Sense on Cents

For time immemorial, nations and economies have operated by the Golden Rule. Well, in this economy and this market, that Rule is strong and seemingly getting stronger. While the U.S. dollar sank to a 13yr low vs the Japanese Yen and declined another 2+% vs the Euro, gold moved higher by another 2+% and is now at a 9 week high and up 9% for the year.

In speaking with an investment advisor today, he told me that he has moved almost 20% of his fund into gold in anticipation of continued declines in the value of the dollar.

While gold is increasing in value, we are not seeing other commodities follow its lead. In fact, oil (down 7% on the day) intraday went below $40 per barrel, while copper dropped to a near 4yr low. Through the grapevine, a close friend shared with me today that Goldman is long oil in SIZE from a very large transaction with Mexico. Both commodity moves indicate to me that the market believes the economy will bump along the bottom for the foreseeable future.

What is going to get us to turn the corner on the economy? The Fed has done all it can monetarily, and will clearly utilize “quantitative easing” in buying longer maturity mortgage, consumer, and corporate assets. There is another $350 billion in TARP funds, some of which will likely be directed towards helping homeowners on the brink of foreclosure.

Beyond that, all eyes in Washington and across the country are looking toward a MASSIVE economic stimulus. Obama has already indicated the outlines of his plans with the largest component being infrastructure.

Will this be the “magic bullet” that we all hope? It would be foolhardy to think that $300 billion, if not $500 billion, and perhaps $1 trillion, would not give a serious jolt to our economy. That said, will a package of the size and type being discussed by Obama revolutionize the art of stimulus packages and lead us to a viable and sustainable economic recovery? I think not. Why? 1. crowding out….capital allocated toward the government stimulus projects will not be available for other “private sector” initiatives….but you say, “well, LD, you yourself have indicated that there is limited private sector demand.” More on this in a second.

2. productive and efficient use of capital….governments have never been the best at protecting the use of capital (Big Dig…7yrs overdue and $16bln over budget…largest federal works project in our history).

3. higher taxes both at the local and state levels combined with higher taxes at the federal level to pay for the increasing deficit are the biggest disincentive for the allocation of private capital. Robert Reich, one of Obama’s economic advisors, has claimed that it is pointless to offer tax cuts to consumers, as they will merely use them to pay down debts. He did not offer opinion on a cut in capital gains.

Do we have any historical records to review situations of this nature? I’m glad you asked. What did Japan do during its’ “lost decade” of the 1990s and how did the Japanese ultimately come out of it? The massive government spending packages made for some nice roads and airports but it only served to escalate their debt vs GDP. It was only when they acknowledged the losses on their banks’ books and privatized assets, both of which occurred in this century, that the Japanese economy recovered.

Read more  about how the Japanese “lost decade” truly played out and how Barack Obama will need a good dose of luck with his proposed stimulus plan in “Barack Obama-San.”

This piece by Amity Shlaes, a senior fellow in economic history at the Council on Foreign Relations and the author of “The Forgotten Man”, a history of the 1930s, makes an equally compelling case for the need for private sector intervention. Both of these pieces are must reads!!

We have harped on the fact that we have heard very little from analysts, business leaders, or commentators about the need for private sector capital and intervention to take the lead in moving our economy out of this economic morass. Well, at long last we heard two individuals make the case and they deserve a shout out. Thank you Jim Cramer from CNBC and Chairman and CEO Ron Defeo of Terex!!

There’s a fork in the road…let’s take it.

Company News

— Apple trades down 6% as the company indicates Steve Jobs will not be present at an upcoming conference. Speculation persists about Jobs being in ill health, the company not having any new dynamic products, and not wanting to present given the weak economy. Apple leads the Nasdaq lower on the day.

— GE trades down 3% on the day as the company announces it will no longer provide quarterly and annual guidance on earnings. I am definitely a believer that overemphasis on quarterly earnings can often be a hindrance to the long-term health of a company, but not providing guidance on annual earnings begs the question as to transparency. Speculation that GE may ultimately have to become a bank holding company to secure capital to support operations would also subject the company to more restrictive oversight thus limiting growth potential.

— Macy’s trades up 18% (still down app 65% on the year) as it was able to amend some outstanding debt. Retailers in general still have some tough times ahead.

Bonds

Government bonds had a massive flattening in the yield curve as maturities out to 5 yrs sold off fairly sharply (expectations of growing supply with increased deficit) while longer maturities (10-30yrs) rallied sharply in anticipation of Treasury and Fed purchases. A rule of thumb has always been that a flattening curve is in fact the precursor to a recovering economy while a steepening curve portends recession.

I am not so sure that that rule will hold this go round given all of the massive government intervention but it does deserve mention. The only reason an investor would buy a 10yr U.S. government bond yielding 2.2% is if you believe we are going into a depression…or you know that Uncle Sam is behind you waiting to purchase billions of them. Remember that concept of “front running” we broached the other day.

How Bernie “Madoff” with $50 Billion??

Not for nothing, but how is this “Scrooge” out on bail? Bernie’s bail restricts him to a 7pm -9am curfew and requires an electronic bracelet. Wouldn’t the court consider him a serious “suicide candidate” and want to be watching him at all times?? You think?

Bernie’s wife had to forfeit her passport. Supposedly many investors were her friends and relationships. Emphasis on “were”!!

The largest “fund of funds” at Bernie’s “shop of horrors” was Fairfield Greenwich, which in their own publication promotes that they “employ a significantly higher level of due diligence.”  The lawyers are going to have a field day suing this firm!! Game over!

Auto Situation

Chrysler is shutting down plants for the next 30 days. Ford plans on halting production at 10 plants for a week in January….tick, tick, tick…

Personal Finance

A site that I find to be particularly helpful as far as reviewing performance in different sectors and offering lots of insight on different sectors is run by Morningstar. I hope you find it helpful.

Keep those cards and letters coming…and bring your friends for more insights into Wall St. and Main St.

LD

This entry was posted on Thursday, December 18th, 2008 at 7:00 AM and is filed under American Consumers, Auto Industry, Bernie Madoff, Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.