Archive for the ‘Economics’ Category

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Big Business in America Controlled by Wall Street – With your Money

Tuesday, January 12th, 2010

Public companies first and foremost have to answer to their shareholders. If public companies don’t, then their shareholders will abandon ship.

Many Americans primarily hold stock through Mutual Funds and Exchange Traded Funds. This fact is proven by the percentage of ownership of companies by Institutional & Mutual Fund companies. Let’s take a look at the Dow Industrial 30 and their percentage of ownership by Institutional & Mutual Fund companies (as of 1/12/2010, information gathered from Yahoo Finance).

Company : % Owned by Institutional & Mutual Fund companies
3M : 68%
Alcoa : 68%
American Express : 80%
AT&T : 57%
Bank of America : 63%
Boeing : 60%
Caterpillar : 70%
Chevron : 63%
The Travelers Companies : 87%
DuPont : 65%
Exxon Mobil : 48%
GE : 50%
Cisco : 70%
Hewlett Packard Company : 77%
Intel : 65%
IBM : 61%
Johnson & Johnson : 65%
J.P. Morgan : 72%
Kraft : 57%
McDonalds : 71%
Merck : 80%
Microsoft : 63%
Pfizer : 59%
Wal-Mart : 37%
Disney : 67%

Out of the Dow 30 stocks only 2 (Exxon Mobil at 48% and Wal-Mart at 37%) have under 50% ownership Institutional & Mutual Fund companies. Over 93% of the Dow Industrial stocks have 50% or greater ownership by Institutional & Mutual Fund companies. Many of the Institutional & Mutual Fund company owners where the same for the Dow 30 stocks.

The above data shows that most individual investors have chosen to hold stock in the Dow Industrial 30 stock through Exchange Traded Funds and Mutual Funds. But who has the real shareholder control over these companies? Do you have shareholder voting rights as a fund holder with these stocks in it? The answer is no. The fund manager makes the decision for you, theoretically for the best interest of the fund holder. One thing is for sure, Wall Street hold the vote and therefore the control.

Wall Street nearly collapsed the US economy last year with their excessive risks. What type of risks are they forcing these companies to take?

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Federal Reserve’s Scary Math

Thursday, December 10th, 2009

In the early 1980’s mortgage rates where above 14% and other debt carried an even higher rates of interest. During the early 1980’s, banks required most home buyers to put down 20% and have spotless credit. For example if a buyer purchased a home for $125,000 he or she would more than likely need to put $25,000 down (20%) and the monthly principle and interest payment at 14% would be $1184.87.

Over the past 25 plus years, rates on mortgages and most debt have fallen considerably. The cause of this decrease in rates is mostly attributed to the Federal Reserve’s action of lowering rates and raising rates to control inflation in the US economy. Clearly the Federal Reserve has viewed the past 2 plus decades as having relatively low inflation thereby lowing more than raising rates (Fed Funds Rate).

Lowering rates more than raising them creates cheaper costs of borrowing thereby making room for more. This cheap money also creates more of a demand for credit. This excessive credit demand led to fierce competition among banks. Competition is definitely a good thing until demand starts to wane. As soon as the credit demand let up this led to banks acting as their own Federal Reserves by creating products that artificially lowered the cost of lending thereby stimulating borrowing.

Most home buyers view a home purchase not by the sales price, but by the down payment and monthly obligation. Now let’s look at the buyer from the early 1980’s with he or she’s $25,000 to put down and the ability to afford $1184.87 monthly payment. This buyer today could afford a $225,000 home with $25,000 down with $1183.08 monthly principle and interest payment with an interest rate of 5.875% and relaxed down payment restrictions. Identical down payments and same monthly, but twice the debt, was the growth in value or debt?

This rather rapid reduction in the cost of money over the past two plus decades has led to an equal increase in the price of cars, education, utilities, etc. Inflation seems to have been masked in credit. The credit markets in the US and around the world nearly collapsed because they had “maxed out their credit”. With the rapid expansion of debt at the end of the road with the Fed Funds rate at 0 to .25% target and lending rates increasing because of diminishing credit quality (except for mortgages because the Federal Reserve is supporting the rates), what’s next? Deflation?

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Wringing out the Credit

Monday, December 7th, 2009

Last year the world markets suffered a massive trauma that crippled most financial institutions. This trauma, led to; the US government to taking over Fannie Mae and Freddie Mac, form the ever popular TARP fund, the Federal Reserve to reduce the Fed Funds rate to 0 to .25%, President Obama to pass a near $800 billion stimulus and many more multi-billion (probably trillions) dollar actions.

This trauma was caused by a bubble in the credit markets. America and the world essentially took on too much debt. The US and most of the world have attempted to solve this crisis by filling the credit and demand gaps with stimulus and cheap money.

GDP in the 3rd quarter did showed its first positive growth (2.8%, revised down from the 3.5% first estimated) quarter of quarter since the 2nd quarter 2008. Most of the US consumption growth (in GDP) has been attributed to the Government’s cash for clunkers program and the first time homebuyer tax credit (along with the Federal Reserve supporting low mortgage rates). The “cheap money” has reduced the value of the US dollar thereby improving exports, which also has spurred some growth in the US GDP.

The question still remains whether government stimulus and cheap money can truly carry us over the hump. Most of this growth has come at the expense of more credit and reduced buying power. Matter of fact, most the Government’s programs seem to have targeted the only individuals left who had room to expand their credit. Who owns a car worth less than $4000 and typically is a first time home buyer? These programs look to have wrung out the credit from the last remaining source in the US economy, the youth, our future.

What happens when the credit towel is dry?

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Ben Bernanke and The Federal Reserve Money Factory

Thursday, December 3rd, 2009

golden-ticketOver the past few weeks Republican Congressman Ron Paul out of Texas has been making a noticeable push to get more transparency out of the Federal Reserve. The Federal Reserve members and its Chairman (Ben Bernanke) have been verbally opposed to the measures that the Congressman is attempting to have enacted. The proposal Congressman Ron Paul is pushing for would allow for an independent audit to be called for following any decisions on monetary policy by the Federal Reserve.

Currently the Federal Reserve keeps most of its dealings a secret. The Federal Reserve believes that by keeping politics and the public view out of monetary policy they will be able to act more prudently and timely without influence. They believe that this independence is crucial to maintaining their objectives.

Some believe that many of the problems today are caused by their objectives. The Federal Reserve’s deliberate reactions to economic events creates a relatively predictable cycle. When the economy contracts, the Federal Reserve lowers rates to expand credit to spur growth with cheap money. When the economy is growing too fast they raise interest rates to slow the growth. Unfortunately, it is much easier to indentify contraction than over expansion, which typically results in a late raising of rates which can result in a bubble.

For the past 25 years the Federal Reserve has lowered rates more than raising them and now is faced with a very troubling 0 to .25% Fed Funds Rate. Interest rates as a whole should be falling, but for credit that is not supported by the government, rates are rising. One can only assume that with banks profit margins so high that the rising rates are being caused by falling credit quality and defaults. The Federal Reserve has resorted to another avenue in attempts to promote lending with “quantitative easing”. Quantitative easing is essentially when the Federal Reserve becomes the lender of last resort. This form of injecting money into the economy can have adverse and unknown consequences, since much of the money is created out of thin air in the form of credit.

Who, what and how they are supporting these institutions seems to be behind Congressman Ron Paul’s motivation. Over this historical Financial Crisis the Federal Reserve’s political powers have been weakened. We will see if this weakness will lead to the Congressman getting his golden ticket.

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Is an Economic Asteroid Coming?

Tuesday, December 1st, 2009

asteriod-impactThe question really is not whether one is coming but would they tell us if it were? In the movies when an asteroid is headed towards Earth, the government decides to keep the impending doom from its citizens to protect them from the horrible truth. Then typically about 3 days from impact, the secret of the approaching fate is revealed along with a plan to save the day. Is it possible that the US government is sugar coating the truth to protect us, shelter us?

The Chinese government is notorious for embellishing their economic numbers. Is the US government taking a page out of their red book on crowd control.

One possible sign of the potential sugar coat could be in economic data revisions. When data is released the markets react based on whether they meet, miss or exceed expectations. If a market rallies on exceeded expectations, shouldn’t that same market give back those gains if that data is revised down the following month? Most of the time the market ignores these revisions and may actually rally again if the data shows another exceeded expectation even though the data may have actually been negative.

For example; if monthly retail sales went up month over month 1.4%* then the next month they revise this number to -.4%*, but the current month over month sales went up 1.8%. Has retail sales really gone up that much? The markets probably would have rallied the 1.4%* and the 1.8%* if they exceeded expectations. But the data is misleading. Lets simplify this information by using small numbers:

Month 1: $100.00 in retail sales
Month 2: $104.00 in retail sales (1.4% improvement over the previous month)
Month 3: $107.57 in retail sales (-.4 revision plus 1.8% improvement)

*The numbers from the above example are made up and are not real.

So on the surface retail sales going up 1.8% looks good, but retail sale really only went up 1.757% over 2 months. This data becomes even more confusing if it is revised the following month.

Economic data did not predict the beginning of this financial crisis, what makes you think that it will predict the end?

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Ice Cream for Everyone – Well Maybe Not Everyone

Monday, November 30th, 2009

So unemployment has taken the center stage in politics. It was not really important when unemployment was 9.8%, but now it is 10.2%, double digits changes everything. The answer according to the US political powers is stimulus, more and more stimulus. Even know stimulus has really never worked as designed, maybe this time they will get it right, right?

My belief is that economics needs to be broken down into the smallest piece to the individual US citizen. What works for an individual should work for the economy as a whole.

To date the US government has taken the position that the government needs to fill in the demand holes with stimulus by borrowing money. If the US government borrows 1.5 trillion dollars and then spends it into the economy through stimulus, this “growth” in the economy (gdp) should bridge the gap according to the current powers.

What if an individual did the same thing as the US government? Okay so Suzy gets a pay cut and the she decides to adopt the same philosophy as her government. Suzy takes her credit cards and decides to go on a spending spree matching her lost income. Suzy does not just use her credit cards to pay current bills, but she also uses it to redo her kitchen. Suzy lost $30,000 in pay, but she spent $30,000 on her kitchen and other none essential items to make up for the lost income. Did Suzy make up her lost $30,000 in income? Is her situation better after spending the $30,000? Did she reduce or increase her risk?

The answer to the above questions seems relatively obvious to me. If you lose income a budget is the solution not a spending spree. If 70% of the US economy comes down to the US consumer, shouldn’t our rules be their rules?

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What a Tangled Web We Have Woven – Inverse Dollar Market Relationship

Thursday, November 12th, 2009

Simply put, the US economic recovery will be short lived if it depends on the dollar going to zero. By design the current US political powers wanted exactly what is happening, weak dollar improves exports and large companies overseas earnings. Unfortunately this prescription for recovery reduces the buying power of the largest consumer in the world, the USA.

This plan for recovery unfortunately seems to leave out one all important component, the US Citizen. Wall Street is getting back to their country clubs at the expense of the 10.2 % unemployed (and growing) by shorting the US Dollar and crowding the commodities trade. Remember last year when the political powers vilified investors who shorted bank stocks, well isn’t shorting the Dollar kind of un-American. What percentage of those banks bailed out where owned by foreign investors.

Over the recent quarter large companies have credited a large portion of their recovery to overseas sales. McDonalds over the past week announced sales for last month showing that US sales were down, but overseas sales were up. If you are a US Citizen you may or may not have money invested in the stock market, but you definitely have Dollars.

One thing is for sure, if you are an American, this recovery is hurting you.

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Dow 15,000 = $10 Soda?

Wednesday, November 4th, 2009

The Dow Industrial Average has rallied from 6,500 to just over 10,000 in a matter of months. Great news right? Maybe not if you consider at what expense, literally.

In my view the US economy is like a large aquarium. If you lean it in one direction the level may seem like it is going up on one side, but it is always at the expense of the other.

This stock market rally (Since March 2009) is undeniably at the expense of the US Dollar. Every time the dollar is weak the Dow is strong. This weakness in the dollar causes commodities to go up and US buying power to go down. So if the Dow manages to soar another 50%, don’t be surprised when your cost of living soars with it.

The famed “Dr. Doom” Nouriel Roubini has been expressing his concern over the “carry trade” where investors are borrowing dollars (shorting) and buying commodities. Many asset managers of recent have referred to the short dollar trade as “crowded”. This “rally” seems more like a another misuse of leverage. Looks like Wall Street gave up drinking by switching to beer.

Dow Industrial in red and US Dollar in green

Dow Industrial in red and US Dollar in green

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GDP First Look – Robbing Peter to Pay Paul?

Thursday, October 29th, 2009

The 3rd quarter showed a 3.5% increase over the 2nd quarter GDP (Gross Domestic Product). According to the preliminary look at 3rd quarter GDP report the primary contributors where (as quoted by the report):

The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, federal government spending, and residential fixed investment.

Let’s take a better look at the above quote from this widely viewed report.

The first primary contributor according to the report was Personal Consumption Expenditures. The report specifically cited that auto sales accounted for a large part of this upturn. Cash for clunkers is actually quoted by the report as a major contributor to these sales.

Exports are the second contributor named in this report as a large contributor. When the Dollar is cheap so are good that are priced in the Dollar. The news is filled with headlines on how the US Dollar is under significant pressure.

Private Inventory Investment is the next contributor on the list. Over the past year retailers have been shedding inventory to attempt to match supply with current demand. The shelves are empty and they need to be restocked if retailers want to sell products to consumers.

Residential Fixed Investment is named as another large contributor. First time home buyers have been scrambling to purchase homes to take advantage of the $8000 tax credit. In September alone nearly 50% of existing home sales where to first time home buyers. Nearly 70% of existing homes sales in September where under $250,000.

So last on the list is Federal Government Spending. It should be no surprise that Federal Government spending contributed a large portion of 3rd quarter GDP. Looking at what the report cited as the primary contributors to real GDP, I would argue that almost all of the GDP growth was from the government intervention.

The report also sighted the following:

Disposable personal income decreased $20.4 billion (0.7 percent) in the third quarter, in contrast to an increase of $138.2 billion (5.2 percent) in the second. Real disposable personal income decreased 3.4 percent, in contrast to an increase of 3.8 percent.

From the above statement I would gather that consumers made less but spent more. Interestingly this current outcome is what the Federal Government wants to happen, spend our way out. With tight credit and rising unemployment, where does the money come from? Credit is what caused this problem, is it really the cure as well. Drug addicts don’t take more drugs to get off drugs do they.

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Federal Reserve Statement

Wednesday, May 20th, 2009

Judge for yourself, but it looks like according to the US Federal Reserve the outlook has not improved. The economy has continued to “contract” and their hope is resting on the stimulus and the Federal Reserve’s steps it has already taken. They cite household spending has seen signs of stabilizing, “but” with continued job loss, declining housing wealth and tight credit, it still is “constrained. There has never been a time in history where fighting a credit crisis with credit has ever won. Maybe it isn’t a lack of credit, but too much credit in the system.

Here is a copy of their statement released today at 2:00 PM EST:

Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing. Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time. Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. As previously announced, to provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is facilitating the extension of credit to households and businesses and supporting the functioning of financial markets through a range of liquidity programs. The Committee will continue to carefully monitor the size and composition of the Federal Reserve’s balance sheet in light of financial and economic developments.

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