Association of Purchasing Management's monthly manufacturing barometer, which was clearly out in front in hinting at a slower pace of economic growth, slipped again in May. The Index hit a two-year high in September of 57.3 and has lost altitude consistently to 53.2 in May. While the January-May average of 55.4 corresponds to a 4.6% annual increase in real GDP growth while May's reading corresponds to a 3.8% increase. It would seem that the Fed's work is almost done. It is now generally accepted that the U.S. economy's potential non-inflationary growth rate 3.5%. No wonder markets are celebrating. But something tells me that the Fed has more work to do, that this tale won't have such a neat, storybook ending. Policy-makers could easily pass on a rate move at the June 28 meeting, issuing a statement warning of inflation risks just so the stock market doesn't get out of hand. (Caroline Baum 6-1) Home Page Previous Factoid Top Sites |
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