The Fed’s minions have a full agenda this week, with scheduled appearances for both movers and shakers as well as those who toil away in relative obscurity. Inevitably, Fed chatter becomes speculation on interest rates, and this week promises to live up to that tradition.
Monthly Archives: November 2005
RESEARCH ROOM UPDATE: THE DEARTH OF SAVINGS…AGAIN
Kevin Lansing, a senior economist at the Federal Reserve Bank of San Francisco is worried. Well, not worried exactly but concerned, to use his term from an essay published yesterday, titled “Spendthrift Nation,” which of course is focused on Joe Sixpack’s unfailing fondness for spending, consuming and otherwise running up his debts. A smoking statistical gun, among many, is the latest trend for saving, which is to say the lack thereof. “In September 2005, the personal saving rate out of disposable income was negative for the fourth consecutive month,” Lansing wrote. “A negative saving rate means that U.S. consumers are spending more than 100% of their monthly after-tax income.” So what else is new? Everyone’s doing it, and it’s barely caused a ripple. Indeed, as Lansing reminds, declining personal saving rates have been the convention for the better part of the past 20 years. Why start worrying now? Lansing gives a few reasons in his essay, which we’ve added to the Research Room. If you’re inclined toward pessimism regarding Joe’s capacity to spend going forward, read on….
STRATEGIC THINKING TAKES A HOLIDAY
The United States doesn’t have an energy policy to speak of, but the government isn’t idle on the matter of oil and gas. Washington’s latest effort on the energy front includes scolding oil companies for the bull market in crude and killing the idea of drilling in Alaska and thereby tapping America’s largest supply of untapped domestic crude. Welcome to “progress” on the energy front in 21st century America.
EQUITY INDEX SCORECARD
MONTH-TO-DATE PERFORMANCE THROUGH NOVEMBER 8
(Ranked in descending order)
Capitalization/Style (total returns)
Russell 2000 Growth Index 1.99% <-- An early sign of growth's rebound?
Russell Midcap Growth Index 1.73 <-- Midcap growth rolling as well
Russell 2000 Index 1.52
Russell Microcap Index 1.5
Russell 1000 Growth Index 1.35 <--Large cap growth looking good too
Russell 1000 Index 1.07
Russell 2000 Value Index 1.05 <-- The start of value's stumble?
Russell Midcap Index 0.95
Russell 1000 Value Index 0.8 <--Large cap value looks tired
Russell Midcap Value Index 0.22
S&P 500 Sectors (total returns)
Information Technology 2.53% <--Tech continues to rebound in Nov
Consumer Discretionary 1.73 <--Who says consumer spending is history?
Financials 0.99
Industrials 0.92
Energy 0.82 <--Energy stocks still cooling off
Materials 0.74
Health Care 0.49
Telecommunications Services 0.42
Consumer Staples -0.24
Utilities -2.14 <--Interest-rate sensitive stocks take a hit
* * *
S&P Equity REIT 2.1% <--Yield sensitive but still holding up
* * *
S&P 500 0.96
International (price change, in US$)
MSCI JAPAN 3.2% <--Equities are still hot in Japan
MSCI EMERGING MARKETS 3.0% <--Emerging markets continue to climb
MSCI LATIN AMERICA 2.9%
MSCI EASTERN EUROPE 2.6%
MSCI PACIFIC 2.5%
MSCI CHINA 1.7%
MSCI EAFE 1.1%
MSCI EUROPE 0.4% <--Sluggish economic growth takes its toll
Sources: Frank Russell Co., Standard & Poor’s, and MSCI
CRUDE TALK IN THE SENATE
Big Oil’s scheduled for a session in the hot seat in the Senate tomorrow. The rhetoric may soar and the charges will definitely fly, but it’s anyone’s guess what catalysts will spawn in the proceedings.
DECONSTRUCTING S&P 500 EARNINGS
Earnings reports for S&P 500 companies have continued to impress in 2005. Will the good times keep rolling in 2006? There’s reason to wonder, in part because interest rates are expected to rise further, and it’s not clear if the stock market will be able to shrug off the trend indefinitely. The United States economy faces other challenges as well, ranging from trade and budget deficits to next year’s arrival of a new and therefore untested Federal Reserve chairman as replacement for the retiring Alan Greenspan.
ATTITUDE ADJUSTMENT
With less than three months to retirement, America’s monetary demigod yesterday warned that deficits do matter after all. Alan Greenspan scolded that the red ink on the government’s budget ledger is a ticking time bomb. “Unless the situation is reversed, at some point, these budget trends will cause serious economic disruptions,” the Fed chief said yesterday in Congressional testimony, according to AP via BusinessWeek. He want on to remark, “I find it utterly inconceivable, frankly” that ongoing budget deficits in the long run “will not have a significant impact on long-term interest rates.”
WAITING FOR THE NEXT BIG THING
BCA Research advised on Tuesday that an economic slowdown was coming. The bond market, the research shop continued, would see the approaching stumble before the Fed got wind of the trend. “Bonds have already discounted a lot of hawkish Fed rhetoric in recent weeks. Moreover, the selloff at the long-end of the Treasury curve is growing tired, according to our short-term momentum measure. Valuation has improved and there should be strong technical support near the March high of 4.65%.”
A DOZEN TO DATE, AND COUNTING
The Fed raised interest rates for the 12th time yesterday, pushing Fed funds up another 25 basis points to 4.0%. Now what? More of the same, of course.
The central bank assured the world that “that policy accommodation can be removed at a pace that is likely to be measured.” That’s central banking-speak for: 25-basis points for as far as the eye can see remains the mantra for monetary policy, much as it’s been since the tightening began in June 2004.
THE CASE FOR PLAYING DEFENSE IN CONSUMER STOCKS
Investors can’t pay too much attention to the consumer. In good times, consumer spending is the fuel that drives bull markets. But the trend has been known to work in reverse as well. The challenge is figuring out which side of the coin will dominate, and for how long. Turning points, as always, are the tricky parts.