I love higher gasoline prices

Yes, you read that right: I do in fact love higher gasoline prices. More specifically, I place high value on having a clear economic signal being sent to consumers and to car companies and to entrepreneurs and their investors: Shift ASAP to more energy-efficient transportation options.

I personally believe that such a shift is already underway, but unfortunately it is running as slow as molasses.

So, the good news is that higher retail gasoline prices deliver a low blow to consumers. Some of those consumers will rebel and either drive less (maybe take the bus or bicycle or walk) or buy a more fuel-efficient vehicle or shift to an alternative fuel.

Car companies may in turn take a hit because they sell fewer of the high-priced gas guzzlers. Some of this pain will cause them to re-tool their own business models to exploit the "interest" in fuel efficiency. This will in turn open up possibilities for entrepreneurs to introduce new technologies into the market.

Lower gasoline prices would reduce these incentives. Even higher gasoline prices will only increase the incentives to promote fuel efficiency and non-fossil fuel alternative sources of energy. Good stuff. And it will happen quicker the higher and faster retail gasoline prices rise.

In the end, the consumer will be a big winner, but there will be short-term pain. The key is for the consumer to pass the pain on to the other players in the energy and transportation food chain. Consumers need to get active and push back in a healthy and constructive manner.

Passive consumers are weak economic agents, enabling debilitating stagnation to build up in the economy. Active consumers (changing their consumption habits it reflect their own "values") are strong economic agents, facilitating the dynamic equilibrium associated with a strong, healthy, vibrant economy.

This is what it is really all about: clear economic signals. As a society, we need to assure that economic signals are omnipresent and as clear as possible.

-- Jack Krupansky

The housing doldrums continue

The bad news of the 3.9% (call it 4%) monthly decline in New Home Sales from January to February was certainly a disappointment today, but we have to be careful not to extrapolate too far from one data point. For one thing, that is significantly better than the 15.8% decline we saw From December to January.

My suspicion is that we could well see another decline for March (in the April report), but sometime in the April or May timeframe (the May or June report) we should begin to see some improvement, if only because average selling prices are likely to decline. Keep in mind that there may be a 1 in 3 chance of seeing some improvement in the April report covering the February to March period.

The real bottom line here is that housing is no longer "the long pole in the tent" for the U.S. economy. The sooner we "get over it" and focus on the overall economy rather than obsessing over a once-hot sector, the better, for all of us. Money flows that were being directed at housing are now flowing elsewhere, including commercial construction.

Here is an interesting tidbit from the report: new home sales in the Northeast fell by 26.8%, sales in the Midwest fell by 20.0%, but sales rose by 24.6% in the West. Sales in the South fell by 7%. The net of all of this is that the growth in the West almost totally eclipsed the declines for the entire rest of the country.

Another tidbit: There was actually a 7.6% rise in the actual number of new homes sold in the January to February period, but that gain turned into a loss due to the seasonal adjustment factor.

A final tidbit: The average selling price actually rose from $310,100 in January to $331,000 in February.

In short, the housing sector will continue to be a source of bad news for a little while longer, but there is no "massive meltdown" lurking just around the corner.

-- Jack Krupansky

Crude oil rebels against fundamentals

The price of crude oil has spiked up again. Part, but not all, of the spike was due to the transition from the April futures contract to the May futures contract, which was apporximately a $1.80 overnight jump. The rest of the spike could be explained away by any combination of news factors, but is most likely due simply to yet another inflow of speculative "hot" money. On Friday, the NYMEX May crude oil futures contract closed at $62.28, a rise of 9.1% over the close a week ago of $57.11 for the April futures contract. It may take a few more days for crude to reach a new equilibrium price.

Despite all the chatter, crude oil is mostly trading based on short-term chart "technicals" and speculative "hot" money flows rather than long-term economic fundamentals.

There is more than enough crude sloshing around in inventories to fail to justify even current price levels, but that doesn't bother traders and short-term speculators.

-- Jack Krupansky

Euro struggles mightily with the $1.34 level

The euro struggled mightily with the $1.34 level of technical resistance this past week. After the Fed FOMC announcement, quite a number of people misguidely acted as if a couple of Fed rate cuts were in the offing in the near term. As people came back to the reality of the Fed standing pat on rates, the euro retreated a bit, closing Friday at the $1.3334 level.

I wouldn't be surprise if speculators managed to push the euro up into the $1.34 to $1.35 range in the next few weeks whenever there is any bad news to focus on, but it is just as likely that they will trade it back down under $1.30 as soon as people grasp the truth that the Fed is very unlikely to cut rates over the next six months.

In short, the dollar is not "plunging."

-- Jack Krupansky

Fed to stay on course at 5.25% for all of 2007 and probably into 2008

After carefully reading the latest Fed FOMC meeting announcement, a fair amount of commentary on the Fed, and one fairly detailed paper by the Fed, my conclusion remains the same...

For now, my overall assessment of Fed monetary policy remains:

My view is that the Fed will keep the Fed funds target rate paused at 5.25% for all of 2007, and probably into 2008.

There will not be a recession this year, nor even enough of a growth slump to trigger a Fed rate cut.

The Fed will not cut rates in response to the concern about subprime mortgages.

I tentatively say "for now" because I remain half-convinced that the Fed may in fact feel the need to make another hike in May or June to 5.50%. To my way of thinking, it all depends on what happens with energy commodities. Prices of oil and gasoline futures are still quite elevated, albeit off their Summer peaks, and this constitutes an ongoing source of inflationary pressure that continues to propagate throughout the economy. If prices of energy commodities resume their decline, the Fed will be able to remain paused for all of 2007. But if energy commodities prices do not continue to fall, the Fed may have little choice but to hike to 5.50% in May or June. If we don't see crude oil consistently below $50 and retail unleaded gasoline consistently under $2.00 by May, expect a Fed hike to 5.50% at the May or June FOMC meeting. Based on economic fundamentals, we should see the prices of energy commodities come back down to Earth, but unfortunately there is simply so much free cash sloshing around seeking "some action" and a lot of speculators are simply unable to resist the urge to try to run commodities prices back up since "it worked before." My view is that there is a fairly good chance that prices of energy commodities will recede in the coming months, but it may be too soon to bet too heavily against the speculators. My finger is on the trigger, but for now I'll retain my belief that the Fed will remain paused for at least another year. My current feeling is that a hike is unlikely at the May meeting (less than 1 in 3 odds), but almost likely at the June meeting (40% chance).

I am not suggesting that the Fed will "target" commodities prices such as crude oil and gasoline, but that the Fed will be noticing the degree to which elevated commodities prices are influencing the rest of the economy and pushing up even core prices. We did have good news on the inflation front in the past couple of months, but that was primarily the result of the decline of crude oil and gasoline prices off the summer spike, but crude oil and gasoline prices have risen since November. On Friday crude spiked up to $62.65, closing at $62.28, which has to concern the Fed. Wholesale gasoline spiked above $2 and closed at $1.9983, indicating an equilibrium retail level of $2.60 to $2.65.

My latest thinking is that $60 may be the magic number for crude oil for the Fed in May even though $50 is what they would really like to see. If crude is $60 or higher in May, the Fed will have a high probability of a hike to 5.50%. If crude is below $50, the probability of a hike is very low. If crude is at $55, it will be a 50/50 coin flip. At $58, the Fed would seriously consider a hike. At $53, the Fed would likely hike only if there were some other significant factors, such as a strong resurgence in housing demand.

The point here is not $58 crude oil per se, but the fact that $58 crude oil means that either real demand is overly strong, or there is too much monetary liquidity in the financial system that inspires speculators to throw too much money around because it is relatively too cheap and the Fed will feel some pressure to "mop up" such excess liquidity to the extent that it causes higher core inflation in the real economy.

Although the moderation of the housing boom will indeed hold back the economy over the next couple of quarters, the Fed seems to agree with me that this is to be expected and not an indicator of a coming recession. A lot of people are desperately funneling money into bond funds in response to an expectation of well below-par economic growth, and this is depressing Treasury yields and causing an inverted yield curve, but this is ultimately indicating only below-par growth (e.g., 2% to 2.75% rather than 3+%) for the coming six months. Yes, there is a lot of anxiety, but anxiety itself is not a reliable indicator of a particular outcome.

Please note that current Fed policy at 5.25%, or even a hike to 5.50%, is not restrictive, but within the neutral range which is neither accommodative nor restrictive. All "normal" economic activities can be easily financed with Fed policy at this level. This does eliminate a lot of excessive speculative behavior, but won't crimp the average business or consumer. The odds of such a hike causing a recession are negligible.

As of Friday, Fed funds futures contracts indicate the following probabilities for changes in the Fed funds target rate at upcoming FOMC meetings:

• May 9, 2007: 10% chance of a cut
• June 27/28, 2007: 28% chance of a cut
• August 7, 2007: 72% chance of a cut
• September 18, 2007: 94% chance of a cut
• October 30/31, 2007: 100% chance of a cut and 32% chance of a second cut
• December 11, 2007: 100% chance of a cut and 78% chance of a second cut
• January 2008: 100% chance of two cuts and 14% chance of a third cut
• March 2008: 100% chance of a cut and 24% chance of a second cut

The May meeting is now precisely at the outer edge of the 45-day window of reliability for the fed funds futures to predict Fed action, so it is close to a virtual certainty that the Fed will not changes the fed funds target rate at the May FOMC meeting. It is too soon for fed funds futures to reliably predict rates for the June FOMC meeting. A lot can and will transpire during the run-up to the May and June meetings to whipsaw the odds for a rate change at those meetings. My belief is that the odds of a cut will completely evaporate and in fact turn into odds for a hike in May. Ditto for June and August. Stay tuned.

I personally don't concur with these odds after June, but that is how a lot of people are actually "betting." I would simply note that such betting can change on a moment's notice as economic and financial data, not to mention commentary and sentiment, unfolds and evolves -- which is precisely what we saw this past week. Like it or not, the economy proceeds more through Darwinian evolution than "intelligent design." The Fed (and Wall Street) can influence the evolution, of the economy, but not control it as if it were a clockwork machine. Predicting the precise or even general impact of any Fed action or inaction is quite literally a fool's errand. Further, the "betting" on any last Fed move is usually more of an insurance hedge than an outright bet, more of a "just in case I'm wrong" kind of "bet". Finally, studies have shown that Fed funds futures are not a very reliable indicator more than 45 days into the future.

What the Fed funds futures market tells us clearly is that the Fed is most likely to leave rates unchanged at least through June. The market is predicting a cut at the August FOMC meeting, but that is too far in the future for the market to give a reliable forecast.

My feeling is that since the housing retrenchment didn't cause a Fed cut at the January FOMC meeting, it is unlikely that housing will be enough of a problem to cause a Fed cut for the rest of the year either.

As of the February 22, 2007 edition of the UBS As We See It - Market Viewpoint report, UBS Wealth Management Research forecasts a Fed funds rate of 4.25% by the end of 2007. That would be four quarter-point cuts. They continue to forecast 2% GDP growth for 2007. Obviously I do not concur, although I welcome their alternative perspective.

The bottom line here is that the Fed won't move through June, and any speculation about Fed moves further down the road are simply wild guesses based on contrived stories about a hypothetical future economy that happens to have a mind of its own.

Why are so many smart people so confused about the future? It is simply the fact that the conservative thing for them to do is to assume that economic events such as housing booms always play out in the same pattern every single time. For a bureaucrat, that is always the safe approach. Alas, every economic episode has its own idiosyncratic pattern and the real issue is how to forecast the interactions between the many sectors and regions of the economy, and that is a really hard problem that is absolutely not amenable to the cookie-cutter application of historical patterns.

The current "herd mentality" on Wall Street is basically sending so many speculators and even investors off on a truly wild goose chase, after which Wall Street will quietly acknowledge its error ("the data changed in an unexpected manner") and then chase those same speculators and investors back in the opposite direction, making sure to collect transaction fees and spreads on both legs of the roundtrip "chase." Expect to see a reversal of the trend of the past week within a month.

Note that the Weekly Leading Index of the Economic Cycle Research Institute is telling us that the economy will be holding together reasonably reasonably well for at least the next few months.

-- Jack Krupansky

Inflation Dynamics

Everybody wants to be able to out-guess the Fed concerning inflation in the coming months and years. To do so would require that you have a hard-core, deep understanding of inflation dynamics. In fact, just this past Friday, March 23, 2007, Fed Governor Frederic S. Mishkin presented a speech/paper entitled Inflation Dynamics at the Annual Macro Conference of the Federal Reserve Bank of San Francisco.

At the risk of over-simplifying his arguments, the final final paragraphs of his paper provide at least a little insight into how at least one Fed Governor views the outlook for inflation:

Taken together, the data suggest to me that long-run inflation expectations are currently around 2 percent. That said, I think it should be clear that the evidence points to a range of estimates; moreover, this range is itself uncertain because of the assumptions needed to tease point estimates from the available data. So, although I think that 2 percent is a reasonable estimate of current long-run expectations, I don't want to overstate the precision of this figure. We still face some uncertainty in this regard, and policymakers must be cautious about placing too much confidence in any one estimate.

If long-run expectations are in fact about 2 percent, where is actual inflation likely to be headed in the next year or two? While recognizing how embarrassingly wrong such prognostications often turn out to be, I think that we can be reasonably optimistic that core PCE inflation will gradually drift down from its latest twelve-month reading of 2-1/4 percent. This process may take a while in light of the recent rebound in prices for gasoline and other petroleum products. These price increases have boosted the cost of producing many non-energy goods and services, and as firms gradually pass on these higher costs to their customers, monthly readings on the change in core prices are likely to be higher than they otherwise would be. Once this process is completed, however, we might expect consumer price inflation to move into better alignment with long-run expectations and thus settle in around 2 percent. Of course, our understanding of the empirical links between our measures of expected inflation and actual inflation is sufficiently poor that things could well go awry with this forecast. Moreover, many things could happen in the coming months to alter the outlook, as the recent fluctuations in energy markets and swings in GDP growth illustrate.

Looking to the medium term, I am less optimistic about the prospects for core PCE inflation to move much below 2 percent in the absence of a determined effort by monetary policy. For the most part, this assessment--which I should stress is subject to considerable uncertainty--flows from my view that long-term expectations appear to be well anchored at a level not very far below the current rate of inflation. If so, a substantial further decline in inflation would require a shift in expectations, and such a shift could be difficult and time consuming to bring about, as I noted earlier.

As I mentioned at the start, central bankers are acutely interested in the inflation process. This is why I have thought about the topic a lot and chosen to talk about it today. I hope you have found my musings on this subject useful.

In short, the Fed remains intent on pushing inflation and inflation expectations down further, but they fully recognize that the process is likely to take an extended period of time. This is further evidence that rate cuts are not uppermost in the minds of Fed policymakers.

Earlier, the paper noted that "In the case of households, long-term inflation expectations from the Reuters/Michigan survey have been running much higher for a number of years, at around 3 percent." The Fed does in fact recognize that expectations drive behavior of consumers as much as current conditions, but the Fed also notes the "persistent bias found in the short-term inflation expectations reported by this survey." In other words, consumers are rather uncertain about inflation, moderately content with the present, but concerned about the future.

-- Jack Krupansky

Unwary investors or mindless media?

Although I generally have a lot of complaints about the media, I actually do find quite a bit of semi-reasonable reporting in The New York Times. Investing is one exception. Rarely do I read an article on finance or investing in The New York Times that isn't really, really bad. For all of the quality reporting they have in other areas, they compensate in spades with extremely low quality when it comes to reporting on finance and investing. Sure, on occasion some quality reporting on finance does slip out, but that is the exception rather than the rule.

It may simply be that Gretchen Morgenson has undue influence at the paper, or maybe there is some deeper, darker source for the really bad finance and investing reporting.

I pen this post in response to an editorial in The New York Times entitled "Unwary Investors - Investors who fail to take a hard look at the vulnerability of the American economy are courting tremendous risk." The Times started off with the truly outrageous claim that "in this week's upswings, investors have seemed especially heedless of dangers lurking in the economy." That is complete nonsense. It is in fact the Times itself, with its financial yellow journalism that is "heedless" of the underlying strength of the U.S. economy and our financial markets.

The Times speaks of "a lot of reasons to worry", but this is merely part of their yellow journalism shtick, designed to paint lurid headlines and sell papers, rather than a serious attempt to enlighten "investors."

Their final paragraph illustrates how out of touch they are:

Investors who fail to take a hard look at the vulnerability of the American economy are courting tremendous risk. The fact that after years of profligacy the federal government is fiscally ill prepared to respond to a destabilizing downturn only increases those risks. The Fed might — or might not — be able to engineer a rescue. In the global economy, the past performance of Fed rate cuts is no indication of future results.

I'll be the first to admit that the Federal Reserve is not perfect, but the Times does not even come close to being in a position to criticize the Fed.

For some reason, the Times got it in their collective head that serious investors actually believe that the Fed thinks in terms of using rate cuts to "rescue" investors. It was never the case, is not ever intended to be the case, and is not now the case. The Fed does intervene in the sense of seeking to maintain price stability and to ensure ample liquidity in the financial system, but never to intervene for the sole purpose of "rescuing" investors. Sure, there is a myth to that effect floating around (sometimes referred to as "The Greenspan Put"), but shame on The Times if their reporting is so bad that they can no longer distinguish fact from fiction.

The Times makes its case as follows:

On Wednesday, the Federal Reserve signaled that it was neutral on what its next interest rate move would be. Investors immediately took that as implicit assurance that the Fed would cut rates — presumably bolstering growth — if the economy slumped along with the mortgage market.

First of all, the Fed did not "signal" that it was "neutral on what its next interest rate move would be." That is a very false characterization. The Fed did in fact remove some extra language that placed a stronger than needed emphasis on rate hikes, but the Fed continued to warn that it was biased in favor of worrying more about inflation than economic weakness. The Fed is decidedly not "neutral."

To be sure, since August the Fed has pinned its hopes on 5.25% being the interest rate where the economy would gradually settle into a steady equilibrium between reasonably strong economic growth and reasonably low inflation. The hope all along has been that the "pause" will hold for an extended period of time. Nobody has yet come forward with a credible case to counter the Fed position. Many have tried, but they all have problems, not the least of which is a disconnect from reality.

Given that inflation has continued to remain higher than the Fed's comfort level, it has been only natural that the Fed would be sitting with its finger on the trigger, ready to hike rates a little more to keep inflation firmly subdued. That was always only a stance, a form of preparedness or insurance, just in case, the original and still appropriate bet on 5.25% somehow turned out to be a little too low.

But, given the ongoing weakness in the housing market and significant anxiety over mortgage-backed securities, a Fed looking too eager to hike rates was a little too unsettling to many people. Given that the Fed could palpably sense fear in the markets, there was simply no longer any reason for the extra strong language that focused too much attention on the potential for hiking rates. In other words, the language was in there to balance an excess in exuberance, but is no longer needed as that former exuberance has evaporated.

As I said earlier, even without the extra strong language, the Fed still retains a decidedly hawkish stance towards the potential for raising rates to combat inflation. To wit, the Fed said in its most recent FOMC announcement:

Recent readings on core inflation have been somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures. In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected.

I have to laugh. Those words from the Fed in the latest FOMC announcement are in fact incredibly hawkish. For The Times to consider them "neutral" is truly absurd.

Also, it is a mistake for The Times or anybody to mistake the movement of the markets over a day or two or three by traders and short-term speculators as an indication of the sentiment of "investors." My standard pitch is that the markets always need at least three or four days "for the dust to settle" before we can get a good reading of what investors (as opposed to traders and short-term speculators) really think of the outlook implied by the Fed's actions and announcements. Also, it makes sense to wait for at least three Fed officials to speak in public after an FOMC meeting to reliably gauge the Fed's true posture.

For the record, I personally believe that the Fed is likely to "stand pat" for the entire rest of the year, but I also believe there is a fair chance that the economy is actually stronger than even I think, and that another hike may be needed in the May or June timeframe.

-- Jack Krupansky

$30,000 for lunch

$30,000 for lunch? That seems a bit steep, especially for those of us on a tight budget.

On my skimpy budget I try to spend not much more than $4 a day on lunch. That's not so easy when a sandwich can cost $6 or more, but there are ways.

I was thinking about this and realized that $4 is about what I earn a month each month from $1,000 in T-bills. At the latest yield of 5.25%, $1,000 will earn you about $52.50 per year or $4.38 per month.

But I need $4.38 per day, so times 30 days in a month, I would need $30,000 in savings to earn my $4.38 lunch money every day. Actually, that is $4.11 per day at a 5.00% rate.

It seems to me that a lot of people spend $8 to $10 a day for lunch, so that would require $60,000 to $75,000 in savings earning 5.00%.

This is mind boggling.

It has implications for retirement.

Just to pay for my lunch after I retire, I will need $30,000 in retirement savings. Spending $10 per day doesn't seem like a lot, but that works out to a need for $75,000 in retirement savings.

If you expect that you could live on $3,000 per month ($100 per day), that would require about $730,000 in retirement savings at 5.00%. Sure, we can hope to get better than a 5.00% return with various financial "games", but most people will be lucky if they can get that $100 per day even with a gradual draw down of principal.

Anybody want to volunteer to pick up my lunch tab?

-- Jack Krupansky

PayPal money market fund yield rises to 5.05% as of 3/24/2007

Here are some recent money market mutual fund yields as of Saturday, March 24, 2007:

• iMoneyNet average taxable money market fund 7-day yield rose from 4.75% to 4.76%
• PayPal Money Market Fund 7-day yield rose from 5.03% to 5.05%
• ShareBuilder money market fund (BDMXX) 7-day yield fell from 4.49% to 4.48%
• Fidelity Money Market Fund (SPRXX) 7-day yield remains at 5.00% ($25,000 minimum)
• Fidelity Cash Reserves money market fund (FDRXX) 7-day yield remains at 4.98%
• Fidelity Prime Reserves money market fund (FPRXX) 7-day yield remains at 4.45%
• Fidelity Municipal Money Market fund (FTEXX) 7-day yield rose from 3.23% to 3.29% or tax equivalent yield of 5.06% (up from 4.97%) for the 35% marginal tax bracket and 4.57% (up from 4.49%) for the 28% marginal tax bracket
• Fidelity Tax-Free Money Market fund (FMOXX) 7-day yield rose from 3.18% to 3.24% or tax equivalent yield of 4.98% (up from 4.89%) for the 35% marginal tax bracket and 4.50% (up from 4.42%) for the 28% marginal tax bracket
• 4-week (1-month) T-bill investment rate fell from 5.27% to 5.25%
• 13-week (3-month) T-bill investment rate fell from 5.11% to 5.08%
• 26-week (6-month) T-bill investment rate fell from 5.13% to 5.12%
• Treasury I Bond composite earnings rate (semiannual compounded annually) for new I Bonds is 4.52%, with a fixed rate of 1.40% and a semiannual inflation rate of 1.55% (updated November 1, 2006, next semiannual update on May 1, 2007)
• Charles Schwab 3-month CD APY rose from 4.99% to 5.05%
• Charles Schwab 6-month CD APY rose from 5.06% to 5.08%
• Charles Schwab 1-year CD APY remains at 5.00%
• NetBank 6-month CD APY rose from 5.38% to 5.40%
• NetBank 1-year CD APY fell from 5.40% to 5.35%

Note: APY yield is worth somewhat less than the same 7-day yield. See my discussion and table for Comparing 7-day yield and APY.

PayPal continues to be a fairly interesting place to store cash for both relatively quick access and a well above average yield. There is no minimum for a PayPal account, no fee for a basic account, and it can be linked to your bank checking account or even your brokerage checking account for easy access. Right now I am using PayPal as a savings account, putting a little more money in whenever I get a chance and feel that my budget has some "spare change." I did that this past week. The PayPal 7-day yield of 5.05% is equivalent to a bank APY of 5.17%.

4-week T-bills remain very attractive for cash that you won't need for a month, since the new issue yield was well above the yield of PayPal and Fidelity Cash Reserves. But, this rate fluctuates significantly from week to week. The rate is locked in for four weeks once you buy the T-bill at the weekly auction, but you can't predict what rate you will get at the next auction since it is based on supply and demand. Simply letting the T-bills automatically roll every four weeks will average out a lot of this volatility. Mine rolled this past week and will give a 5.27% rate for four weeks.

Check Bankrate.com for the availability of high-rate CDs (5.00% APY to 5.50% APY for 6-month). Alas, there are frequently quite a few caveats, strings, restrictions, requirements, minimums, "introductory specials", and other gotchas, so read the fine print carefully. CDs work great for some people, but horribly for others. I have no CDs since I do not have any free cash that I can afford to lock up with restrictions. But, that said, I am considering putting at least a little free cash in short-term CDs (three-month, six-month, or maybe even one-year), around the middle of 2007, especially if the Fed raises interest rates by a quarter-point in May or June.

Last week I saw an introductory teaser from HSBC Direct Online Savings that promised "New Money Earns 6.00% APY* Through 04/30/07." Hmmm... and then what does it earn? Read the fine print and the answer is: "it then earns an interest rate of 4.94% and yield 5.05% APY after that date." Until the 4.94% rate changes, which can happen at any time. HSBC is aggresively pursuing "new money" since they need to make up for huge losses on subprime credit.

Please note the disclaimer on Fidelity's web site for mutual funds:

Past performance is no guarantee of future results. Yield will vary.

As always, please note that cash placed in money market mutual funds is subject to the disclaimer that:

An investment in the Fund is not insured or guaranteed by the Federal Insurance Deposit Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.

In practice, that is not a problem at all, but it does incline me to spread my money around a bit.

T-bills and the cash in your bank checking and savings accounts or bank CDs are of course "protected", either by "the full faith and credit of the U.S. Treasury" or the FDIC. Please realize that you may not get your full principle back if you attempt to cash out early for Treasury securities since you'll get the price on the open market, which is not guaranteed by the U.S. Treasury. You are only assured of getting your full principle if your Treasury security is held until maturity (or Treasury "calls" the security or issues an offer to repurchase.)

-- Jack Krupansky

How much will my CD be worth at maturity?

I personally do not have any money in CDs (yet), but if you are interested in calculating how much a CD will be worth at maturity, NetBank has a calculator. I haven't used it myself, but let me (and your fellow blog readers) know what you think of it.

Be forewarned, the calculator does need to know the compounding frequency (daily, monthly, quarterly, yearly), the "Interest rate" (as distinct from the APY which gets calculated), and your federal and state income tax rates.

Somebody should do a calculator that also includes the rate of inflation so that you get an idea of how your "buying power" changes over the term of the CD. After all, that's how most of us ultimately judge "worth."

-- Jack Krupansky

ECRI Weekly Leading Index indicator down slightly but continues to point to a relatively healthy economy in the months ahead

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) fell slightly (-0.04% vs. +0.05% last week) but the six-month smoothed growth rate rose modestly (from +3.7% to +3.9%), and continues to be modestly above the flat line, suggesting that the economy continues to retain much of the steam that it had picked up. The smoothed growth rate has been positive for 23 consecutive weeks. We haven't finished the soft landing yet, but we are in great shape, despite the weakness in the housing sector and the feverish hand-wringing of the pundits.

The WLI is now 33 weeks past its summer low and the six-month smoothed growth rate is now 30 weeks past its summer low. Although not signalling an outright boom, this is a fairly dramatic recovery from the somewhat dark times of last summer.

A WLI growth rate of zero (0.0) would indicate an economy that is running at a steady growth rate, neither accelerating nor decelerating. A WLI fluctuating in a range from +1.5% to -1.5% would seem to be a relatively stable "Goldilocks" economy. We're actually doing somewhat better than that now.

Although the WLI smoothed growth rate remains relatively modest and will likely remain so for the next few months, it isn't showing any signs of the kind of persistent and growing weakness (values more negative than -1.5% over a period of time) that would be seen in an economy that was slowing on its way into recession, but does look a lot like an economy moderating on its way to a relatively stable growth rate.

If I were looking at this one indicator alone, I would say that the Fed is succeeding at its goal of moderating the economy to a sustainable growth rate. Goldilocks might not be completely happy with the current state of the economy, but she should be. Ditto for NYU Professor Nouriel Roubini. Sorry Nouriel, but Professor Ben Bernanke has it right this time. Anyone expecting a recession or very weak economy this year will be disappointed.

I will offer the caveat that the Weekly Leading Index and its smoothed growth rate do not tell us how strong the economy will be six or nine months from now, but do tell us whether whether weakness or strength is more likely a few months from now. It works best to tell us whether a "gathering storm" might be lurking just around the corner, but presently indicates "clear weather" for the next few months.

-- Jack Krupansky

Finished organizing my tax prep info

A couple of weeks ago I ruminated about my difficulty in getting around to organizing my info so that my accountant could actually prepare my taxes. It only took me three weeks to get around to doing the work. I actually did next to nothing for those three weeks, other than a little pre-organizing in my head. It wasn't until last night that I finally felt that I had the raw energy to start tackling this task.

I resolved to get up early this morning and "just do it" and try to finish it by noon. Well, it didn't quite work out that well, but close enough. I only got about half of the work done this morning, but that was enough to keep me motivated and on track.

When I got back home later in the afternoon, I was psyched to be so close to getting it done. I just finished it all and emailed the  package (fourteen spreadsheets plus a Word document with 21 notes explaining things) off to my accountant. All told, it was about five and a half hours of work. Some of it was simply shuffling numbers between spreadsheets, some was transcribing numbers from paper forms, and some was searching through my paper files for missing numbers. Some of the time was simply sitting and staring at the numbers and thinking for a while to figure things out, or to remember what I might have forgotten. Usually it takes me more than six hours, but this year I had fewer business expenses.

What a relief. Until next year. But, it should be easier next year since I am no longer self-employed with lots of business expenses. And I won't have to file a partial year Colorado state income tax return next year; Washington has no state income tax.

-- Jack Krupansky

Crude oil struggles to find an equilibrium price

After traders and short-term speculators repeatedly tried and failed to break through the $62.50 level of technical resistance for crude oil, they have apparently thrown in the towel (for the moment) and started to trade back down in the trading range towards the mid-$50's. On Friday, the NYMEX April crude oil futures contract closed at $57.11, a decline of 8.6% off the recent intraday peak price of $62.49.

Despite all the chatter, crude oil is mostly trading based on short-term chart "technicals" rather than long-term economic fundamentals. In particular, the chart shows that $62.50 is a level of intense technical resistance.

There is more than enough crude sloshing around in inventories to fail to justify even current price levels, but that doesn't bother traders and short-term speculators.

Crude oil futures prices will be quite volatile over the next two weeks as traders and short-term speculators shift from the April contract, which ceases trading on Tuesday, March 20, to the May contract, which closed at $59.58 on Friday, which will become the "front-month" contract for trading on Wednesday.

-- Jack Krupansky

Euro struggles with the $1.34 level

The euro did manage to pop up above the $1.32 resistance level, which enabled it to push above $1.33, but the technical resistance at the $1.34 proved to be too much for even a "plunging" dollar. Part of the impetus for this "spurt" is the ongoing "crisis of confidence" over subprime mortgages and alleged potential contagion spread to the rest of the U.S. economy, and a misguided belief that the Fed is likely to cut interest rates "sooner rather than later." These fears are way overblown and eventually will evaporate, but timing that shift is a fool's errand.

I wouldn't be surprise if speculators managed to push the euro up into the $1.34 to $1.35 range in the next few weeks whenever there is any bad news to focus on, but it is just as likely that they will trade it back down under $1.30 as soon as people grasp the truth that the Fed is unlikely to cut rates over the next six months.

In short, the dollar is not "plunging."

-- Jack Krupansky

Average 15-year fixed mortgage rate at 5.88%

Freddie Mac's Weekly Primary Mortgage Market Survey shows that the average 15-year fixed mortgage rate rose slightly to 5.88% from 5.86 last week. Despite all the chatter about subprime "carnage", relatively cheap mortgages continue to be available to consumers with semi-decent credit.

Mortgage applications were also up last week.

Maybe the sky isn't falling after all. Sorry Chicken Little.

-- Jack Krupansky

Fed to stay on course at 5.25% for all of 2007 and probably into 2008

Despite the ongoing chatter and "crisis of confidence", the hard-core analysis and conclusion remains the same...

For now, my overall assessment of Fed monetary policy remains:

My view is that the Fed will keep the Fed funds target rate paused at 5.25% for all of 2007, and probably into 2008.

There will not be a recession this year, nor even enough of a growth slump to trigger a Fed rate cut.

The Fed will not cut rates in response to the concern about subprime mortgages.

I tentatively say "for now" because I remain half-convinced that the Fed may in fact feel the need to make another hike in May or June to 5.50%. To my way of thinking, it all depends on what happens with energy commodities. Prices of oil and gasoline futures are still quite elevated, albeit off their Summer peaks, and this constitutes an ongoing source of inflationary pressure that continues to propagate throughout the economy. If prices of energy commodities resume their decline, the Fed will be able to remain paused for all of 2007. But if energy commodities prices do not continue to fall, the Fed may have little choice but to hike to 5.50% in May or June. If we don't see crude oil consistently below $50 and retail unleaded gasoline consistently under $2.00 by May, expect a Fed hike to 5.50% at the May or June FOMC meeting. Based on economic fundamentals, we should see the prices of energy commodities come back down to Earth, but unfortunately there is simply so much free cash sloshing around seeking "some action" and a lot of speculators are simply unable to resist the urge to try to run commodities prices back up since "it worked before." My view is that there is a fairly good chance that prices of energy commodities will recede in the coming months, but it may be too soon to bet too heavily against the speculators. My finger is on the trigger, but for now I'll retain my belief that the Fed will remain paused for at least another year.

I am not suggesting that the Fed will "target" commodities prices such as crude oil and gasoline, but that the Fed will be noticing the degree to which elevated commodities prices are influencing the rest of the economy and pushing up even core prices. We did have good news on the inflation front in the past couple of months, but that was primarily the result of the decline of crude oil and gasoline prices off the summer spike, but crude oil and gasoline prices have risen since November.

My latest thinking is that $60 may be the magic number for crude oil for the Fed in May even though $50 is what they would really like to see. If crude is $60 or higher in May, the Fed will have a high probability of a hike to 5.50%. If crude is below $50, the probability of a hike is very low. If crude is at $55, it will be a 50/50 coin flip. At $58, the Fed would seriously consider a hike. At $53, the Fed would likely hike only if there were some other significant factors, such as a strong resurgence in housing demand.

The point here is not $58 crude oil per se, but the fact that $58 crude oil means that either real demand is overly strong, or there is too much monetary liquidity in the financial system that inspires speculators to throw too much money around because it is relatively too cheap and the Fed will feel some pressure to "mop up" such excess liquidity to the extent that it causes higher core inflation in the real economy.

Although the moderation of the housing boom will indeed hold back the economy over the next couple of quarters, the Fed seems to agree with me that this is to be expected and not an indicator of a coming recession. A lot of people are desperately funneling money into bond funds in response to an expectation of well below-par economic growth, and this is depressing Treasury yields and causing an inverted yield curve, but this is ultimately indicating only below-par growth (e.g., 2% to 2.75% rather than 3+%) for the coming six months. Yes, there is a lot of anxiety, but anxiety itself is not a reliable indicator of a particular outcome.

Please note that current Fed policy at 5.25%, or even a hike to 5.50%, is not restrictive, but within the neutral range which is neither accommodative nor restrictive. All "normal" economic activities can be easily financed with Fed policy at this level. This does eliminate a lot of excessive speculative behavior, but won't crimp the average business or consumer. The odds of such a hike causing a recession are negligible.

As of Friday, Fed funds futures contracts indicate the following probabilities for changes in the Fed funds target rate at upcoming FOMC meetings:

• March: 2% chance of a cut
• May: 14% chance of a cut
• June: 30% chance of a cut
• August: 88% chance of a cut
• September: 100% chance of a cut and 6% chance of a second cut
• October: 100% chance of a cut and 46% chance of a second cut
• December: 100% chance of a cut and 84% chance of a second cut
• January 2008: 100% chance of two cuts and 20% chance of a third cut
• February 2008: 100% chance of a cut and 30% chance of a second cut

The March meeting is well within the 45-day window of reliability for the fed funds futures to predict Fed action, so it is a virtual certainty that the Fed will not changes the fed funds target rate at the March FOMC meeting. It is too soon for fed funds futures to reliably predict rates for the May FOMC meeting, but they will be in another one to two weeks. A lot can and will transpire during that period of time to whipsaw the odds for a rate change at the May meeting. My belief is that the odds of a cut will completely evaporate and in fact turn into odds for a hike. Ditto for June and August. Stay tuned.

I personally don't concur with these odds after May, but that is how a lot of people are actually "betting." I would simply note that such betting can change on a moment's notice as economic and financial data, not to mention commentary and sentiment, unfolds and evolves -- which is precisely what we saw this past week. Like it or not, the economy proceeds more through Darwinian evolution than "intelligent design." The Fed (and Wall Street) can influence the evolution, of the economy, but not control it as if it were a clockwork machine. Predicting the precise or even general impact of any Fed action or inaction is quite literally a fool's errand. Further, the "betting" on any last Fed move is usually more of an insurance hedge than an outright bet, more of a "just in case I'm wrong" kind of "bet". Finally, studies have shown that Fed funds futures are not a very reliable indicator more than 45 days into the future.

What the Fed funds futures market tells us clearly is that the Fed is most likely to leave rates unchanged at least through June. The market is predicting a cut at the August FOMC meeting, but that is too far in the future for the market to give a reliable forecast.

My feeling is that since the housing retrenchment didn't cause a Fed cut at the January FOMC meeting, it is unlikely that housing will be enough of a problem to cause a Fed cut for the rest of the year either.

As of the February 22, 2007 edition of the UBS As We See It - Market Viewpoint report, UBS Wealth Management Research forecasts a Fed funds rate of 4.25% by the end of 2007. That would be four quarter-point cuts. They continue to forecast 2% GDP growth for 2007. Obviously I do not concur, although I welcome their alternative perspective.

The bottom line here is that the Fed won't move through June, and any speculation about Fed moves further down the road are simply wild guesses based on contrived stories about a hypothetical future economy that happens to have a mind of its own.

Why are so many smart people so confused about the future? It is simply the fact that the conservative thing for them to do is to assume that economic events such as housing booms always play out in the same pattern every single time. For a bureaucrat, that is always the safe approach. Alas, every economic episode has its own idiosyncratic pattern and the real issue is how to forecast the interactions between the many sectors and regions of the economy, and that is a really hard problem that is absolutely not amenable to the cookie-cutter application of historical patterns.

The current "herd mentality" on Wall Street is basically sending so many speculators and even investors off on a truly wild goose chase, after which Wall Street will quietly acknowledge its error ("the data changed in an unexpected manner") and then chase those same speculators and investors back in the opposite direction, making sure to collect transaction fees and spreads on both legs of the roundtrip "chase." Expect to see a reversal of the trend of the past week within a month.

Note that the Weekly Leading Index of the Economic Cycle Research Institute is telling us that the economy will be holding together reasonably reasonably well for at least the next few months.

-- Jack Krupansky

PayPal money market fund yield remains at 5.03% as of 3/17/2007

Here are some recent money market mutual fund yields as of Saturday, March 17, 2007:

• iMoneyNet average taxable money market fund 7-day yield fell from 4.76% to 4.75%
• PayPal Money Market Fund 7-day yield remains at 5.03%
• ShareBuilder money market fund (BDMXX) 7-day yield rose from 4.48% to 4.49%
• Fidelity Money Market Fund (SPRXX) 7-day yield rose from 4.99% to 5.00% ($25,000 minimum)
• Fidelity Cash Reserves money market fund (FDRXX) 7-day yield rose from 4.97% to 4.98%
• Fidelity Prime Reserves money market fund (FPRXX) 7-day yield rose from 4.44% to 4.45%
• Fidelity Municipal Money Market fund (FTEXX) 7-day yield rose from 3.19% to 3.23% or tax equivalent yield of 4.97% (up from 4.91%) for the 35% marginal tax bracket and 4.49% (up from 4.43%) for the 28% marginal tax bracket
• Fidelity Tax-Free Money Market fund (FMOXX) 7-day yield rose from 3.15% to 3.18% or tax equivalent yield of 4.89% (up from 4.85%) for the 35% marginal tax bracket and 4.42% (up from 4.38%) for the 28% marginal tax bracket
• 4-week (1-month) T-bill investment rate rose from 5.25% to 5.27%
• 13-week (3-month) T-bill investment rate remains at 5.11%
• 26-week (6-month) T-bill investment rate rose from 5.06% to 5.13%
• Treasury I Bond composite earnings rate (semiannual compounded annually) for new I Bonds is 4.52%, with a fixed rate of 1.40% and a semiannual inflation rate of 1.55% (updated November 1, 2006, next semiannual update on May 1, 2007)
• Charles Schwab 3-month CD APY remains at 4.99%
• Charles Schwab 6-month CD APY rose from 5.01% to 5.06%
• Charles Schwab 1-year CD APY remains at 5.00%
• NetBank 6-month CD APY rose from 5.30% to 5.38%
• NetBank 1-year CD APY rose from 5.31% to 5.40%

Note: APY yield is worth somewhat less than the same 7-day yield. See my discussion and table for Comparing 7-day yield and APY.

PayPal continues to be a fairly interesting place to store cash for both relatively quick access and a well above average yield. There is no minimum for a PayPal account, no fee for a basic account, and it can be linked to your bank checking account or even your brokerage checking account for easy access. Right now I am using PayPal as a savings account, putting a little more money in whenever I get a chance and feel that my budget has some "spare change." I did that this past week. The PayPal 7-day yield of 5.03% is equivalent to a bank APY of 5.15%.

4-week T-bills remain very attractive for cash that you won't need for a month, since the new issue yield was well above the yield of PayPal and Fidelity Cash Reserves. But, this rate fluctuates significantly from week to week. The rate is locked in for four weeks once you buy the T-bill at the weekly auction, but you can't predict what rate you will get at the next auction since it is based on supply and demand. Simply letting the T-bills automatically roll every four weeks will average out a lot of this volatility. Mine rolled this past week and will give a 5.27% rate for four weeks.

Check Bankrate.com for the availability of high-rate CDs (5.00% APY to 5.50% APY for 6-month). Alas, there are frequently quite a few caveats, strings, restrictions, requirements, minimums, "introductory specials", and other gotchas, so read the fine print carefully. CDs work great for some people, but horribly for others. I have no CDs since I do not have any free cash that I can afford to lock up with restrictions. But, that said, I am considering putting at least a little free cash in short-term CDs (three-month, six-month, or maybe even one-year), around the middle of 2007, especially if the Fed raises interest rates by a quarter-point in the spring.

I just saw an introductory teaser from HSBC Direct Online Savings that promised "New Money Earns 6.00% APY* Through 04/30/07." Hmmm... and then what does it earn? Read the fine print and the answer is: "it then earns an interest rate of 4.94% and yield 5.05% APY after that date." Until the 4.94% rate changes, which can happen at any time. HSBC is aggresively pursuing "new money" since they need to make up for huge losses on subprime credit.

Please note the disclaimer on Fidelity's web site for mutual funds:

Past performance is no guarantee of future results. Yield will vary.

As always, please note that cash placed in money market mutual funds is subject to the disclaimer that:

An investment in the Fund is not insured or guaranteed by the Federal Insurance Deposit Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.

In practice, that is not a problem at all, but it does incline me to spread my money around a bit.

T-bills and the cash in your bank checking and savings accounts or bank CDs are of course "protected", either by "the full faith and credit of the U.S. Treasury" or the FDIC. Please realize that you may not get your full principle back if you attempt to cash out early for Treasury securities since you'll get the price on the open market, which is not guaranteed by the U.S. Treasury. You are only assured of getting your full principle if your Treasury security is held until maturity (or Treasury "calls" the security or issues an offer to repurchase.)

-- Jack Krupansky

ECRI Weekly Leading Index indicator up slightly and continues to point to a relatively healthy economy in the months ahead

Despite all the ongoing chatter about whether a recession is possible or likely by the end of the year, the Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) rose slightly (+0.06% vs. +0.01% last week) and the six-month smoothed growth rate rose modestly (from +3.3% to +3.7%), and continues to be modestly above the flat line, suggesting that the economy continues to retain much of the steam that it had picked up. The smoothed growth rate has been positive for 22 consecutive weeks. We haven't finished the soft landing yet, but we are in great shape, despite the weakness in the housing sector and the feverish hand-wringing of the pundits.

The WLI is now 32 weeks past its summer low and the six-month smoothed growth rate is now 29 weeks past its summer low. Although not signalling an outright boom, this is a fairly dramatic recovery from the somewhat dark times of last summer.

A WLI growth rate of zero (0.0) would indicate an economy that is running at a steady growth rate, neither accelerating nor decelerating. A WLI fluctuating in a range from +1.5% to -1.5% would seem to be a relatively stable "Goldilocks" economy. We're actually doing somewhat better than that now.

Although the WLI smoothed growth rate remains relatively modest and will likely remain so for the next few months, it isn't showing any signs of the kind of persistent and growing weakness (values more negative than -1.5% over a period of time) that would be seen in an economy that was slowing on its way into recession, but does look a lot like an economy moderating on its way to a relatively stable growth rate.

If I were looking at this one indicator alone, I would say that the Fed is succeeding at its goal of moderating the economy to a sustainable growth rate. Goldilocks might not be completely happy with the current state of the economy, but she should be. Ditto for NYU Professor Nouriel Roubini. Sorry Nouriel, but Professor Ben Bernanke has it right this time. Anyone expecting a recession or very weak economy this year will be disappointed.

I will offer the caveat that the Weekly Leading Index and its smoothed growth rate do not tell us how strong the economy will be six or nine months from now, but do tell us whether whether weakness or strength is more likely a few months from now. It works best to tell us whether a "gathering storm" might be lurking just around the corner, but presently indicates "clear weather" for the next few months.

-- Jack Krupansky

The non-crisis fizzles on

The non-crisis anxiety over subprime mortgages continues to fizzle on, despite the fact that there is no evidence of any significant contagion effect that might affect the rest of the economy or financial markets in general.

The crazy idea that the Fed should cut interest rates to deal with the so-called "crisis" remains absurd. As of this moment, fed funds futures are indicating only a 2% chance of a rate cut in March, which is the same as zero. Futures are indicating only an 20% chance of a rate cut in May, which is also essentially equivalent to zero. Futures are in fact indicating a 50% chance of a rate cut in June, but a coin-flip three months in the future is hardly an affirmation of any immediate crisis.

There is no "liquidity" problem in the overall economy or in financial markets in general. There isn't even a liquidity problem in the overall mortgage market. The only liquidity problems are with specific subprime companies. Whether thosed companies get bailed out at fire sale prices or go the bankruptcy (followed by fire sale) route remains to be seen, but there is nothing to do on this front for the Fed, other than to continue to encourage reasonable lending standards. Some Wall Street firms have already taken a "haircut" (loss) on the shakiest portions of their subprime business and may take a bit more of a haircut, but there is no evidence that they pose any systemic risk. Those taking haircuts are probably completely balanced by those who have profited by betting against subprime mortgages.

At some point in here, even some of the shakier bundles of subprime mortgage bonds will find an equilibrium price that is attractive to some hedge funds. Even at "record levels of foreclosures", bonds can be very attractively priced to account for those foreclosure rates.

The media loves to chat up the potential for disaster, or I should say the media loves to create the impression that there is potential for disaster when the hard facts do not argue for disaster. And there is no shortgage of pundits, cynics, and other forms of perma-bears always willing to talk up the potential for disaster even on the sunniest of days. Shame on all of them, but that's life in the big city.

All of that said, the fizzling could fizzle on for a while longer. As I wrote recently, March and April are the critical turning point months for the economy and March could be quite volatile and look rather unappealing or mixed until we finally start to see real light at the end of the tunnel in the April timeframe. It is this mixed level of good and bad news that gets a lot of people confused and susceptible to the doom and gloom prognostications of the perma-bears.

-- Jack Krupansky

Crude oil retreats

Traders and short-term speculators finally seem to have thrown in the towel on crude oil as far as trying to break out above the $62.50 price level in the near-term. They may try again in another week or two, but the odds are that crude oil will trade down towards the mid or even low $50's in the coming weeks.

The NYMEX April Crude oil contract closed at $57.93 on Tuesday.

-- Jack Krupansky

Will the Fed cut interest rates to respond to the subprime mortgage crisis?

Let me be very clear: there is no true crisis related to subprime mortgages, nor will there be. At worst, you could call the situation a mini-crisis, which has been caused by far too much mindless chattering, inflamed by a bit of yellow journalism as well.

So, there is no crisis to be dealt with.

Hence, there is nothing for the Fed to do other than to repeat the mantra "There is no crisis."

Cutting rates would not make sense since it was low rates that kicked off the subprime lending frenzy in the first place.

Most importantly, there is already far too much liquidity sloshing around in our financial system for there to be any need for the Fed to add any more.

In short, the Fed is not going to cut interest rates to cope with the so-called subprime mortgage crisis.

Furthermore, fed funds futures are not forecasting a rate cut this month or in may.

-- Jack Krupansky

Crude oil continues to struggle against the $62.50 level of technical resistance

Traders and short-term speculators tried again to break through the $62.50 level of technical resistance for crude oil, but were once again unsuccessful. It's possible that they will try again, but the odds are now against them. Barring some kind of breakthrough, the odds are that crude will continue to retreat for the next few weeks, possibly back down to the mid-$50's.

Despite all the chatter, crude oil is mostly trading based on short-term chart "technicals" rather than long-term economic fundamentals. In particular, the chart shows that $62.50 is a level of intense technical resistance.

There is more than enough crude sloshing around in inventories to fail to justify such elevated prices, but inventories are quite volatile and volatility gets traders and short-term speculators excited and active. The official EIA inventory report notes that:

Total commercial petroleum inventories plummeted by 15.8 million barrels last week, and are now just below the upper end of the average range for this time of year.

Traders and short-term speculators usually react to weekly fluctuations rather than paying attention to overall inventory levels.

That said, speculators could also continue to push crude up in a continuation of the speculative commodities bubble.

-- Jack Krupansky

Is the dollar continuing to plunge?

Despite all the recent press about the "plunging" dollar, the dollar actually rose modestly against the euro this past week. Most of the "action" in foreign exchange is short-term trading and speculation and not based on long-term economic fundamentals.

The euro continues to "hover" near the $1.32 level waiting for major players to either push it higher or push it lower. Traders and short-term speculators can push the euro up and down within a relatively narrow range, but have to wait for the major players to do any heavy lifting. Now we wait and see if any of those heavy-lifters show up any time soon. They certainly were AWOL this past week.

One impetus for the euro pushing up against the top of its trading range is a belief that the Fed will soon cut rates, which would in theory make U.S. debt instruments incrementally less attractive than euro debt. That's the theory, but the Fed is not likely to cut rates any time soon and maybe not even over the next year, so short-term speculators who have pushed up the euro will likely grow impatient and abandon some of their long-euro/short-dollar positions. The better than expected monthly employment report on Friday took the wind out of the sails of the pro-rate cut crowd, causing the euro to fall a bit further below the $1.32 level of short-term resistance.

I wouldn't be surprise if speculators managed to push the euro up into the $1.33 to $1.35 range in the next few weeks whenever there is any bad news to focus on, but it is just as likely that they will trade it back down under $1.30 as soon as people grasp the truth that the Fed is unlikely to cut rates over the next six months.

In short, the dollar is not continuing to "plunge."

-- Jack Krupansky

Mini-crisis for mortgage-backed securities has passed

I've never been a fan of Gretchen Morgenson's style of writing for The New York Times. Yes, she does report quite a number of useful facts, but she does it with a style that actually hides or misrepresents more than she enlightens. A good case in point is her latest article out today entitled "Crisis Looms in Market for Mortgages" which does educate the reader about quite a few of the ins and outs of the mortgage-backed securities market, but leaves out a lot of key facts, not the least of which is that she has come to the party too late and the actual mini-crisis has already passed. Sure, there is still quite a mess to clean up, but any potential for systemic risk is now behind us. Yes, there are plenty of critics who insist that the worst is yet to come, but you can always find such perma-bears in any kind of market, and a little bit of objective, fair, and balanced reporting would have made the article much more credible, although it would have then required a new title: "Mini-Crisis in Mortgage Market Has Passed."

She does make quite a few really good points, but then does a very poor job of tying them toegther to arrive at her conclusion that a big crisis remains looming.

It is indeed true that there was a speculative "bubble" in residential real estate, with quite a number of people being given credit that they simply didn't deserve. That form of lending is essentially over. Between the Federal Reserve, Freddie Mac, and others, credit standards have been shifted from being ultra-loose or even nonexistent, back to normal. There may still be some pockets of ultra-easy credit left, but even Wall Street is giving those guys the cold shoulder.

What isn't true and isn't acknowledged in the article is that Wall Street still has quite an appetite for quality mortgages, and mortgage rates for qualified buyers are still quite readily available. The weekly survey by Freddie Mac finds the average 15-year fixed mortgage rate to be down to 5.86%. Sure, it is down because demand is down, and borrowers are not being granted as liberal credit, but all of that is a good thing, and the availability of the lower lending rate for quality borrowers is something that the article does not acknowledge. If Wall Street were really panicking, the mortgage rate would be sky-high, but obviously it isn't, and in fact it has declined over the past few weeks, further evidence that the mini-crisis has passed rather than a huge crisis looming.

The article indirectly acknowledges that the concerns over the mortgage problems at New Century Financial (NEW) are a month old, yesterday's news, hardly the criteria that should be used for a "looming" crisis.

One important fact that the article fails to mention is that nobody even needs these so-called "lenders." They don't really "loan" money in the traditional sense, but are primarily intermediaries between the borrowers and the ultimate sources of the money being loaned. In other words, their focus is origination of mortgages. They got into problems because they got greedy and decided to actually hold some of the MBS bonds for extra profit. Wall Street firms made the same mistake, but on a relatively smaller scale. Then they also got hit with bad mortgages that were pushed back to them by Wall Street and other holders of the MBS bonds. The important thing to keep in mind is that traditional banks are also in this new mortgage origination business. The non-bank "lenders" are simply another form of competition and, frankly, there have been too many competitors chasing a limited amount of business, so problems arose. Weeding out so many of these ecess and weak competitors will simply leave us with a much more healthy mortgage origination business, one that traditional banks will be comfortable with and one which Wall Street will be more than happy to do business with and continue to package quality mortgages into MBS bonds that pension funds and insurance companies and hedge funds will be more than happy to invest in. This is not a recipe for a "looming" crisis. This is simply a rational adjustment phase after a period of irrational excess.

The financial system is still awash in liquidity, which actually prevents anything more than short mini-crises, a fact that the article does not mention.

The tone of the article suggests that if housing prices were to decline, any crisis would be magnified. What nonsense. Lower housing prices would simply increase the buying opportunities for borrowers for whom high prices were previously an obstacle. Equilibrium will be reached between supply and demand. That is a good thing and is the opposite of a crisis.

A fatal flaw with the article is that its central thesis is that housing is like the tech stock boom and bust of 2000. Sure, there are some parallels, but the existence of some parallels does not imply that all aspects are identical. Put simply, any purchase of a tech stock was by definition speculation, whereas for housing only a subset of purchases were purely speculation. People don't buy tech stocks to live in them or even to live off their dividends. Sure, people would like to see the value of their homes appreciate (except when it comes time to paying taxes), but the primary "value" of a house is as a place to live. Whereas with tech stocks there is no price level where true "value" can be firmly established, even the average homeowner appreciates the fact that for given credit standards, there is a limit to the quantity or quality of housing that they can afford. You don't buy so many "shares" of a house, but rather you decide which house you can afford to buy.

It is true that quite a number of Wall Street firms have gotten burned and taken profit hits due to their freewheeling participation in the MBS bond market, but that is all yesterday's news and mostly been resolved. Sure, there is more mopping up to do, but Wall Street's appetite for deals is just as insatiable as it ever was.

If anything, the key fact missing from the article was the lack of an acknowledgment that our financial system is far more robust than it was, say, back in 1998. If there was really going to be a big-deal crisis in the MBS market, it would have already happened, probably months ago.

Another fact that the article failed to acknowledge is that the people who actually manage the mortgages are increasingly sensitive to defaults, so they have an incentive to do "workouts" where they may relax onerous conditions on existing mortgages (e.g., limiting rate adjustments) to actually allow the borrowers to make good and avoid default. In today's housing market, there is less benefit to foreclosing on technicalities. To be sure, we are going to see ongoing foreclosures, but there is no evidence any massive wave of foreclosures to come. The article commits the journalistic sin of speculating on the future rather than focusing on balanced reporting and objective analysis.

Management at The Times is probably thrilled with this slash and burn example of yellow journalism that does more to incite passion and readership, even if truth and facts and objectivity are casualties.

I much preferred reading the article back on March 1 by Jenny Anderson and Vikas Bajaj entitled "Soothing Words and a Stock Market Rebound" which does a fairly decent job of explaining mortgage-backed securities (MBS) that are used to finance many home mortgages, including how Wall Street itself participated in the financing of subprime mortgages using MBS bonds. That was a quality piece of journalism, the kind that Ms. Morgenson should aspire to.

-- Jack Krupansky

Fed to stay on course at 5.25% for all of 2007 and probably into 2008

Despite the ongoing chatter about the "possibility" of a recession by the end of the year, the hard-core analysis and conclusion remains the same...

For now, my overall assessment of Fed monetary policy remains unchanged:

My view is that the Fed will keep the Fed funds target rate paused at 5.25% for all of 2007, and probably into 2008.

There will not be a recession this year, nor even enough of a growth slump to trigger a Fed rate cut.

I tentatively say "for now" because I am half-convinced that the Fed may in fact feel the need to make another hike in May or June to 5.50%. To my way of thinking, it all depends on what happens with energy commodities. Prices of oil and gasoline futures are still quite elevated, albeit off their Summer peaks, and this constitutes an ongoing source of inflationary pressure that continues to propagate throughout the economy. If prices of energy commodities resume their decline, the Fed will be able to remain paused for all of 2007. But if energy commodities prices do not continue to fall, the Fed may have little choice but to hike to 5.50% in May or June. If we don't see crude oil consistently below $50 and retail unleaded gasoline consistently under $2.00 by April, expect a Fed hike to 5.50% at the May or June FOMC meeting. Based on economic fundamentals, we should see the prices of energy commodities come back down to Earth, but unfortunately there is simply so much free cash sloshing around seeking "some action" and a lot of speculators are simply unable to resist the urge to try to run commodities prices back up since "it worked before." My view is that there is a fairly good chance that prices of energy commodities will recede in the coming months, but it may be too soon to bet too heavily against the speculators. My finger is on the trigger, but for now I'll retain my belief that the Fed will remain paused for at least another year.

I am not suggesting that the Fed will "target" commodities prices such as crude oil and gasoline, but that the Fed will be noticing the degree to which elevated commodities prices are influencing the rest of the economy and pushing up even core prices. We did have good news on the inflation front in the past couple of months, but that was primarily the result of the decline of crude oil and gasoline prices off the summer spike, but crude oil and gasoline prices have risen since November.

My latest thinking is that $60 may be the magic number for crude oil for the Fed in May even though $50 is what they would really like to see. If crude is $60 or higher in May, the Fed will have a high probability of a hike to 5.50%. If crude is below $50, the probability of a hike is very low. If crude is at $55, it will be a 50/50 coin flip. At $58, the Fed would seriously consider a hike. At $53, the Fed would likely hike only if there were some other significant factors, such as a strong resurgence in housing demand.

The point here is not $58 crude oil per se, but the fact that $58 crude oil means that either real demand is overly strong, or there is too much monetary liquidity in the financial system that inspires speculators to throw too much money around because it is relatively too cheap and the Fed will feel some pressure to "mop up" such excess liquidity to th extent that it causes higher core inflation in the real economy.

Although the moderation of the housing boom will indeed hold back the economy over the next couple of quarters, the Fed seems to agree with me that this is to be expected and not an indicator of a coming recession. A lot of people are desperately funneling money into bond funds in response to an expectation of well below-par economic growth, and this is depressing Treasury yields and causing an inverted yield curve, but this is ultimately indicating only below-par growth (e.g., 2% to 2.75% rather than 3+%) for the coming six months. Yes, there is a lot of anxiety, but anxiety itself is not a reliable indicator of a particular outcome.

Please note that current Fed policy at 5.25%, or even a hike to 5.50%, is not restrictive, but within the neutral range which is neither accommodative nor restrictive. All "normal" economic activities can be easily financed with Fed policy at this level. This does eliminate a lot of excessive speculative behavior, but won't crimp the average business or consumer. The odds of such a hike causing a recession are negligible.

With all the chatter about the debate over the "possibility" of a recession by the end of the year, people bet heavily on early Fed action. As of Friday, Fed funds futures contracts indicate the following probabilities for changes in the Fed funds target rate at upcoming FOMC meetings:

• March: 2% chance of a cut
• May: 6% chance of a cut (was 36% a week ago!)
• June: 32% chance of a cut
• August: 84% chance of a cut
• September: 100% chance of a cut and 4% chance of a second cut
• October: 100% chance of a cut and 36% chance of a second cut
• December: 100% chance of a cut and 78% chance of a second cut
• January 2008: 100% chance of two cuts and 4% chance of a third cut
• February 2008: 100% chance of a cut and 98% chance of a second cut

The better than expected monthly employment report on Friday was a surprise for many people and caused a dramatic scaling back of betting on earlier rate cuts.

The March meeting is well within the 45-day window of reliability for the fed funds futures to predict Fed action, so it is a virtual certainty that the Fed will not changes the fed funds target rate at the March FOMC meeting. It is too soon for fed funds futures to reliably predict rates for the May FOMC meeting, but they will be in another two to three weeks. A lot can and will transpire during that period of time to whipsaw the odds for a rate change at the May meeting. My belief is that the odds of a cut will completely evaporate and in fact turn into odds for a hike. Ditto for June and August. Stay tuned.

I personally don't concur with these odds after May, but that is how a lot of people are actually "betting." I would simply note that such betting can change on a moment's notice as economic and financial data, not to mention commentary and sentiment, unfolds and evolves -- which is precisely what we saw this past week. Like it or not, the economy proceeds more through Darwinian evolution than "intelligent design." The Fed (and Wall Street) can influence the evolution, of the economy, but not control it as if it were a clockwork machine. Predicting the precise or even general impact of any Fed action or inaction is quite literally a fool's errand. Further, the "betting" on any last Fed move is usually more of an insurance hedge than an outright bet, more of a "just in case I'm wrong" kind of "bet". Finally, studies have shown that Fed funds futures are not a very reliable indicator more than 45 days into the future.

What the Fed funds futures market tells us clearly is that the Fed is most likely to leave rates unchanged at least through June. The market is predicting a cut at the August FOMC meeting, but that is too far in the future for the market to give a reliable forecast.

My feeling is that since the housing retrenchment didn't cause a Fed cut at the January FOMC meeting, it is unlikely that housing will be enough of a problem to cause a Fed cut for the rest of the year either.

As of the January 25, 2007 edition of the UBS As We See It - Market Viewpoint report, UBS Wealth Management Research forecasts a Fed funds rate of 4.25% by the end of 2007. That would be four quarter-point cuts. They continue to forecast 2% GDP growth for 2007. Obviously I do not concur, although I welcome their alternative perspective.

The bottom line here is that the Fed won't move through June, and any speculation about Fed moves further down the road are simply wild guesses based on contrived stories about a hypothetical future economy that happens to have a mind of its own.

Why are so many smart people so confused about the future? It is simply the fact that the conservative thing for them to do is to assume that economic events such as housing booms always play out in the same pattern every single time. For a bureaucrat, that is always the safe approach. Alas, every economic episode has its own idiosyncratic pattern and the real issue is how to forecast the interactions between the many sectors and regions of the economy, and that is a really hard problem that is absolutely not amenable to the cookie-cutter application of historical patterns.

The current "herd mentality" on Wall Street is basically sending so many speculators and even investors off on a truly wild goose chase, after which Wall Street will quietly acknowledge its error ("the data changed in an unexpected manner") and then chase those same speculators and investors back in the opposite direction, making sure to collect transaction fees and spreads on both legs of the roundtrip "chase." Expect to see a reversal of the trend of the past week within a month.

Note that the Weekly Leading Index of the Economic Cycle Research Institute is telling us that the economy will be holding together reasonably well for at least the next few months.

-- Jack Krupansky

PayPal money market fund yield falls to 5.03% as of 3/10/2007

Here are some recent money market mutual fund yields as of Saturday, March 10, 2007:

• iMoneyNet average taxable money market fund 7-day yield rose from 4.75% to 4.76%
• PayPal Money Market Fund 7-day yield fell from 5.04% to 5.03%
• ShareBuilder money market fund (BDMXX) 7-day yield remains at 4.48%
• Fidelity Money Market Fund (SPRXX) 7-day yield remains unchanged at 4.99% ($25,000 minimum)
• Fidelity Cash Reserves money market fund (FDRXX) 7-day yield rose from 4.95% to 4.97%
• Fidelity Prime Reserves money market fund (FPRXX) 7-day yield fell from 4.46% to 4.44%
• Fidelity Municipal Money Market fund (FTEXX) 7-day yield fell from 3.22% to 3.19% or tax equivalent yield of 4.91% (down from 4.95%) for the 35% marginal tax bracket and 4.43% (down from 4.47%) for the 28% marginal tax bracket
• Fidelity Tax-Free Money Market fund (FMOXX) 7-day yield fell from 3.26% to 3.15% or tax equivalent yield of 4.85% (down from 5.02%) for the 35% marginal tax bracket and 4.38% (down from 4.53%) for the 28% marginal tax bracket
• 4-week (1-month) T-bill investment rate fell from 5.27% to 5.25%
• 13-week (3-month) T-bill investment rate fell from 5.19% to 5.11%
• 26-week (6-month) T-bill investment rate fell from 5.16% to 5.06%
• Treasury I Bond composite earnings rate (semiannual compounded annually) for new I Bonds is 4.52%, with a fixed rate of 1.40% and a semiannual inflation rate of 1.55% (updated November 1, 2006, next semiannual update on May 1, 2007)
• Charles Schwab 3-month CD APY fell from 5.04% to 4.99%
• Charles Schwab 6-month CD APY fell from 5.11% to 5.01%
• Charles Schwab 1-year CD APY fell from 5.15% to 5.00%
• NetBank 6-month CD APY fell from 5.40% to 5.30%
• NetBank 1-year CD APY fell from 5.45% to 5.31%

Note: APY yield is worth somewhat less than the same 7-day yield. See my discussion and table for Comparing 7-day yield and APY.

PayPal continues to be a fairly interesting place to store cash for both relatively quick access and a well above average yield. There is no minimum for a PayPal account, no fee for a basic account, and it can be linked to your bank checking account or even your brokerage checking account for easy access. Right now I am using PayPal as a savings account, putting a little more money in whenever I get a chance and feel that my budget has some "spare change." I did that this past week. The PayPal 7-day yield of 5.03% is equivalent to a bank APY of 5.15%.

4-week T-bills remain very attractive for cash that you won't need for a month, since the new issue yield was well above the yield of PayPal and Fidelity Cash Reserves. But, this rate fluctuates significantly from week to week. The rate is locked in for four weeks once you buy the T-bill at the weekly auction, but you can't predict what rate you will get at the next auction since it is based on supply and demand. Simply letting the T-bills automatically roll every four weeks will average out a lot of this volatility. Mine roll this week.

Check Bankrate.com for the availability of high-rate CDs (5.00% APY to 5.44% APY for 6-month). Alas, there are frequently quite a few caveats, strings, restrictions, requirements, minimums, "introductory specials", and other gotchas, so read the fine print carefully. CDs work great for some people, but horribly for others. I have no CDs since I do not have any free cash that I can afford to lock up with restrictions. But, that said, I am considering putting at least a little free cash in short-term CDs (three-month, six-month, or maybe even one-year), around the middle of 2007, especially if the Fed raises interest rates by a quarter-point in the spring.

Please note the disclaimer on Fidelity's web site for mutual funds:

Past performance is no guarantee of future results. Yield will vary.

As always, please note that cash placed in money market mutual funds is subject to the disclaimer that:

An investment in the Fund is not insured or guaranteed by the Federal Insurance Deposit Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.

In practice, that is not a problem at all, but it does incline me to spread my money around a bit.

T-bills and the cash in your bank checking and savings accounts or bank CDs are of course "protected", either by "the full faith and credit of the U.S. Treasury" or the FDIC. Please realize that you may not get your full principle back if you attempt to cash out early for Treasury securities since you'll get the price on the open market, which is not guaranteed by the U.S. Treasury. You are only assured of getting your full principle if your Treasury security is held until maturity. (or Treasury "calls" the security or issues an offer to repurchase).

-- Jack Krupansky