The Big Picture | September 2004

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Random Notes

Thursday, September 30, 2004 | 12:09 PM

Today's random items relate back to the prior post:

When George Meets John
Goodbye, Geneva
Oil hangs over foreign policy debate
Al Qaeda Seen as Wider Threat
Growing Pessimism on Iraq
Pentagon Spends Without Bids, a Study Finds

Quote of the Day:
“In business, words are words; explanations are explanations, promises are promises, but only performance is reality.”
-Harold S. Geneen

Confessions of Repentant Hawk

Thursday, September 30, 2004 | 12:01 PM

in Politics

One hardly hears much about Iraq’s impact on the US Economy and Equity markets. Since tonight’s Presidential debate will focus on Foreign Affairs and National Security, a review of our past analyses on Iraq and its likely impact on the markets is past due. Iraq is the Wild Card: It impacts the cost of oil, America’s standing in the world. It has been undercutting the sense of stability that is necessary for global trade.

Three months ago I wrote: “The Neo-Conservatives hawks who pressed for the invasion of Iraq failed to create an adequate strategy for a post-war period. This created an opportunity for insurgents to cause havoc and mayhem; With the handover to the Iraqi Ruling Council a few days early, the planners have gotten one right for a change. The insurgents will be denied an opening to thwart sovereignty for Iraq.”

That marginally positive view turned out to be far too optimistic. As I wrote that in June, the CIA was reaching the exact opposite conclusion: conditions in Iraq were bad and deteriorating rapidly. Subsequent events have shown the CIA’s assessment was far more prescient than my own.

My original analysis of the invasion was based on the potentially positive domino effects. As we wrote in March 2003, it was never about WMD or Hussein as a ‘threat’ to the region; Rather, it was all about eliminating potential negatives: Saudi oil fields falling into the hands of Fundamentalists; Our securing Pakistani Nukes, and lastly, brokering a deal between the Israelis and Palestinians. I am chastened by how inaccurate those expectations were.

None of these goals have been accomplished. While the potential benefits of intervention in the Middle East were significant, the incompetent execution of the post-war period raised new problems. It has become a debacle. Further, I find it unconscionable that the basic military lessons of Viet Nam - give the Pentagon what its military planners ask for, and do not micro manage the war - were mostly ignored.

The first of three presidential Debates are tonight, and it will be about Foreign Affairs. Everyone expects Iraq and terrorism to be topic A. From the incumbent, I’d like to hear a frank assessment of what went wrong, why the best minds from the Pentagon and State Department were not listened to, and what will change if he wins a second term. From the challenger, I’d like to hear specifics as to how he can extricate us from this quagmire.

I do not expect much on either count . . .

The Bush vs. Kerry Ratio

Thursday, September 30, 2004 | 06:55 AM

in Politics

Martin Pring is a reknowned market technician. His site includes an interesting chart, derived from data via Rasmussen, a reliable pollster.

Click for larger graphic

Graphic via Pring Research

There is a caveat to the charting of polling data patterns: It hardly correllates to technical trading patterns; Polling is a cost free public opinion survey, subject to headlines and PR issues rather than fundamental concerns of the business cycle. Individual equity performance is driven by 'Supply and Demand' issues.

Still, its an interesting concept, and Pring does a nice job of presenting the data as an objective assessment. It will be curious to see if the debate tonight impacts this . . .

via Mike Barret, NYU

Sources:
Pring Research
http://pring.com/2004election.htm

WSJ & Barrons pick up Oil comments

Wednesday, September 29, 2004 | 05:12 PM

in Media

barrons_online

Some of our earlier comments on Oil got picked up by 2 separate Dow Jones properties:
Barron's and the Wall Street Journal.

T. Boone Pickens (BP Capital) has been talking about a permamently high plateau for oil, stating we will never see $32 oil again.

This is an issue that is likely not to go away anytime soon.

UPDATE: September 29, 2004 10:54pm
Whoops! Better add Slate to the mix . . .

Sources:
Oil, the Next Stop and Its Impact
Tim Annett
WSJ, September 29, 2004 2:40 p.m
http://online.wsj.com/article/0,,SB109646957678031259,00.html

Oil Hits $50 on Heavy Demand
Market Watch Today
Barron's, WEDNESDAY, SEPTEMBER 29, 2004 2:03 p.m. EDT
http://online.barrons.com/article/SB109640741006030495.html

Oil Terror
Don't blame Osama for high gas prices.
Daniel Gross
Slate, Wednesday, Sept. 29, 2004, at 3:40 PM PT
http://www.slate.com/id/2107454/

Global Crude Oil Demand & Gasoline

Wednesday, September 29, 2004 | 09:55 AM

in Finance

I've been talking about the extent of global demand for Crude outside of the US; This chart demonstrates that perfectly:

Global Oil Consumption
click for larger chart

chart courtesy of Chart of the Day

The trend in China and India is clearly higher; I expect this pace to be maintained at the very least, and potentially accelerate later this decade.

There also seems to be a theory circulating that Oil and Gasoline are uncorrelated; This chart (from this morn's NYT shows that not to be hardly true over the long term:

Oil and Gasoline Divergement?
click for larger chart

chart courtesy of NYT

While there are occasional divergments, they are hardly the typical pattern. Instead, we see they are temporary and mostly modest -- except recently. While there are several unconvincing explanations for this, I expect that eventually, the two will reconverge. The unusually rapid rise in Oil and the longer lag in gasoline is a condition that cannot continue undefinitely. One will have to move towards the other.

Here's a quick excerpt from the times piece:

As the price of crude oil flirts with $50 a barrel, gasoline prices are heading up again, ending an unusual period in which gasoline prices were falling even as oil prices rose.

Crude oil and gasoline prices began moving in opposite directions in June, a conundrum that was a pleasant surprise for motorists in the peak summer holiday season.

Last week, however, gasoline prices jumped 5.1 cents a gallon, to a national average of $1.917 a gallon, still below the record average of $2.06 a gallon in May but 33 cents higher than a year ago, the Energy Department said. If crude oil prices keep going up, as many oil industry officials predict, gasoline prices are expected to keep climbing as well, as is the price of home heating fuel.

Finally, we look at this chart of the recent run-up in Oil. The WSJ notes that it pulled gasoline higher, and we are likely to heating oil and natural gas prices rise next.

Bubbling Up: Along for the Ride
click for larger chart

Source:
Chart of the Day
http://www.ChartoftheDay.com

With Oil Near $50 a Barrel, Gas Prices Start to Inch Up
SIMON ROMERO
New York Times, September 29, 2004
http://www.nytimes.com/2004/09/29/business/29gasoline.html

Bubbling Up: Along for the Ride
WSJ Graphic

Oil at $50 Could Bring Sharp Pinch
By JON E. HILSENRATH, RAY A. SMITH and PATRICK BARTA
THE WALL STREET JOURNAL, September 29, 2004; Page A2
http://online.wsj.com/article/0,,SB109640240692530366,00.html

New Column up at Real Money (9/28/04)

Tuesday, September 28, 2004 | 03:17 PM

in Media

RealMoney

The latest Street.com column is up:

"Bounce Beckons but Long-Term Challenges Remain"
In a postbubble, poststimulus economy, look for trading vs. investing opportunities.

For those of you without a subscription, its loosely based on Monday's comments, Bull or Bear Market?

Here's an excerpt:

"Two weeks ago, the S&P 500 and Dow Jones Industrial Average had reached the top of their trading ranges and I surmised that, at the very least, a retracement of the Aug. 13 to Sept. 15 rally was likely. Furthermore, I suggested any break of S&P 1123 would project a pullback toward 1100-1105.

These levels have been reached -- the S&P traded as low as 1101.29 Tuesday morning -- and the markets have become slightly oversold, at least on a short-term basis. That suggests to me that a small, relatively insignificant, bounce is due. After that, we should resume moving downward toward an intermediate-term low sometime in October.

As that progression unfolds, investors may wish to ponder this philosophical query: What is the meaning of the lower highs and lower lows of 2004? Are we in a bear market? Or, as some have argued, are we merely digesting outsized gains from 2003?

With the third quarter ending Thursday, and the indices flat to down for the year, one can hardly claim this is a powerful bull market. Yet the range-bound environment hardly proves the bear's case."

Oil = $50 a Barrel

Tuesday, September 28, 2004 | 06:19 AM

in Finance

Oil broke a psychological barrier last night: $50.

As I have been lamenting for quite some time, this is not due to a "terror premium." Oil is rising in a response to demand from Asia, especially China.

Click for larger graphic

Graphic courtesy StockCHarts.com, RealMoney.com

As the chart above makes clear, after 9/11 there was brief plunge in oil prices. This reflected the expectation that the global economy would slow. It snapped back from that fairly quickly. Oil prices were then stable from April 2002 to January 2004 -- hardly a terror premium.

Here's a more recent history of oil prices relative to events:

Click for larger graphic

Graphic courtesy WSJ

The WSJ observed:

As oil topped $50 a barrel Monday, "one of the world's most important fuel gauges -- U.S. commercial inventories of crude oil -- signaled that the surge in prices may well continue. Inventories in the U.S. have plunged substantially below last year's level, confounding predictions by many analysts that stocks were building.

That may portend bigger jumps in the price as the Northern Hemisphere approaches winter, the season of peak oil use due to consumption of heating oil. To rebuild stocks and keep refineries humming, the actual users of oil -- rather than speculators -- are likely to snap up petroleum, keeping up the pressure on prices.

The decline in American inventories is roiling markets because the U.S., as the world's largest oil user by far, is the main setter of world prices. The fall in stockpiles was exacerbated by Hurricane Ivan's hammering of key producing and transport facilities in the oil-rich Gulf of Mexico. Oil output in the U.S. gulf is still running about 25% below normal, robbing U.S. refiners of needed supplies and prompting the Bush administration to make some emergency loans to buyers from the U.S. government's Strategic Petroleum Reserve. The government is considering making more such loans."

I suspect that $40-50 is a likely range for the next year or so. Look for events to conspire to create oil hitting $57 sometime in Q1 2005 . . .

Sources:
Market Challenged by Macro Concerns
Barry Ritholtz
RealMoney.com, 9/22/2004 3:37
http://www.thestreet.com/p/_rms/rmoney/barryritholtz/10184276.html

Low Oil Inventories in U.S. Signal High Prices May Stay a While
BHUSHAN BAHREE
THE WALL STREET JOURNAL, September 28, 2004; Page A1
http://online.wsj.com/article/0,,SB109631888189629185,00.html

Bull or Bear Market? (hint: Neither)

Monday, September 27, 2004 | 11:43 AM

in Finance

Two weeks ago, we noted that the SPX and Dow had reached the top of their trading ranges. We suggested at the very least a retracement of the August 13 to September 15 rally was due. Further, the break we were looking for below 1123 has produced our expected pullback towards 1105. As those levels get hit, the markets will become oversold, at least on a short term.

As we wait for that to play out, investors are left pondering the meaning of the lower highs and lower lows of 2004: Is this a Bear market, or are we merely digesting 2003’s outsized gains? With the quarter ending Thursday, and the indices flat to down for the year, one certainly cannot make the claim that this is a powerful Bull market. Yet the range-bound trading hardly proves the Bear case.

Our conclusion? We are working our way through a post-bubble, post-stimulus economy. The Nasdaq remains more than 60% off from its highs. We continue to suffer the hangover from the bubble’s aftermath: Capacity utilization is lingering in the ~75% area, thanks to all the overbuilding and over-investment from the ‘90s. End-user demand remains anemic, and manufacturers find themselves unable to pass along price increases, despite the rising prices of many commodities.

All this suggests to us that economic growth will remain in the modest 2.75–3.5% range. Inflation will primarily be found in commodities, as opposed to wage pressure. Job growth will continue to be mostly mediocre.

With or without further stimulus, the U.S. economy requires additional time to heal and work off the excesses of the bubble. How much time? Following the popping of the Japanese bubble in 1989, and the 80% drop of the Nikkei Dow, Japan was mired in an economic hangover for 14 years. But the Japanese central bankers made the mistake of cutting rates somewhat gradually. They allowed a deflationary mentality – postponing purchases as prices slid – to take hold amongst their consumers.

That doesn’t appear to be happening in the U.S. Our central bankers produced more monetary stimulus, and in a faster timeframe, than did their peers across the Pacific. So far, we appear to have dodged the deflation bullet. But that doesn’t suggest that we are out from under the post-bubble environment.

As such, we continue to look at the markets as presenting trading – but not investing – opportunities. Modest support exists at SPX 1100-1105 — and if we get extreme sentiment readings at that level, we would be buyers, albeit with tight stops loss points.

Chart of the Week: Yield Curve

Monday, September 27, 2004 | 11:18 AM

in Finance

Looking at the past two decades, whenever the Fed has started tightening AND the yield curve has flattened, it has presaged a downturn in economic activity, as reflected in the ISM.

That is exactly the situation we find ourselves in at present:

Federal Reserve, Yield Curve and the Economy
click for larger chart

chart courtesy of Michael Panzner, Rabo Securities

Panzner used this measure because it has had a pretty good correlation with swings in year-over-year Gross Domestic Product data during the period.

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Quote of the Day:
“The work of the individual still remains the spark that moves mankind forward.”
-Igor Sikorsky

Classical and Opera DVDs: Cheaper than CDs

Sunday, September 26, 2004 | 06:09 AM

in Finance | Music

We haven't addressed anything new in the music area recently (I have a long queu of comments getting ready) but this discussion of classical/opera DVDs caught my eye. While the article is mostly an exposition on the virtues of DVD for these genres of music, one cannot help but notice a key economic issue: Opera & Classical DVDs cost less than music only CDs:

"Though VHS offered only a postscript experience to classical music (and didn't sell well), DVD has become a medium unto itself, a genre with its own rules, never usurping the primary strengths of the compact disc or the live concert, but having virtues of its own.

DVDs offer no great sound and picture advances over the now-defunct laser disc. But unlike those bulky, heavy discs, DVDs are, as Video Artists International chief Ernie Gilbert put it, "cute." That means storage is easy. There's no hunt-and-rewind tedium. "With DVD, you click and, in a quarter of a second, you're there," Gilbert says.

Sales regularly hit 5,000 units, the standard break-even figure for classical CDs, and go as high as 40,000 worldwide, says Klaus Heymann, the Hong Kong-based head of Naxos International. Also, the hard-core classical community doesn't have to wait around for the video companies to finish issuing meaningless Luciano Pavarotti galas before going on to the real stuff.

Major classical labels initially hesitated to jump into DVD, so smaller, specialized concerns took the medium directly into niche marketing. Upfront "authoring costs" (translating video to the small disc) were as low as $2,000 a few years ago, says Gilbert, and are now half that.

Once a nightmare of regional formats, DVDs are increasingly universal (look for the "0" in the code box), though savvy consumers still need a specially doctored player to read all codes on discs available on European Web sites. Disc prices, which range from $10 to $35, are still unstandardized. The Deutsche Oper's Die Meistersinger is $39, but the Australian Opera's better cast sells for as little as $25.

Whatever the reason, even the most expensive DVD operas cost less than sound-only, full-price CD sets. "And that's contentious," admits Chris Roberts, head of Universal Music's worldwide classical arm. "Fewer and fewer sound-only opera recordings are being made, and some people think DVDs are an excuse to get out of making them. But DVD is a better way of doing it."

The ongoing slow death of the CD format continues apace . . .

Sources:
DVD's classy way with classical music
David Patrick Stearns
Inquirer Music Critic, Posted on Sun, Sep. 26, 2004
http://www.philly.com/mld/inquirer/entertainment/9749901.htm?1c

Beware Economists seeking guidance from stock markets

Saturday, September 25, 2004 | 09:03 AM

in Finance

Beware the Economist who is seeking guidance from the stock market as to the state of the economy. These creatures make lousy economists and worse money managers.

That's a lesson I learned a long time ago, and its one that Michael Panzner reminded me of again today. Panzner is a trader and author (he wrote the book: "The New Laws of the Stock Market Jungle" which is in my queu, waiting to be read). What started this line of thinking was an interesting question Panzner sent out Friday morning: What to make of the "Flattening Yield Curve & Fed Tightening Cycle?"

It seems that GKST's Brian Wesbury put the Hookah down long enough to pen a Wall Street Journal op-ed, "What's an Analyst to Do?" Wesbury's piece is somewhat disengenuous; A quick sample reveals one of the analytical flaws I see all too often lately from dismal scientists: "Since Aug. 12, the Dow is up 2% and the Nasdaq is up 8%, signaling a positive view of the economy." (emphasis added)

Puh-leeze.

It is the height of folly to pull out a single 30 day period of market activity and declare that it reveals the basis of an economic anything.

Looking at the performance of the markets year-to-date shows not only how financially costly such an exercise can be, but how totally dubious a proposition this is. As this chart below clearly reveals, the markets have hardly been signalling Wesbury's "positive view of the economy." In fact, that same argument could have been made at least 3 times so far in 2004; Unfortunately, the markets also signalled the converse view of the economy at least 3 times in '04.

The most recent reversal (which started the week of September 14) would be the 4th negative signal; Especially if it gathers any more downside momentum, a distinct possibility. In reality, these short term jags are indiciative of nothing -- they are typically knee jerk reactions to sentiment and overbought/oversold scillators. More significant, however, is the market's overall bias since the beginning of 2004: Its been mostly negative, as the down channel clearly reveals to anyone who can read a chart (that includes economists, too).

click for larger chart

Source: Stockcharts.com, BLR

Panzner makes note of Wesbury's theory that

"recent moves in the long end of the yield curve do not reflect the bond market's anticipation of an economic slowdown. In his opinion, other factors negate this argument, and he seems to offer an alternative view that the decline in long-term rates is mainly due to "carry trade" arbitrage stemming from a monetary policy that remains "excessively accomodative."

Essentially, Wesbury confronts two possibilities: Either the Fed is being too accomodative, or the economy is (horror!) slowing. Wesbury decides that its not the economy, stupid, and instead both the Bond and the Federal Reserve are wrong.

Well, perhaps. But as Panzner correctly observes:

"If one looks back at data over the past two decades (see nearby chart), it seems that whenever the Federal Reserve has embarked on a tightening cycle and the yield curve has flattened -- which is the situation we have now -- it has presaged a downturn in economic activity, as reflected in the Institute for Supply Management Manufacturing Index. I have used this measure because it has had a pretty good correlation with swings in year-over-year Gross Domestic Product data during the period."

click for larger chart

chart courtesy of Michael Panzer, Rabo Securities USA

I much prefer quantitiative analysis -- its far more persuasive to me -- than an unsupported theoretical argument . . .

Panzner concludes: "While the possibility remains open that Mr. Wesbury may be correct, a wide range of profit-warnings and anecdotal reports suggest it is more likely a case of deja vu all over again. If so, the economy -- and equity prices -- may slip lower in the months ahead."

That's not far off from my own expectations: I'm looking for more a bounce off of 1100 SPX, followed by downward pressure culminating in an October bottom (that may lead to a new rally peaking in February March time period, but that's just a guess).

Update: September 27, 2004 8:15
The WSJ's Steve Liesman considers a third conclusion: Both. The Economy is slowing, and the Fed may be at the end of its rate hiking cycle because of it.

Sources:
Graphic courtesy of Michael Panzner, Rabo Securities

What's an Analyst to Do?
By BRIAN S. WESBURY
WSJ, September 24, 2004; Page A14
http://online.wsj.com/article/0,,SB109598124180526723,00.html

Does Slide in Bond Yields Signal the Sky Is Falling?
Steve Liesman
WSJ, September 24, 2004
http://online.wsj.com/article/1,,SB109597124738626376,00.html

Cavuto on Business: (9/23/04)

Thursday, September 23, 2004 | 01:07 PM

in Media

A heads up: I'll be appearing on on Fox today (Cavuto on Business @ 4:15pm EST).
I'll be on with Adam Lashinsky of Fortune Magazine.

We'll be looking at high oil prices, continued drop in stocks, profit warnings by many companies, etc.

Barron's picks up "Between a Rock and a Hard Place"

Thursday, September 23, 2004 | 11:03 AM

in Media

Barron's picks up Tuesday's piece, Between a Rock and a Hard Place.

I like the renaming on their part: "The Pig is through the Python." Clever.

Source:
The Pig is through the Python
Barron's MARKET WATCH TODAY
Monday, September 22, 2004
http://online.barrons.com/article/SB109578192879623595.html

Fight for Senate Has Tightened

Thursday, September 23, 2004 | 06:28 AM

in Politics

wsj_format_logo

While we have been discussing how tight the Presidential race is -- along with some of the deficiencies of the polling agencies -- we appear to have overlooked the Senate. According to a recent WSJ article, the battle for control of the Senate has tightened. Democrats are running surprisingly well in the South, and are in competitive races in Colorado, Alaska, North Carolina, South Carolina, Louisiana and Florida.

While it is unlikely that the Republicans will lose control of the House, the Senate is a definite wild card. The length of each candidate's coat tails could determine the net result.

This WSJ chart reveals that for the most part, the hotly contested races are not in the so-called swing states, with Florida and Colorado being the exceptions.

click for larger chart

chart courtesy of WSJ

The graphic above is from the Cook Political Report. From what I have read, Cook gets high marks for accuracy.

WSJ excerpt:

"With five Southern Democrats retiring and the rest of the 2004 Senate electoral map tilting in Republicans' favor, odds are Republicans will hold or even increase their slim Senate majority. But Democrats are running surprisingly well in the South, including for the North Carolina Senate seat being vacated by Democratic vice presidential nominee John Edwards. They also think they have a shot at seats in such Republican strongholds as Oklahoma, Alaska and Colorado.

Given their long odds, Democrats tried to go all out this year, fielding strong candidates, avoiding contentious primary battles and raising enough money to diminish the Republicans' traditional fund-raising advantage. Sen. Jon Corzine of New Jersey, who heads the Democratic Senatorial Campaign Committee, believes President Bush and his party have been hurt by economic uncertainty and the war in Iraq. "It levels the playing field," Sen. Corzine says.

Fascinating stuff . . .

Source:
Fight for Senate Has Tightened
In Some Races, Democrats Run More Strongly Than Expected
Shailagh Murray
The Wall Street Journal, September 22, 2004; Page A4
http://online.wsj.com/article/0,,SB109582003157424598,00.html

Where are all the Political Cheerleaders today?

Wednesday, September 22, 2004 | 04:08 PM

in Politics

Djia_92204_1

The market got creamed today. Dow off triple digits, Nasdaq down almost 2%, S&P500 rocked.

So where are all the Political Cheerleaders? Where are all the people claiming the rally from August 13th to Spetmber 14th made the incumbent a lock?

Today is a perfect example why I find the connection between polling data and the markets so utterly tenuous: For those who mistakenly insist that the market is a political polling device -- and not an economic discounting mechanism -- pray tell: What does today's market action mean for your candidate or his opponent? Obviously, it means doom for (insert your least favorite candidate here).

For all the idiots who think the market is predicting politics, this new excerpt is for you:

"Today's market action indicates that Bob Yuldock, candidate for dog catcher, is inevitiably heading for double-digit defeat. Furthermore, the action in the bond market, where the 10 year broke below a 4% yield, unequivocally concludes that his wife is fat and his kids are ugly.

In other news . . . "

It bears repeating: Your taxes are going higher, regardless of who wins on Nov. 2. Oil will be expensive. GDP will be modest. While different sectors may do better or worse under each candidate, Greenspan will still be Fed Chief. That matters a whole lot more than who is sitting in the Oval Office...

Taxes, Capital Spending, and Jobs

Wednesday, September 22, 2004 | 03:19 PM

in Finance

Business Week has an extensive chat about Accelerated Depreciation of Capital Spending with your humble scribe.

Recall that we discussed this extensively a couple of weeks ago.

Sources:
Taxes, Capital Spending, and Jobs
Karyn McCormack
SEPTEMBER 20, 2004, BusinessWeek Online
http://www.businessweek.com/bwdaily/dnflash/sep2004/nf20040920_8177_db049.htm

Parsing Changes in the Fed Statement

Wednesday, September 22, 2004 | 06:59 AM

in Finance

wsj_format_logo

Terrific comparo by the WSJ on the bias statement released by the Fed. Note the key phrase is "appears to have regained some traction" after "moderating earlier this year."

Click for larger graphic

Graphic courtesy of WSJ

Here's a brief excerpt:

"The Fed's campaign to lift interest rates is intended not to slow the economy, but to lift rates from emergency lows so that the Fed doesn't create an inflation problem in the future.

The target on the federal-funds rate, the rate banks charge each other for overnight loans, was chopped from 6.5% at the beginning of 2001 to a 45-year-low of 1% in mid-2003. With much advance warning, the Fed lifted the rate to 1.25% in June and 1.5% in August.

In the last few months, the economy now appears to have pulled out of a "soft patch" -- as Federal Reserve Chairman Alan Greenspan has put it -- that was largely the result of higher oil prices. After substantial hesitation, employers are hiring, adding about 1.7 million jobs since the low point in August 2003, though payrolls remain 1 million shy of the March 2001 peak. Following disappointing second-quarter growth of 2.8%, the U.S. economy is now growing at better than 3.5%, perhaps as strong as 4%, private economists estimate.

They forecast similar growth for the fourth quarter, though recent declines in long-term bond yields suggest the bond market isn't as optimistic."

Sources:
Federal Reserve Statements: A Comparison
http://online.wsj.com/documents/retro0904-fedrelease.html

Federal Reserve Increases Key Rate Target to 1.75%
By David Wessel and Greg Ip
The Wall Street Journal, September 21, 2004 5:16 p.m.
http://online.wsj.com/article/0,,SB109559653883321547,00.html

Double Squeeze: Between a Rock and a Hard Place

Tuesday, September 21, 2004 | 12:02 PM

in Finance

The Fed meets today to discuss their inflation expectations (see nearby chart), and the gradual end of their policy of accommodation. Since what they will do is essentially a fait accompli, we are left waiting to read the tea leaves of what they will say. It is likely that they will emphasize the gradual removal of their accommodative monetary stance, and that the recent “soft patch” is showing signs of abating.

That stuff is now boilerplate. Most concerning is what the Federal Reserve will say about growth and inflation. They are likely to assert inflation is benign, and for it stay that way, they will be moving towards a neutral policy.

We fear that in each of these instances, the Fed will get it wrong. Inflation is not at all benign. That point was made clear by household names in the consumer non-durable sector: Coca Cola, Colgate Palmolive, Unilever, each pre-announced disappointing earnings. The reason for their weakness were two-fold: 1st, the prices of their raw materials have risen significantly. Yet these firms find themselves unable to pass along these increases to their customers, hence, a margin squeeze. 2nd, their consumers are facing Oil in the mid-40s, hence, a sales reduction. It’s a commodity based “double-squeeze,” as costs go higher, while their client’s have less cash.

At the same time, we continue to see evidence that the U.S. soft patch is anything but. GDP is likely to muddle along at the ~3% level, until hiring and corporate CapEx picks up. Unless and until that happens, growth is going to be anemic. To paraphrase one of our favorite commentators, “for the first time in 3 years, there are no government tax cuts, no rebate checks, no other one-off items to spur the economy forward. The refinance afterburner has flamed out, and the Fed is raising rates.” The pig is through the python.

That is the quandary the Fed finds itself in: They find themselves trapped between inflationary pressures, and feeble growth – a rock and a hard place – with most of 2003’s stimulus far behind us.

We mentioned last week the sledding would be getting more difficult from this point forward. The SPX and Dow are still working off their overbought conditions, retreating in the face of overhead resistance, while looking for the next positive catalyst. The Nasdaq, while not yet at major resistance, is groping for both direction and leadership. We are not quite yet at a point of denouement. Thus, we continue to advise caution here, waiting for better entry points – long or short.

Chart of the Week: Inflation Predictor Model

Tuesday, September 21, 2004 | 12:01 PM

in Finance

Technimentals inflation model has been shifting higher for 2 years, mostly on the heels of escalating energy prices. Most of its commodity components have risen, while retail sales have gone stagnant, as the consumer appears weakened.

Inflation Predictor Model
click for larger chart

Source: Technimentals

Average Hourly Earnings, which have increased on a Year-over-year basis, still lags behind “normal” wage growth at this stage of a recovery.

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Quote of the Day:
“All the features and achievements of modern civilization are, directly or indirectly, the products of the capitalist process.”
-Joseph A. Schumpeter (1883-1950)

Projected Electoral College Vote: Swing States, 9/20/04

Monday, September 20, 2004 | 11:55 PM

in Politics

wsj_format_logo

The Wall Street Journal shows the race even tighter than several other polls. They note the electoral college tally is 297 to 241, in Senator Kerry's favor; However, Electoral-vote has the balance at 327 to 211�in President Bush�s favor.

click for larger chart

Chart courtesy of WSJ

The Journal observes:

"Sen. John Kerry's state tally shrank but his overall position appears to have stabilized among likely voters in many of the 16 battleground states, according to the latest Zogby Interactive poll.

Mr. Kerry now leads in 11 states -- down from 12 states he held two weeks ago and 14 a month ago -- and his leads over President Bush in Florida and Arkansas are less than one percentage point. At the same time, he maintained or added to comfortable advantages in Michigan, Oregon and New Mexico -- states that have been largely in his camp since the first poll in this series back in May. One state to watch is Pennsylvania, which is still in Mr. Kerry's column but for the second straight poll is considerably tighter than it was prior to the Republican convention.

The leads Messrs. Bush and Kerry hold in 10 of the 16 states are within the margin of error, which varies between +/- 2.4 and +/- 4.4 percentage points. Mr. Kerry's leads in Washington, Oregon, Michigan, New Mexico and Minnesota are outside the margin of error, while Mr. Bush's lead is outside the margin in West Virginia. Presuming that all the states -- including the 33 electoral votes from the tight Florida and Arkansas races -- go to the current leading candidates and that the other 34 states and the District of Columbia go as they did in the 2000 election, Mr. Kerry would get 297 electoral votes and Mr. Bush would get 241."

Note how tight the race is in these three key States:

Ohio

Florida

Pennsylvania

Also of interest: Nader is polling relatively poorly. He seems to be putting up the strongest numbers where there is the biggest lead: In Minnesota, where Kerry is up by 12.7%, Nader polls 3.9%; In New Mexico, were Kerry is +12.7% Nader gets 2.2%; Oregon has Nader at 1.7% (Kerry +12%)

A few exceptions: In Arkansas, a dead heat, Nader gets 2.2%; In Florida, where Nader was just cleared to be placed on the ballot by State's Supreme Court, is also a statistical tie, and Nader has 0.9%. That's enough to tip the race away from the challenger, and to the incumbent.

No wonder so many Democrats are still so angry at the former consumer folk hero . . .

UPDATE: September 22, 2004 7:01am
The American Research Group (ARG) has a new 50 state poll out. It is consistent with the WSJ/Zogby findings . . .

Sources:
Battlegrounds States Poll - August 23, 2004
http://online.wsj.com/public/resources/documents/info-battleground04-0920print.html

Electoral College Analysis
http://online.wsj.com/public/resources/documents/info-battleground04-an0920.html

WSJ: Ignore the Polls?

Monday, September 20, 2004 | 06:48 AM

in Politics

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Interesting front page article in the WSJ today by John Harwood, especially for those of us with a quantitative bend.

The crux of the Harwood's argument is this: For followers of the political horserace, you might as well ignore the day-to-day polls: "Opinion polls themselves had been getting harder to conduct long before the matchup between President George W. Bush and his Democratic rival, Massachusetts Sen. John Kerry. The reasons range from growing reluctance to participate in surveys to increasing reliance on cellphones rather than the land lines pollsters have long used to ensure demographic and geographic balance in surveys."
Wsj_poll09192004205921_1
The Journal notes criticisms similar to Zogby's; Namely, that sampling with a disproportionate number of party members -- in this case, GOP -- will inaccurately skew polls in that direction.

Handicappers of the race should recall that Zogby has won acclaim as the most accurate pollster for the past few years, including the tight 2000 Presidential election. Over the same period, Gallup was predicting a similar-to-today double digit lead for then Governor George W. Bush in 2000.

Despite Gallup's predictions, Bush lost the popular vote by more than half a million votes.

The Journal notes that "Gallup asks a series of questions first devised decades ago that assigns voting probability to each respondent; it then uses their answers and an overall estimate of voter turnout to identify the likely electorate." (emphasis added)

Several commentators note that Gallup poll internals are tracking the exact same error they made in 2000. The Journal even cites Ruy Teixeira's blog Donkey Rising. It is yet another instance of the blogosphere impacting mainstream media.

Here's an excerpt:

Widely divergent poll results in recent days underscore a paradox of the 2004 presidential race: Despite all the surveys, it may be the toughest election in memory for anyone to track . . .

But this year's bitter presidential contest has heaped on new challenges. They include an exceptionally close race and a polarized electorate that magnifies the consequence of different polling methods. In addition, unprecedented voter-mobilization drives by both parties make it especially tough for pollsters to say which voters probably will show up on Election Day.

"It makes it harder" to forecast the likely electorate, says Fred Steeper, a longtime pollster for Mr. Bush. In the six weeks to Election Day on Nov. 2, he adds, disparate polls may reflect sampling error and methodological differences more often than shifting opinion. "My advice to the consumer is ... the day-to-day reports of polling will exaggerate the changes in this race."

For more on this subject, see Why You Should Ignore The Gallup Poll

Sources:
Divergent Opinion Polls Reflect New Challenges to Tracking Vote
John Harwood
The Wall Street Journal, September20,2004;PageA1
http://online.wsj.com/article/0,,SB109563333476021828,00.html

It Is Not An 11 Point Race
John Zogby
Zogby International, September 07, 2004
http://www.zogby.com/news/ReadNews.dbm?ID=859

Gallup Strikes Again!
Ruy Teixeira
Donkey Rising, September 17, 2004
http://www.emergingdemocraticmajorityweblog.com/donkeyrising/archives/000689.php

A Few More Thoughts on the New CBS News/New York Times Poll
Ruy Teixeira
Donkey Rising, September 20, 2004
http://www.emergingdemocraticmajorityweblog.com/donkeyrising/archives/000686.php

Why You Should Ignore The Gallup Poll This Morning - And Maybe Other Gallup Polls As Well
Steve Soto
Sep 17, 2004
http://www.theleftcoaster.com/archives/002806.html

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WSJ: Ignore the Polls?

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