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Election Outcome Overshadowed by Structural Concerns

Saturday, October 30, 2004 | 07:10 AM

The election of your lifetime.

That's what the vote on November 2nd vote has been called. It's probably a fair description in many, many policy areas. The two major party nominees for President differ on a host of issues, ranging from international affairs to economic strategy to tax policy. Even on basic issues of science – stem cell research (biology), global warming (chemistry), missile-defense (physics) – there are huge distinctions between the Republican and Democratic candidates.

When it comes to the capital markets, conventional wisdom assumes that the outcome of this election will matter a great deal.

I disagree.

Why? There are simply far too many structural factors that will hamstring whoever assume the Office of Presidency on January 20, 2005. The post-bubble environment has problems that will likely be cured only by the passage of time. Large budget deficits will continue, as will the ongoing weakness of the dollar. The economy is likely to grow, albeit at only a very modest pace, for the foreseeable future.

Further, U.S. presidents have far less influence over the macro-environment than most believe. The United States economy is a multi-trillion dollar behemoth, and its business cycle is not readily changed by minor – or even major – course corrections.

Consider the environment the president-elect steps into: With the 2003 stimulus fading, the economic expansion has already started to slow down. The trend of the past four quarters of GDP growth is revealing: 7.4% in the third quarter of 2003, 4.2% in the fourth quarter, 4.5% in the first quarter of 2004, and 3.3% in the second quarter. The end of the softspot was supposed to be 2004's 3rd Quarter GDP -- that came in below consensus, at a (disappointing) 3.7%.

This movement is even more pronounced if we back out government spending on military and wartime explanations.

Unless another trillion-dollar stimulus package is forthcoming – and given the huge deficit, that is highly doubtful – economic growth will be in the 2.5% to 3% range.

And that's without factoring in the impact of $50-plus-a-barrel crude.

Continue reading "Election Outcome Overshadowed by Structural Concerns"

Saturday, October 30, 2004 | 07:10 AM | Permalink | Comments (2) | TrackBack (1)
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Deficit Issues

Saturday, October 30, 2004 | 06:09 AM

Ben Sargent via Yahoo!

Graphic courtesy Ben Sargent

Sargent makes this a partisan issue by juxtaposing George W. Bush's campaign rhetoric against his budgetary track record. However, as the post that follows this will make fairly clear, the deficit issue (as well as other structural problems) will affect whoever is sworn in as President on January 20th, 2005.

Saturday, October 30, 2004 | 06:09 AM | Permalink | Comments (0) | TrackBack (1)
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Last of the Swing States?

Friday, October 29, 2004 | 11:54 AM


Click for larger graphic
Graphic courtesy WSJ

One of the last of the swing state polls

Friday, October 29, 2004 | 11:54 AM | Permalink | Comments (0) | TrackBack (0)
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Consolidation in Financial Media

Friday, October 29, 2004 | 05:57 AM

Here's two news stories you may have overlooked this week:

CNN will shut down its struggling CNNfn financial news network in mid-December, giving up its attempt after nine years to compete in a market dominated by CNBC. CNNfn was believed to be marginally profitable.

CNNfn only reaches 30 million homes (out of a possible 110 million). Its deal with Sat provider DirecTV was about to expire, and Murdoch/Fox is rumored to be considering a challenge to CNBC. In that battle, CNNfn would have been collateral damage.

On the internet side, CBS MarketWatch has been put up for sale by MarketWatch. They hope to get ~$400 million for the company. Possible suitors rumored to be bidding are CBS (Viacom) Dow Jones/ WSJ, New York Times Company, the Financial Times Group, as well as Yahoo.

I wish I could say this is a contrary indicator suggesting a long term bottom in the stock market. Instead, I suspect it is merely a sign of additional consolidation in the increasingly competitive media area, as dead tree editions look to bulk up their internet offerings.

Financial network to end after nine years
Seattle Times
Friday, October 29, 2004

MarketWatch, Web News Site, Is Up for Sale
Andrew Ross Sorkin
NY Times, October 28, 2004

Friday, October 29, 2004 | 05:57 AM | Permalink | Comments (0) | TrackBack (0)
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Big Biz Bails on Bush?

Thursday, October 28, 2004 | 07:20 AM
"If President Bush loses on Nov. 2, the finger-pointing among Republicans will begin immediately. Some may ask whether corporate America did its part. "The business community has to recognize that the public-policy arena is a very competitive place," says Mr. Fuller. "If you aren't going to participate fully, you aren't going to get results that are very satisfactory."

Indeed. We continue to observe a number of demographic groups slipping from the incumbent's grasp: Cubans, Arab Americans, Hispanics, Soccer moms -- even conservative states such as Coors hometown, Colorado, is in the swing column.

How did the GOP let these traditional strongholds slip from their grasp? Alan Murray of the WSJ notes the deafening silence from big business as one possible factor:

"President Bush holds a lead of less than three percentage points among "likely voters," according to an average of recent national polls. Some Republican strategists worry that isn't enough to offset a potent mix of antiwar warriors, anticapitalism capitalists and organized labor working night and day to turn out legions of new voters.

The counterbalance to the [left leaning 527 donors] of course, should be the hordes of American business leaders who support capitalism and limited government, who have benefited handsomely from the policies of this administration and who would like to see George Bush re-elected. Where are they? Surprisingly quiet.

It is one of the great ironies of Election 2004. Mr. Bush's opponents attack him daily for being the tool of big business. But big business is hardly heard."

Why is that so? Say what you will about the colder aspects of the markets, but at its heart, modern capitalism is a meritocracy. Why would the business community endorse an administration that by all measures appears to be bumbling incompetants?

Maybe its the economy. After all, the recovery has been feeble, and executives are loathe to put their quarterly numbers at risk. But I doubt that's it. Corporate America's balance sheet is in the best condition it been for years. Debt has been refinanced, profitibility is very high.

So what then? So far, we have heard that the new campaign finance rules have kept corporations sidelined to some extent. Others blame the trial lawyers, and even Eliot Spitzer (where are the Law & Order Republicans when you need them?)

Perhaps there's another reason: It's just bad business publicly backing Bush.

Look at the Sinclair debacle. Shareholders punished the stock. Fund managers screamed at their self-indulgent politicizing of shareholders assets. Calls for an FCC investigation have been made, shareholders law suits have been filed, and there is a grassroots movement to publicly challenge their licenses the next time they come up for renewal.

The bottom line is, well, the bottom line.

And it appears in an evenly divided nation, alienating exactly half of your clientele is simply bad business.

UPDATE: October 28, 2004 10:04
Just noticed that The New York Times has a related story: Private Political Donations Can Carry a Business Price
More of the same . . .

Cubans, Hispanics, Arabs: Are Key Demographic Shifting Party Affiliation?
Barry Ritholtz
The Big Picture, Thursday, October 21, 2004

Wary Big Business Is Loath to Speak On Bush's Behalf
By Alan Murray
The Wall Street Journal, October?26,?2004;?Page?A4

Private Political Donations Can Carry a Business Price
Glen Justice
New York Times, October 28, 2004

Thursday, October 28, 2004 | 07:20 AM | Permalink | Comments (4) | TrackBack (1)
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Can Colorado Swing ?

Wednesday, October 27, 2004 | 11:19 PM


Can Colorado swing blue? That's an issue hardly anyone thought would be up in the air a week before the election. Bush appeals to "rank-and-file conservatives" in Colorado, which he won by nine points in 2000 (51%, to Al Gore's 42% and Ralph Nader's 5%).

Which, as the WSJ point out, only means nothing is certain:

Wsj_colorado_10252004 "There are red states and blue this fall, and then there is Colorado: a mile-high brew all its own, where just a few political inches could be huge in the struggle for Congress as well as the White House.

President Bush is ahead in polls here, but by small enough margins that he returned again yesterday for a rally in Greeley. Sen. John Kerry drew thousands in Pueblo on Saturday, and Democrats hope for a record turnout by Hispanic voters, drawn by a remarkable pairing of fifth-generation Mexican-American brothers who are running for Congress as Democrats.

Republicans agree they have dominated Colorado in recent years by making Democrats look risky. The big question now is whether today's real-life problems of Iraq, rising health-care costs, dwindling water supplies and a state fiscal crisis are frightening enough that voters may be willing to take a chance on the party out of power.

All that makes Colorado a potential swing state at every level in next week's election. "People have forgotten that this is not a partisan state. It is not an ideological state," says Bill Armstrong, a former two-term Republican senator from Colorado. "So while people say Republicans are losing their grip, the truth is they never had a grip."

Republicans have clear advantages: They enjoy a 178,000 edge over Democrats among registered voters and a proven ability to maximize turnout. "Fight Terrorism, Vote Republican" is a favorite slogan. Party ads on Christian radio stations include a toll-free number to facilitate early voting, which is attracting record numbers this year.

But some Republicans complain that their party may have pushed to the limits its antitax and socially conservative ideology. The second especially rubs against a Western libertarian streak on issues such as gay rights and stem-cell research."

Question: Is Colorado really in play? I never would have surmised that 6 months ago. Here's a quote that provides some good insight as to why this is likely so:

"I'm a 1964 Goldwater Republican and I'm not happy where the neo-Republicans are taking us," says Mark Larson, a state legislator from Cortez. In fact, the party's leader, Gov. Bill Owens, is no longer the partisan powerhouse he once was and has been hurt by his well-publicized separation from his wife. The brightest new political star may be Denver Mayor John Hickenlooper, a Democratic businessman who cultivates a brand of nonpartisan politics and a friendship with the Republican governor."
Fascinating stuff.

Colorado Has Swing Potential
Democrats Seek Inroads in Races That May Have a Broad Impact
October 26, 2004; Page A4

Wednesday, October 27, 2004 | 11:19 PM | Permalink | Comments (1) | TrackBack (1)
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Aggregate Demand versus Job-Creation

Wednesday, October 27, 2004 | 07:21 AM


Over the past year, we have extensively discussed how important job creation was in order for an economic recovery or expansion to keep running. This is especially true now that the leading economic indicators have decayed for 4 consecutive months.

Paul McCulley of bond giant PIMCO waxes eloquent on why we continue to see mediocre job creation, despite the past years improving demand side of the equation:

Click for larger graphic
Graphic courtesy PIMCO


"Despite aggressive and massive easing in 2001 - from 6½% to 1¾% for Fed funds - monetary stimulus was simply not getting sufficient "traction," notably in fostering job creation and tempering disinflation expectations. The record of history said that such massive easing should be "working." And, indeed, it was in stimulating aggregate demand, notably in the household sector. But there was a large slip between the aggregate demand cup and the job-creating lip.

Corporate America just wasn’t in the mood to meet indications of rising demand with more job supply, choosing instead to meet rising demand by goosing the productivity of the existing work force. Boosting profits by exploiting operating leverage is, of course, a time-honored tradition of capitalists. But this time ‘round, would-be employers had an overriding reason to exploit operating leverage: a concurrent need to reduce financial leverage.

This was particularly the case in 2002, in the wake of revelations that there were crooks - yes, crooks! - among the capitalist class, who had been blowing heinous smoke up the backsides of both stock and bond holders alike. Stock holders took their losses abjectly. But corporate bond holders didn’t, blowing out corporate bond spreads and de facto refusing to finance or re-finance any but highest grade issuers. Simply put, corporate bond investors demanded that Corporate America check into the Betty Ford Center for Balance Sheet Rehabilitation, most urgently those on the rating cusp between investment grade and junk.

McCulley has consistently had a level headed and insightful view of the economy and the Fed. He's worth adding as a regular monthly read . . .

Managing It Forward
Paul McCulley, Managing Director
PIMCO, October 2004

Wednesday, October 27, 2004 | 07:21 AM | Permalink | Comments (0) | TrackBack (0)
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Frankenstein Economy Revisited

Tuesday, October 26, 2004 | 03:39 PM

October’s reputation as one of the year’s scariest months appears well deserved this year. The frights began piling up weeks in advance of Halloween: Record oil prices, weak corporate guidance, disappointing pre-announcements, the Insurance bid-rigging scandal and a spate of mostly mixed economic reports have been pressuring the indices. This has driven the Dow down to the lowest point of the year.

But this low has set the markets up for the seasonal rally. We have observed that November to January each year tends to be amongst the strongest 3-month periods, while the 6 months from Halloween until May Day has a solid bullish bias. For the intermediate term, we advise investors to think about starting to deploy capital on the long side.

When considering the longer-term, however, we are quite mindful of the Presidential Cycle (mentioned previously). This 4-year cycle tends to see market’s bottom in the 2nd year of a Presidential term, and peak in the 4th year. That proved true for the present 4-year cycle, with lows in October ‘02 and peaks in January ’04. Were that to replay itself out, as we expect it will, 2005 will be the precursor to a significant correction. That is likely to start sometime in the second half of ‘05, and reach its denouement in 2006.

How will that likely come about? A year ago this week, we discussed our fears of the “Frankenstein Economy.” The lifeless, post-bubble financial system was reanimated through massive doses of stimulus. Historical levels of tax cuts, interest rate cuts, increased monetary supply, devalued currency, and deficit spending jolted the economy back to life - at least temporarily.

We may be witnessing the nightmare scenario we feared most last year coming to pass. Colossal though the stimulus was, it could not defeat the immutable business cycle. Recent data points to an expansion that is slowing, mostly due to the lack of both job creation and capital spending. With the stimulus behind us, we continue to see its effects waning. The LEI has dropped for 3 consecutive months, and that bodes poorly for the mid-2005.

Without some significant change in the economic climate, we expect recent trends to continue: a feeble economic expansion with high oil prices ($40-50), modest job creation, and anemic Capital Expenditures.

The 2002-04 stimulus has been extraordinary; Yet the economy remains recalcitrant. What unknown harm awaits when the failed reanimation - Frankenstein’s body, now deceased again - slumps back onto the slab?

Tuesday, October 26, 2004 | 03:39 PM | Permalink | Comments (1) | TrackBack (0)
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Chart of the Week: Dow Industrials (Feb - Oct 2004)

Tuesday, October 26, 2004 | 03:22 PM

The Dow continues to trade in its downwards channel. As the chart below shows, each cyclical top has been followed by a lower low. The key as to whether this pattern can be broken would be a higher low (in circle with “?”), possibly leading to a break of the upper downtrend line.

Dow Industrials (Feb - Oct 2004)
click for larger chart
Source: Arms Advisory

The sharp downward move has penetrated the lows of late September. The vertical blue lines indicate the very regular cyclicality of the tops. The ellipses are indicating the bottom of each cycle.

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Quote of the Day:
The test of success is not what you do when you are on top. Success is how high you bounce when you hit bottom.
-General George S. Patton

Tuesday, October 26, 2004 | 03:22 PM | Permalink | Comments (0) | TrackBack (0)
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Cavuto on Business: (10/26/04)

Tuesday, October 26, 2004 | 01:01 PM
in Media


A heads up: I'll be appearing on on Fox today (Cavuto on Business @ 4:10pm EST).

It’s a special panel on the Election and the markets – what happens in the event of a “no decision” on November 3rd, etc.

In addition to Neil, I'll be on with Poli Sci Professor Costas Panagopoulos from Yeshiva University and Don Luskin of Trend Macro Analytics.

As always, I am the moderate, there as the voice of reason. I cannot say I know the Poli Sci Professor's work, but I assume (based on his CV) he is left leaning; Don has long been right leaning (to say the least).

Should be fun . . .

Tuesday, October 26, 2004 | 01:01 PM | Permalink | Comments (1) | TrackBack (0)
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