Mid-Life MBA: The Art of Business

The Conference Board, an industry-backed research group, said its index of leading economic indicators fell 0.6 percent to 137.9 in May following a 0.1 percent decline to 138.7 in April.  It was the index’s 3rd decline in six months, and the lowest figure since a reading of 136.9 in October. The drop accompanies gasoline price run-ups, interest rate creep, and a chilling real estate market. 

The labor department has also reported the largest jump in numbers of Americans filing for unemployment in five weeks. and the commerce department has reported another 0.3% slip in orders for durable goods.  Orders for transportation equipment fell by 2.9% reflecting a 17.9% fall in demand for commercial aircraft after a previous 29.7% drop. 

While the economy surged by 5.3% in the 1st quarter of 2006, a downward adjustment to 3% is expected for the remainder of the year, largely reflecting decreased consumer spending as a function of tightening credit.  Consumer spending is responsible for two thirds of economic activity.

The DJIA has beat it back into the black in a stunning two day recovery of almost 300 points.  The Nasdaq showed its largest gain in two years.  Some of it had to do with good news from Caterpillar, some of it had to do with good news from Goldman Sachs and Lehman Bros earlier in the week and then Bear Stearns today (NI up 81%), more of it probably had to do with Bernanke’s doveish comments and improved reports from the Feds.

Still, the economic indicators remain mixed and most agree that at least a quarter-point interest rate hike is in the works. “It’s a resignation rally,” said Bob Hynes, senior market analyst at IFR Markets. “People are resigned to the fact that the Fed is going to go higher.”

I agree and remain concerned about macroeconomic pressures.  Aggregate demand is still being driven by war (that and the relentless appetite for consumer credit at any price) and even with slight pull back below $70.00 for oil, fuel costs continue to drive inflation.

Despite reports on inflation and the looming Fed increase the dow bounced back 110 basis points today.  I wish the economic indicators were substantial enough to point to more than a sucker’s rally but in my opinion they do not.  Even the WSJ reported the one day upturn in terms of disbelief, “Stocks advanced Wednesday, even though a stronger-than-expected inflation report heightened expectations the Federal Reserve would raise interest rates again at the end of June”

Many downturns over recent weeks came in late trading after a positive uptick.  Today stocks bounced 40 points higher following positive announcements from Boeing, partly pumped by the delay on Airbus A-380s.  Airbus’s parent company EAD dropped 26% yesterday as investors panicked while Boeing rose 6.5% today following a new Singapore Airlines order for 20 Dreamliners.  Overall trading was mixed with as many stocks rising as falling. 

I still can’t see jumping back in until September.

The Index of the Bombay Exchange Sensitive Index (Sensex) – the benchmark index of the Bombay Stock Exchange (BSE) has lost 25% since its May 10th peak. It is the oldest stock index in India.  The Indian market lost 331.34 basis points today alone in an unpredictable bout of seesaw trading.

A commentator from Mumbai reported, “Concerns over liquidity and mutual funds redemption are dogging market sentiment. “Liquidity is going to tighten. The easy availability seen over the last two years is not going to remain. And with commodity prices ruling high, corporate numbers will not look too attractive. Added to this there have been rumours of a leading mutual fund calling up to stop redemption. There is total withdrawal of buying interest,” said a dealer.”

Stock prices fluctuated wildly today losing over 170 points by mid-day but as bargain hunters entered the fray, the DJIA managed an overall 7.92″ point gain by closing.

According to the WSJ, emerging markets have shed $250 billion in market capitalization in the past month, while all stock markets outside the U.S. have shed  $1.3 trillion over that period, according to MSCI.

The selloff comes as Americans’ exposure to overseas markets many be at an all-time high. Foreign markets in 2005 outperformed U.S. stocks for the third straight year, and U.S. net purchases of foreign stocks exceeded $100 billion for the first time last year. That suggests that many Americans, through their mutual funds and 401(k) plans, will feel the pain more acutely than they have in similar reversals abroad.

A co-worker of mine has lost over $20,000 in value in her modest 401 K account.  The figures above suggest that this may not be unusual.

Today the DJIA dropped another 71.30 points to 10930.90, the lowest level in three months.  The Wall Street Journal attributed the drop to interest anxiety.  BusinessWeek blamed the problem on concerns for all three of the “big ‘I’s” rising interest rates, rising inflation, and dwindling corporate income.  The DJIA has lost over 316 points this week and markets in Japan, China and Europe have all taken a beating.  European markets recovered slightly.

“When we have big down days on big volume, that’s a sign of capitulation,” said Chris Johnson, manager of quantitative analysis at Schaeffer’s Investment Research in Cincinnati. “Monday and Tuesday, we saw selling, but it wasn’t the type of volume we like to see for short term-buying opportunities…. All the sellers aren’t out of this market yet.”

If they’re not, it might be a good time for them to kiss their losses goodbye and tread water in the money markets for awhile, at least through September.

The center for retirement research at Boston College reported in a new study released this week that 43% of Americans will not have enough money for retirement.  Assumptions included a requirement for 73% of pre-retirement income.

CRR said that those most at risk included Low-income Gen Xers (60%); Low-income late boomers (54%); Middle-income GenXers (46%); Two-earner GenX couples (53%); Single GenX women (52%).

The average 401-k savings of those approaching retirement is currently near $60,000 and constitutes the sole provision for additional income beyond Social Security payments.

Private investors have  bid to take oil pipeline company, Kinder Morgan, private.  Richard Kinder, former Enron executive, owns 20% of the shares and has rallied support of other company executives as well as a cadre of private equity firms including Goldman Sachs, American International Group and Carlyle and Riverstone.

Shares notched up almost 20% today to 100.90 following Kinder’s current bid which represented $100.00 per share. The current bid at $13.4 billion (over $20 billion including debt) is anticipated to move yet hire. Some analysts speculate that interests such as TransCanada and Enbridge may offer competing bids.

Richard Branson, chairman and owner of the Virgin group estimates that in the event of the bird-flu virus mutating to facilitate ”human to human” transmission of the disease, 70% of airline carrying capacity could be grounded for up to a year. He said, “statistically, there is about a 6 percent chance that in any one year of the next 10 years this becomes a person-to-person problem, and we just have to hope it is not this year.”  The only up side to the epidemic would be a precipitous drop in fuel costs.

As a precautionary measure Virgin Airlines has purchased sufficient quantities of the Tamiflu, anti-viral drug to treat all of its airline employees.

 
“Rising incomes allowed Americans to spend more in April.”

It’s always interesting to read analysis from a foreign perspective.  The BBC reported on Friday that “US spending grew at it’s fastest rate for 3 months as US workers brought home more money.”

The article noted that a .5% increase in incomes fueled the .6% increase in spending that it termed “a spending rush.”

The article also points out that core inflation rose by only .2% but admitted that once food and fuel were included overall inflation rose by .5%. 

The obvious explanation is that both food and fuel are relatively inelastic and that .4% of the increase in spending was pretty much unavoidable.  What about the other .2% increase in spending?  How about rising interest rates, upwardly adjusting ARMs and a deflating dollar?