Commercial paper vs. repurchase agreements in money market funds

I have noticed that the commercial paper (CP) outstanding has been creeping down in recent weeks even as money market fund deposits soar (although nonfinancial CP is creeping up)... could this mean that repurchase agreements (actually, they are reverse repurchase agreements, known as "repos") are becoming more attractive to money market fund managers? Do they tend to pay higher rates than CP? I do suppose that reverse repurchase agreements do allow banks to gain liquidity without dumping more of their "hard to value" assets. A typical repurchase agreement would cover a mortgage-backed security or CDO or corporate loan with an agreement by the bank to repurchase the asset within a short period of time. Money market funds have traditionally bulked up on large amounts of commercial paper, but after the SIV scandals they pulled back a bit. And with treasury bill yields as low as they are, fund managers have to do something to get decent returns. Repos actually seem like an ideal fit for both the banks with capital tied up in illiquid assets and money market funds searching for yield.

I haven't seen any press coverage of this angle on money market fund investment yet, in particular an evaluation of risk and what range of assets banks are repo'ing to money market funds. I am curious whether a repo is considered more or less risky than CP. After all, isn't a repo virtually the same as the CP used for SIVs, with the only different that the backing asset is now on the bank balance sheet and that the bank is now assuming that the asset will not be offloaded in the near future?

Personally I do not feel that there is any significant risk with repos, but these days, who knows.

Of course, it is possible that the pullback in CP was simply less buying by money market funds in anticipation of withdrawals for payment of taxes for April 15. But, I would expect that to be reflected in the normal seasonal adjustment.

-- Jack Krupansky

Commercial paper market modestly pulling back

The commercial paper (CP) market does appear to be modestly pulling back in the past few weeks, although it is still roughly in its recent range of $1.75 trillion to $1.90 trillion outstanding, . Nonfinancial CP has continued to rise lately, but financial and asset-backed CP have pulled back a bit. Not by a lot, and it may simply be temporarily retreating to the bottom of the recent range, but it is noticeable. Total CP outstanding was $1.79 trillion last week vs. $1.81 trillion the prior week.

Whether this modest pullack is temporary or a trend will be a bit more clear once we have another month of weekly data.

Actually, all three categories of CP did in fact rise last week but financial and asset-backed showed a decline after the seasonal adjustment was applied. After all of the turmoil of the past nine months and the dramatically different levels compared to a year ago, I am not very confident that anybody knows what seasonal adjustments make sense anymore.

Commercial paper is an important source of short-term credit for businesses that have short-term funding needs. A significant fraction of CP is funded by money market funds. Commercial paper is commonly issued in durations of 1 day, 7 days, 15 days, 30 days, 60 days, and 90 days. It is considered fairly low risk, commanding interest rates in the 1.91% to 3.28% range, giving businesses a fairly economical source of short-term funding for short-term business needs.

-- Jack Krupansky

Price of a good steak

I am debating whether to treat myself to a steak for dinner. I have been fairly good about resisting my old habit (I used to eat at the Palm steak house every Sunday evening in Washington, D.C.), but since I may not be staying in the area for more than the next month, I figure I should enjoy living here just a little bit. My preference here in downtown Bellevue is Daniel's Broiler. I do walk past the local Ruth's Chris Steak House, and check the prices when I do. Very interesting. They raised the price for a New York strip steak back in February 2007 to $41, but did not raise it this year. I am sure their costs went up, but I suspect that they also realize that there is resistance from consumers to spend more than $41 on a steak, no matter how good it is. Daniel's has a fairly upscale clientele that is less price-sensitive, so they can get away with charging $43 for a New York strip steak. Ouch. So expensive, but so good.

Actually, I can save a few bucks and get a nice rib-eye steak. Hmmm... maybe I can use the "savings" as an excuse to justify the expense.

The $64 question is whether higher commodities and food prices will continue to push up the price of a godd steak, or whether consumer resistance will reduce demand and the law of supply and demand will keep prices in check, in a relative sense.

-- Jack Krupansky

Financial stocks and bonds and FBALX

There is a lot of inconclusive debate these days over the price and value of financial stocks and bonds. Some people think they have "bottomed" and others believe that the mortgage mess and credit crunch and write-offs are doomed to get much worse. In truth, I do not know where these stocks and bonds sit today and what moves they are poised to make. I bring this up because I am thinking about starting to put some money in a balanced fund such as Fidelity Balanced Fund (FBALX), but I see that their largest sector investment is financials at 13.2%. Top 10 holdings include bonds from Ginnie Mae and Fannie Mae and stocks of JPMorgan Chase and Bank of America, but these holdings may have already shifted since they are as of march 31, 2008, almost a month ago. My personal feeling is that these stocks and bonds are likely to rebound, especially for the long term. Even if financials have not completely bottomed, they are currently at a sufficient discount after the weakness of the last nine months to reduce their risk substantially.

OTOH, the whole point of picking a balanced fund as my no-brainer investment is that I would not focus on this level of detail. Still, since I have not settled on this appraoch yet, a little bit of due diligence is still appropriate.

Personally, I have great confidence in Fannie Mae (and Freddie Mac) for the long run, and I think JPMorgan Chase is a solid company for the long run as well.

The yellow flag here is that financials did so poorly over the past nine months and helped to drag down FBALX, -7.29% year-to-date, -8.67 over six months, and -1.99 over one year, as of March 31, 2008. Actual YTD is -2.13% and it is -11.4% off its peak last October. OTOH, I am looking to buy after that adjustment occurred, so it feels as if I am getting a better deal, but there has also been a rebound since the big drop.

I would say that this yellow flag is not a deal-breaker for me or even for me to recommend this fund to others, but I do want to make sure that I have rock-solid confidence in this fund.

I see that Morningstar says "This mutual fund is a solid but not a distinctive option." I do not have a premium account, so I cannot read the full Morningstar analyst report, but the overall Morningstar rating is a full five stars.

I am thinking of setting up an investment in FBALX using the Fidelity Automatic Account Builder which would add a modest amount ($100 to $250) each month on an automated schedule.

-- Jack Krupansky

What really defines the middle class these days?

During this presidential primary season, it is clear that the Democrats consider an income of $250,000 as marking the upper end of being "middle class." That seems high, but maybe it is not. I would have said something in the $85,000 to $150,000 range or say $100,000 or $125,000 to pick a single number. I suppose it depends on how you characterize the quality of life that comes with being middle class. Does it mean that you can afford to send three kids to "some" college, or send all three to the top ivy league universities?

To me, being middle class is more a matter of a sense of security than what you can technically afford. By my definition, very few people have truly secure streams of income. So many people who may have incomes above $100,000 today may be one pink slip away from falling a dozen rungs down the ladder.

I think we do need to distinguish at least lower-middle, middle-middle, and upper middle class. Sure, a couple of attorneys or professors might well be "struggling" on $200,000 per year, but that is an entirely different "class" of struggle than a household with an income of $35,000 and three kids. And each of these tiers probably has three sub-tiers. I would suggest that the middle-middle class ranges from $50,000 to $100,000, with some clear distinctions in lifestyle and choices between the $50,000 to $65, 000 range, the $65,000 to $85,000 range, and the $85,000 to $100,000 range. I freely admit that some people would insist that the $85,000 to $100,000 range should be considered upper-middle class.

Now, the question becomes whether the upper-middle class extends only from $100,000 to $125,000, to $150,000, to $175,000, to $200,000, to $225,000, to $250,000, or even beyond.

If we read the Wikipedia article on middle class, we find that the defining characteristics are no income or spending per se, but degree of economic independence and degree of social influence and power. The lower class has no economic independence and no social influence or power. The upper class has both economic independence and social influence and power. The middle class has a degree of economic independence but not a great deal of social influence or power.

I would draw the line between middle class and upper class as whether a household has to spend most (more than 75%) of its energy focusing on maintaining economic independence. If the household income is high enough, the household can spend most (more than 75%) of its energy either on other pursuits such as charity, social causes, etc. or pursuing additional income not because it is needed for economic independence but simply for the satisfaction or power that comes with it.

My 75% threshold is arbitrary. It could be 80% or 90% or 60% or even 50%. I would note that even households with very modest incomes manage to squeeze in some amount of non-economic social efforts such as volunteering, church, youth activities, charities, social organizations, etc. The issue is whether the household income is sufficient so that the household can choose to reduce income in favor of non-economic activities without feeling any significant financial pinch.

One could take the approach of defining upper class as a household than absolutely does not need to work to maintain its economic independence. So-called "trust babies" would fit this bill.

OTOH, there are plenty of households which have very high incomes but do not have the wealth to support a middle-class life style solely on income from wealth and investments. They may in fact be on a path to the upper class, but they have not yet arrived. I have argued that you need $50 million to be comfortably wealthy. Maybe we need another category called working wealthy which covers households which are clearly capable of living the lifestyle of the upper class, but only because they are working a very-high-paying jobs.

So, I am torn here by using the criteria of not needing to work for upper class while households with very-high incomes of $500,000 or more clearly do not have the same issues as the true middle class (e.g., whether they can afford to send their kids to top-tier universities or even private schools).

For now, I am going to suggest that my working wealthy should in fact be categorized as upper class.

Alas, that still does not finish the job. What about households earning between $150,000 and $500,000? Where do you draw the line? $250,000 seems rather arbitrary. I will suggest that the primary criteria is the extent to which the household shares the common middle class issues. I suggest that you are no longer even upper-middle class if you meet at least a few of these criteria:

• You can afford to send your kinds to private school
• You can afford to send three kids to top-tier universities without any financial strain
• You never worry about the cost of health care
• You can afford to own or at least rent a yacht
• You can afford to give each of your kids a high-end automobile
• You live comfortably enough on a single income that having significantly higher income from a second income in the household is not a significant incentive to do so

It is possible for investment bankers and hedge fund managers and high-end attorneys and doctors and professors to reach those levels of income that allow them to live a lifestyle comparable to those who are truly wealthy, but an average attorney or professor could well fail to meet more than one or two of my criteria for being working wealthy and hence on the bottom rungs of the upper class.

So, if we have a household with two attorneys or two professors earning over $150,000, the question is whether they really do need most of that income to maintain basic economic independence. There is a vast gray area since obviously they may "need" the income to afford a summer house and two high-end automobiles, but maybe they could live just as comfortably with a more modest summer cottage and mid-range automobiles. The extent to which they can freely choose to spend money on high-end luxuries gradually begins to phase the household from middle class to upper class. If they can only afford the luxuries with two earners, that says that maybe they are still middle class, but that they may simply be straddling the fence between middle class struggling to make ends meet for non-luxuries and upper class "struggling" to decide which luxuries to choose from.

In the end, I think it all comes down to degree of choice that a household feels that it has. The threshold for entering the middle class is that you have sufficient income to afford what a person with common sense would consider basic necessities for a modern household, such as not worrying how to pay for food, access to basic health care, can afford basic amenities such as cable TV, Internet access, annual vacation, etc. I would define the upper class as having the flexibility to take on a fair amount of non-financial activities without putting their financial independence at risk.

I am tempted to define yet another category that is not clearly middle class or upper class or even working wealthy. I will call it the working near-wealthy, where the households are clearly spending a lot of money on luxuries or other discretionary expenses or charities but not quite to the level of a truly wealthy household, and maybe they are only able to support this level of near-wealth by having two incomes.

Now the question becomes whether the working near-wealthy are in fact the highest rung of the middle class or the lowest rung of the upper class. Maybe they are in fact both, depending on the context of the question. I am tempted to define the working near-wealthy as the range $150,000 to $350,000. I do not think a household earning $125,000 would be considered "wealthy" by almost any metric and I think that a household earning close to $400,000 would clearly be considered in the working wealthy category. Again, these numbers are quite rough and arbitrary. It so happens that the midpoint of my working near-wealthy range is $250,000. That seems like a good compromise.

After all of this, I am still not sure where to draw the line between middle class and upper class, or between middle class and the working wealthy, other than that it is somewhere between $150,000 and $350,000. OTOH, this issue has only come up in the context of government tax policy. The issue seems to be that the lower tiers of the working wealthy, the working near-wealthy, very much resent being treated as if they were the same as those several rungs higher on the ladder. And the people at those higher rungs still have enough of a "work" mentality that they are happy to keep a few more of their bucks all because politicians want to salve the resentments of the lower rungs of the working wealthy (the working near-wealthy.)

The Democrats seem to understand the economics here and are using it as a wedge issue to separate the lower rungs of the working wealthy from the upper rungs. Giving a tax preference to those people earning $100,000 to $250,000 quiets most of the more intense resentment and assures that the Democrats can count on the support of those upper-middle class voters. Besides, those earning $100,000 to $250,000 are ideally positioned to make substantial campaign contributions. The "calculus" suggests that the number of people earning more than $250,000 is small enough to simply write them off and let them "go Republican."

Incidentally, $175,000 is the household threshold for the fiscal stimulus payments that are going out starting on Monday.

In short, I do not personally think that a household earning $150,000 to $250,000 is necessarily properly considered middle class or even upper middle class, but I can understand why the Democrats are targeting such households and labeling them as middle class.

-- Jack Krupansky

How will people play MSFT after the fall?

It will be interesting to see how people play Microsoft now that the quarterly report and initial reaction are out of the way. The stock did fall sharply on Friday (-6.19%) in part due to disappointment that there was no "blowout" surprise and modest disappointment over a modest revenue shortfall and mixed outlook for the current quarter, but I would note that the stock ended only 19 cents lower than the open for the day. That strongly suggests a knee-jerk reaction by traders and short-term speculators. I have not run across any serious analyst or money manager commentary to suggest a sea-change of negative sentiment on Microsoft.

Ultimately, the $64 billion question is whether money managers will contemplate moving out of the stock now that they have had a weekend to contemplate all of the details and ramifications of the quarterly report and outlook from Thursday. I suspect not, but we will see. Traders and short-term speculators can push a stock around wildly in the short run, but it is the actions of longer-term money managers as well as the overall market and overall outlook going forward which determine the stock price trend going forward beyond the short run.

It is possible that the stock could settle a bit more before bouncing.

It is also possible that the stock could bounce within the next couple of days due to short covering, and then dip again before giving a more durable bounce in the coming weeks.

-- Jack Krupansky

Economic excitement this coming week

This will be a very exciting week coming up on the economic front. Monday the initial batch of economic stimulus checks will be "in the mail." Wednesday we get the first, "advance" report on Q1 GDP, and the Federal Reserve FOMC is expected to make no more than a quarter-point cut in its federal funds target rate. Thursday we get the ISM Manufacturing report, personal income and spending for March, and construction spending for March. Friday we get the employment report for March. That is a lot of information for March, so this is a rear-view look at the economy and will not tell us a lot about April, let alone the outlook for May and beyond. The ISM report is for April, but more about early April.

The most recent forecast from Macroeconomic Advisers (MA) is for Q1 real GDP growth of +0.4%. The actual "advance" official report could be somewhat above or below that forecast simply because we do not have all of the economic data for March yet. this "advance" report will be refined into a "preliminary" report at the end of May and then at the end of June we will finally get the "final" report for Q1 GDP. Macroeconomic Advisers has issued their estimate for monthly GDP in February, but they won't have an estimate for March until the middle of May.

If we really are in a recession, the employment report on Friday would show a payroll job loss north of 200,000. If we get a loss less than 150,000, I would conclude that we are still in a "slowdown" and near the "edge" of a recession rather than being in the middle of an outright recession.

I will offer no forecast of the actual economic impact of these stimulus checks, but I think they will have some (positive) psychological effect. We will simply have to wait and see if the economic numbers in late June start to show a pop for spending in May.

-- Jack Krupansky

Fidelity Balanced Fund as a no-brainer investment

I continue to think about ways to simplify management of my investment money. For my retirement money, I am experimenting with the Fidelity Freedom Fund 2025 (FFTWX), a so-called "life-cycle target-date fund" on the presumption that I will be retiring roughly around 2025. I might consider that fund for my taxable, non-retirement money, but I am concerned about how tax-efficient a retirement-oriented fund might be in a non-retirement account. What I am really looking for is a no-brainer investment that may not give the best returns, but requires zero attention.

One of my criteria for low-maintenance investment is that I want something that can auto-balance as we go through market transitions so that I do not have to do that by hand. It occurred to me that balanced funds essentially do just that. That does cut into their returns in either a stock or bond "boom", but also reduces losses during a stock or bond "bust." Sure, you could do better yourself if you had the patience, discipline, attention, and time, but I want to identify an investment that "simply works" without me having to tinker with it. Sure, I will do my own tinkering with my higher-risk capital, but I want to build up a base of capital that is not high-risk and simply gives a decent appreciation with minimal effort on my part. That will allow me to focus much more of my attention on non-investment pursuits and any occasional high-risk investment activities I might choose to engage in, without putting my base investments at risk.

Fidelity has a balanced fund, Fidelity Balanced Fund (FBALX). It certainly has not done very well this year or over the past year, but that is not atypical and over the past ten years it has roughly doubled.

Forbes lists this fund as one of its Top 5 Best Buys for the Balanced Fund Category. They are:

1. Berwyn Income Fund
2. Fidelity Balanced Fund
3. Oakmark Equity & Income
4. Vanguard STAR Fund
5. Vanguard Wellington Fund-Inv

One or more of those funds may be "better" than Fidelity, but being No. 2 is not too shabby and I already do a lot of business with fidelity.

The Fidelity fund does not get a very good grade for a down market, but I am interested primarily for performance across all markets. In other words, total long-term return. What matters most to me is that after a down market they position themselves well for the rebound.

I do worry about tax consequences, especially since the fund by definition needs to periodically rebalance.

I am not making any decisions right now, but I am strongly leaning towards Fidelity Balanced Fund (FBALX) as my preferred choice as a no-brainer investment.

Another motive is that I want to be able to give people a recommendation for a best first choice when they are clueless but have some money that they want to invest.

I am also thinking about what style of investment would be most appropriate as we contemplate privatization of social security.

Even if we never do privatize social security, I am sure there will be incentives for personal contributions to retirement accounts, so the question is what the best default investment should be.

It feels to me that a balanced fund is likely to be the best way to go for a lot of these investment decisions.

-- Jack Krupansky

ECRI Weekly Leading Index indicator rises slightly but index remains deep in recession territory

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) rose slightly (+0.12% vs. +0.02% last week) and the six-month smoothed growth rate rose moderately (to -9.7 vs. -10.2 last week), but still well below the flat line, suggesting that the economy will be struggling in the months ahead.

According to ECRI, "WLI growth has recovered to an 11-week high, but remains deep in recession territory, therefore it is premature to forecast a business cycle recovery." I find the fact that "WLI growth has recovered to an 11-week high" at least a little promising.

The bottom line is that the ECRI WLI remains "flashing red." Alas, even the ECRI WLI is not a guaranteed, fool-proof economic indicator, especially when the data is mixed and there is a lot of stimulus as well as potential problems in the pipeline.

I will keep my personal assessment of the chance of recession to 75% based on the magnitude of the negative level of the WLI smoothed growth index, the ECRI assessment, and the fact that although the data remains mixed, it is strongly biased towards weakness. I am also refraining from going higher than 75% because there has not been enough time for all of the positive stimulus in the pipeline to have had an effect on the real economy and the depth of the declines are simply not deep enough to indicate that a recession is imminent. The economy still has a very modest chance of avoiding an outright recession, but only if the data continues to improve at an increasing pace.

I continue to be very tempted to lower my assessment to 70% since I think the recent data shows that the so-called recession is not worsening, but I'll give the data another week or two to show that this "nascent recovery" is in fact showing some spine.

I am still at least somewhat optimistic that the U.S. economy will escape a full-blown recession, but I do have to recognize what the data itself is signalling to me, as well as ECRI's assessment and recession "call." Incidentally, the Intrade Prediction Market rates the probability of a U.S. recession in 2008 at 70%, roughly inline with my own assessment, maybe a little better since a lot of people act out of a visceral reaction to whether the latest news sounds good or bad, not to mention how their stocks are doing.

I would note that in three weeks, less than half of the most recent 24 weeks of WLI data will be higher than the current level. That means that even if the WLI remains flat, within three months if not two months the very negative readings on the smoothed growth index will have risen to 0.0. Alas, that is more an artifact of how the smoothed growth rate is calculated than an indicator of economic strength. But, that rise cannot occur if the so-called recession "worsens." The smoothed growth rate rising to 0.0 presumes that the economy does not weaken further. I would also note that the WLI is above the level of a month ago. There are some promising signs here, but some mixed signals as well.

-- Jack Krupansky

Mixed quarterly report from Microsoft

An article on MarketWatch by John Letzing and Dan Gallagher entitled "Microsoft shares fall as core business weakens - Third-quarter results show weakness in Windows, Office franchises" is actually a fairly balanced summary of the quarterly results from Microsoft, although the headline does not completely match the actual story and actual results. The bottom line is that revenue was a little light, coming in at $14.45 billion, $120 million less than the $14.57 billion that analysts had forecast. Earnings were actually ahead of analyst estimates.

The only other significant piece of bad news was that guidance on earnings for the current quarter are somewhat below analyst estimates, at between 45 and 48 cents versus 48 cents for the analyst estimates. But, the revenue guidance of between $15.5 billion and $15.8 billion is actually modestly ahead of the analyst estimate of $15.5 billion. So, we have the classic mixed bag.

Other good news is that fiscal year 2009 guidance of revenue between $66.9 billion and $68 billion and earning between $2.13 and $2.19 a share. I believe that is a bit ahead of the analyst estimate.

Business is booming in emerging markets, but prices there tend to be somewhat lower and there is more piracy. The company admitted that they had a "setback" on the piracy front this quarter. Meanwhile, Microsoft is a little more sensitive to the overall U.S. macro economy and demand is a little lighter here in the U.S.

There is the Vista versus XP debate lurking in the background, which does put a little downwards pressure on results, but these latest results (a $120 million revenue shortfall) do not indicate a major problem, and it is more of a short-term issue anyway.

As far as so-called weakness in the Office franchise, the article actually explains that Microsoft's business division is actually doing better, once you remove an accounting adjustment from a year ago:

Microsoft's business division, which includes its Office software suite, also saw revenue fall in the quarter, to $4.75 billion from $4.83 billion. Taking the deferral from the year-earlier period into account, though, the business division actually saw 9% revenue growth.

Everybody focuses on their favorite subset of numbers. Short-term traders and speculators will do what they always do. Given that they pushed Microsoft up sharply over the past week, the decline today looks like a classic "Buy the rumor, sell the news." A hint of negative news only accelerated that movement. One analyst suggested that people were expecting a "blowout" after Intel, so merely having a decent report was simply not good enough.

The $64 billion question now is how true investors (e.g., mutual fund managers) view the results and whether they are inclined to retain or lighten their holdings. It will take a couple of weeks to filter out the short-term "action" from longer-term fund positioning.

-- Jack Krupansky

Fed almost done cutting rates

Federal funds futures are now indicating a 100% probability that the Federal Reserve FOMC will not make more than a single quarter-point cut at the next FOMC meeting at the end of this month, a high probability (80%) that the Fed will make a single quarter-point cut, a high probability (96% chance) of no additional cuts this year, and a reasonably high probability (70%) chance of a quarter-point hike (after the cut next Wednesday) by the end of the year.

In short, the futures market is indicating that the Fed will almost certainly make one last small "insurance" and confidence cut on Wednesday, and that people are expecting that May will be the start of a turnaround for the economy.

-- Jack Krupansky

Mostly good news on the unemployment claims front

The news was mostly good from the weekly unemployment insurance initial claims report. Initial claims were down, the more-reliable 4-week moving average was down, and continuing claims were down. The only bad news was the the 4-week moving average of continuing claims continues to rise.

The 4-week moving average of initial claims is sitting at 369,500, which is somewhat elevated (compared to 324,000 a year ago), but still moderately belong the 400,000 threshold traditionally associated with a full-blown recession.

Continuing claims remain elevated, flirting with the 3 million, 442,000 higher than a year ago.

The insured unemployment rate remains stable at 2.2%, up from 1.9% a year ago.

So, unemployment insurance claims are flashing yellow, but there is nothing here to indicate that we in the middle of a full-blown recession.

In short, the elevated level of initial claims suggest that we may be near the edge of a recession, but you will have to look elsewhere if you want evidence that we are in a full-blown recession rather than merely a slowdown or soft patch.

-- Jack Krupansky

Mixed data for existing home sales

Although the headline numbers were disappointing, there were some bright spots in the Existing Home Sales report for March. Although sales were down -19.3 from a year ago and -2.0 from February, actual sales were up +19.9% over February once you strip out the seasonal adjustment. So, there is interest in buying houses, but it is not as strong as a year ago. Also, even with the seasonal adjustment, there was a +2.2 increase in sales for both the Northeast and the West. So, we are seeing unevenness, but not across-the-board weakness.

Although the headline story highlights a -7.7% decline in prices over a year ago, that overlooks the fact that prices are up +2.6% from February and up for both seasonally adjusted and unadjusted prices. Prices were down only in the West. In fact, prices in the Northeast are now higher than any time since last July.

Sales and prices in the West are quite weak, possibly because there are still a lot of houses priced well above even the raised limits for Fannie Mae and Freddie Mac.

In short, the housing sector is still a relative mess, but it is showing at least a hint of a possible recovery.

-- Jack Krupansky

 

Impact of commodities speculation on farming and food prices

An article in the New York Times by Diana Henriques entitled "Price Volatility Adds to Worry on U.S. Farms" provides a little insight into the impact of commodities speculation on farming and food prices, but really only scratches the surface. It does note that:

Prices of broad commodity indexes have climbed as much as 40 percent in the last year and grain prices have gained even more -- about 65 percent for corn, 91 percent for soybeans and more than 100 percent for some types of wheat. This price boom has attracted a torrent of new investment from Wall Street, estimated to be as much as $300 billion.

Whether new investors are causing the market's problems or keeping them from getting worse is in dispute. But there is no question that the grain markets are now experiencing levels of volatility that are running well above the average levels over the last quarter-century.

Mr. Grieder's crop insurance premiums rise with the volatility. So does the cost of trading in options, which is the financial tool he has used to hedge against falling prices. Some grain elevators are coping with the volatility and hedging problems by refusing to buy crops in advance, foreclosing the most common way farmers lock in prices.

"The system is really beginning to break down," Mr. Grieder said. "When you see elevators start pulling their bids for your crop, that tells me we've got a real problem."

...

... David D. Lehman, director of commodity research and product development for the C.B.O.T.'s owner, the CME Group ...

Many farmers and people in related businesses blame the tidal wave of investment pouring in from hedge funds, pension funds and index funds for the faulty futures contracts and rising volatility. But those institutional investors' money actually adds liquidity to the market, which in theory should reduce price volatility, Mr. Lehman noted.

First, we need to be clear that this so-called "investment" by Wall Street is absolutely 100% in the form of speculation.

Farmers and food producers need the futures trading system to smooth price fluctuation. So-called "investment" by Wall Street is only increasing the level of price volatility. And, because food producers need to use futures to smooth price fluctuations on their side of the table, the higher prices of futures contracts and options for hedging translates directly into higher input costs for food production.

The theory that the addition of liquidity will reduce volatility is fine on paper, but in practice is completely bogus. Hedge funds are trying to time the market, pouring money in one day when betting on bullish market moves and pulling money out on another day when they want to bet on a short-term market decline. The theory would be fine if the rise in liquidity was steady or always increasing, but the sudden and sharp swings in liquidity can only increase volatility.

This is another great example of how the media sometimes gets the story half right and then simply loses the thread and fails to see the full picture.

In any case, at least they gave us a hint of where the truth might lie.

-- Jack Krupansky

 

Private equity to the rescue

Just a couple of months ago people were talking as if private equity was dead. Sure, that was and is true for heavily leveraged deals, but private equity comes in a lot of flavors and private equity firms still have many billions of dollars of unleveraged cash sitting idle and ready to be put into action. We are starting to see some action lately. For example, a piece in MarketWatch by Alistair Barr entitled "National City, WaMu get private-equity cash" highlights a couple of the recent private equity deals.

We will be seeing more private equity deals in the weeks and months ahead. The appeal to companies is a ready supply of relatively cheap cash. The appeal to the private equity firms is that they are buying stock at fire-sale prices and on terms that give them some amount of control over the restructuring of the businesses.

The good news for the rest of us is that these cash infusions are helping to stabilize a number of financial institutions and at rational prices and without government intervention.

There is probably still quite a distance to go before we get Humpty Dumpty put back toegther again, but at least we are making decent progress.

-- Jack Krupansky

 

Why I never buy a computer from Dell

I have never purchased a computer from Dell (although I did buy my Sony Clie PDA from them.) I have no general animosity towards them, but I seriously object to their sleasy price promotion. Just now I saw a display ad for a $499 notebook PC, but by the time you customize the default configuration to make it reasonably usable for mid-range computing tasks, the price jumped to over $1,400. Well, maybe it really didn't need some of those additions, so maybe the price would only jump to $1,200. Still, that is a very serious gap between promotion and reality.

I go over to ToshibaDirect.com and start at $783 and end up at about the same price. Toshiba used to be even better at giving realistic configurations up front, but competition with Dell has led them to stoop to similar sales tactics, although as not extreme and the starting configuration tends to be much more reasonable.

Toshiba does still do a fair amount of up-front promotion of very reasonable configurations that do not require massive Dell-like customization to make them reasonable. For example, the Satellite A305-S6845 for $1,250. It does not have Ultimate, but does come with 3GB of memory and a 200GB disk.

The key things that push the price up for me is to get to Vista Ultimate and to get a processor that is a reasonable leap forward from my current mid-range Toshiba notebook PC which will be three years old in June.

I am disappointed that disk and screen technology are not significantly better than my current machine.

I am not actually looking to buy a new machine just yet. I would like to spend my money on moving to New York City in a month or two and maybe get at least another six months if not a year out of my current machine.

If you want to know what my computer looks like, see the new movie 88 which is actually set in Seattle. There is a scene where the FBI agent is using his computer. It has a blue ("Peacock Blue") lid that says Toshiba. That's the same as my machine.

-- Jack Krupansky

Fed may be almost done cutting rates

Federal funds futures are now indicating a high probability (96% chance) that the Federal Reserve FOMC will make only a single quarter-point cut at the next FOMC meeting at the end of this month, and a high probability (82% chance) of no additional cuts this year, and a coin-flip (56%) chance of a quarter-point hike (after the April cut) by the end of the year.

In short, the futures market is suggesting that the Fed is likely to make one last small "insurance" and confidence cut this month, and then people are expecting that May will be the start of a turnaround for the economy.

-- Jack Krupansky

Intrade indicates only a 60% chance of a recession this year

The Intrade Prediction Market is now indicating only a 60% chance of a recession in the U.S. economy in 2008.

I am very tempted to lower my own assessment from a 75% chance, but I would like to see the data firm up a little or at least not worsen dramatically over the next few weeks.

-- Jack Krupansky

Shrinking size of the auction-rate securities (ARS) problem

According to a Bloomberg article by Jeremy R. Cooke entitled "Auction-Rate Market Shrinks by 18% Amid State Probes" the amount of outstanding auction-rate securities (ARS) has declined by about $59 billion or 18% since January:

At least $58.9 billion, or 18 percent of the securities outstanding in January, have been redeemed or will be converted by states, cities, hospitals and closed-end mutual-funds, data compiled by Bloomberg show.

...

Borrowers are replacing bonds whose yields are set through periodic auctions after the market's collapse raised taxpayers' debt costs to as high as 20 percent, kept investors from selling their holdings...

More than 60 percent of the thousands of auctions conducted each month have failed since Feb. 13, data compiled by Bloomberg show. The average rate on seven-day municipal auctions soared to 6.89 percent Feb. 20 from 3.63 percent a month earlier, according to the Securities Industry and Financial Markets Association. The rate fell to 4.62 percent as of April 16, the lowest in 10 weeks, the latest data show.

...

Borrowers have converted or plan to replace at least $48.3 billion of municipal auction debt by the end of next month, according to disclosure notices received by Bloomberg. BlackRock and nine other fund managers said they plan to redeem at least $10.6 billion in taxable and tax-exempt preferred auction shares, whose rates also change through dealer-run bidding.

There is still a long way to go, but at least there is some visible progress on resolving the auction-rate securities fiasco.

I also read in a Q&A session with Warren Buffett published by Fortune Magazine  entitled "What Warren thinks..." that he is getting involved in cleaning up the mess:

In the past seven or eight or nine weeks, Berkshire has built up a position in auction-rate securities of about $4 billion.

-- Jack Krupansky

Warren Buffett

Fortune Magazine published an interesting Q&A session within Warren Buffer entitled "What Warren thinks... - With Wall Street in chaos, Fortune naturally went to Omaha looking for wisdom. Warren Buffett talks about the economy, the credit crisis, Bear Stearns, and more." As far as advice for small individual investors, about all he has to say is:

What advice would you give to someone who is not a professional investor? Where should they put their money?

Well, if they're not going to be an active investor - and very few should try to do that - then they should just stay with index funds. Any low-cost index fund. And they should buy it over time. They're not going to be able to pick the right price and the right time. What they want to do is avoid the wrong price and wrong stock. You just make sure you own a piece of American business, and you don't buy all at one time.

...

What should we say to investors now?

The answer is you don't want investors to think that what they read today is important in terms of their investment strategy. Their investment strategy should factor in that (a) if you knew what was going to happen in the economy, you still wouldn't necessarily know what was going to happen in the stock market. And (b) they can't pick stocks that are better than average. Stocks are a good thing to own over time. There's only two things you can do wrong: You can buy the wrong ones, and you can buy or sell them at the wrong time. And the truth is you never need to sell them, basically. But they could buy a cross section of American industry, and if a cross section of American industry doesn't work, certainly trying to pick the little beauties here and there isn't going to work either. Then they just have to worry about getting greedy. You know, I always say you should get greedy when others are fearful and fearful when others are greedy. But that's too much to expect. Of course, you shouldn't get greedy when others get greedy and fearful when others get fearful. At a minimum, try to stay away from that.

By your rule, now seems like a good time to be greedy. People are pretty fearful.

You're right. They are going in that direction. That's why stocks are cheaper. Stocks are a better buy today than they were a year ago. Or three years ago.

Sounds simple enough, but it also feels so bland and unexciting. OTOH, people who have experienced significant stock market losses are standing in line for a helping of anything more in the line of bland and a lot less like the excitement of a disabled plane accelerating for the ground.

I think it would have been a bit more helpful if he had simply came out and said dollar-cost averaging and asset allocation model and rebalancing. Oh well.

-- Jack Krupansky

Was the recession caused by the war in Iraq?

I am sure that the ongoing war in Iraq does drag the domestic U.S. economy to some extent, but MoveOn.org is now peddling the theory that the war in Iraq is the primary cause of our current economic weakness, the so-called "recession." I am not convinced. Their "evidence" is a poll that shows that a majority of Americans believe that Iraq and recession are "linked." Granted, there may be some correlation, but correlation is not the same as causality. An email from MoveOn today informs us that:

I'm looking at an amazing new poll.

We commissioned it earlier this year. It shows that voters in all 50 states see a link between the war and our sinking economy. Folks across the country think getting out of Iraq is one of the best ways to help fix our deepening economic crisis.

This message is political dynamite. If the link between Iraq war spending and the recession was in the headlines, John McCain and other pro-war politicians wouldn't get away with their endless war strategy.

We've got to spread the word -- so we're ramping up a massive "Iraq/Recession" campaign to get the message out that the war is standing in the way of economic recovery. We'll use ads, bird-dogging, local press conferences from coast to coast, and a host of other methods to make the point. Will you become an "Iraq/Recession" monthly donor so we can run this critical campaign? Click here to chip in:

https://pol.moveon.org/donate/od0408m.html?id=12472-3947155-_N2qrl&t=3

Our first step will be to release this new poll next week in hundreds of communities around the country, with the local media looking on. We'll follow that up with a media campaign on the tradeoffs between war and economic progress -- and then a bird-dogging campaign aimed at both Senator McCain and Republican Senate candidates. Everywhere these candidates go, we'll make sure it's clear that their most important economic policy is to keep dumping billions every year into Iraq's unwinnable war.

The ironic thing is that in a normal economy such deficit spending on an expensive war would crowd out other demands for capital, but right now as a result of a loss of confidence in commercial debt, there is incredible, almost insatiable demand for U.S. government debt. Very low yields on government debt are not a sign of the government crowding out competing demand for credit. The most recent 3-month T-bill auction came in at a very skimpy yield of only 1.08%. What this really says is that even the high rate of expenses on the war in Iraq are easily being met by the excess of cash sloshing around in our financial system. Of course this cannot go on forever, but right now it is not at all clear that the expenditures on Iraq are dragging down the U.S. economy, regardless of what opinion polls seem to say.

I am sure that in the coming weeks and months we will hear a lot more of this MoveOn Iraq/Recession campaign, but it is mostly about politics rather than economics.

I am all in favor of getting out of Iraq, but it will not result in some miracle cure for the economy. Besides, it probably won't be until late 2009 or early 2010 when we seel war expenditures begin to fall back to earth. Even then, there will be significant follow-on expenditures simply to repair and replace so much of the equipment that has been worn down in Iraq.

-- Jack Krupansky

Auction-rate securities (ARS) as Roach Motels - You can check in but never leave

Al Lewis of The Denver Post has a nice blog post on auction-rate securities (ARS) entitled "Roach Motel of investing." He tells the stories of a couple of investors:

... a TD Ameritrade employee told him the money market wasn't paying well so why not invest in auction-rate securities?

That seems to be a common theme for how customers get sucked in: "the money market wasn't paying well."

Al continues:

"I called the bond desk at TD Ameritrade," Cohen said, "and the guy there said, 'You can get in, but I'm not quite sure you can get out.' I said, 'What do you mean I can't out?' He said: 'Yeah, you can't get out. There are no more auctions. The auctions failed.' "

Who would have believed that Wall Street could sink this low?

-- Jack Krupansky

Auction-rate securities (ARS) - How could so many people have been so stupid?

It shouldn't have taken more than 30 seconds of due diligence for any "investor" to realize that auction-rate securities (ARS) were not "as good as cash", but somehow thousands of investors and quite a number of big-name businesses fell prey to the seductive allure of promises of higher yields. How could so many people have been so incredibly gullible and stupid?

Well, simply because they did not have a lot of choice.

It appears to me that the primary "reason" so many people got sucked into the ARS black hole of investing was that the yields offered by their brokers on "core cash" were incredibly anemic and below the yield offered by a number of the big-name money market funds such as Fidelity. And these anemic yields were offered even for cash balances over $100,000 and even over $1,000,000. These anemic cash yields seemed to have had two purposes: 1) provide the firm with very cheap capital, and 2) an incentive to con people into "investing" what was supposed to be "cash."

People were not out researching places to park their cash. They just assumed that their brokers knew how to park cash. I mean, like, that should be a no-brainer, right? Well, they were wrong in such an assumption. But the problem is that people don't like to spend much time thinking about simple things that should not require a lot of thought.

My real take on all of this is that if your so-called full-service broker does not offer you a decent yield for parked cash, then find another broker. I have been quite happy with Fidelity. And the default "core cash" at Muriel Siebert is quite decent as well.

And my real bottom line is that there is absolutely no longer any good excuse for even an average "investor" to depend any longer on a so-called full-service broker. My choice would be Fidelity or Siebert. In fact, I do business with both.

-- Jack Krupansky

Brokers who peddled auction-rate securities (ARS): The Dirty Dozen and a Half

The length of the list of big-name brokerage firms that peddled auction-rate securities (ARS) to unsuspecting clients is just starting to sink in. There are a dozen and a half (18) names on it. And theses are just the firms that the New York State attorney general has recently subpoenaed. The Dirty Dozen and a Half:

• UBS
• Merrill Lynch
• Goldman Sachs Group
• Citigroup Inc
• Raymond James Financial
• First Albany
• Wachovia Corp
• Morgan Keegan
• Piper Jaffray
• AG Edwards
• Deutsche Bank
• TD Ameritrade
• Lehman Brothers Holdings
• RBC Dain Rauscher
• Bank of America
• JPMorgan Chase & Co
• Morgan Stanley
• E*Trade Financial

I still have a small IRA account at UBS that has only a little cash-cash still in it that I am in the process of moving to Fidelity, who is not on the list. Most of my assets are at Fidelity. I also have two small accounts at Muriel Siebert & Co, who is also not on this list.

About the only other major brokers I know of that are not on the Dirty Dozen and a Half list are Charles Schwab, ScottTrade, and Wells Fargo. Wells Fargo is being sued in California over ARS, but I do not think Wells Fargo has any retail operations in New York State. Charles Schwab appears to be "clean" on the ARS front but is being sued over problems with their YieldPlus ultra-short bond funds which also were apparently marketed as being "as good as cash."

-- Jack Krupansky

How will people play MSFT for their earnings release?

Now that the market has popped up a bit after decent quarterly results from Intel, IBM, and Google, the question is how people will position themselves ahead of and in response to Microsoft's quarterly financial report which comes out after the market close on this coming Thursday, April 14, 2008. Some possibilities:

• The rally might run out of steam before we even get to Microsoft.
• The rally might continue as it has and get a further boost from Microsoft
• Microsoft (maybe by itself) might rally strongly in advance of the report on Thursday and then decline after the report, even if it is strong, on traditional "Buy the rumor, sell the news" trading sentiment.
• The rally might encounter a little profit taking between now and the market close on Thursday,but otherwise stay intact, Microsoft could see a decline in advance of their report, and then see at least a modest or possibly even a sharp rally after the report.

In short, anything could happen.

One underlying concern is whether the recent rally is simply a short-term trading phenomenon (stocks oversold in response to GE and other anxieties) or whether it is the base of a recovery rally in anticipation of better economic news six to nine months from now.

I am assuming that Microsoft will have solid numbers. I would note that they did not issue any "warnings."

As of the close on Friday, MSFT is at its highest level since the announcement of the Yahoo acquisition proposal.

In any case, it will be a great show this coming week.

I personally am not planning any trading in advance or in response to any of this, but I do hold a sizeable fraction of my net worth/wealth in MSFT stock as well as some underwater July 35 call options (I refer to them as my "Not Worth / Not Wealth.")

-- Jack Krupansky

Harry Potter to investigate firms over auction-rate securities

Harry Potter investigating auction-rate securities (ARS)? Well, it hasn't gone that far, yet, but the news is full of talk of stepped-up investigations of major investment firms and how they improperly peddled auction-rate securities and improperly managed the auction process.

Bloomberg: SEC Seeks Customer Names in Auction-Rate Bond Inquiry

The U.S. Securities and Exchange Commission asked brokerages to hand over more details about auction-rate bond sales, as regulators examine whether firms improperly steered clients into securities they can't sell.

The SEC's inspections office sent letters to the biggest sellers of auction-rate securities this month seeking the names of customers who purchased the notes and the identities of brokers who sold them. Inspectors want lists of bonds that clients bought, showing their values on different dates, a copy of a letter obtained by Bloomberg News shows.

``We are looking at representations made to investors when they purchased auction-rate securities in coordination with Finra,'' Lori Richards, head of the SEC's Office of Compliance Inspections and Examinations, said in an interview, referring to the Financial Industry Regulatory Authority. She declined to discuss specific firms or investors.

Bloomberg: Auction-Bond Probes Widen as Cuomo Subpoenas 18 Firms

Regulators are widening their probes into the collapse of the auction-rate securities market as states from New York to Washington scrutinize how Wall Street peddled the bonds to investors and issuers.

New York Attorney General Andrew Cuomo subpoenaed 18 banks and securities firms including UBS AG and Merrill Lynch & Co. in an investigation that could lead to criminal charges, a person familiar with the probe said yesterday. Officials from nine other states formed a task force to determine whether brokers misrepresented the debt as an alternative to money-market investments when they sold it to individuals.

"To have subpoenas and the threat of criminal investigations raised suggests that somebody has made up their mind that there really are abuses there," said Donald Langevoort, a former U.S. Securities and Exchange Commission attorney who now teaches securities law at Georgetown University in Washington. "It certainly suggests something more than regulatory curiosity."

Bloomberg: Auction Bond Collapse Spawns Nine-State Task Force

Nine state regulators formed a task force to investigate the auction-rate securities market and whether laws were broken when they were sold to investors, the North American Securities Administrators Association said.

Regulators in Florida, Georgia, Illinois, Massachusetts, Missouri, New Hampshire, New Jersey, Texas and Washington are probing whether brokers misrepresented the securities in their marketing to individuals, the Washington-based group said today in a news release.

"We're all getting complaints on a daily basis from retail investors and they all have the same the story: they were told by their brokers these were safe as cash and they're not," said Bryan Lantagne, the securities division director for Massachusetts Secretary of State William Galvin and head of the task force.

...

"If the product was represented as a cash equivalent going in, it must be treated as a cash equivalent coming out," Karen Tyler, the securities commissioner in North Dakota and president of the North American Securities Administrators Association, said in a statement.

Reuters: State officials probing auction-rate market

I'm only being semi-facetious when I suggest that investment firms were using far more "magic" than even Harry Potter ever aspired to.

We still haven't seen any congressional hearings yet, but I would surmise that it is only a matter of time.

The message to Wall Street is simple: Feel the heat.

-- Jack Krupansky

ECRI Weekly Leading Index indicator rises slightly but index remains in recession territory

The Weekly Leading Index (WLI) from the Economic Cycle Research Institute (ECRI) rose slightly (+0.06% vs. +1.86% last week) and the six-month smoothed growth rate rose moderately (to -10.2 vs. -10.9 last week), but still well below the flat line, suggesting that the economy will be struggling in the months ahead.

According to ECRI, "Despite its two-week uptick, the WLI is still in recession territory."

The bottom line is that the ECRI WLI remains "flashing red." Alas, even the ECRI WLI is not a guaranteed, fool-proof economic indicator, especially when the data is mixed and there is a lot of stimulus as well as potential problems in the pipeline.

I will keep my personal assessment of the chance of recession to 75% based on the magnitude of the negative level of the WLI smoothed growth index, the ECRI assessment, and the fact that although the data remains mixed, it is strongly biased towards weakness. I am also refraining from going higher than 75% because there has not been enough time for all of the positive stimulus in the pipeline to have had an effect on the real economy and the depth of the declines are simply not deep enough to indicate that a recession is imminent. The economy still has a very modest chance of avoiding an outright recession, but only if the data continues to improve at an increasing pace.

I was tempted to lower my assessment to 70% this week since I think the recent data shows that the so-called recession is not worsening, but I'll give the data another week or two to show that this "nascent recovery" is in fact showing some spine.

I am still at least somewhat optimistic that the U.S. economy will escape a full-blown recession, but I do have to recognize what the data itself is signalling to me, as well as ECRI's assessment and recession "call." Incidentally, the Intrade Prediction Market rates the probability of a U.S. recession in 2008 at 70%, roughly inline with my own assessment, maybe a little better since a lot of people act out of a visceral reaction to whether the latest news sounds good or bad, not to mention how their stocks are doing.

I would note that in another two weeks, less than half of the most recent 24 weeks of WLI data will be higher than the current level. That means that even if the WLI remains flat, within three months if not two months the very negative readings on the smoothed growth index will have risen to 0.0. Alas, that is more an artifact of how the smoothed growth rate is calculated than an indicator of economic strength. But, that rise cannot occur if the so-called recession "worsens." The smoothed growth rate rising to 0.0 presumes that the economy does not weaken further. I would also note that the WLI is above the level of a month ago. There are some promising signs here, but some mixed signals as well.

-- Jack Krupansky

Siebert and Fidelity are tops for yield on cash in accounts

Kiplinger has a nice review of the value you get with cash in various (online) brokerage accounts in an article entitled "Best Online-Broker Deals for Fund Investors." The article is mostly about mutual funds, but "Investing your cash" was one of their criteria. Siebert and Fidelity are their top picks. As the article notes:

Investing your cash. The better brokers -- Siebert among them -- automatically sweep your cash into a decent-yielding money-market fund. Fidelity gets a middling score because it requires investors to opt for a money-market fund; otherwise, cash goes into an interest-bearing account. We gave the least credit to firms that don't offer a money-market fund at all (Scottrade) or that impose restrictions (Schwab and Wells Fargo).

I use Fidelity as my preferred brokerage account, but I still have a Siebert account and always appreciated the decent rate for uninvested cash. In fact, I was always annoyed that Fidelity had options that were less attractive than Siebert, even though Siebert uses a Fidelity fund. I opted to use Fidelity Municipal Money Market (FTEXX), for my Fidelity account which has a so-so yield but it is tax-free, making it fairly decent. And then I occasionally move cash to Fidelity Money Market (SPRXX) or Fidelity Cash Reserves (FDRXX) for better yields. Siebert has only Fidelity Prime Fund Capital Reserves (FPRXX) for "core cash", which doesn't yield as much as FDRXX or SPRXX, but does yield better than any of the options that Fidelity offers me for "core cash." Siebert does use FDRXX for "core cash" in retirement accounts.

Note: The failure of the full-service brokers to offer a decent yeild on "core cash" was, in my opinion, the single biggest factor encouraging gullible investors to go along with their full-service broker's "suggestion" that they put their money in auction-rate securites (ARS).

-- Jack Krupansky

Gasoline not showing any signs of consumer retrenchment

If there is a recession underway, you would not know it by looking at the consumer and business appetite for gasoline here in the U.S. Retail gasoline is at an all-time high ($3.44 5 according to AAA), but demand is 0.8% higher than a year ago according to the U.S. DOE EIA.

OTOH, demand for jet fuel is down -3.0% from a year ago.

Note that the steep rise in retail gasoline prices is primarily due to the role of speculators in commodities markets, not demand or any supply shortages.  The rise in demand is quite modest while inventories of gasoline are "above the upper limit of the average range" for this time of year according to EIA. We would be seeing lower prices if the normal law of supply and (end-user) demand were in effect.

Regardless of the reason for the price rise, consumers are finding both the wherewithal and the necessity (e.g., they do have jobs and priority tasks) to keep up the pace of motor vehicle travel.

Also note that even if consumer spending on gasoline cuts into discretionary spending, it is still consumer spending and counts in GDP.

The good news about rising gasoline prices is that it is in turn fueling interest, research, and development of alternative energy sources, whether it be biofuels or electric and hybrid vehicles. So, there is a silver lining to even the dark cloud of speculative-driven energy prices.

-- Jack Krupansky

Now it's Google overwhelming the cynics

First it was Intel overwhelming the bearish cynics and purveyors of crisis, gloom, and recession, and then IBM delivered solid financial results, and now Google crushes its critics. Sure, the U.S. economy is on the edge of recession, but so much of that is related to housing and Wall Street finance. Besides so many tech companies get a large fraction of their business from overseas and growth in emerging markets is still booming.

The message continues to be clear: Don't count tech out just because other sectors of the U.S. economy have faltered in recent months.

-- Jack Krupansky

Restructure GE

After reading the article in the New York Times by Nelson Schwartz and Claudia Deutsch entitled  "G.E.'s Shortfall Calls Credibility Into Question", I agree with critics that GE should be restructured ASAP. I think it makes perfect sense for the company to focus on high-value, high-profit industrial infrastructure and energy production technology. The company should have a CEO focused on infrastructure and energy. Spin off the finance arm, low-margin consumer appliances, and entertainment businesses. Alternative energy is going to be a huge and booming business and GE should be shedding non-industrial businesses to make room in the heads of executives and board members to focus extremely intently on managing both the current infrastructure business and selectively targeting emerging alternative energy infrastructure opportunities.

The longer-term potential for GE is potentially fantastic, but the near-term is somewhat problematic due to their confused corporate structure.

OTOH, I would give the current CEO a year to turn things around and prove that he can make a conglomerate work in a difficult economy. Even if a dismembered GE might deliver more perceived value, sometimes great management can pull off plans that mere analysts and pundits find great fault with.

As long as the CEO and prove that he can manage to grow the infrastructure and energy businesses strongly, nobody is really going to care what is going on elsewhere in the company.

In short, Execute or restructure.

-- Jack Krupansky

More mixed data on the unemployment front

Once again the weekly unemployment insurance initial claims report does more to confuse people than to clarify the state of the economy. There was a moderate rise in initial claims this week, but the more-accurate 4-week moving average declined slightly. Both numbers (372,000 and 376,000) remain elevated, but still moderately below the 400,000 level traditionally associated with a recession.

Continuing claims do remain elevated, approaching 3 million, almost half a million higher than a year ago.

So, we do have some warning signs, but there is nothing here to indicate that we in the middle of a full-blown recession.

In short, the elevated level of initial claims suggest that we may be at the edge of a recession, but you will have to look elsewhere if you want evidence that we are in a full-blown recession.

-- Jack Krupansky

Now it's IBM overwhelming the cynics

First it was Intel overwhelming the bearish cynics and purveyors of crisis, gloom, and recession, and now IBM delivers solid financial results. Sure, the U.S. economy is on the edge of recession, but so much of that is related to housing and Wall Street finance. Besides so many tech companies get a large fraction of their business from overseas and growth in emerging markets is still booming.

The message is clear: Don't count tech out just because other sectors of the U.S. economy have faltered in recent months.

-- Jack Krupansky

Treasury I-Bond rate could approach 6% in May

One inflation hedge is the U.S. Treasury I-Bond which pays a nominal fixed rate plus inflation. The I-Bond rate is reset every six months and that rate is in effect for the next six months. Rate resets occur on May 1 and November 1. For I bonds purchased in the November 1007 through April 2007 period the rate has been 4.28%. The rate for May has not been set yet, but since inflation was just reported today for March, we can estimate that semiannual inflation was 2.42%. We do not know what Treasury will do with the nominal fixed rate for May, but if it was kept at the current 1.20%, the I-Bond rate would work out to 6.07%. If the fixed rate were dropped to 1.00%, the I-Bond rate would still be 5.87%. Not bad. But this rate would only be good for six months before it resets again based on inflation over the next six months.

I-Bonds are a great investment if you expect inflation to be high and you do not need access to your cash for a few years. But if inflation falls, your I-Bond yield will fall as well.

Here is another twist: The fixed rate is set when an I-Bond is issued and does not reset every six months. So, if you buy now, you can lock in the current fixed rate of 1.20%. The downside is that you won't get a higher fixed rate if the fixed rate rises in the future. Check this out: If you had purchased an I-Bond in May to November of 2000, when the fixed rate was 3.60%, you would currently be earning 6.72% and in May your rate would jump to 8.53%!

You do have to pay taxes on all I-bond interest, including the inflation portion, so they are not a full inflation hedge. Interest accrues in the value of the bond and becomes taxable income upon redemption. I am not sure if there are state income taxes on I-Bond interest.

Please note that there are severe restrictions on I-Bonds, such as limits to how much you can purchase ($5,000 in any calendar year) and early redemption penalties (you can't redeem in the first year after purchase and forfeit 3-months' interest if you redeem within the first five years.)

You can purchase Treasury I-Bonds via the TreasuryDirect web site or from a bank.

The good news is that you do not have to pay a "broker" even one dime in direct or indirect form to make this kind of investment.

See I Savings Bonds Rates & Terms.

I personally have never purchased a Treasury I-Bond, but I am thinking about it. It is a small amount of money, but a great way to have a little money "working" for you without any further effort on your part and is "out of sight, out of mind", so you won't be tempted to spend it. And the inflation hedge is attractive.

-- Jack Krupansky

Recession Watch: February real GDP falls sharply from January peak but Q1 still on track to be positive

Monthly real GDP, one of the five primary economic indicators that the NBER Business Cycle Dating Committee uses to judge recession start and end dates, fell very sharply in February from the January peak. The government does not publish GDP data at a monthly level, but the NBER BCDC refers to sources such as Macroeconomic Advisers (MA) and their MGDP data series. This was a significant decline, and in fact below the August level, but a one-month decline is not sufficient to "call" a recession. As as Macroeconomic Advisers puts it:

Monthly GDP declined 1.2% in February.  This was the second largest one-month decline in the nearly 16-year history of the index; it declined 1.6% in September 2001.  The sharp drop in monthly GDP in February was led by a sharp decline in nonfarm inventory investment.  Also subtracting from monthly GDP were declines in net exports, capital goods, and construction.  Averaged over January and February, monthly GDP was 0.8% above the fourth-quarter average at an annual rate.  Our latest tracking forecast of a 0.4% increase of GDP in the first quarter assumes a 0.3% increase in monthly GDP in March.

If the NBER BCDC is the definitive expert on marking of recessions, MA is the definitive expert on measuring real GDP at the monthly level with their MGDP data series. So, for now, I will accept their forecast that in a month we will see a rebound in monthly GDP for March so that Q1 GDP is likely to come in with a modest +0.4% gain. Such a gain would mean that a recession did not start in Q1 using the two-negative-quarter rule, but the NBER BCDC does not use the two-negative-quarter rule. The NBER BCDC measures from the peak month, so it could take a few months or more for monthly GDP to climb back up to the January peak level.

In short, February was a bad month and suggested a plunge into a recession, but one bad month does not constitute a recession. Note that even is March and April bounce back somewhat, that may still represent a decline from the peak in January. The strongest statement I can make is that we are almost there, but not yet clearly there.

-- Jack Krupansky

Recession Watch: Industrial production up in March but still modestly below January peak

Industrial production, one of the five primary economic indicators that the NBER Business Cycle Dating Committee uses to judge recession start and end dates, rose modestly in March, but erased less than half of the February decline off the January peak. In fact, industrial production is now slightly below its level in November and even September. Clearly industrial production is "faltering", but the absolute level of decline from the January peak is still only a relatively modest decline and only two months from the peak, which would not seem to meet the NBER BCDC threshold for a "significant decline."

In short, industrial production still strongly suggests that we are at the edge of a recession, but certainly not yet in the middle of a full-blown recession. The strongest statement I can make about industrial production is that is is roughly flat since the Summer.

-- Jack Krupansky

Fidelity Freedom Fund 2025 now in my Roth IRA

As I discussed previously I went ahead and committed my 2007 Roth IRA contribution to buy a position in the Fidelity Freedom Fund 2025 (FFTWX), a so-called "life-cycle target-date fund" on the presumption that I will be retiring roughly around 2025. Silly me, I expected that the order would execute first thing Monday morning. Not exactly. You can tell that I do not do much investing in mutual funds. Only when I thought about the process in the middle of the morning did I remember back four or five years ago to the "market timing" and "late trading" mutual fund scandals and how mutual funds actually trade. You place an order during the day (or any time after the previous market close) and the order sits there until the next NAV (Net Asset Value) calculation which occurs sometime after the stock market closes at 4:00 p.m. (on normal days.) Within a few hours (or so) of the market close your order will be filled at the new NAV price. The "Late Trading" scandal was that mutual funds were allowing hedge funds to place orders after 4:00 p.m., until about 4:30 p.m. after post-market news (e.g., earnings reports like that from Intel today) would come out, but at the market-close NAV price. The mutual fund would then kick the fees from the hedge funds up to the parent company that managed the fund.

I did confirm that since I am over 50 years old, the 2008 Roth IRA contribution limit will be $6,000. I will make that contribution as soon as I am confident that my 2008 income will not exceed the Roth IRA eligibility limit.

And tomorrow I'll go ahead and trasfer the remains of my old UBS Roth IRA to Fidelity. It is a rather small account and currently 100% cash after my old Geodyne limited partnership recently liquidated. I'll put that cash into the Fidelity Freedom Fund 2025 (FFTWX) as well.

It is nice knowing that at least this one corner of my financial life can now run on auto-pilot.

-- Jack Krupansky

Van Campen to redeem a portion of its auction-rate preferred securities (ARPS)

There was yet another modest ray of sunlight penetrating the auction-rate securities (ARS) gloom today as Van Kampen announced that it would redeem about 50% of the oustanding holdings of the Van Kampen Senior Income Trust. This is a very modest move, redeeming $350 million of a $700 million fund, but with the bulk of the ARS market frozen, every little helps.

The allocation may be a bit odd. The distribution of funds to broker-dealers will be on a pro rata basis, but it is up to the individual broker-dealers to decide how they choose to allocate to individual customers. They may choose to distribute on a pro rata basis as well, but are not obligated to.

See the Business Wire press release entitled "Van Kampen Senior Income Trust Announces Refinancing of Auction-Rate Preferred Securities."

-- Jack Krupansky

Intel doing fine despite the recession

Intel's latest quarterly results show that the company is doing fine despite the so-called recession.

One thing to keep in mind is that quite a number of technology companies get a large chunk of their business from overseas.

Overall, I suspect that stocks will be trading in a wide range in the coming months, so given that we had a big decline last week, we could see a little rally in the coming weeks. Subject of course, to the evolving economic outlook. But if Intel can look good in a recession, who can complain.

-- Jack Krupansky

Black Rock to buy out some of its auction-rate securities

There was a modest ray of sunlight penetrating the auction-rate securities (ARS) gloom today as BlackRock announced that it would buy out $1.9 billion of its taxable auction-rate preferred shares (ARPS.) According to an Associated Press article entitled "BlackRock to buy out $1.9B in auction-rate preferred shares", BlackRock has $9.8 billion in ARPS outstanding. The article says BlackRock will be buying about half of the outstanding shares of each of its taxable ARPS, and three-quarters of one of the funds.

There was no mention of their intentions for the other 50% of those funds, the tax-free ARPS, or how they would allocate the money to ARPS shareholders.

Still, every little bit of progress helps, and this was a notable degree of progress.

-- Jack Krupansky

Is the country in a recession?

An Associated Press article in the Boston Globe about Vermont entitled "Big revenue shortfall seen by state" indicates that the U.S. is in a recession:

Vermont could be facing a $30 million hole in its budget for next year.

That's the word from the state Emergency Board, a panel made up of the governor and chairs of legislative money committees.

They heard Tuesday from two consulting economists who said the state and nation are in a recession that has not bottomed out yet.

Now, if only they would identify the "two consulting economists" so that we could find out what they really said about the overall U.S. and what metrics they were using.

Just give me the data, unfiltered by the media, politicians, and "consultants."

-- Jack Krupansky

Evil biofuel

There has been a lot of chatter about diversion of crops to biofuels causing a global food shortage. An article in the New York Times by Andrew Martin entitled "Fuel Choices, Food Crises and Finger-Pointing" chronicles some of the debate. The article concludes by informing us:

But August Schumacher, a former under secretary of agriculture who is a consultant for the Kellogg Foundation, said the criticism of biofuels might be misdirected. Development agencies like the World Bank and many governments did little to support agricultural development in the last two decades, he said.

He noted that many of the upheavals over food prices abroad have concerned rice and wheat, neither of which is used as a biofuel. For both those crops, global demand has soared at the same time that droughts suppressed the output from farms.

The simple fact is that we need biofuels. If that means we need to create incentives to increase agricultural production overall, so be it.

Out of curiosity, I wonder what the presidential candidates have to say about all of this. What change would Barack really make?

Maybe we actually do need some incentives to increase farming and agricultural output in this country, especially if we are producing a product that the world needs and demand is rising.

I'd actually like to see some data on U.S. wheat production.

-- Jack Krupansky

Mounting debt

I am a little skeptical about some of the unsubstantiated claims made in at article in the New York Times by Michael Barbaro entitled "Retailing Chains Caught in a Wave of Bankruptcies." The article purports to be about bankruptcies but many of the examples and the picture accompanying the article and the data graph are simply about store closings and slowed expansion plans, not bankruptcies. The common elements are mounting debt and over-dependency on housing. Those two topics would have made better focal points for both the overall article and its title, but I guess for some reason the bankruptcy angle was maybe more eye-catching. Besides, bankruptcy per se, especially in retail, is not a reliable indicator of anything. The need for cheap and readily available capital and debt is quite interesting, but the article really only glossed over that critical angle, calling it simply "mounting debt" and even going so far as to blame consumers and "declining sales" when finance and business strategy were the primary culprits. If the Times had focused on that debt angle and then given us some juicy data and details and some back-story about Wall Street's role in encouraging companies to take on debt, that would have made a great story, but as it is, the story ends up being mildly-botched and a better example of mediocre journalism. What really makes the story mediocre is that it is so late. Almost everything in the story has been going on for many months if not years (excessive accumulation of debt), so this comes across more as a "filler" article. Finally, nowhere in the article is there any data or evidence provided that retailer chains are experiencing "waves" of bankruptcies. That description seemed rather inappropriate. Wave of store closings, yes, but from reading the story, the count of bankruptcies seems only moderate, hardly a wave. Nonetheless, the all-too-brief mention of "mounting debt" at least partially redeemed the article.

It is actually a very good thing that debt-fueled retail expansion is slowing down. It was unhealthy for the economy and helped to push costs higher. It may take a bit longer to unwind the most egregious excesses of the Wall Street-inspired retailer debt binge, but it will be a benefit for the economy. Sure, there has been and will be some short-term pain, but the end result will be a healthier economy.

And maybe some enterprising entrepreneur will resurrect the Bombay brand and return it to its roots as an elite niche retailer rather than all the other things it tried to get into. If that happens, then its bankruptcy will have been a good thing.

-- Jack Krupansky