Budget for other expenses for my June trip to New York City - rev 1

Oops... I forgot that I had a certificate for a free entree (steak or lobster) at the Palm steakhouse. I've adjusted my budget downwards and the new budget is shown below, compared to my previous budget...

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Although I've taken care of my flight and hotel expenses for my trip to New York City in June, I do need to finish budgeting other expenses that wouldn't be covered by my normal daily budget.

Expenses I already know about:

• Bus fare between Newark Airport and Manhattan - $23 RT
• Bus fare to Ocean County to visit my mother - $38.10 RT ($15.50 * 2 + $3.55 * 2)
• Lunch premium - $35 ($5 * 7)
• Dinner premium - $180 ($10 * 3 + $30 * 1 + 1 free + $45 * 2)
• Misc - $50

For a total of $296.

I have tried to be overly generous on my meals budget since I know how expensive Manhattan can be and I know that I want to enjoy the visit, but I do in fact expect to come in well under budget on meals and "Misc." I have no idea what I might spend the $50 "Misc" on, but unexpected expenses or opportunities do come up.

I've added this amount to my August budget spreadsheet since that is when I would have to pay the credit card bills, assuming I incur the charges after the June statement date.

That does put a modest hole in my August budget,but I think I have enough slack in my overall budget to recover as I go through the next two months.

-- Jack Krupansky

Budget for other expenses for my June trip to New York City

Although I've taken care of my flight and hotel expenses for my trip to New York City in June, I do need to finish budgeting other expenses that wouldn't be covered by my normal daily budget.

Expenses I already know about:

• Bus fare between Newark Airport and Manhattan - $23 RT
• Bus fare to Ocean County to visit my mother - $38.10 RT ($15.50 * 2 + $3.55 * 2)
• Lunch premium - $35 ($5 * 7)
• Dinner premium - $180 ($10 * 3 + $30 * 2 + $45 * 2)
• Misc - $50

For a total of $326.

I have tried to be overly generous on my meals budget since I know how expensive Manhattan can be and I know that I want to enjoy the visit, but I do in fact expect to come in well under budget on meals and "Misc."

I've added this amount to my August budget spreadsheet since that is when I would have to pay the credit card bills, assuming I incur the charges after the June statement date.

That does put a modest hole in my August budget,but I think I have enough slack in my overall budget to recover as I go through the next two months.

-- Jack Krupansky

Oh no... higher-than-sky-high gasoline prices have started to decline

It took a while, but sky-high gasoline prices have started to decline. According to AAA, they peaked on Wednesday and declined on Thursday and Friday. They are about 0.9 cents off the peak. Out here east of Seattle I have seen a few gas stations with declines in the 4 to 9-cent range over the past week.

I absolutely love these sky-high gasoline prices. They really are a great incentive for consumers to switch away form traveling so much and driving such gas guzzlers and to encourage entrepreneurs to pursue alternative energy and transport innovations. Alas, these sky-high prices are not likely to last much longer. A month ago I had expected an imminent decline, but obviously I was too early in that call. I really do expect them to start declining soon, maybe as soon as the Memorial Day weekend "wave" approaches or passes.

The thing that is crystal clear is that despite all the chatter about demand and refinery outages, the bulk of the price rise has the wild speculation in wholesale gasoline futures. It is always dicey to try to predict the precise top of any speculative bubble, but 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 will continue to 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 wholesale gasoline futures prices for the rest of the year as of the close on Friday:

• June 2007: $2.4037
• July 2007: $2.3105
• August 2007: $2.2520
• September 2007: $2.1835
• October 2007: $2.0175
• November 2007: $1.9455
• December 2007: $1.9160

As you can see, even the speculators are speculating that prices will decline, with a 9.32-cent decline over the next month and a 49-cent decline by the end of the year. Add 60 to 65 cents to those wholesale prices to get equilibrium retail prices (before the gouging premium or state and local premiums are added.) Be aware that these number are subject to radical and frequent change on a monthly, weekly, and even a daily basis.

-- Jack Krupansky

What is the state of the housing market?

There is an ongoing debate about the state of the housing market, with one side fiercely protesting that the so-called "housing recession" really "has a long way to go", and the other camp boldly insisting that housing will begin ticking up "any day now." I am more in the latter camp, and characterize the housing market as being in a mushy bottoming process that will likely begin to recover modestly "any month now."

We had some mixed data this past week, with new home sales up but existing home sales down, and prices lower for both. It is not so surprising that new home sales were stronger than existing home sales since the companies building new houses have no emotional "investment" to "get over" and are more than willing to simply cut prices to the level where they can "move the goods" since it is "nothing personal, just business" to them, whereas individual homeowners have a personal and emotional "investment" and simply don't have the skills and market research tools to "do the deal" in a prompt and efficient manner.

Mortgage rates are still quite low for "qualified" buyers, with Freddie Mac reporting in their latest weekly survey that the average rate for a 15-year fixed rate mortgage was 6.06%. That was up sharply from 5.92% the previous week, but is nonetheless still quite low and quite reasonable.

Mortgage applications have recently been trending up lately as well. Applications for both purchase and refinancing were both up modestly this past week, as were the four-week moving averages. Rest assured, we wouldn't be seeing these kinds of numbers if the housing market were "continuing to crumble."

As far as declining prices, while some people see this as a sign of "more troubles to come", I see it as a very good and healthy sign that the housing market is in fact "recovering" from the speculative excesses of recent years. It wouldn't surprise me at all to see median home prices decline another 5% to 10% or even 15% before prices stabilize and begin rising again, maybe a year from now.

The strongest statement I can and will make right now is that the January to April period probably marked the end of the worst of the housing downturn. Not that there might not be further declines in construction, sales, or prices, but simply that the majority of the declines are behind us. And when I speak of recovery, I don't mean a return to the "boom", but simply growth in units comparable to growth in demographics and the overall U.S. economy and eventually price growth no more than modestly higher than inflation. And I also do not mean a return to speculative buying or buying by people with horrible or even no credit profile, but simply a return to normal buying by normal buyers and with a healthy but not scandalous subprime market.

We also need to consider that each region of the country and each price range will have its own growth curve, so that we may see some weakness in some segements even as we see strength in others.

I wrote this post after reading part of an article in The New York Times by Abby Goodnough entitled "As Condos Rise in Florida, Investors Try to Flee" which seemed to go out of its way to try to paint as gloomy a picture as possible, regardless of the fact that this requried focusing on an area that may have been the epitome of the speculative excesses that we hopefully have now left behind us. The article was an interesting "story", but made no attempt to provide a balanced view of the overall housing market or even of a segment relevant to most readers of The Times. I don't particularly care for that style of yellow journalism.

-- Jack Krupansky

Euro continues to drift downwards

The euro continues to drift downwards after upwards momentum evaporated a couple of weeks ago, with euro futures closing on Friday at $1.3462, more than a half-cent below the $1.3522 level of a week ago. I strongly suspect that this "retreat" continues to be more of a short-term trading phenomenon and not indicative of a longer-term trend per se. I would give the euro bulls and dollar bears a few more shots at $1.37 and $1.38 over the next month before concluding that the euro is likely to weaken for the rest of the year.

For now, the euro remains in relatively uncharted territory. It is 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, a decent Q2 GDP report in July, and a strong hint of a rate hike in August, could quickly sap the staying power of any over-extended speculators.

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.

In short, the dollar is not "plunging."

-- Jack Krupansky

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

[Warning: I may suspend this weekly post in the near future, but I haven't decided for sure yet.]

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 "real" 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 August or September. 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 August or September 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 the 1.3% Q1 GDP number has frightened so many people (and emboldened so many bears and cynics) that the Fed may simply wait until the Q2 GDP number "prints" in late July before seriously considering a rate hike in August.

This coming week we will get the preliminary revision to Q1 GDP. Some serious people believe that it could be revised down to the 0.7% range. I normally don't pay that much attention to the GDP report, but I will be looking to see what they do with the inflation price deflator which was 4.0% in the advance report. In any case, the range for revision of annualized real Q1 GDP growth is from about a low of 0.5% to a high of 2.75%. A revised GDP number towards the lower end of that range will get people worried about slow growth again and raise the belief in earlier Fed rate cuts, while a GDP number towards the higher end of that range will take pressure off the concerns over growth and lower the belief in Fed rate cuts. Either way, half the market will rally and the other half will sell off. The two halves being the pro-rate-cut camp which believes that only rate cuts can keep the "rally" going and the pro-growth camp which focuses on economic and business fundamentals and sees economic growth as a boost for corporate revenues and profits and that rising earnings lead to rising stock prices. The two camps are roughly balanced, so predicting market reaction is rather dicey, but I still lean in the direction of stock prices experiencing a slow, gradual rise punctuated with bouts of volatility. A GDP number below 1.0% would make it more likely that the Fed will stay paused in August and a GDP number above 2.0% will increase the odds of a hike in August. The GDP report comes out at 8:30 a.m. this Thursday, May 31, 2007.

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 up at $65.20 (up from $64.94 a week ago), 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 $2.4037 last week (down slightly from $2.4077 a week ago) indicates an equilibrium retail level of $3.00 to $3.05, 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 June even though $50 is what they would really like to see. If crude is $60 or higher in June, the Fed will have a higher probability of a hike to 5.50% in August or September. 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 have been desperately funneling money into bond funds in response to an expectation of well below-par economic growth, and this has depressed Treasury yields and caused 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:

• June 27/28, 2007: 2% chance of a cut -- effectively zero chance
• August 7, 2007: 8% chance of a cut -- effectively zero chance
• September 18, 2007: 16% chance of a cut -- people are confused and uncertain, but a cut is still unlikely 
• October 30/31, 2007: 28% chance of a cut -- people are confused and uncertain, but a cut is still unlikely
• December 11, 2007: 48% chance of a cut -- people are really confused and uncertain, but a cut is still unlikely
• January 2008: 70% chance of a cut -- a cut is likely
• March 2008: 94% chance of a cut
• May 2008: 100% chance of a cut and 6% chance of a second cut

The June FOMC meeting is now within the 45-day window of reliability for fed funds futures to predict Fed action, so it is a high-probability indicator of the degree of certainty that the Fed will not change the fed funds target rate at the June FOMC meeting. It is too soon for fed funds futures to reliably predict rates for the August or September FOMC meetings. A lot can and will transpire during the run-up to the June and August 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 August.

I personally don't concur with these odds after August, 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 December. The market is predicting a cut at the January 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 May 4, 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. At least they are now admitting that "A first rate cut in June seems less likely now" and that "The tentative signs of a growth revival put into question our aggressive Fed call, both in terms of timing and scope." They conclude that "For now, we are waiting for more growth data before reassessing our call." It sounds to me that their commitment to their "call" is rapidly crumbling and that they themselves are on the verge of admitting that they are clueless.

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 December, 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 rises to 5.03% as of 5/26/2007

[Warning: I may suspend this weekly post in the near future, but I haven't decided for sure yet.]

Here are some recent money market mutual fund yields as of Saturday, May 26, 2007:

• iMoneyNet average taxable money market fund 7-day yield rose from 4.71% to 4.72%
• PayPal Money Market Fund 7-day yield rose from 5.02% to 5.03%
• ShareBuilder money market fund (BDMXX) 7-day yield remains at 4.47%
• Fidelity Money Market Fund (SPRXX) 7-day yield rose from 5.00% to 5.01% ($25,000 minimum)
• Fidelity Cash Reserves money market fund (FDRXX) 7-day yield remains at 4.97%
• 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 fell from 3.52% to 3.48% or tax equivalent yield of 5.35% (down from 5.42%) for the 35% marginal tax bracket and 4.83% (down from 4.89%) for the 28% marginal tax bracket -- this may be the best rate that most of us can get for "core cash" in a checking-style account
• Fidelity Tax-Free Money Market fund (FMOXX) 7-day yield fell from 3.48% to 3.43% or tax equivalent yield of 5.28% (down from 5.35%) for the 35% marginal tax bracket and 4.76% (down from 4.83%) for the 28% marginal tax bracket
• 4-week (1-month) T-bill investment rate rose from 4.76% to 5.00%
• 13-week (3-month) T-bill investment rate rose from 4.87% to 4.91%
• 26-week (6-month) T-bill investment rate rose from 4.93% to 5.01%
• Treasury I Bond composite earnings rate (semiannual compounded annually) for new I Bonds is 3.74% (down from 4.52%), with a fixed rate of 1.30% (down from 1.40%) and a semiannual inflation rate of 1.21% (down from 1.55%) -- updated May 1, 2007, next semiannual update on November 1, 2007
• Schwab Bank Investor Checking APY remains at 4.25%
• Schwab Value Advantage Money Fund (SWVXX) 7-day yield fell from 4.91% to 4.90%
• Schwab Investor Money Fund (SW2XX) 7-day yield fell from 4.74% to 4.73%
• Charles Schwab 3-month CD APY remains at 5.10%
• Charles Schwab 6-month CD APY remains at 5.11%
• Charles Schwab 1-year CD APY fell from 5.12% to 5.11%
• NetBank 6-month CD APY rose from 5.30% to 5.35%
• NetBank 1-year CD APY rose from 5.25% 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." The PayPal 7-day yield of 5.03% is equivalent to a bank APY of 5.15%.

Possible red flag on PayPal: The interest credited to my PayPal account back in April seemed low. My rough calculation showed a simple rate of 4.95% (even factoring in that it was a 30-day month) rather than the weekly rates of over 5% that I saw quoted over that period. I will carefully examine my return this coming week to see if there is anything amiss.

4-week T-bills may once again be a fairly decent place for cash that you won't need for a month, since the new issue yield is now only slightly below the yield of PayPal and slightly above 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. Frankly, the extreme volatility with frequent low yields has turned me off to T-bills in favor of PayPal and Fidelity Cash Reserves, but we'll see how yields evolve over the coming months.

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 June or August. My current thinking is that although I can get a moderate increment of yield from a CD (e.g., from NetBank), the additional hassles don't seem worth the effort compared to the simplicity and flexibility I get with PayPal and Fidelity FDRXX.

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.)

I am not an investment adviser, so my opinions and the data presented here should not be considered as advice for where to invest your money. You should examine this and other available data before deciding how to invest your money. And, seriously, past returns should not be construed as a guarantee of future returns.

-- Jack Krupansky

ECRI Weekly Leading Index indicator down modestly 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 modestly (-0.2% vs. +0.01% last week) but the six-month smoothed growth rate rose modestly (to +6.4% vs. +6.1% ), and remains moderately 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 29 consecutive weeks. We haven't finished the soft landing yet, but we are in great shape, despite the weakness in the housing sector, the misleadingly low GDP report for Q1, and the feverish hand-wringing of the pundits.

The WLI is now 42 weeks past its summer low and the six-month smoothed growth rate is now 39 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

Hotel reservation for my trip to New York City in June

I had expected the process for getting a hotel reservation for my trip to New York City in June to more drawn out, but it is now done. I'll be arriving the evening of Tuesday, June 19, 2007 and departing the afternoon of Tuesday, June 26, 2007, for eight days and seven nights. I had hoped to get a sweet deal using Priceline, but I wasn't having much luck. My best bet with Priceline would have been to wait until the last minute and hope that some "extra" rooms would be available, but with Manhattan being very tight for hotel space, even that seemed rather risky. In the back of my mind I knew I had some Marriott Reward points, but I had always hoped to keep them for something special or when I was really low on cash or something or whatever, so I wasn't seriously considering them until now. I did make a number of bids with Priceline, but even my $100 bid was rejected. Even at $100 a night, for seven nights the taxes and fees came to $122 or an average rate of $117 a night. Faced with the prospect that my hotel bill might run $1,000 or higher, I bit the bullet and used some of my old Marriott Reward points.

Marriott ranks their hotels as if they were hurricanes, so unfortunately their hotels in Manhattan are mostly "Cat 7" with a couple of "Cat 6." Yeah, I know, hurricanes only go up to Cat 5, so that gives you some idea of how expensive Manhattan hotels are. In addition, besides the normal or "standard" reward rates, they also have "Stay Anytime" rates which are 50% above the standard rates (going up to 100% premium for reservations made after June 1, 2007.)

I could have stayed across the river in Jersey City near the PATH train stop for a mere 85,000 points, which is reasonably attractive, but I just didn't want the hassle of a "commute."

I also could have stayed at the Marriott Financial Center way downtown south of the World Trade Center site, which is a "Cat 6", for the standard rate of 130,000 points, but even that seemed like too much of a "commute" from midtown Manhattan.

I ended up selecting the Marriott Courtyard on 40th Street near Fifth Avenue ("Courtyard New York Manhattan/Fifth Avenue"), which is very convenient for midtown but not the circus-like neighborhood like the Marriotts in and near Times Square. This also has the advantage of being "only" a Cat 6 hotel. Even so, the demand and availability meant that I got stuck with having to use the "Stay Anytime" point level of 195,000. That is a lot, but the convenience will be worth it to me since my time does have some value to me. And, this fits nicely into my budget since it will cost me zero dollars.

Unfortunately, this reward could not be reserved online (although others can), so I had to call the Marriott reservations phone line. I didn't have to wait too long, although the recorded voice told me that I might have to wait longer than usual "due to inclement weather", wherever that was.

They give you the option of having a certificate mailed to you, or they can "order" the certificate to the hotel (electronically) so that you basically just show up and say "It's me, I'm here" and they give you your room. They do email you the confirmation so you can print that to show as proof. The reservation did require that I give them a credit card number, but I'm not sure if that was for incidentals or identification. Having the points handled by "e-certificate" also means that you can cancel the reservation and automatically have your points re-deposited to your account without having to mail the certificate back.

I checked the normal Marriott online reservation system and was quoted a rate of $479 per night plus tax for the first three weekday nights, $299 for Friday, Saturday, and Sunday on the weekend, and $399 for the next Monday. This does include "free" high-speed Internet access, as if anyone who can afford those room rates would even notice. That totals to $2,733 or with 10% tax would be $3,006. Yikes. This is yet another tiny reminder that I need to reconsider where I really am on the economic totem pole. I did notice that the web page already shows that my points have been deducted.

The bottom line is that I'll have a nice comfortable room in a convenient location with no hit to my budget.

As far as budgeting for future trips, that will be another story.

-- Jack Krupansky

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

I absolutely love these sky-high gasoline prices. They really are a great incentive for consumers to switch away form traveling so much and driving such gas guzzlers and to encourage entrepreneurs to pursue alternative energy and transport innovations. Alas, these sky-high prices are not likely to last much longer. Three weeks ago I had expected an imminent decline, but obviously I was too early in that call. I really do expect them to start declining soon, maybe as soon as the Memorial Day weekend "wave" approaches or passes.

The thing that is crystal clear is that despite all the chatter about demand and refinery outages, the bulk of the price rise has the wild speculation in wholesale gasoline futures. It is always dicey to try to predict the precise top of any speculative bubble, but 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 will continue to 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:

• June 2007: $2.4077
• July 2007: $2.3112
• August 2007: $2.2542
• September 2007: $2.1862
• October 2007: $2.0207
• November 2007: $1.9412
• December 2007: $1.9022

As you can see, even the speculators are speculating that prices will decline, with a 9.5-cent decline over the next month and a 50-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

UBS backs off its bearish interest rate forecast

As of the May 4, 2007 edition of the UBS As We See It - Market Viewpoint report, UBS Wealth Management Research had been forecasting a Fed funds rate of 4.00% by the end of 2007. That would be five quarter-point cuts. Barely two weeks later in their May 17 report they significantly ratcheted back that outlook and are now forecasting a year-end Fed funds rate of 4.50%, or only three quarter-point cuts. That is a big change, but they did it with little fanfare.

They continue to forecast 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.

They did in fact "warn" us that a change was coming, with the May 4 report telling us that "A first rate cut in June seems less likely now" and that "The tentative signs of a growth revival put into question our aggressive Fed call, both in terms of timing and scope." They concluded that "For now, we are waiting for more growth data before reassessing our call." That sounded to me as if their commitment to their "call" was rapidly crumbling and that they themselves are on the verge of admitting that they are clueless. Clueless, yes, but no admission, yet.

-- Jack Krupansky

Euro continues to drift in the face of heavy resistance at the $1.37 level

After so much enthusiasm a month ago, now the euro is stuck in the doldrums, between $1.33 and $1.37, with no apparent upwards momentum, with euro futures closing on Friday at $1.3522, almost a quarter-cent below the $1.3546 level of a week ago. I strongly suspect that this "retreat" continues to be more of a short-term trading phenomenon and not indicative of a longer-term trend per se. I would give the euro bulls and dollar bears a few more shots at $1.37 and $1.38 over the next month before concluding that the euro is likely to weaken for the rest of the year.

For now, the euro remains in relatively uncharted territory. It is 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, a decent Q2 GDP report in July, and a strong hint of a rate hike in August, could quickly sap the staying power of any over-extended speculators.

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.

In short, the dollar is not "plunging."

-- Jack Krupansky

Does Greenspan really believe that a recession is likely later this year?

I have lost count of how many times I have seen a recent headline trying to connect Greenspan and the likelihood of a recession. The most recent was an MSNBC article entitled "Greenspan sees one-third chance of recession - Former Fed chairman reiterates his concerns about U.S economy", which continues the myth that Greenspan is saying that the U.S. economy will be in trouble at the end of the year.

Yes, Greenspan says that he sticks by his analysis that "there's a one-third probability of a recession", but the absurd and ridiculous nature of the press coverage on this point has forced him to point out the obvious:

"My arithmetic says if there's a one-third probability of a recession, then there's a two-thirds probability there won't be a recession," Greenspan told a closed-door Merrill Lynch investor forum, according to an official at the U.S. investment bank.

How could anyone state so clearly that the odds of avoiding a recession are twice as high as the odds of a recession and why should it be necessary to point out something so obvious? Clearly the media are out of control and lost in a sea of negativity.

-- Jack Krupansky

Is the Fed really opening the door to rate cuts later this year?

I continue to be annoyed by so-called professionals who apparently sincerely believe that the Fed will cut interest rates as soon as inflation moderates. Such a suggestion is ridiculous since the Fed has made it clear that current rates are neutral. That means that cutting rates would lead to an accommodative or stimulative monetary policy, which is precisely the last thing the Fed would want to do to keep a lid on inflation.

This week a see a subtle variation on the "Fed will cut rates" theme from a journalist whose Fed credentials are beyond reproach, but with a twist that makes more sense.

John Berry used to report on the Fed for the Washington Post, but now writes a Fed-related column for Bloomberg. In his latest column provocatively entitled "Fed Rate Cut Possible If Inflation Keeps Easing" he writes:

The Federal Reserve's forecast that core inflation would begin to decline this year appears to be falling into place.

If the better numbers continue, it might open the door to interest rate cuts later in the year should economic growth fail to rebound as Fed officials expect.

[My emphasis] 

So, he does use the provocative language that lower inflation "might open the door to interest rate cuts later in the year ", but clearly adds the double caveat "should economic growth fail to rebound as Fed officials expect." So, yes, he says that lower inflation could lead to Fed rate cuts, but only under the condition that growth fails to rebound and he reminds us that this is not the economic forecast that the Fed is operating under.

I am moderately annoyed that John's headline is seeming to cater to the bears and cynics and a false view of the criteria for a rate cut, but I am at least relieved that he has succinctly stated the conditions that would be needed and the fact that those conditions are contrary to what the Fed has publicly stated as its outlook.

To further emphasise the nature of the economic outlook, John writes:

Is growth likely to slow? More than a few forecasters, including those at Macroeconomic Advisers -- whose work many Fed officials follow closely -- expect growth at an annual rate of 2.5 percent to 3 percent in the second half of the year.

Some may regard 2.5% growth as too low and worthy of a rate cut, but there simply is no evidence that the Fed thinks that way.

Regardless of what you think of the Fed's own economic outlook, we have the outlook of the independent Macroeconomic Advisers to depend on. To be brutally honest, you should be skeptical of anybody who thinks they are that much better at forecasting than Macroeconomic Advisers.

So, as far as those rate cuts as soon as inflation moderates: dream on.

-- Jack Krupansky

Greenspan and PIMCO

Here's an interesting article from Bloomberg by Caroline Baum entitled "Will Greenspan and Gross Merger Create Value?" which gives us some color on the news of former Fed chairman Greenspan's agreement to be an exclusive advisor to PIMCO. The real bottom line here is that nobody has a clue what good or bad will come from this collaboration, but simply that it should be interesting.

-- Jack Krupansky

PIMCO's Bill Gross changes his tune, finally, with a nod to Greenspan

I enjoy reading the monthly Investment Outlook (IO) newsletters written by PIMCO's "Bond King", Bill Gross. I don't agree with much of what he writes, but at least it is stimulating food for thought. In general, he takes a cynical and bearish view of the U.S. economy and stock market. Unexpectedly, his newletter this month (May/June) has a radically different tone. It is entitled "How We Learned to Stop Worrying (so much) and Love 'Da Bomb'". He starts with a mea culpa and admits that his outlook and decisions led to investments in which "those positions cost us some basis points." This doesn't mean he has had a complete change of heart, saying that "We didn't really vow to stop worrying – just to worry less – and to look at 'da bomb' from a different perspective and ask if there was a lotta love there."

He defines 'Da Bomb' as having four critical components: 1) globalization, 2) technology, 3) freer markets/financial innovation, and 4) favorable public policy, and notes that "all of these ingredients have combined to produce the dynamic trends displayed in our four mini-charts below: accelerating global growth; disinflation; increasing returns on equity capital; and low real interest rates."

So, why the sudden change of heart after all these years? Well, there is a hint deeper in the newsletter: "Importantly, special consultant to PIMCO Alan Greenspan has pointed out that the process of transitioning hundreds of millions of workers from planned economies to a market environment may peak in the next 2-3 years in terms of its rate of growth, reducing the disinflationary impact." Ah, that explains it. We have seen press reports about former Fed chairman Greenspan agreeing to work with PIMCO, and here we see the first fruit of that collaboration. Good work, Alan.

-- Jack Krupansky

Reuters: Economy may be growing faster than GDP data shows

Echoing some of the themes I have been focusing on, I see a Reuters article by Joanne Morrison entitled "Economy may be growing faster than GDP data shows" which tells us that "Signs of unexpected vigor in the job market are among several factors that may mean the economy may be performing better than gross domestic product data suggests" and that " the meager increase in U.S. GDP in the first three months of this year comes against a backdrop of other data showing a pickup in manufacturing, steady hiring, strong corporate profits, and stable worker income growth."

The article notes that "Even Federal Reserve officials are puzzled and say the indicator mismatch is making their job in setting interest rates more difficult." One Fed official is quoted as saying that we don't have comparable indicators for the service sector that we have for the manufacturing sector.

The article tells us that maybe we should be focusing more on income growth:

A big gap has opened between the growth of GDP, the standard yardstick of economic activity, and gross domestic income or GDI, which measures the economy in terms of the income derived from wages and salaries, in addition to profits.

Over the course of last year, the year-over-year growth rate of nominal GDI was on average 0.5 percentage points higher than the growth of nominal GDP.

Further, that last sentence refers to nominal GDP, failing to note that headline real GDP growth is billed as being much lower than nominal GDP growth due to a misleading inflation adjustment in Q1, so the gap is much greater than 0.5%.

The good news is that the Fed economists do in fact examine all of the dis-aggregated economic reports rather than using the one-size-fits-all headline real GDP numbers.

-- Jack Krupansky

Managing your personal and household finances

There is an interesting article in The New York Times by John Leland entitled "Couple Learn the High Price of Easy Credit" which highlights a number of personal and household finance issues. Although nominally an attempt to blame it all on "easy credit", it ends up demonstrating, at least to me, that easy credit is not the whole problem or even the heart of the problem, but rather that the lack of planning and discipline is the root of most personal and household finance issues.

Read the article for yourself, but it caused me to appreciate the critical importance of some key personal finance principles:

• Have a budget, for all income and expenses, for the coming year. Know where every dollar of expense can reasonably be expected to go, and where every dollar will come from to pay for those expenses.
• Never wait for a "bill" before deciding how an expense will be paid.
• Respect your financial obligations. Maintain that budget and have an organized file box (one per year) with a manila folder for each account or activity that even vaguely has a dollar sign associated with it.
• Ruthlessly pay your bills on time as if it were a religion in which you were a zealous true-believer. Resolve to pay them early if you have trouble with procrastination.
• Keep your budget in a simple computer spreadsheet. Nothing fancy, but easy to access, easy to update, and easy to read.
• Log every expense as it is incurred in a computer spreadsheet, whether it be a check written, a credit card charge, a bill paid, etc. There should be no surprises when the "bills" finally arrive because you will have it all planned out in your budget and expense logs.
• Keep a computer spreadsheet for your checking account and update it at least twice a week for both income and expenses so that you always know how close to the edge you might be.
• Set aside a non-negotiable time allowance each week, if not twice a week, for reviewing your personal finances.

There are two simple facts: 1) if you follow the above principles you will do just fine, and 2) you can't blame "easy credit" for failing to follow these principles.

Yes, it is true that loss of a job or medical problems can devastate even the most disciplined of budgets, but that is no excuse for people with decent jobs, and even two-income households, and in good health to claim that the banks and finance companies are the cause of their personal and household finance problems.

When I read something like "sorted through the plastic laundry basket where she keeps the family bills, statements and coupons", I cringe and realize that this is someone who is so disorganized and undisciplined that they are literally begging for financial ruin. This is an example of the need for my principle of respecting your financial obligations and the need to be organized. Get a file box and manila folders, not a laundry basket! And, where do they keep the family budget and expense log? I suspect they simply don't.

When I read something like "how well they shuffle what they owe among a broad array of credit cards, home equity loans and other lines of credit", I cringe again and it confirms for me that these are people who have no sense of respect for their financial obligations and are literally begging for financial disaster. Don't blame the credit card and finance companies for this family's total lack of respect for its financial obligations and total lack of discipline.

When I read that they "have run up avoidable penalties and occasionally spent themselves into more debt or higher interest rates", I cringe again and the passage only reaffirms that the credit card companies and finance companies are being unfairly blamed for the couple's lack of organization and discipline.

When someone says "It doesn't matter what you do, you always have that credit card debt", it once again points to their own lack of budget, lack of organization, and lack of discipline, not some problem created by the credit card companies or finance companies.

When I read that the husband, who is a software applications designer who should know a little about organization and discipline, "used a debit card rather than a credit card to make nine purchases, ranging from $5.38 to $48, hoping to avoid finance charges. But he miscalculated their checking account balance. Each purchase incurred an overdraft charge", once again I ask where that budget and expense log and checking account spreadsheet are. In addition, I don't care how deep in debt you are or how many credit cards you have, but there is no excuse not to keep a low-limit card exclusively for expenses which must be paid off each month, and hence incur no finance charges and avoid problems with cash flow through your checking account. Bottom line: There is simply no rational excuse for blaming the bank, credit card companies, or finance companies for lack of personal organization and failure to track your budget and expenses. Sure, everybody makes mistakes, but don't blame financial institutions for anything that happens as a result of your own boneheaded blunders.

When I read that "Every two or three months they send in a payment late, running up a late fee of $30 or more", I cringe again as we once again hear about people who of their own volition refuse to be organized and refuse to be disciplined, and turn around and blame financial institutions for their own personal mistakes. A sane person would expect that after paying late fees two or three times, they would come up with a plan to avoid paying bills late again, ever. Remember, this is a two-income household with a fairly healthy income stream, so paying late is primarily a result of failing to regularly track their budget and expense log.

I'll give the couple a free pass on the whole marriage and home improvement thing. Those were decisions they made and priorities that they had. But, please don't blame the finance companies for those decisions.

But when I read that "if the cat gets sick or something, then suddenly we're trying to figure out, what kind of card can we use to pay this $500 vet bill", I cringe again as we are once again faced with the finance companies being blamed for personal lifestyle choices. Good grief... if we didn't have "easy credit" we would probably be reading an article about how their cat died because the bank wouldn't loan them money to pay the vet.

Then comes the straw that breaks the camel's back as we read that "It's been almost two weeks since we've had time to sit down and go over the bills... You can't do it every day because... they want all our attention... We're trying to... We have to do... We're exhausted... And on the weekends... and we want to spend time... we don't want to spend time going through the bills." This is simply a total lack of commitment to a core activity for any household. There are countless demands on the time of everyone in every life situation. They say "since we've had time", but the key, tell-tale flaw that illustrates the almost complete lack of organization and discipline is that this couple fails to acknowledge that they have to "take the time" or "make the time." This absolute refusal to accept responsibility for managing their own financial matters is certainly a choice that they can make, but I find it deeply offensive that this abdication of personal responsibility is used as the closing paragraph for an article whose thrust is to blame their financial predicament on "easy credit" and the institutions that provide it.

Please, please please, accept responsibility for managing your own personal and household finances and please, please, please refrain from blaming financial institutions if you won't take that responsibility.

-- Jack Krupansky

What are the leading indicaters telling us?

In theory, so-called leading economic indicators are supposed to tell us the nature of economic strength in the months ahead. Sometimes they do, and sometimes they don't. Most so-called indicaters are problematic, and the so-called leading economic indicaters have their share of "issues." To wit, the Conference Board leading indicators this past week which which came in with a moderately negative reading of -0.5% simply seem dramatically out of whack with some of the actual recent economic data that seem more indicative of economic strength going forward. As a result, the best we can say about the Conference Board Leading Indicators is that they continue to bear watching, but they are not gospel, and we need to look elsewhere for true indications of the likely trajectory of the economy in the coming months.

 Here's what the Conference Board had to say about Leading Indicaters in April:

LEADING INDICATORS. Two of the ten indicators that make up the leading index increased in April. The positive contributors — beginning with the largest positive contributor — were stock prices and real money supply*. The negative contributors — beginning with the largest negative contributor — were building permits, average weekly initial claims for unemployment insurance (inverted), manufacturers' new orders for nondefense capital goods*, index of consumer expectations, vendor performance, average weekly manufacturing hours, and interest rate spread. The manufacturers' new orders for consumer goods and materials* held steady in April.

The leading index now stands at 137.3 (1996=100). Based on revised data, this index increased 0.6 percent in March and decreased 0.6 percent in February. During the six-month span through April, the leading index decreased 0.2 percent, with three out of ten components advancing (diffusion index, six-month span equals thirty percent.)

It is certainly true that having only 2 of 10 indicators up and 7 of 10 down is at least superficially very negative, especially in light of mixed and weak readings over the past six months, but there is more to the story than that.

Here are the specific 7 indicators that allegedly drag the Conference Board leading indicators into negative territory:

1. building permits
2. average weekly initial claims for unemployment insurance (inverted)
3. manufacturers' new orders for nondefense capital goods
4. index of consumer expectations
5. vendor performance
6. average weekly manufacturing hours
7. interest rate spread

Yeah, building permits are certainly in the doldrums and unlikely to be offering significant economic strength in the months ahead.

Interest rate spread really isn't a leading indicater at all. Some people view a yield curve inversion as an indicator that a recession is coming, which sometimes does happen, but it really isn't a leading indicator of activity at all. Rather, low interest rates which can fuel economic growth are what matter. In times past, a positive yield curve did matter, but in today's world of private capital and a glut of capital, the spread between the yield on a 6-month T-bill and a 10-year Treasury note simply has virtually no impact on real economic activity.

Capital goods orders are extremely volatile on a monthly basis, so they don't work well at all as a leading inidicater on a monthly basis. Even if manufacturers' new orders for nondefense capital goods were down in April, the ISM manufacturing report for April showed a dramatic rise in orders, from 51.6 to 58.5, and the ISM non-manufacturing (services) report showed a modest rise as well, so the fact that the Conference Board indicators were down here is rather misleading about the big picture.

Weekly unemployment claims have actually declined in recent weeks, so this would be a positive factor rather than the negative factor we see in the April report. So, there is no negative leading indicator on this front.

Studies have shown that consumer confidence/sentiment is not a predictor of future consumer spending at all, and consumers themselves are unable to forecast the future any better than so-called "professional" economists, so consumer expectations also should not be included as part of a leading economic indicater. I have yet to encounter a sound argument for including this unreliable indicator as a leading economic indicator.

Given the extent to which services have overtaken manufacturing, it is certainly odd that average weekly manufacturing hours would still be considered a reliable component of a leading economic indicater index.

So, given the actual components of the Conference Board leading index, it is no surprise that it was so negative, but it also should not be considered a reliable indicater of future economic activity.

I much prefer the Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI). Being reported weekly, it gives you a clue based on the latest data. It also has a six-month smoothed growth rate index that shows more of the big picture. This index is currently indicating modest to moderate economic growth in the coming months, neither boom nor bust, and no sign of any impending recession of economic slump.

In short, overall, the so-called leading indicators are giving us mixed readings, but no confirmation of economic weakness in the months to come. If anything, they are merely telling us that we are simply not looking at a boom (e.g., no 4% GDP growth.)

-- Jack Krupansky

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

[Warning: I may suspend this weekly post in the near future, but I haven't decided for sure yet.]

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 "real" 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 August or September. 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 August or September 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 the 1.3% Q1 GDP number has frightened so many people (and emboldened so many bears and cynics) that the Fed may simply wait until the Q2 GDP number "prints" in late July before seriously considering a rate hike in August.

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 up at $64.94 (up from $62.37 a week ago), 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 $2.4077 last week (up from $2.3521 a week ago) indicates an equilibrium retail level of $3.00 to $3.05, 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 June even though $50 is what they would really like to see. If crude is $60 or higher in June, the Fed will have a higher probability of a hike to 5.50% in August or September. 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 have been desperately funneling money into bond funds in response to an expectation of well below-par economic growth, and this has depressed Treasury yields and caused 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:

• June 27/28, 2007: 4% chance of a cut -- effectively zero chance
• August 7, 2007: 14% chance of a cut -- effectively zero chance, but people are a bit confused and uncertain
• September 18, 2007: 24% chance of a cut -- people are confused and uncertain, but a cut is still unlikely 
• October 30/31, 2007: 36% chance of a cut -- people are confused and uncertain, but a cut is still unlikely
• December 11, 2007: 56% chance of a cut -- flip a coin with a bias towards a cut, plenty of uncertainty and confusion
• January 2008: 82% chance of a cut
• March 2008: 100% chance of a cut and 6% chance of a second cut
• May 2008: 100% chance of a cut and 22% chance of a second cut

The June FOMC meeting is now barely (at 41 days) within the 45-day window of reliability for fed funds futures to predict Fed action, so it is getting close to being a high-probability indicator of the degree of certainty that the Fed will not change the fed funds target rate at the June FOMC meeting. It is too soon for fed funds futures to reliably predict rates for the August or September FOMC meetings. A lot can and will transpire during the run-up to the June and August 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 August.

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 May 4, 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. At least they are now admitting that "A first rate cut in June seems less likely now" and that "The tentative signs of a growth revival put into question our aggressive Fed call, both in terms of timing and scope." They conclude that "For now, we are waiting for more growth data before reassessing our call." It sounds to me that their commitment to their "call" is rapidly crumbling and that they themselves are on the verge of admitting that they are clueless.

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 October, 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 5.02% as of 5/19/2007

[Warning: I may suspend this weekly post in the near future, but I haven't decided for sure yet.]

Here are some recent money market mutual fund yields as of Saturday, May 19, 2007:

• iMoneyNet average taxable money market fund 7-day yield remains at 4.71%
• PayPal Money Market Fund 7-day yield remains at 5.02%
• ShareBuilder money market fund (BDMXX) 7-day yield remains at 4.47%
• 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 4.96% to 4.97%
• 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 fell from 3.54% to 3.52% or tax equivalent yield of 5.42% (down from 5.45%) for the 35% marginal tax bracket and 4.89% (down from 4.92%) for the 28% marginal tax bracket -- this may be the best rate that most of us can get for "core cash" in a checking-style account
• Fidelity Tax-Free Money Market fund (FMOXX) 7-day yield remains at 3.48% or tax equivalent yield of 5.35% (unchanged) for the 35% marginal tax bracket and 4.83% (unchanged) for the 28% marginal tax bracket
• 4-week (1-month) T-bill investment rate rose from 4.73% to 4.76%
• 13-week (3-month) T-bill investment rate fell from 4.90% to 4.87%
• 26-week (6-month) T-bill investment rate fell from 5.02% to 4.93%
• Treasury I Bond composite earnings rate (semiannual compounded annually) for new I Bonds is 3.74% (down from 4.52%), with a fixed rate of 1.30% (down from 1.40%) and a semiannual inflation rate of 1.21% (down from 1.55%) -- updated May 1, 2007, next semiannual update on November 1, 2007
• Schwab Bank Investor Checking APY remains at 4.25%
• Schwab Value Advantage Money Fund (SWVXX) 7-day yield remains at 4.91%
• Schwab Investor Money Fund (SW2XX) 7-day yield rose from 4.73% to 4.74%
• Charles Schwab 3-month CD APY fell from 5.11% to 5.10%
• Charles Schwab 6-month CD APY rose from 5.06% to 5.11%
• Charles Schwab 1-year CD APY rose from 5.06% to 5.12%
• NetBank 6-month CD APY remains at 5.30%
• NetBank 1-year CD APY remains at 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 5.02% is equivalent to a bank APY of 5.14%.

4-week T-bills remain rather less 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 June or August. My current thinking is that although I can get a moderate increment of yield from a CD (e.g., from NetBank), the additional hassles don't seem worth the effort compared to the simplicity and flexibility I get with PayPal and Fidelity FDRXX.

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

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) rose slightly (+0.06% vs. +0.20% last week) and the six-month smoothed growth rate rose moderately sharply (to +6.1% vs. +5.2% ), and is now moderately 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 28 consecutive weeks. We haven't finished the soft landing yet, but we are in great shape, despite the weakness in the housing sector, the misleadingly low GDP report for Q1, and the feverish hand-wringing of the pundits.

The WLI is now 41 weeks past its summer low and the six-month smoothed growth rate is now 38 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

One-year anniversary of my ShareBuilder monthly investment plan

This past week I completed the first year of my small monthly dollar-cost averaging investment plan with ShareBuilder which has been investing a small monthly amount 100% in Microsoft stock on the second Tuesday of each month. Is has actually done reasonably well for a "dead" stock. Now, I am contemplating whether to continue this small plan since I am now rather top-heavy with Microsoft stock and accumulating more on a regular basis with my 401k plan (every two weeks) and employee stock purchase plan (every three months.)

My default choice will be to continue the plan since I do like the fact that it mindlessly accumulates "wealth" and gives me at least a modest sense of discipline.

One alternative is to switch to another stock or maybe an index fund. Personally, I do not have the time or interest in researching the fundamentals of companies or sectors.

Another alternative is to suspend my Sharebuilder plan and simply raise my Roth 401k contribution rate since the stock appreciation and dividends would then accumulate tax-free. The advantage of my Sharebuilder plan is that I can sell the stock any time and use the proceeds immediately. A year ago this was a high priority for me since I had a virtually empty rainy-day contingency fund. Today, since I now have a fully-funded rainy-day contingency fund, I simply don't need that extra flexibility that the Sharebuilder investment provides. Besides, I know have a substantial amount of stock from my ESPP plan which I can sell, if needed.

A minor consideration is that if I suspend the plan, I can use the money in June and July to make up for a modest budget shortfall, or to fund my next trip to New York City. On the other hand, I do hate the thought of abandoning a disciplined investment mechanism simply to fund expenses. Yes, this is an option, but not high on my priority list.

I am tempted to shift this investment plan to my 401k Roth plan, if for no other reason than to simplify my investment activities. Also, there is a $4 monthly fee for each Sharebuilder investment, so I would clearly be earning more for the same amount of money.

The Sharebuilder plan was a great idea a year ago and even six months ago, and I would certainly recommend it to others, but my financial situation has significantly changed over the past year, so my plans should adapt to my current situation.

Still, I haven't decided what to do yet.

-- Jack Krupansky