The Big Picture | January 2006

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Media Appearance: Kudlow & Company (1/31/06)

Tuesday, January 31, 2006 | 03:45 PM

Tonight's media appearance will be Kudlow & Company. I will be on from 5:20 to 6:00 pm, along with Cult of the Man Cow President Noah Blackstein, John Rutledge, and Gene Henssler. I imagine the Fed Meeting and statement will be discussed extensively.

Also appearing: Washington Post columnist E.J. Dionne and politico Terry Jeffrey discussing the SOTU address.

I rarely do the political thing (I'm an Independent), but here's my overview:

• The President has little budgetary room -- and even less political capital -- for any grand projects; If he can extend his tax cuts, it would be a big victory;

• I would love to see some sort of a capital gains tax cut for the development of alternative energies; Sending lots of $$$ to the Middle East works against our National Security interests;

• Bush's re-election was not a mandate, but (IMO) a decision by the electorate not to change horses or riders during a War; It also speaks to his challenger's relative lack of appeal;

• Ironically, the President gave nearly that exact same advice to Hammas: Not a mandate, but a repudiation of your opposition;

• He is almost -- but not quite -- a lame duck;

• There is a small but increasing chance the GOP will lose control of one house of Congress.

As far as the market is concerned, we have seen much better performance under a mixed government than with single party rule.

When Republican President Reagan was forced to deal with Democratic House Speaker Tip O'Neill, and when Democratic President Clinton had to deal with Republican House Speaker Newt Gingrinch, it forced all involved towards the Center -- where Mr. Market likes them.

In each of these instances of divided government, Markets did well. Why? When politicos grit their teeth and learn to work together, good things happen. Each side cuts the other's desires by claiming fiscal prudence: Taxes get cut, spending gets cut, budgets get balanced, good things happen.

The one divided government caveat: just about all of the 4 terms of the Reagan and Clinton divided government market gains came during the 1982 - 2000 Bull run.

PARSING THE FED

Tuesday, January 31, 2006 | 03:18 PM

in Federal Reserve

The online WSJ writes:

THE FED'S STATEMENTS reflect how the members of the central bank's Federal Open Market Committee perceive the economy. The slightest changes are scrutinized for clues about where interest rates may be headed. With Greenspan stepping down and Bernanke set to replace him, January's statement will be read particularly closely.

The Jan. 31 statement announced that the Fed was raising its key short-term interest rate by one-quarter point to 4.5%, its 14th increase in a row. In a sign that rate increases may be nearing an end, the Fed also removed the word "measured," which had come to signal steady quarter-point increases ahead. Below is a look at differences between the January statement and the December one.

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Click for larger graphic

courtesy of WSJ

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Source:
PARSING THE FED
One More for the Road
WSJ, Jan. 31, 2006
http://online.wsj.com/documents/info-fedparse0601.html

Media Center's Next Gen Remote?

Tuesday, January 31, 2006 | 01:30 PM

in Television

While we lounge around waiting for the inevitable -- no, not death, I refer to the Fed hike -- take a gander at this:

How cool looking is this piece of home theatre erotica?

"The SimpleRemote incorporates features like Wi-Fi connectivity, a 2.2-inch quarter VGA color screen, and support for Universal Plug and Play (UPnP) devices, to create a remarkably powerful and easy-to-use control center for digital homes. The reference design is capable of controlling multiple rooms full of devices and automatically discovering networked webcams or Wi-Fi-connected digital cameras as they're connected to a home network.

The SimpleRemote also works with UPnP streaming media devices in a unique manner. Using the remote's Wi-Fi connection and color screen, a user can preview photos or video files stored on networked PCs on the remote before displaying them on TV through a the streaming media bridge."

Reviews are here, and the full specs can be found at their website.

I want one!

New Column: Myths of the Greenspan Era

Tuesday, January 31, 2006 | 11:32 AM

in Federal Reserve

RealMoney My new column is posted at TheStreet.com, titled Myths of the Greenspan Era. Its a modest look at some of the economic urban legends that have sprung up around Easy Al.

Based on yesterday's Free Lunch discussion, it includes additional charts and data. Its also much less critical than our analysis back in 2004.

Here's an excerpt:

"Myth 1: Greenspan Whipped Inflation: This is by far the most pervasive fallacy of the era. It has added to the Maestro's legend -- undeservedly so, in my opinion. This is probably the myth that's easiest to disprove.

Numerous factors have led to low inflation over the past few decades; none of them have much to do with Greenspan.

To understand where you are, you must consider how you got here. And when it comes to whipping inflation, it all begins with Chairman Paul Volcker.

As the chart of long-term interest rates reveals, inflation was spiking in the late 1970s. The oil embargo of the early '70s started an inflationary spiral that threatened the entire economy. Growth was anemic, and Japan was a growing threat to the industrial heartland. A post-Watergate and post-Vietnam malaise hung over everything. It was not a particularly joyous period in the U.S. When Volcker was appointed Fed chairman, inflation was in the double digits, and growth was stagnant. That combination came to be known as "stagflation."

Fed Chair Volcker aggressively changed the way the Fed attacked inflation. He forced some unpleasant but necessary monetary medicine down the gullet of the American economy.

No helicopter drops for Volcker: The first thing he did was idle the Treasury Department's printing press. By limiting the growth of money supply -- and abandoning interest rate targeting -- he made it clear that no matter how painful in the short term, he was going to get runaway prices under control. Inflation, which had peaked at 13.5% in 1981, was down to 3.2% by 1983. The U.S. has been enjoying the fruits of his labor ever since."

Its on the free Street.com site. Go forth and read!.

Source:
Myths of the Greenspan Era
RealMoney.com, 1/31/2006 11:08 AM EST
http://www.thestreet.com/markets/economics/10265345.html

Will Pixar Bring Magic Back to the Magic Kingdom?

Tuesday, January 31, 2006 | 05:30 AM

in Film

If you missed it on Sunday, there was a terrific article on the very different way Pixar does Business in the NYT:

"Since 1995, with the release of "Toy Story," Pixar's films have reinvented the art of animation, won 19 Academy Awards and grossed more than $3 billion at the box office. But the secret to the success of Pixar Animation Studios is its utterly distinctive approach to the workplace. The company doesn't just make films that perform better than standard fare. It also makes its films differently — and, in the process, defies many familiar, and dysfunctional, industry conventions. Pixar has become the envy of Hollywood because it never went Hollywood.

More than a few business pundits have drawn parallels between the flat, decentralized "corporation of the future" and the ad-hoc collection of actors, producers and technicians that come together around a film and disband once it is finished. In the Hollywood model, the energy and investment revolves around the big idea — the script — and the fine print of the deal. Highly talented people agree to terms, do their jobs, and move on to the next project. The model allows for maximum flexibility, to be sure, but it inspires minimum loyalty and endless jockeying for advantage.

Turn that model on its head and you get the Pixar version: a tightknit company of long-term collaborators who stick together, learn from one another and strive to improve with every production. Consider the case of Brad Bird, writer and director of "The Incredibles," who spent the first decades of his career shuttling around the business as an ever-promising, never-quite-recognized animator. (He worked on "The Simpsons" and directed one feature, the critically acclaimed but commercial dud, "Iron Giant.") When Pixar recruited him, Mr. Bird went to work immediately on "The Incredibles," which went on to win two Academy Awards and a nomination for best original screenplay."

Given that most mergers are unsuccessful -- at least when measured by how much value they create for shareholders -- the big question is not whether Disney can integrate Pixar into their corporate culture, but vice-versa: Can Disney adapt Pixar's looser style and methods to their other creative departments; can they port that formula within the company?

There are definitely risks: The upside is bringing some magic back to the Magic Kingdom; the downside is killing a terrific franchise.

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Source:
How Pixar Adds a New School of Thought to Disney
WILLIAM C. TAYLOR and POLLY LaBARRE
NYT, January 29, 2006
http://www.nytimes.com/2006/01/29/business/yourmoney/29pixar.html

It's (Still) a Small (Cap) World

Monday, January 30, 2006 | 06:30 PM

in Investing | Markets

I was just clicking around on WSJ On Line, when I came across a great new page of resources:
Markets Data Index. Tons of good stuff, charts, resources.

I randomly click on one page -- and found this chart on market capitalization: "Small caps, stocks with market capitalizations of less than $1.5 billion, offer investors a chance to outperform the broad market, but are prone to price swings."

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Weekly Market Screen
click for larger chart:

Source: WSJ

In the Long Term Small-cap stocks vs. large-cap stocks in good market times and bad. One size usually dominates at any given time.

Source:
Stocks
Weekly Market Screen
WSJ, January 29, 2006
http://online.wsj.com/public/resources/documents/mktscan.pdf

Free Lunch: Myths of the Greenspan Era

Monday, January 30, 2006 | 03:30 PM

in Federal Reserve

Federal Reserve Chairman Greenspan’s imminent retirement has become the largest love-fest since Woodstock. Alas, we cannot avoid adding to the chatter. Besides, how many Fed Chairs will retire in our lifetimes? Perhaps we can act as a counter-ballast to all the accolades and bon mots. Now would be as good a time as any to discuss some of the myths and misunderstandings of the Alan Greenspan era:

Myth 1 Greenspan whipped inflation: This is the most pervasive-yet-easiest to disprove Fed Chair legend. As the nearby chart of long term interest rates reveals, inflation spiked in the late 1970s. Paul Volcker became Fed Chair during that period of ugly stagflation. He aggressively changed the way the Fed attacked inflation, and the U.S. has been enjoying the fruits of his labor ever since.

Myth 2 Greenspan’s flexibility met all challenges: Flexible? Hardly. The Fed Chair’s response to every challenge has been the same: inject more liquidity into the system. That’s why Money Supply has risen so dramatically over the past 18 years (M3 included), and why rates are down to unnaturally low levels. To be considered flexible, you would need more than one move in your bag of economic tricks.

Myth 3 The Plunge Protection Team: After the 1987 crash, traders claimed the market “mysteriously” managed to stop its sickening fall. While others have laid this myth to rest previously, let’s go right to the source of this one. The Dow had dropped from 2,400 to almost 2,200 on Friday, and then plummeted to almost 1,600 on Black Monday. A 33% peak-to-trough drop is no sign of an invisible hand: That’s a massive, capitulatory distribution which exhausts sellers. That correction brought out bottom-fishing fools and heroes alike – no Plunge Protection Team necessary.

Myth 4 The Greenspan Put: While the concept of the “Put” is alive and well, I do recall a recent 78% plunge in the Nasdaq. As of Big Al’s 2^nd to last day as Chairman, the Nasdaq was still down close to 60%. If that’s the kind of capital destruction that exists with the “Put,” its really not worth all that much. Indeed, the brutal crash makes it kinda hard to argue that the Put is – or ever was – alive and well.

Myth 5 Greenspan as Economic Sage: We laid this fable to rest in 2004 (Ignore the Cheerleader-in-Chief).

One has to wonder why so many acolytes believe you can get something for nothing. Yet Greenspan’s legacy is based on the Free Lunch: easy money, and lots of it. Yet I recall the very first lesson in Economics: “There is no Free Lunch.”

Much of the Greenspan myth is actually the result of his fortuitous timing: He started his gig as head honcho 5 years into the biggest Bull Market in history, and even before the crash, his reputation had been cemented.

Despite the saying, people still confuse a bull market with genius.

Chart of the Week: 10 year Treasury 1974-2006

Monday, January 30, 2006 | 02:10 PM

in Federal Reserve | Fixed Income/Interest Rates

Greenspan garners all the credit for the low interest rates of the past 20 years. We believe the chart below proves otherwise. The Oil shock in the 1st half of the 1970s gave way to inflation shock of the 2nd half.

10 year Treasury 1974-2006, Constant Maturity

Source: RCP, Economagic

When Volcker was appointed Fed Chair, inflation was in the double digits and growth was stagnant. He forced unpleasant medicine down the gullet of the American economy, limiting the growth of the money supply and abandoning interest rate targeting. Inflation, which had peaked at 13.5% in 1981, was down to 3.2 percent by 1983.

Random Items:

Americans Say Economy Is Getting Worse

The Reform of October 1979: How It Happened and Why

Technical Evidence Builds That We're Near a Top

Media Lesson: How the not to cover the economy

U.S. IN TECHNICAL DEFAULT

Ignorance is the opposite of bliss

Partisans Adept at Ignoring Facts, Study Finds

Quote of the Day:

“A wise observer of the economic scene once commented that ‘what can be left to later, usually is – and then, alas, it's too late.’”

-Paul Volcker, Federal Reserve Chairman, 1979-87

The Real Estate Soufflé

Monday, January 30, 2006 | 05:15 AM

in Economy | Markets | Real Estate

We have a decidely nuanced view of Real Estate: While not neccessarily a bubble, it has been the prime driver of the economy since rates were slashed to half century lows 3 years ago.

Our expectation for the slow motion slow down rests on Real Estate cooling (which its been doing since August), home construction and sales slipping, and prices slowly sliding. That may stop the Fed from tightening appreciably further (2 and through?). Mortgage rates staying below 6.5% allows Real Estate to maintain a moderate level of activity -- but one that is obviously way off its prior white hot pace.

I suspect this could happen more slowly than those who think Real Estate is a full blown bubble ready to pop. Indeed, one of the comments in "Top Ticking Real Estate is Different Than Stocks" notes that:

"Last weekend I first heard the term "real estate soufflé" proposed on the radio to replace the term "real estate bubble." Even when the soufflé falls as it comes out of the oven, it doesn't pop like a bubble."

That seems to make a lot of sense to me. Its consistent with last month's final Home Sales slipping to to a minus 0.3%, from a prior 3 month average gain of 4.6%. While down on a month to month basis, the absolute levels still remain historically high. Mortgage Rates have been bouncing between 6 and 6.25% -- still historically cheap.

Barron's Alan Abelson is even more Bearish than I on the prospects for Housing & Real Estate:

"On that score, our conviction has been mightily strengthened by clear signs that the great housing boom is rolling over. Exhibit A is last month's steep drop in the sales of existing houses -- 5.7%, to be precise. Yes, we're well aware that the Commerce Department reported that sales of new single-family homes rose 2.9% in December. But the figures don't jibe with the rather downbeat findings of the housing industry. And as to which we find more credible -- Uncle Sam's or the builders themselves -- it's no contest."

Merrill Lynch's David Rosenberg has become a regular in his column. His views on the end of the housing boom, and its impact on the macro economy are also pretty bearish:

"To that astute economic observer David Rosenberg of Merrill Lynch, the startling collapse of sales of existing single-family homes in the October-December span -- they fell at a 36% annual rate -- is persuasive proof that the bull market in housing has metamorphosed into a bear market.

What marked the extended and powerful cycle, he reminds us, is that it was built on cheap credit and incredibly relaxed loan standards. Some 43% of first-time buyers, David recounts, put zero money down on their home purchases last year; by contrast, two years earlier, 28% bought a house with no down payment. Well over a quarter of the mortgages in '05 were of the dicey "buy now, pay later" variety. Not exactly sturdy underpinnings for a boom, especially with credit likely to get increasingly less cheap and the regulators fretting over lending standards.

The backlog of unsold inventories in the resale housing market last month shot up 26% above the December '04 level to a 5.1 months' supply; that compares with the low of 3.8 months in January of last year. Inventory of new homes stands at its highest level in nine years. The overhang of unsold units in the condo market constitutes a formidable 6.2 months' supply. And pricing is beginning to reflect the inventory bulge: December's median price of $211,000 for an existing home was virtually unchanged from last spring and down 4% from the August peak."

There's little there I disagree with; If anything, we only differ on how long this will take. I have no clue, but I suspect it will be a more gradual process than many expect.

"For the economy, David asserts, the end of the housing boom could be a serious drag on economic growth. Considerably more serious, we might interject, than most of the sunshine gang, whether in Wall Street or D.C., care to admit. In the past three years, the surge in housing prices, he calculates, accounted for nearly 40% of the expansion in household spending via home equity cash-outs. Merely stagnant home prices, by his reckonings, would shave a full percentage point off consumer spending growth in the coming year. An outright decline obviously would have that much more of an impact.

Just the direct effects of the raging bull market in housing, he figures, chipped in 25% of the overall growth in GDP since 2003. The real-estate boom, he goes on, was responsible for a cool 20% of the rise in total retail sales, while enlarging the nation's payrolls by around a million jobs.

As David wonders, "So who picks up the baton now that the housing parade is over?" Who, indeed?""

The sunshine crowd will tell you that Business is ready to pick up the baton; they certainly sang that from on high after Q3 GDP showed a big uptick in Corporate Capex. Of course, they have been saying that for years now. And as Q4 GDP has revealed, Q3 capex is looking more and more like an outlier . . .

Source:
UP AND DOWN WALL STREET: Fun and Games
ALAN ABELSON
Barron's MONDAY, JANUARY 30, 2006
http://online.barrons.com/article/SB113840713897658794.html

Weekend Linkfest!

Sunday, January 29, 2006 | 06:00 PM

in Weblogs

Thanks for all the nice feedback, after last week's linkfest was put up at TheStreet.com.

The most common emailed question: Where do you find all these links? Well, during the course of a week's worth of research, I see tons of great stuff. I cull my favorites articles and columns, saving them and voila! Weekend Linkfest.

Let's get down to it:

• Barron's Alan Abelson notes that the speculative juices are running hot (if no Barron's, go here);

• Awful. That's the only word for Q4 GDP (prelim), as Government spending plunged, the Consumer throttled back, Businesses failed to pick up the slack, Inflation accelerated and Imports (mostly energy) surged. There will be 2 more GDP releases -- a revised and final -- and I expect the data may creep up some.

Tony Crescenzi did a nice job explaining the Causes of GDP Miss and Implications, and the WSJ's always fine online version gathered lots of economist GDP musings. (If no WSJ, go here);

• Good discussion on The Perils of Forecasting; (You already know my views on the subject);

• Is New York City a microcosm of the US? I never thought so, but "Priced out of Brooklyn" implies otherwise. There are surprising similarities between the wealth disparities of Manhattan versus the Outer Boroughs, and the rest of the nation's economic class distinctions;

• Demand for Durables Goods rose 1.3%, but Furniture sales took a big hit;

• Despite the strong week, be aware of the The December Low Indicator's track record; It's pretty damned good -- and that's bad for the Bulls;

• Jim Rogers in BW on Investing in a Material World;

• I was almost a guest on The Daily Show. Almost (so close!).

• Speaking of TV: Rumors abound of a Jim Cramer Wall Street Reality Show

• We know about The Five Dumbest Things on Wall Street This Week -- How about Business 2.0's 101 dumbest moments in Business ?

• Forget the Cult of the Bear for a minute, and consider The Cult of Ferrari;

• Enron is proof positive that Markets can be Astonishingly Inefficient;

• IBD looks at how Home Equity Extraction in Q3 Fueled a Shopping Spree;

• The NYT asks "Is the Fourth Year a Charm for the Bull Market?" This is a surprisingly oversimplified single variable market prediction. Simple and understandable are good, but I find that over the long run, oversimplification is a misleading and money losing approach;

• Oil Charts galore:

-Crude Production by Country

-Oil and the Markets

-Oil Futures and Trading

• In a Ruined Country: The Atlantic argues Yasir Arafat destroyed Palestine;

• The Associated Press totally blew a story on Digital Music; If you are going to merely repeat industry press releases, why should anyone take you seriously?

• Former Treasury Secretary and now Citibank Director Robert Rubin on why "We Must Change Policy Direction;"

• There is no indicator more worthless than the Conference Board's LEIs;

• Is there a potential Liquidity Fire Trap?

• An Interesting blog: sound money tips;

• Speaking of Blogs: Here's Forbe's look at the Best of the Web, including lots of blogs;

• Fun with Lists:
- 10 tips to being a better wine buyer

- 50 Books for Thinking About the Future Human Condition

- How to eat Sushi
• Lastly, some pop culture mash up that is simply too funny: A Fan-produced video of William Shatner's version Lucy in the Sky with Diamonds

That's all from NY, where its a gorgeous, sunny, 50 plus degree day -- and yet Oil remains over $65 a barrell -- what happens when it becomes seasonably cold?

Get outside, and enjoy the day! (Don't worry, you can finish the linkfest tomorrow -- its supposed to rain!)

Returning to the Work Force

Sunday, January 29, 2006 | 06:47 AM

in Employment

"The concept of sitting in a rocking chair and retiring just doesn't exist anymore"

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So says Barbara Rice, a former school teacher who now works at Borders in what she calls a "hobby job."

In fact, while the 20-40 year old set has increasingly been dropping out of the work force (NiLF), this older crowd has been the only thing preventing a total crash of the Labor Participation Rate:

"While many retirees are still focused on leisure activities, a growing number are returning to the work force. A recent study by Putnam Investments estimated that seven million previously retired people, or about 10 percent of the work force over the age of 40, are now back at work or looking for jobs.

And among those, the number of older retirees returning to work is growing quickly. Today, nearly one-fourth of all people in the 65-to-74 age group hold jobs, compared with just one in six just two decades earlier, according to the Bureau of Labor Statistics. Putnam's study found that the number of workers in the 65-to-74 group grew three times as fast as the overall work force last year."

About one-third of those surveyed said they were returning to work because they needed the additional income to survive financially.

The Putnam Survey is very consistent with our prior look at labor force participation rates : Look Who's Dropping Out of Labor Force.

Given the post-crash damage wrought on 401ks -- now jokingly referred to as 201ks -- by the popped tech bubble, its no surprise that Babyboomers and Retirees are going back to work. But the way the demographic trends have been running, it is somewhat disconcerting to see Students, Child Rearing Women, and Over-qualified mid-level employees bailing out of the labor pool.

Time will tell if this is a short term phenomena, or an ongoing major shift . . .

>

Source:
The Golden Years: Travels, Hobbies and a New Job, Too
ANNA BERNASEK
NYT, January 29, 2006
http://www.nytimes.com/2006/01/29/business/yourmoney/29reti.html

Graphic courtesy of NYT

About that GDP . . .

Saturday, January 28, 2006 | 06:02 PM

in Economy

I find it amazing that the economic slow down -- obvious not just in hind sight, but for the past 6 months (at least) -- has finally grabbed the attention of Wall Street.

Not that you could tell from yestersday's market, but who am I to question the perversity of the crowd? As mentioned previously, we are in a "bad news is good news" phase.

Anyway, check out where the economy softened in the very ugly chart below:

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Consumer spending dropped over 70%, and Business investment dropped nearly as much. Home building cut in half. A huge buildup in inventories versus a prior drop. The trade deficit got much worse. Even Uncle Sam sepnt less.

Occasional Fed conduit Greg Ip notes the details in the WSJ: "Economic growth slowed to its most sluggish pace in three years at the end of last year as consumers and businesses applied the brakes to spending. While a rebound is likely in the current quarter, the expansion after two brisk years appears to be moderating as higher energy prices and interest rates begin to bite.

The nation's gross domestic product, or total output of goods and services, grew at just a 1.1% annual rate in the fourth quarter, the Commerce Department said Friday. That's the slowest rate since the fourth quarter of 2002 and well below the average 4.1% growth of the prior 10 quarters.

The principal cause was a slowdown in growth of consumer spending to a four-year low of 1.1%. Other sectors softened, too. Business investment grew just 2.8%, less than a third of the prevailing rate in the prior 2½ years. Residential housing construction grew 3.5%, the slowest pace in a year. And the trade deficit widened sharply, damping domestic production. Federal defense spending dropped, too."

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How is it that Federal spending slowed? Aren't we helicopter dropping cash into New Orleans? (oh, wait -- that's for deflation).

The sunshine crowd pointed to four factors that are likely to reverse in Q1:

1) Emergy imports replacing Gulf of Mexico production

2) Consumer spending growth slowed during the quarter mostly because of weak automobile sales.

3) Federal defense outlays fell because of the late signing of the defense appropriations bill, and Pentagon spending will likely rebound.

4) Business investment was held back by a drop in transportation-equipment purchases.

I guess they are about half right. I certainly do not expect a consumer spending resurgence -- that's just wishful thinking in my book after the mediocre holiday season; And the crew that touted Q3 Capex Spending as the start of a new run of corporate spending, is deathly silent on the Q4 Capex dearth. The Q4 Capex makes that one strong quarter look like an aberration. We'll see if it resumes anywhere near Q3 strength in Q1.

The dismal scientists expect growth to (mostly) recover in the first quarter: "Indeed, initial claims for unemployment insurance have been trending lower, leading some analysts to predict that job growth will top a hefty 250,000 in January."

Puh-leeze. Need I have to remind you how utterly awful this crowd has been at guess-timating job creation?

Later in the article, the Ipster gets into some harsh specifics:

"Yet the U.S. may be settling into a period of growth that is slower than in the past couple of years -- not unusual for an economy four years into an expansion. To absorb last year's jump in natural gas and gasoline prices, consumers may have to restrain other spending. The Federal Reserve's steady increases in short-term interest rates may finally be having an effect on borrowing and spending. Auto makers are more reluctant to offer cut-rate financing. And while long-term mortgage rates haven't risen in the past two years, increasingly popular adjustable-rate mortgages, tied to short-term rates, have.

The GDP report also found that inflation crept up. The price index of consumer expenditures, excluding food and energy, the Fed's preferred inflation measure, advanced at a 2.2% annual rate, up from 1.4% in the third quarter, putting it around the top of incoming Fed chairman Ben Bernanke's comfort zone of 1% to 2%.

The Fed is expected to raise its target for short-term interest rate to 4.5% on Tuesday from 4.25%. Markets and economists are divided on whether it will raise the rate again on March 28 to 4.75%.

Consumers did spend more than they earned in the fourth quarter, producing a negative saving rate for the third consecutive quarter and a negative rate for the year as a whole for the first time since 1947, when records of such data began. But the rate improved in the fourth quarter to minus 0.4%, from minus 1.8% in the third quarter."

Why the rally, if things look that sour? The assumption is that this bad news is good, because the Fed will end its tightening cycle. Then all we have to worry about is everything else, and a slowing economy. (Whoopee!)

Source:
Economic Growth Slowed to 1.1% In Fourth Quarter
GDP Is Likely to Rebound, But Many Say Expansion Will Moderate This Year
By GREG IP
THE WALL STREET JOURNAL, January 28, 2006; Page A1
http://online.wsj.com/article/SB113836607293558161.html

Economists React to GDP

Saturday, January 28, 2006 | 08:57 AM

in Economy

The always excellent online Journal collect lots of econo-geek comments on yesterday's GDP stinkeroo: I didn't feel the need to pile on, but I do dig the difference between the excuse makers and those genuinely shaken by the awful data:

WSJ: "After the economy navigated a brutal hurricane season to post robust growth in the third quarter of 2005, growth cooled considerably in the fourth quarter. Gross domestic product, the broadest measure of U.S. economic output, increased at just a 1.1% seasonally adjusted annual rate as free-spending consumers became more cautious and the gaping trade deficit continued to provide a drag on the expansion. For all of 2005, GDP growth averaged a 3.5% annual rate. What does the slowdown in the fourth quarter mean for the economy in the months ahead?

Economists weigh in with their reactions:

"In both its overall appearance and underlying detail, the 1.1% fourth quarter growth in real GDP ranks as the most perplexing report in memory. At face value, such weakness would seem to make it more difficult for the Fed to tighten monetary policy again. But the underlying details reinforce -- if not increase -- perceptions that much faster growth lies ahead. Nonetheless, the confusing and conflicting contradictions with other data make it difficult to be confident in any inferences about the outlook."

-- David Resler and Gerald Zukowski, Nomura Securities International

* * *

"Consumer spending was actually a little better than expected, rising by 1.1% in the quarter vs. our forecast of +0.3%. I think more of the decline in auto sales was apportioned to the business sector (fleet sales) and less to the retail side than we expected. Housing posted a reasonable gain of 3.5%, but this was less than half of our assumed rise. The monthly source data pointed to a bigger gain, so this is a bit puzzling."

-- Stephen Stanley, RBS Greenwich Capital

* * *

"The consensus was a bit optimistic but this is a big surprise. The softness against our 2.6% forecast is explained by two components, fixed investment and government consumption. The former rose only 3.0%, with equipment and software up only 3.5%. This is baffling, given the 19.5% annualized leap in the value of capital goods production and the 14.9% rise in shipments of core nondefense capital goods. We expect big upward revisions."

-- Ian Shepherdson, High Frequency Economics

Continue reading "Economists React to GDP"

The Speculative Sap is Rising

Saturday, January 28, 2006 | 07:07 AM

in Markets | Psychology/Sentiment

Barron's Alan Abelson notes that the speculative juices are running hot:

"IT ISN'T EVEN SPRING, yet the speculative sap is rising and we can espy, of all things in January, tulips starting to bloom.

The stock market not only shook off the previous week's ugly bout of the shakes, but bounded smartly ahead. Even doubting Thomases like ourselves couldn't help but be impressed by the plurality of advancing over declining stocks (known among the cognoscenti as "breadth") and the outsized number of stocks setting new highs versus those setting new lows.

But most striking was the garish speculative cast to the trading. Dogs that we had thought safely confined in their kennels were running loose with eager investors (or whatever) in wild pursuit. Our old friend Taser International (ticker: TASR) is a frothy for instance. The rousing reception that greeted the IPO of Chipotle (CMG), McDonald's Mexican food entry -- the stock doubled in its first day of trading -- was still another sign of aroused animal spirits. And so in its way is the mad passion for Google (GOOG), price be damned.

Sentiment readings, moreover, also display a vigorous enthusiasm. Although a tad more subdued after the recent selloff, the Consensus Index and Market Vane tallies, both of which tend to track the attitudes of the gamier pros (those who dabble in futures and that sort of thing), remain conspicuously bullish (72% in the former's survey, 68% in the latter's), while Investors Intelligence's canvass of investment advisers shows more than twice as many bulls as bears. And that most telling barometer of speculation, margin debt, has been mounting steadily, topping $220 billion in December, the highest level of on-the-cuff stock buying since the giddy days of 2000.

In this increasingly caloric investment climate, good news is seized on as sufficient reason for piling into the market; bad news is typically ignored, excused away or rationalized as favorable because supposedly it'll quicken the day the Fed relents and stops raising interest rates. The response to even so horrific a sight as an incredibly shrinking Detroit is pretty much a yawn.

All of which smacks of another round of irrational exuberance, the 2006 version. For the prudent investor -- and we assume a few are still extant -- the conundrum is that bucking a trend can be like lying down in front of a steamroller and taking the plunge can be like diving into an empty pool. An excellent time, we'd say, to turn coward and watch the fun and games from that nice cushy vantage point several rows back from the playing field.

Not quite "Katie Bar the Door," but working its way in that direction.

Source:
UP AND DOWN WALL STREET: Fun and Games
ALAN ABELSON
Barron's MONDAY, JANUARY 30, 2006
http://online.barrons.com/article/SB113840713897658794.html

Media Appearance: Kudlow & Company (1/27/06)

Friday, January 27, 2006 | 03:00 PM

in Media

Tonight's appearance will be Kudlow & Company, and I am scheduled to be on from 5:00 to 6:00 pm. Also appearing: Supply Side Art Laffer, Chief Economist for Mesirow Financial Diane Swonk, Raymond Learsy, and Jed Babbin.

There were some rumors wirling around sometime about Diane being appointed to the Federal reserve . . .

UPDATE: January 28, 2006 6:19am

Lots of email and comments about the show -- and people continue to ask "why do it." Aside from the obvious, there's plenty of good explanations:

1) I may disagree with his politics (I'm a pragmatic independent) but he is an extremely bright and engaging guy; Off camera, Larry is utterly charming and guileless; The on camera bluster is just "show bidness;"

2) I try to keep my appearances on any show I'm on reality based. So when 2 other panelists claim "There is no inflation" I do not try to convince them -- instead, I want the viewers to think: "No inflation? These dolts are clueless -- let me listen to what that fat bastard is saying."

3) Of all the people who are not in the conservative camp (me), I can get Larry to actually listen to alternative arguments -- he knows I was Bullish on Oil since 12/03, and on Gold for even longer -- so when I say there is a real chance of market dislocation, it get his attention. And he is well aware that almost nobody else on Wall Street is saying this. He's been around long enough to know when everyone is on one side of the boat . . .

4) He's definitely come around (somewhat) on the more egregious examples of the Administration's incompetence. Especially with spending and deficits, but on New Orleans and Iraq also.

5) Speaking of Mess O'Potamia: The subtext of Jed Babbin's comments is that if we weren't so tied down in Iraq, we would have the free hand needed to ~~address~~ confront Iran -- a soon to be nuclear power. So the f%&@ up in Iraq becomes a National Security issue . .

Sell Off on Volume

Friday, January 27, 2006 | 01:22 PM

in Technical Analysis

My pal Kevin Lane focuses on the volume during last Friday's sell off (and I agree):

Thanks, Kev.

Technicals versus Economics

Friday, January 27, 2006 | 12:45 PM

in Economy | Technical Analysis

I got involved in a debate earlier at RealMoney - Columnist Conversation, and wanted to pass it along here.

Pre-GDP (1/27/2006 7:31 AM EST), I wrote :

1) Technicals remain strong, and continue to be the driving force short term. But economics look weak, and continue to be source of concern long term.

2) Last Friday's market actions was the market's early warning sign. Very heavy volume to the downside on a big selloff is never a good thing. I interpret that day as a foundational crack of the cyclical Bull market. Again, we are not looking for a 1987 situation, but rather a Q1 topping out, and an ugly rest of the year.

3) Gold also looks toppy -- it's well overdue for a 10% correction. We are short here, but would re-establish a long position in the 480-510 range.

4) A 500 point day in Japan is too exuberant -- it's a sign of very emotional trading. Historically, these sort of buying frenzies tend to end badly. As such, we are lowering our multiyear price target on the Nikkei down from 21,000 to 18,000. I would not be surprised to see this lowered again before year's end. And the Korean Topix, which I have liked for some time, is geting crazed. Still plenty of upside, but getting frothy...

Norm Conley raised a legitimate question about this:

"It seems as if you are taking two outlier one-day moves in markets (one "up" move, and one "down" move), and extrapolating that although they are contradirectional, they both carry ominous portents."

My response was:

Continue reading "Technicals versus Economics"

The Astonishingly Inefficient Market

Friday, January 27, 2006 | 10:30 AM

in Apprenticed Investor | Markets | Psychology/Sentiment | Technical Analysis

One of the themes we keep coming back to is the so called efficient market hypothesis. We simply don't buy into the near religous belief that markets are perfect, omniscient processors of information.

Instead, we find markets are eventually, mostly, kinda efficient. They very often miss what in hindsight is obvious. Its why prediction markets' value are often limited.

Today's example comes from a NYT article about ENRON, the biggest ever corporate bankruptcy in the United States.

>
click for enormo graphic

graphic courtesy of NYT (for an even more enormous graph, click here)

Where, pray tell, is the efficiency there? The information that Enron was giant fraud was out, and yet the stock took over a year to collapse.

Efficient? P'shaw . . .

Source:
Big Test Looms for Prosecutors at Enron Trial
KURT EICHENWALD
NYT, January 26, 2006
http://www.nytimes.com/2006/01/26/business/businessspecial3/26enron.html

TA Infiltrating Everywhere!

Friday, January 27, 2006 | 08:30 AM

in Technical Analysis

Is it just me, or has technical analysis even crept into the comics?

via Mutts

"Priced out of Brooklyn"

Friday, January 27, 2006 | 05:50 AM

in Data Analysis | Earnings | Economy | Real Estate

Is NYC a Microcosm of the U.S.?

I would never had thought so. Manhattan is totally unlike the rest of the nation. I always loved paraphrasing a great line from Spaulding Gray's Swimming to Cambodia, which pointed out Manhattan's almost foreign nation status relative to the rest of the country:

Q: Do you live in the United States?

A: No, I live on a small island off the East Coast of America."

But in a surprising twist, a recent front page column in the NYT raises an interesting and unexpected parallel: It turns out the wealth dichotomy in the U.S. between the Haves and the Have Nots (or more accurately, the Have Less) is surprisingly similar to those of Manhattanites versus the outer boroughs:

New data compiled by the federal government suggests that New Yorkers who work outside Manhattan are being increasingly squeezed by inflation and slow wage growth - the bookends of economic struggle. And while inflation may vary somewhat from borough to borough, economists say that those variations do not affect the overall trend.

The Consumer Price Index rose 24 percent from 1996 to 2005 nationwide but grew 27.6 percent in every borough of New York. In the last three years, New Yorkers saw fuel prices rise 27 percent, while they grew 19 percent nationwide. And while the housing prices rose 8.4 percent nationwide, they went up 14.7 percent in New York. At the same time, benefits have decreased in many professions.

While Manhattan workers were not impervious to inflation, their wages helped shield its blow. Indeed, the number of families in Manhattan earning more than $200,000 a year rose almost 20 percent from 2002 to 2004 alone, according to the Federal Bureau of Labor Statistics.

In other words, the borough of New York County is very much is like the rest of the nation -- assuming you compare it only with the top 1% of earners nationally.

Consider: The real estate wealth, the limited access to exclusive events, museums, restaurants, shows. Manhattan turns out to be exactly like a cross section the country -- just limit your gaze to the very most expensive parts.

Meanwhile, people in the outer boroughs are struggling to keep up. Here's a phrase I never thought I would ever hear: "Priced out of Brooklyn." While we've heard similar phrases referring to other regions, where once sleepy bedroom communities see a big real estate price rise as higher paid urban professionals outbid the locals for homes in convenient commuter towns. In the NY area, its not just Great Neck and Manhasset and New Rochelle and Scarsdale -- its been happening in Brooklyn, lower Harlem and Queens. The Bronx may very well be next.

Why? Personal Income gains for the rest of NYC -- Queens, Bronx, Brooklyn and Staten Island -- are actually