Euro remains in uncharted territory flirting with the $1.37 level

A week ago I wrote that the euro was flirting with the $1.37 level, and now a week later that same statement holds. Traders did manage to briefly push the euro above the technical resistance level of $1.37 this past week, but profit-taking ensued and the euro was unable to close above the $1.37 level, with the June futures contract closing the week at $1.3669, less than half a cent above the prior week ($1.3628.)

We shouldn't take too much solace in the diminutive nature of that move since traders frequently take days and even weeks to "digest" any big significant move before a new trend emerges.

It would be absolutely no surprise if traders and speculators push the euro up above $1.37, but it is not an absolute "slam dunk" either.

There is no good economic fundamental reason for the euro to trading with this upwards bias, but strong anti-dollar investor sentiment has continued to ignore underlying fundamentals. Apparent current economic strength in Eastern Europe is not a credible comparison to future economic growth in the U.S.

For now, the euro remains in truly uncharted territory. It's now mostly a question of the level of speculative money flows. With a lot of people still misguidedly believing that Fed rate cuts are still likely over the next six months, the flows could be net-euro for some time to come. On the other hand, just a few good economic reports, persistently high energy prices, strong talk from the Fed about fighting inflation, and a strong hint of a rate hike in June or August, could quickly sap the staying power of any over-extended speculators.

$1.37 is within striking distance for euro speculators, but the shortness of that distance is far less important than the strength and durability of speculative money flows that can evaporate and reverse on a dime.

I wouldn't be surprised if speculators managed to keep the euro up in the $1.33 to $1.37 range for the next few weeks whenever there is any superficially 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.

If traders and speculators do manage to push the euro up above $1.38, I will have to review and revise my outlook for the euro, but we aren't there yet. For now, $1.37 is a tough barrier for the euro to break through in a convincing manner.

In short, the dollar is not "plunging."

-- Jack Krupansky

Fixed income securities usually aren't

I was just looking at the online summary for my old UBS account and noticed that they had separate lines for "Cash" and "Fixed Income", which seemed odd although technically accurate. The cash portion is actually a "deposit" in the banking sense. But then I realized that "fixed income" is somewhat of a misnomer for money market mutual funds and bonds funds where, almost by definition, the payments and rate of return are highly variable rather than fixed. My accounts with Muriel Siebert & Co list "Cash and Cash Equivalents", which is much more sensible. Fidelity categorizes information on their web site about money market funds under "Fixed Income", while on their statements they simply lump them in with other "Mutual Funds."

The reason I bring this up is simply to highlight the need for rational terminology so that we can understand each other. The primary use that I have in mind is for describing asset allocation. Lumping both money market funds and bonds under "Fixed Income" is rather useless.

I would prefer to use the term "Cash" as being simply a shorthand for "Cash and Cash Equivalents", which should include money market mutual funds, bank checking and savings accounts, short-term bond bunds (no more than a year), T-bills, short-term CDs (no more than a year), and anything else that is liquid enough that you won't take a "haircut" to sell it and convert to something you can debit from your account without accruing some significant cost or liability.

We may also need to have a distinction between "Cash" and what I would call "Near Cash", which means that there might be some modest penalty, such as early withdrawal from a CD or selling a T-bill before its maturity or a short-term bond fund when interest rates are volatile.

I think the terms I would prefer to use would be "Cash" as I described above (including 1-year CDs and short-term bond bunds), "True Cash" which is really only bank checking and savings and money market mutual funds, and "Near Cash" which includes short-term CDs and short-term bond bunds.

Now, we have this lingering conundrum with T-bills, where on the one hand they are "Near Cash" and literally just as safe and sound as Cash, but technically still fall under even the purest definition of "fixed income", namely that the total return if held to maturity is fixed.

Incidentally, that purest definition for "fixed income" would exclude TIPS and I Bonds since their total return will vary, based on changes in the rate of inflation.

We could tweak that purest definition for "fixed income" to say that the return at redemption by the issuer is not subject to market pricing. Though technically accurate, that does seem to be a somewhat odd way of defining "fixed income" and flies in the face of an asset allocation category that is supposed to yield a fixed rate of return.

The best way out of that conundrum may simply be refer to such assets as "debt securities", some of which offer "fixed income", and some of which offer "variable income".

In terms of an asset allocation model, I would suggest we use the following terms for the main three traditional asset categories:

• Cash - includes cash equivalents, such as money market mutual funds, T-bills, short-term CDs (no more than 1-year), and short-term bond funds (no more than 1 year)
• True Cash - immediate liquidity with no penalty, fee, time requirement, or market risk
• Near Cash - may have a modest penalty, fee, time requirement, market risk, consists of T-bills, short-term CDs, and short-term bond funds
• Stocks (or Equities)
• Debt Securities - Treasury notes, bond funds (greater than 1 year), longer-term CDs, corporate debt, government agency debt
• Fixed Income - total return defined in advance. This will tend to exclude virtually all bond funds since their rate of return will not be fixed.
• Variable Income - total return will vary based on either being a bond fund whose composition varies over time or may be traded by the fund, or non-market conditions (e.g., inflation and Fed funds rate, prime rate, 10-year Treasury rate). This will include essentially all non-short-term bond funds

One remaining issue is how to treat the traditional, vague, loose term of "bond." I would suggest that we presume that the term "bond" refers to what I categorize as "Debt Securities", which excludes the short-term assets. So, I offer this as an alternate nomenclature for my main nomenclature:

• Cash
• Bonds
• Stocks

This presumes that the distinctions in my main terminology hold, particularly that short-term debt is considered Near Cash under Cash.

But, let's stop referring to assets as "Fixed Income" when the income is clearly not fixed!

-- Jack Krupansky

BW: Soft GDP report belies future acceleration

Michael Englund, chief economist for Action Economics, has a piece in Business Week entitled "Soft GDP Won't Stop Fed Inflation Fight - Even though U.S. economic growth underperformed in the advance report for the first quarter, component measures suggest a future acceleration" that tells us that "a closer look at the report shows upside surprises for measures of consumption and fixed investment that offer some good news for the 2007 growth outlook." He concludes by saying:

... even though first-quarter GDP underperformed, the components of the report suggest a pickup in coming quarters, especially if the housing market stabilizes. We suspect this won't be lost on the Fed. While Bernanke & Co. may acknowledge the weakness in the economy at its upcoming policy meeting, it's more likely to reiterate that recent indicators have been mixed and to retain its forecast for moderate growth ahead. We also expect policymakers to say that inflation remains the predominant risk, while restating that future policy adjustments will depend on upcoming data.

-- Jack Krupansky

Three cheers for higher-than-sky-high gasoline prices, but they really are now likely to decline

Last week I had expected that the wild speculation in retail gasoline futures would abate to some degree, but it only increased.  That's the way it is with speculative bubbles, like the one we are in for a wide range of commodities. Even as we get closer to the "top", the spikes can become even sharper.

I remain a big fan of higher gasoline prices since they are a great economic signal to direct consumers to switch to more fuel-efficient transportation and to otherwise reduce their consumption of gasoline, as well as to incentivize development of alternative fuels.

That said, I strongly suspect that the recent run-up of gasoline prices has mostly run its course and we could see a decline over the next couple of months as speculators who had fueled the recent steep rise take profits and look for some other commodity price to manipulate.

Incidentally, here are the gasoline futures prices for the rest of the year as of the close on Friday:

• May 2007: $2.3613
• June 2007: $2.2598
• July 2007: $2.2108
• August 2007: $2.1708
• September 2007: $2.1188
• October 2007: $1.9743
• November 2007: $1.9098
• December 2007: $1.8773

As you can see, even the speculators are speculating that prices will decline, with a 10-cent decline over the next month and a 48-cent decline by the end of the year. Be aware that these number are subject to radical and frequent change on a monthly, weekly, and even a daily basis.

-- Jack Krupansky

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

Although the headline GDP number of an anemic 1.3% annualized real growth was quite dispiriting, the exaggerated inflation component of the GDP calculation (4.0%, while it is generally accepted that core inflation was about 2.2%) suggests that we would do better by focusing on the nominal GDP growth rate of a healthy 5.3%. In fact, the odds of Fed rate cuts declined as a result of the GDP report (from 94% to 90% for a quarter-point cut in December.) The odds of a Fed rate cut in September are only 40%.

With mixed signals on both the inflation and economy growth fronts, the Fed will most likely decide to wait yet another monthly cycle before judging that inflation is either truly under control, or truly under poor control, and whether the economy is simply stumbling out of a soft patch and on the verge of accelerating or falling deeper into a slump. We need to see more than a little consistency in the signals before judging the degree of stability.

And with the economy being a little weaker than desired over the past few months, the Fed is likely to want to see some clear evidence that the recent "soft patch" is each receding or deepening before making further judgments about the economic outlook for the rest of the year.

Personally, I would suggest that the recent surge in speculation in commodities, including oil, gasoline, and metals is a dual indication of inflationary pressure and a huge excess of money or so-called liquidity, both of which together suggest that the Fed is likely to have to seriously consider another hike in the June or August timeframe.

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.

The Fed will not worry about the health of the economy since it is a lot healthier than the 1.3% Q1 GDP growth rate "estimate" suggests.

I tentatively say "for now" because I remain half-convinced that the Fed may in fact feel the need to make another hike in June or August 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 June or August. If we don't see crude oil consistently below $50 and retail unleaded gasoline consistently under $2.00 by June, expect a Fed hike to 5.50% at the June or August 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 (45% 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 over time. The price of crude oil remains way up at $66.46, which has to concern the Fed. The Fed is usally quite tolerant of short-term energy and food price spikes because they tend to quickly recede, but oil and gasoline and other energy prices have remained persistently high for a prolonged period of time, which results in upwards pressure on core, non-energy prices. Wholesale gasoline remains well above $2, and at $2.3613 last week indicates an equilibrium retail level of $2.96 to $3.01, which is too far above $2 to give the Fed any comfort that inflationary pressures are "subdued."

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 June, the Fed will have a high probability of a hike to 5.50% in June or August. 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: 0% chance of a cut -- no chance
• June 27/28, 2007: 8% chance of a cut -- effectively zero chance
• August 7, 2007: 28% chance of a cut -- people are confused and uncertain, but not betting on a cut 
• September 18, 2007: 40% chance of a cut -- people are confused and uncertain
• October 30/31, 2007: 64% chance of a cut -- almost effectively 100% chance, but still a fair amount of confusion and uncertainty 
• December 11, 2007: 100% chance of a cut and 6% chance of a second cut
• January 2008: 100% chance of a cut and 50% chance of a second cut
• March 2008: 100% chance of a cut and 88% chance of a second cut
• May 2008: 100% chance of a two cuts and 10% chance of a third cut

The May meeting is now 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 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 June. Ditto for August and September. 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." Emergent phenomena and evolution are the norms for the economy. 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 September. The market is predicting a cut at the October 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 and so-called subprime "crisis" didn't cause a Fed cut at the January (or March) FOMC meeting, it is unlikely that housing or the so-called subprime "crisis" will be enough of a problem to cause a Fed cut for the rest of the year either.

As of the April 5, 2007 edition of the UBS As We See It - Market Viewpoint report, UBS Wealth Management Research continues to forecast a Fed funds rate of 4.00% by the end of 2007. That would be five quarter-point cuts. They are also forecasting a Fed funds rate of 3.75% by the end of 2008. They continue to forecast 2% GDP growth for 2007. Obviously I do not concur, although I welcome their alternative perspective.

Why would the UBS outlook be so far off from my own view or even from the pessimistic market view? The wide divergence of these views doesn't make sense, right? Well, that's true if one were considering only economic fundamentals, but we do need to take into account that UBS has a customer base that they want to preserve and that the "research" document I referenced is really marketing literature, most likely designed to make the existing UBS customer base feel that UBS is "in touch" with their customers and their "needs." That is par for the course with the big financial firms. Step 1 is to understand the hopes and fears and anxieties of your customers and step 2 is to directly tap into those hopes and fears and anxieties. Right now, a lot of people hear so many desperate and gloomy stories in the media and internalize that desperation and gloom, and the result is that firms like UBS have no choice but to send out a message of "we understand and share your fears and anxieties." Better to be wrong and keep your customer base than be right and lose your customers. The bottom line is that individual investors cannot look to the research and economic outlooks peddled by Wall Street for a balanced accurate view of how the conomy and businesses will likely unfold in the coming months or year or over any period of time.

The bottom line here is that the Fed won't move through September, 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 remains at 5.04% as of 4/28/2007

Here are some recent money market mutual fund yields as of Saturday, April 28, 2007:

• iMoneyNet average taxable money market fund 7-day yield fell from 4.76% to 4.73%
• PayPal Money Market Fund 7-day yield remains at 5.04%
• ShareBuilder money market fund (BDMXX) 7-day yield fell from 4.48% to 4.47%
• Fidelity Money Market Fund (SPRXX) 7-day yield remains at 4.99% ($25,000 minimum)
• Fidelity Cash Reserves money market fund (FDRXX) 7-day yield fell from 5.00% to 4.98%
• Fidelity Prime Reserves money market fund (FPRXX) 7-day yield fell from 4.46% to 4.45%
• Fidelity Municipal Money Market fund (FTEXX) 7-day yield rose from 3.35% to 3.44% or tax equivalent yield of 5.29% (up from 5.15%) for the 35% marginal tax bracket and 4.78% (up from 4.65%) for the 28% marginal tax bracket -- this is probably close to the best rate you can get for "core cash" in a checking-style account
• Fidelity Tax-Free Money Market fund (FMOXX) 7-day yield rose from 3.33% to 3.39% or tax equivalent yield of 5.22% (up from 5.12%) for the 35% marginal tax bracket and 4.71% (up from 4.62%) for the 28% marginal tax bracket
• 4-week (1-month) T-bill investment rate fell from 4.94% to 4.92%
• 13-week (3-month) T-bill investment rate fell from 5.01% to 4.98%
• 26-week (6-month) T-bill investment rate fell from 5.07 to 5.04%
• 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) -- based on the latest inflation reports (1.21% semiannual inflation rate) and assuming no change to the 1.40% fixed rate (no guarantee there, and it could raised), my preliminary and unofficial calculation shows that the new I Bond earnings rate will be 3.83%
• Schwab Value Advantage Money Fund (SWVXX) 7-day yield at 4.90%
• Schwab Investor Money Fund (SW2XX) 7-day yield at 4.72%
• Charles Schwab 3-month CD APY remains at 5.00%
• Charles Schwab 6-month CD APY rose from 5.06% to 5.11%
• Charles Schwab 1-year CD APY remains at 5.10%
• NetBank 6-month CD APY remains at 5.30%
• NetBank 1-year CD APY fell from 5.30% to 5.25%

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." The PayPal 7-day yield of 5.04% is equivalent to a bank APY of 5.16%. I just added some cash to my PayPal account last weekend.

4-week T-bills remain not so attractive for cash that you won't need for a month, since the new issue yield was below the yield of PayPal and even below 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.

Check Bankrate.com for the availability of high-rate CDs (5.00% APY to 5.45% 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. And some of these banks may have been involved in the subprime lending mess, so you might want to avoid them out of principle even if your principal is protected by the FDIC. 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 for even three months. 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.

I continue to see an introductory teaser from HSBC Direct Online Savings that promises "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: "will earn an interest rate of 5.84% and yield 6.00% APY ... until April 30, 2007 ... 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. BIG NOTE: April 30 is not the deadline for putting "new money" into the account, but the end of the period during which your "new money" can earn 6.00% APY.

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 moderately sharply and continues to point to a relatively healthy economy in the months ahead

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) rose moderately sharply (+0.85% vs. +0.002% last week) and the six-month smoothed growth rate rose modestly (+4.0% vs. +3.6%), 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 25 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 38 weeks past its summer low and the six-month smoothed growth rate is now 35 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 (under +1.00%) 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

GDP confusion and inflation

Hmmm... the headline number for the advance GDP report for Q1 seemed rather low, lower than seems to make sense for what was really going on in Q1. Of course, we can always fall back on the fact that this is only the "advance" report, that even the BEA admits that the report is "based on source data that are incomplete or subject to further revision by the source agency", and that upward revisions are very typical for this report, but still... that number was awfully low. But I think I did find the reason, and it relates to confusion about inflation.

The headline number for annualized real GDP growth in Q1 was 1.3%. We get "real" GDP by taking "nominal" GDP and subtracting inflation, or what the BEA calls the "implicit price deflator." It turns out that the implicit price deflator was a whopping 4.0%, which is much higher than any estimate of inflation for Q1 that I have heard about. The annualized "nominal" GDP growth rate in Q1 was a quite healthy 5.3%. Subtract 4.0% from 5.3% and you get that anemic 1.3%.

So, where did this 4.0% come from? I don't know exactly, for sure, but it appears to be headline CPI inflation for the December, January, and February period. Headline CPI inflation was 0.4% in December, 0.2% in January, and 0.4% in February, which sums to 1.0% for three months or multiplying by 4 to annualize it produces 4.0%, which happens to be the number that BEA is using for their implicit price deflator. So, yeah, inflation was an annualized 4.0% for that period. Maybe they actually used some different data series for the January to March period, but they're close enough. Most of that inflation shows up in higher energy prices which come from higher prices for imported oil, and those imports are a subtraction from GDP, so it is almost as if we were double-subtracting from "actual" GDP griowth.

Specifically, the BEA report gives a price index of 118.073 for Q1 and 116.930 for Q4, the annualized difference being 3.91%, which is close to 4.0, kind of.

One reason that GDP was weaker than the economy "feels" is that there was a decline in exports, which we don't directly "see" in our daily lives (unless you are in the export business) and there was an increase in imports, which gets masked by apparent domestic "activity", plus the fact that part of the rise in imports was simply rising energy oil prices. But even with all of that, nominal GDP growth was nonetheless quite reasonable for the quarter.

If we substitute a more reasonable value for inflation, say 2.4%, which is the core inflation for that same December to February period, we get a pseudo-real annualized GDP growth rate of 2.9%, which is about what the economy felt like.

So, what do you think... was inflation really 4.0% in Q1?

-- Jack Krupansky

Hooray for sky-high gasoline prices, but they are now likely to decline

I am a big fan of higher gasoline prices since they are a great economic signal to direct consumers to switch to more fuel-efficient transportation and to otherwise reduce their consumption of gasoline, as well as to incentivize development of alternative fuels.

That said, I strongly suspect that the recent run-up of gasoline prices has mostly run its course and we could see a decline over the next couple of months as speculators who had fueled the recent steep rise take profits and look for some other commodity price to manipulate.   

-- Jack Krupansky

Getting my budget back on track

I have been doing reasonably well with my personal budget over the past year, but it still doesn't feel as if I really have it totally under control. Three factors collectively conspired to put me in my current state of anxiety: 1) I spent too much on my holiday trip to NYC back in December, I made an unplanned, unbudgeted trip to Colorado in March, and I forgot to budget the expense of income tax preparation for April. All of these items are now explicit in my current budget spreadsheets through July, but I have a net deficit of over $600 in the middle of June when I am scheduled to pay off a credit card that gave me six months at 0%. In truth, I had saved the money in my PayPal account for that NYC trip since the middle of last summer, but 5% interest was more attractive than paying off that 0% credit card immediately. There is enough slack in my budget that I have been hoping to make up at least most of the $600 deficit over the next two months. Still, my desire and firm intention is to have more than enough slack in my budget so that I don't have any deficits popping up on my spreadsheets. Worse, I would still like to take a trip to New York in May, which would take another $900 unbudgeted bite out of my budget.

So, that's where I currently stand. Now the question is what to do about it.

I am expecting that the bill for my tax return preparation will be substantially lower than the amount I budgeted.

If I do travel to New York, I will make a diligent effort to use Priceline or some other technique to keep my airfare below $350 and to limit my hotel stays to five nights at no more than $90 per night. It would be best for me to forego this trip, but we will see.

Without the "extra" NYC trip, I would probably come in fairly close to budget with no actual deficit.

I just realized that my budget does not include about $115 per month in interest income on my rainy-day fund. I have no intentions of spending that money on my monthly budget. Most of that income does not show up in my main account that I use for my monthly budget, but I just now went ahead and transferred more than two months of that interest to my PayPal money market fund account anyway. My June deficit is now up to $860. Ouch. At a minimum, this puts significantly more pressure on me to skip the NYC trip, or to at least tighten up on my spending in other ways. The upside is that my balance sheet is now even stronger.

Still, I feel a need to refine and tighten my budget even more, while at the same time keeping enough slack so that every month or even every other month is not some sort of financial mini-crisis. The flip side is that keeping my saving pace sky high almost by definition keeps my budget on constant edge.

-- Jack Krupansky

Life in the year 2059

I was checking out Fidelity's retirement planner and was once again confronted with the question of what I expected for my life expectancy. They suggested 92. I responded with 105. That seems to be a lifetime that feels "right" for me. It is nominally just more than twice my current age. I suspect what I will do is up it by two years every year so that I can always at least imagine that I still have half of my life in front of me.

Anyway... if I live until I am 105, that means I will be alive in the year 2059, 52 years from now. That raises the obvious question of what life will be like in the year 2059. I have no immediate answers, but it is at least an interesting thought experiment. It begs the question of what events might have transpired between now and then, but mostly I'm focusing on what the world will be like when I finally "leave the scene." On the other hand, maybe I should back off and look at the year 2049 or 2050 so that I can contemplate a time when I still have a whole ten years to live. That seems to make more sense. Besides, 2050 is a nice round number.

So, what will life be like in the year 2050? Some categories of thought:

• Health, health care
• Nutrition, food
• Work
• Play, recreation, entertainment
• Housing, living spaces, living arrangements
• Transportation, travel
• Air quality
• Water quality
• Climate
• Politics
• Religion
• Sex
• Sports
• Culture
• Social relations
• Marriage
• Childrearing
• School, education
• Cultures
• Crime, violence
• Law
• Philosophy
• Economics
• Foreign Relations
• Nations
• Conflicts, wars
• Weapons
• Materials
• Buildings
• Communications, computer networks
• Tools and technologies
• What can computers do?
• What can computers still not do?
• Biology, genetics
• Space travel, space life
• Global, national, regional, and local financial systems
• Shopping
• Insurance
• What will money look like?
• What will the term wealth mean?

Will life be radically different from today in a revolutionary sense, or more or an incremental evolutionary sense?

From a finance and retirement planning perspective, how much of this might we have to make sense of to adequately prepare ourselves for a "comfortable" retirement?

Will retirement planning be inherently a "moving target", with radical redeployment every five years?

-- Jack Krupansky

Irrational consumers

One of the reasons that the economy continues to be stronger than expected, with no sign of a recession, is that consumers are simply being irrational, at least relative to how classical economists would expect them to behave.

Look at the price of gasoline. It is through the roof again and is not slowing consumer spending in a significant manner. Consumers are taking the price rise in stride and continuing to spend anyway.

Where are consumers getting all of this money?

Basically what this "episode" tells us is that traditional economists simply do not have a comprehensive model for "The Modern American Consumer."

It may be true that income levels in the middle class have "downshifted", but the simple fact is that people have in fact done the rational thing and adjusted to the new realities of the Post-New Economy.

One simple fact is that there had been a huge growth in dual-income families in the 1970's, 1980's, and 1990's, so that even a moderate level of layoffs and under-employment simply reduced the "saving power" of the average household, but so many households still have more than enough income even in single-earner mode to support reasonably comfortable lifestyles, even with high gasoline prices.

These are not your grandfather's consumers.

-- Jack Krupansky

Euro now in uncharted territory flirting with the $1.37 level

After sprinting above the $1.34 and $1.35 levels the previous week, the euro inched its way above $1.36 this past week and is now cleanly in uncharted territory. After the June 2007 futures contract closed at $1.3573 a week ago Friday, this past week the euro only managed to creep up a mere half-cent to $1.3628 (actually 0.55 cents.) This was primarily a technical move, but there is probably still a fair amount of anti-dollar speculative hot money chasing after the euro and any other non-dollar currency. There appeared to be little appetite for pushing up through the more difficult $1.37 level.

There is no good economic fundamental reason for the euro to trading with this upwards bias, but strong anti-dollar investor sentiment has continued to ignore underlying fundamentals.

Now, the euro is in truly uncharted territory. It's now mostly a question of the level of speculative money flows. With a lot of people still misguidedly believing that Fed rate cuts are still likely over the next six months, the flows could be net-euro for some time to come. On the other hand, just a few good economic reports, persistently high energy prices, strong talk from the Fed about fighting inflation, and a strong hint of a rate hike in June or August, could quickly sap the staying power of any over-extended speculators.

$1.37 is within striking distance for euro speculators, but the shortness of that distance is far less important than the strength and durability of speculative money flows that can evaporate and reverse on a dime.

I wouldn't be surprised if speculators managed to keep the euro up in the $1.33 to $1.37 range for 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

Finally done with my taxes

I finally mailed my tax returns this morning. I should been able to mail them on Tuesday, but due to some confusion, my package was misplaced with no notice in my mail box and didn't get to me until last night, so I was forced to file extensions on Tuesday. But, as they say, all's well that ends well.

Now all I need to do is wait for confirmation that my Federal tax return was actually processed and that my "refund" was properly credited to my 2004  back taxes. Either my May of June monthly installment plan statement from the IRS will tell me. The "refund" will reduce my back taxes by about the same as three monthly payments. None of this will change the amount that I will be paying in May or June, but I simply want to see that my balance is debited correctly.

Since I was so far over this past year on payroll withholdings, I am tempted to up my exemptions so that I won't have such a large refund and can directly apply the money to paying down my back taxes and saving on the interest up front, but it may simply have been a fluke since I only worked part of the year at my higher income level. Alas, I'll probably have to see how I do in a year at "full pay" before trying any gimmicks with exemptions.

-- Jack Krupansky

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

In parallel with the wholesale inflation report from the prior week, the consumer inflation report this past week sent mixed signals with a strong headline number, but a weak core number. Although core inflation is technically more important, it is almost as important to see headline inflation moderate, over time, as well.

With mixed signals on both the wholesale and consumer fronts, the Fed will most likely decide to wait yet another monthly cycle before judging that inflation is either truly under control, or truly under poor control. We need to see more than a little consistency in the signals before judging the degree of stability.

And with the economy being a little weaker than desired over the past few months, the Fed is likely to want to see some clear evidence that the recent "soft patch" is each receding or deepening before making further judgments about the economic outlook for the rest of the year.

Personally, I would suggest that the recent surge in speculation in commodities, including oil, gasoline, and metals is a dual indication of inflationary pressure and a huge excess of money or so-called liquidity, both of which together suggest that the Fed is likely to have to seriously consider another hike in the June or August timeframe.

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 June or August 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 June or August. If we don't see crude oil consistently below $50 and retail unleaded gasoline consistently under $2.00 by June, expect a Fed hike to 5.50% at the June or August 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 (45% 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 over time. The price of crude oil remains way up at $64.11, which has to concern the Fed. The Fed is usally quite tolerant of short-term energy and food price spikes because they tend to quickly recede, but oil and gasoline and other energy prices have remained persistently high for a prolonged period of time, which results in upwards pressure on core, non-energy prices. Wholesale gasoline remains well above $2, and at $2.1374 last week indicates an equilibrium retail level of $2.74 to $2.79, which is too far above $2 to give the Fed any comfort that inflationary pressures are "subdued."

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 June, the Fed will have a high probability of a hike to 5.50% in June or August. 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: 2% chance of a cut -- effectively zero chance
• June 27/28, 2007: 8% chance of a cut -- effectively zero chance
• August 7, 2007: 30% chance of a cut -- people are confused and uncertain, but not betting on a cut 
• September 18, 2007: 42% chance of a cut -- people are confused and uncertain
• October 30/31, 2007: 72% chance of a cut -- effectively 100% chance, but still a fair amount of confusion and uncertainty 
• December 11, 2007: chance of a cut and 22% chance of a second cut
• January 2008: 100% chance of a cut and 60% chance of a second cut
• March 2008: 100% chance of a two cuts and 8% chance of a third cut
• May 2008: 100% chance of a two cuts and 32% chance of a third cut

The May meeting is now 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 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 June. Ditto for August and September. 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." Emergent phenomena and evolution are the norms for the economy. 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 September. The market is predicting a cut at the October 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 and so-called subprime "crisis" didn't cause a Fed cut at the January (or March) FOMC meeting, it is unlikely that housing or the so-called subprime "crisis" will be enough of a problem to cause a Fed cut for the rest of the year either.

As of the April 5, 2007 edition of the UBS As We See It - Market Viewpoint report, UBS Wealth Management Research continues to forecast a Fed funds rate of 4.00% by the end of 2007. That would be five quarter-point cuts. They are also forecasting a Fed funds rate of 3.75% by the end of 2008. They continue to forecast 2% GDP growth for 2007. Obviously I do not concur, although I welcome their alternative perspective.

Why would the UBS outlook be so far off from my own view or even from the pessimistic market view? The wide divergence of these views doesn't make sense, right? Well, that's true if one were considering only economic fundamentals, but we do need to take into account that UBS has a customer base that they want to preserve and that the "research" document I referenced is really marketing literature, most likely designed to make the existing UBS customer base feel that UBS is "in touch" with their customers and their "needs." That is par for the course with the big financial firms. Step 1 is to understand the hopes and fears and anxieties of your customers and step 2 is to directly tap into those hopes and fears and anxieties. Right now, a lot of people hear so many desperate and gloomy stories in the media and internalize that desperation and gloom, and the result is that firms like UBS have no choice but to send out a message of "we understand and share your fears and anxieties." Better to be wrong and keep your customer base than be right and lose your customers. The bottom line is that individual investors cannot look to the research and economic outlooks peddled by Wall Street for a balanced accurate view of how the conomy and businesses will likely unfold in the coming months or year or over any period of time.

The bottom line here is that the Fed won't move through September, 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

Consumer prices send mixed inflation signals

Anybody looking for clarity about inflation in the consumer prices report (Consumer Price Index) for March on Tuesday was disappointed and had to settle for mere nuance. Yes, the headline inflation rate was up a heavy 0.6% in a single month, but ex food and energy was up only a very modest 0.1%, or 1.2% annualized, which is towards the lower end of the Fed's target range of 1% to 2%.

Another way of looking at core consumer prices is to average the past six monthly readings to get a more stable read of where inflationary pressure appears to be trending. The past six months of core consumer price changes were +0.1%, +0.1%, +0.1%, +0.3%, +0.2%, and +0.1%, for an average of +0.15% which annualizes to +1.8%, which is towards the upper end of the Fed's range, which isn't so great. If you look at the actual data, the six-month gain is an annualized +1.89%. So, by at least by this one reasonable measure, the Fed is doing a fairly good job, but needs to do better. As I said, you have to resort to nuance to draw any strong conclusions from this data.

-- Jack Krupansky

PayPal money market fund yield remains at 5.04% as of 4/21/2007

Here are some recent money market mutual fund yields as of Saturday, April 21, 2007:

• iMoneyNet average taxable money market fund 7-day yield rose from 4.75% to 4.76%
• PayPal Money Market Fund 7-day yield remains at 5.04%
• ShareBuilder money market fund (BDMXX) 7-day yield remains at 4.48%
• Fidelity Money Market Fund (SPRXX) 7-day yield remains at 4.99% ($25,000 minimum)
• Fidelity Cash Reserves money market fund (FDRXX) 7-day yield rose from 4.97% to 5.00%
• Fidelity Prime Reserves money market fund (FPRXX) 7-day yield remains at 4.46%
• Fidelity Municipal Money Market fund (FTEXX) 7-day yield rose from 3.29% to 3.35% or tax equivalent yield of 5.15% (up from 5.06%) for the 35% marginal tax bracket and 4.65% (up from 4.57%) for the 28% marginal tax bracket -- this is probably close to the best rate you can get for "core cash" in a checking-style account
• Fidelity Tax-Free Money Market fund (FMOXX) 7-day yield rose from 3.26% to 3.33% or tax equivalent yield of 5.12% (up from 5.02%) for the 35% marginal tax bracket and 4.62% (up from 4.53%) for the 28% marginal tax bracket
• 4-week (1-month) T-bill investment rate fell from 5.00% to 4.93%
• 13-week (3-month) T-bill investment rate fell from 5.02% to 5.01%
• 26-week (6-month) T-bill investment rate fell from 5.10 to 5.07%
• 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) -- based on the latest inflation reports (1.21% semiannual inflation rate) and assuming no change to the 1.40% fixed rate (no guarantee there), my preliminary and unofficial calculation shows that the new I Bond earnings rate will be 3.83%
• Charles Schwab 3-month CD APY fell from 5.01% to 5.00%
• Charles Schwab 6-month CD APY remains at 5.06%
• Charles Schwab 1-year CD APY rose from 5.06% to 5.10%
• NetBank 6-month CD APY rose from 5.25% to 5.30%
• NetBank 1-year CD APY rose from 5.20% to 5.30%

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." The PayPal 7-day yield of 5.04% is equivalent to a bank APY of 5.16%.

4-week T-bills are once again not as attractive for cash that you won't need for a month, since the new issue yield was below the yield of PayPal and even below 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.

Check Bankrate.com for the availability of high-rate CDs (5.00% APY to 5.45% 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. And some of these banks may have been involved in the subprime lending mess, so you might want to avoid them out of principle even if your principal is protected by the FDIC. 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 for even three months. 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.

I continue to see an introductory teaser from HSBC Direct Online Savings that promises "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: "will earn an interest rate of 5.84% and yield 6.00% APY ... until April 30, 2007 ... 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. BIG NOTE: April 30 is not the deadline for putting "new money" into the account, but the end of the period during which your "new money" can earn 6.00% APY.

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

NASDAQ once again floating above the psychological 2,500 level but can it stay aloft?

NASDAQ finally managed to break out above the psychological 2,500 level again, closing at 2,536.29 on Friday after five consecutive daily closes above 2,500, but it remains to be seen whether it can stay above that level "permanently." I think it might this time, but I don't have much of a say in the matter.

Actually, I do have just as much say as anybody else, and I am a net investor in stocks and will be for the next five years. The "problem" is that there are far too many short-term market timers who seek to profit from short-term market volatility rather than buying or selling based on sound economic and business fundamentals.

-- Jack Krupansky

Average 15-year fixed mortage is even cheaper at 5.89%

The weekly survey by Freddie Mac finds the average 15-year fixed mortgage rate down slightly to 5.89% (from 5.90% last week.) This is still quite cheap.

The average 30-year fixed mortgage ticked down from 6.22% to 6.17%, which is also still dirt cheap.

The continued availability of relatively cheap mortgages will continue to keep the housing sector from falling off a cliff. We've blown off most of the speculative and low-quality mortgage demand, so we are mostly back to relatively high quality borrowers, where we want to be anyway.

We may have a bit more weakness to work through, but sometime within the next couple of months we should finally "turn the corner" and actually see a rise in demand for housing.

With a lot of the low-quality borrowers forced to seek or remain in apartments, even with a continued build-out of apartments, rents will likely be rising, giving high-quality renters a financial incentive to shift over to being homeowners.

-- Jack Krupansky

ECRI Weekly Leading Index indicator flat 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) rose very slightly (+0.01% vs. +0.24% last week) and the six-month smoothed growth rate was unchanged (at +3.6%), 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 24 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 37 weeks past its summer low and the six-month smoothed growth rate is now 34 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 (under +1.00%) 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

Diffused economic strength in the U.S. economy

Most Wall Street types are always trying to identify "hot" sectors of the economy to promote intensified trading, so the very nature of that orientation prevents them from comprehending a merely "warm" or "lukewarm" economy such as the U.S. has right now. For Wall Street, it is simply "Hot or Not." The U.S. economy is most decidedly not "hot." That's actually okay and the preferred state of the economy, with inflation reasonably under control and moderate but not overheated growth.

The problem here is that the Wall Street approach essentially says that if an economy is not booming, then it must be headed into a recession. This is not the case. The U.S. economy is not simply black or white. The U.S. economy has many shades of gray. Unfortunately, Wall Street doesn't "do" gray very well at all.

The good news about the U.S. economy is that there is a lot of "hidden" strength. It is hidden because it is diffused throughout the whole economy and not concentrated in any of the kind of clearly identifiable "hot spots" that Wall Street gravitates towards.

In any case, the bottom line is that you can't look to Wall Street for guidance as to the overall state of the U.S. economy today or how it will be shaping up in the months to come.

-- Jack Krupansky

Euro finally breaks cleanly above the tough $1.34 level

After struggling mightily with the tough $1.34 level for two weeks now, the euro finally broke cleanly above the $1.34 level and even sprinted cleanly above the $1.35 level aw well, with the June 2007 futures contract closing at $1.3573 on Friday. This was primarily a technical move, but there is probably still a fair amount of anti-dollar speculative hot money chasing after the euro and any other non-dollar currency.

There is no good economic fundamental reason for the euro to trading with this upwards bias, but strong anti-dollar investor sentiment has continued to ignore underlying fundamentals.

Now, the euro is in truly uncharted territory. It's now mostly a question of the level of speculative money flows. With a lot of people still misgudedly believing that Fed rate cuts are still likely over the next six months, the flows could be net-euro for some time to come. On the other hand, just a few good economic reports, persistently high energy prices, strong talk from the Fed about fighting inflation, and a strong hint of a rate hike in June or August, could quickly sap the staying power of any over-extended speculators.

$1.36 is clearly within striking distance for euro speculators, but the shortness of that distance is far less important than the strength and durability of speculative money flows that can evaporate and reverse on a dime.

I wouldn't be surprised if speculators managed to keep the euro up in the $1.33 to $1.37 range for 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

Travel budget

I'm trying to avoid doing too much traveling since it cause my budget to take quite a hit, but my sanity seems to require at least a little travel (likewise, my sanity require that I not travel too much.) I just took a short trip to Colorado, but that was a modest hit to my budget. My big trip to New York City over the holidays was a huge hit to my budget (which is not completely paid off since I have a 0% credit card and put the money in savings until the 0% runs out in June). I had been expecting to take a trip back to Washington, D.C. at the end of April or early May, but that trip probably won't happen, or may morph into a similar trip later in May or in June. I also would like to get down to San Francisco sometime. This is already much more travel than I had expected. I have to sit down and work through what a reasonable travel budget would be.

Travelling every other month is probably too much for my budget. If I spent $1,000 per trip, that would be $6,000 per year or $500 per month.

Four trips per year may be the happy medium for me. That would be three trips plus the Christmas holidays. Or two trips besides my short Colorado trip which I have been doing every year.

My April/May trip represented a twice a year trip to Washington, D.C. for a finance-related meeting that I became interested in. Unfortunately, that group suspended their meetings last Fall and may not meet again until this coming Fall, if then. If they do get back to a twice a year schedule, that plus Colorado plus the holidays would completely fill my four-trip travel budget. That makes me lean towards budgeting five trips and focusing on keeping the cost of each trip down.

Airfare is problematic. Sometimes I have enough advance notice and can get decent deals, and sometimes not. In the past, I would exert a modest level of effort and then bite the bullet and pay what the fare cost. If I want to take five trips a year, I'll have to get creative and possibly even take an extra vacation day or two to accomodate the oddball scheduling that great deals like Priceline might require.

I can usually get very decent hotel deals with Priceline, with the exception of New Years Eve in NYC. The trick here will be to keep my stay nights down.

Maybe at dinner tonight I'll come up with some numbers and see how to make this work.

-- Jack Krupansky

Almost done with my taxes

My accountant emailed me on Tuesday that my tax return was ready. I opted to have her mail it to me via snail mail since I don't need to get it until Tuesday. The good news is that I was way over on my Fed taxes, so I will get a hefty "refund", but since I have back taxes, that "refund" stays right where it is at the IRS and I simply see the amount of my back taxes shrink by almost 10%. The bad news is that I still owe Colorado $9, but that's bad news that I can live with.

I'm starting to toy with the idea of actually paying off all of those back taxes by the end of the year. By then, I will have paid them down by another 25%, have a higher credit limit on my new credit cards to be able to cover and near-term "rainy-day" expenses, accumulated a sizable pot of assets in both my retirement plan and my employee stock purchase plan (ESPP), been at my new job long enough to start feeling secure and have gone through a full, annual review cycle and possibly gotten a modest raise, and simply feel comfortable enough that I could get by with a mere six months of rainy-day contingency fund in exchange for having a nice increase in short-term cash flow that can go into my retirement plan or simply go back into rebuilding the rainy day fund up to a full year within 18 months. I'm not quite convinced it's the right thing to do, but at least it's beginnning to look like an option I can realistically consider, and it would get me completely out of "the hole." Besides, I have eight months to think about it.

In any case, I absolutely won't go below six months of rainy-day fund to pay off those back taxes. An alternative idea is to actually stretch out payment of the back taxes in order to build up an even fatter rainy-day fund. We'll see how I feel about "the future" in six months. I'm sure a lot will change between now and then.

-- Jack Krupansky

President Bush doesn't need a " War Czar"

All of the talk about President Bush's efforts to recruit someone to be a "War Czar" to manage the wars in Iraq and Afghanistan is a definite indicator that the president is really out of touch and has really lost it. The reality is that the "wars" are battles between the Pentagon and State Department, and battles between the Neoconservative hawks and the pragmatists.

The real problem is that there already is a "War Czar", and his name is Dick Cheney. He is a prime cause of many of the squabbles. All President Bush has to do is push Cheney aside and call Gates and Rice into his office and tell them that they both have to work together or they both go and that would be the end of the story. But, apparently President Bush doesn't have the force of will to do that. He's the kind of guy who needs a hatchet man.

The flip side of that real problem is that President Bush is still a "prisoner" of the whole Neoconservative ideology which has its roots in an unholy alliance between far-right wing Christian fanatics and far-right wing Jewish fanatics. An ongoing war against Islam and all non-Judeo-Christian elements in the Middle East is their top priority. Managing this "crusade" is everything to them.

Adding a "War Czar" as an extra level of management between President Bush and the Pentagon and State Department would simply take more of the responsibility off of everyone's shoulders and lead to a whole new level of finger pointing.

The fact that no sane person wants the job is a solid indicator that the whole concept is a non-starter.

President Bush is simply unwilling to admit the core truth that the mess originated with Dick Cheney and the whole Neoconservative ideology and that the problems with prosecuting the wars (and the whole overall so-called "Global War On Terror") will persist as long as Cheney and his staff continue to exercise veto authority over decisions of the Pentagon and the State Department.

The really mind-boggling thing is that the brain-dead Democrats in charge of Congress are completely unable to exploit the chaos over management of "the war." They have their own internal battles to keep them occupied.

-- Jack Krupansky

NASDAQ once again within striking distance of the psychological 2,500 level

After breaking out above the psychological 2,500 level earlier this year and then pulling back with a minor correction, NASDAQ is once again poised to break through the 2,500 level. Closing at 2,491.94 on Friday, even normal daily volatility could take us back over 2,500 in less than an hour. Whether NASDAQ is really ready to solidly break out and stay above 2,500 "permanently" is another matter. I think it is, but I don't have much of a say in the matter.

Actually, I do have just as much say as anybody else, and I am a net investor in stocks and will be for the next five years. The "problem" is that there are far too many short-term market timers who seek to profit from short-term market volatility rather than buying or selling based on sound economic and business fundamentals.

-- Jack Krupansky

Average 15-year fixed mortage still cheap at 5.90%

The weekly survey by Freddie Mac finds the average 15-year fixed mortgage rate up slightly to 5.90% (from 5.87% last week.) This is still quite cheap.

The average 30-year fixed mortgage ticked up from 6.17% to 6.22%, which is also still dirt cheap.

The continued availability of relatively cheap mortgages will continue to keep the housing sector from falling off a cliff. We've blown off most of the speculative and low-quality mortgage demand, so we are mostly back to relatively high quality borrowers, where we want to be anyway.

We may have a bit more weakness to work through, but sometime within the next couple of months we should finally "turn the corner" and actually see a rise in demand for housing.

With a lot of the low-quality borrowers forced to seek or remain in apartments, even with a continued build-out of apartments, rents will likely be rising, giving high-quality renters a financial incentive to shift over to being homeowners.

-- Jack Krupansky

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

A huge headline number for wholesale inflation caught a lot of attention, but overall that report was so chock full of mixed signals that few conclusions could be drawn other than that the Fed still needs to continue to be "vigilant" about inflation.

Personally, I would suggest that the recent surge in speculation in commodities, including oil, gasoline, and metals is a dual indication of inflationary pressure and a huge excess of money or so-called liquidity, both of which together suggest that the Fed is likely to have to seriously consider another hike in the June or August timeframe.

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 or August. 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 (45% 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 over time. The price of crude oil remains way up at $63.63, which has to concern the Fed. The Fed is usally quite tolerant of spikes because they tend to quickly recede, but oil and gasoline and other energy prices have remained persistently high for a prolonged period of time, which results in upwards pressure on core, non-energy prices. Wholesale gasoline remains well above $2, and at $2.1797 last week indicates an equilibrium retail level of $2.78 to $2.83, which is too far above $2 to give the Fed any comfort that inflationary pressures are "subdued."

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% in June. 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: 0% chance of a cut -- zero chance
• June 27/28, 2007: 4% chance of a cut -- effectively zero chance
• August 7, 2007: 22% chance of a cut -- people are confused and uncertain
• September 18, 2007: 28% chance of a cut -- people are confused and uncertain
• October 30/31, 2007: 54% chance of a cut -- effectively 100% chance, but people are still mostly confused and uncertain and mostly sitting on the fence
• December 11, 2007: 90% chance of a cut
• January 2008: 100% chance of a cut and 24% chance of a second cut
• March 2008: 100% chance of a cut and 58% chance of a second cut

The May meeting is now 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 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 June. Ditto for August and September. 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." Emergent phenomena and evolution are the norms for the economy. 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 September. The market is predicting a cut at the October 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 and so-called subprime "crisis" didn't cause a Fed cut at the January (or March) FOMC meeting, it is unlikely that housing or the so-called subprime "crisis" will be enough of a problem to cause a Fed cut for the rest of the year either.

As of the March 23, 2007 edition of the UBS As We See It - Market Viewpoint report, UBS Wealth Management Research is once again forecasting a Fed funds rate of 4.00% (down from 4.25%) by the end of 2007. That would be five quarter-point cuts. They are also forecasting a Fed funds rate of 3.75% by the end of 2008. They continue to forecast 2% GDP growth for 2007. Obviously I do not concur, although I welcome their alternative perspective.

Why would the UBS outlook be so far off from my own view or even from the pessimistic market view? The wide divergence of these views doesn't make sense, right? Well, that's true if one were considering only economic fundamentals, but we do need to take into account that UBS has a customer base that they want to preserve and that the "research" document I referenced is really marketing literature, most likely designed to make the existing UBS customer base feel that UBS is "in touch" with their customers and their "needs." That is par for the course with the big financial firms. Step 1 is to understand the hopes and fears and anxieties of your customers and step 2 is to directly tap into those hopes and fears and anxieties. Right now, a lot of people hear so many desperate and gloomy stories in the media and internalize that desperation and gloom, and the result is that firms like UBS have no choice but to send out a message of "we understand and share your fears and anxieties." Better to be wrong and keep your customer base than be right and lose your customers. The bottom line is that individual investors cannot look to the research and economic outlooks peddled by Wall Street for a balanced accurate view of how the conomy and businesses will likely unfold in the coming months or year or over any period of time.

The bottom line here is that the Fed won't move through September, 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