President Ford R.I.P

President Gerald Ford passed away yesterday evening at the age of 93 years old. While he was a great American—college football star, congressman, Vice President and eventually President—he will be remembered mostly (and unfortunately) for the pardon of his predecessor, President Richard M. Nixon, remarking “our long national nightmare is over.”

In his 29 months in the White House, he was the only post modern Commander-in-Chief not to enjoy a honeymoon (100 days free of press scrutiny) and was most often lampooned on Saturday Night Live as being clumsy, with Chevy Chase trade-marking the first “Presidential pratfall” at Ford’s expense in a cornucopia of scenarios—from putting a star on a Christmas Tree to exiting Air Force One.

He was also very early to recognize the threat that inflation posed to our economy and even coined a term, “W.I.N.,” (Whip Inflation Now) to try and stymie prices from spiraling out of control. Ford also failed in his vision of a Federal Reserve Chairman’s term to run concurrently with the President’s, in order to pinpoint focus on price control.

Needless to say, he was a great man and a dedicated public servant. He was the longest living President in U.S. history, surpassing Ronald Reagan (whom was also 93) by a few months. He will surely be missed.

(Bad) Boat Analogy

If everyone stands on the same side of the boat, it is bound to capsize. The same can be said for the market. Take 2000-2001 when everybody and their neighbor were bullish. People giving stock tips to strangers on the street. I had a cab driver tell me about an internet startup that was going to change the way the world thought about gardening and landscaping. You couldn’t attend a cocktail party without being regaled of tales of 8000% percent gains over the course of weeks from some IPO which happened to have “.com” somewhere in the title. I don’t want to depress anyone over the course of making my point, but you get it.

In 2001 the market experienced a rather nasty downturn when the S&P 500 went from roughly1360 to 1140 over the course of the year. In 2002, the pain continued. Everybody was trying to be a bullish contrarian and were rewarded with a ride on the S&P 500 that made Disney’s Space Mountain seem tame. First we broke below 1000. Then a year later it was about 770. At that point, the financial press and its remora-like commentators saw no recovery ever—not only was the internet done, but so was business, the economy and perhaps life as a whole. We were heading toward a barter economy and sooner our later the system would collapse reminiscent of the great depression.

Luckily, the readers of the web-log are bright individuals, so I don’t have to go into too much detail about what followed: i.e., the NEAR DOUBLE we have experienced since the October 2002 lows—sitting at about 1425 on the S&P 500 today.

I, for one, have been nervous about this boat and where I stand among my fellow bullish seamen. But I think that something is desperately missing in this analogy, which I will devote some time to below.

1996-2002 was a different boat. Maybe it was like a clipper ship or a schooner. The US was at the wheel, helm and manning both port and starboard. Japan was still in the doldrums, the UK/Europe were afraid to board as they were more preoccupied with inflation. China and India were just beginning to build docks (and the necessary infrastructure) for a boat of their own.

Today’s ship is more comparable to a Cruise Boat or tanker in my opinion. The point being, it’s a bigger boat—a huge boat, if you will. It would take more than a handful of wishful commentators, press and investors to tip this baby over.

In addition, our European and Asian neighbors were no longer at the dock wishing us a safe voyage; they are integral members of this voyage.

Very simply stated, the bigger the boat, the harder it is to capsize. The caveat emptor here is though the bigger they are, the harder they fall.

So I think there is plenty more room on one side of the boat for the time being. As long as the global nature of the economy continues: the President of the US maintains sole trade agreement negation powers, the newly-elected democrat congress doesn’t make protectionism a “call to arms” and the Fed/Treasury Dept. can keep Senators Schumer and Graham at bay—the economy (and subsequent rally) is not in jeopardy.



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Holiday Potpourri

The economy is cruising. Unemployment remains near a record low at 4.5%. GDP growth has been firm, between 2-4% over the last few years. Inflation remains in check (though slightly stronger than the Fed would like). The interest rate cycle appears to have peaked (despite no signal from the Fed that they are coming down anytime soon).

The market is also cruising. Fundamentals are reasonable and technicals are generally strong (despite some listless action as of late). More importantly, the market has managed to shrug off a deluge of geopolitical events—mainly the situation in the Middle East and the recent powder keg that Iraq has morphed into.

The holiday season also seems to be off to a promising start. With the exception of the largest catch-all retailer of them all (Wal Mart), sales have been strong across the board. Black Friday was another record, showing special promise among Clothing (high end/specialty, name-brand clothiers), Consumer Electronics (I-Pods, Game Consoles, Phones/PDA’s, Digital Photography, etc.) and Toys.

Now I am not calling a top in the economy, market or any particular sector—but I think some caution is warranted. When things are this good, sometimes there is not too much room for fundamentals, technicals or economic data to improve— minus inflation (which could retreat further alongside weakening energy and other commodity prices). In fact, a simple risk-reward analysis shows most of the major averages are fairly extended on their respective daily, weekly and monthly charts.

Now everybody knows that often overbought often becomes more overbought and there is nothing to suggest that this time is any different. The simple fact of the matter is that all signs point to the Fed engineering the all-elusive “soft landing,” which in this case has resulted in another cliché—the “Goldilocks Economy’—not too hot, not too cold. Since the layman’s translation of this scenario is ‘perfect,’ what could improve?

The fear indicators (VIX, Put-Call, Sentiment, etc.) also suggest that investors have been lulled into a sense of security and are far from exhibiting any level of concern. The market did something similar in the 1990’s following the massive sell off on Black Monday in 1987—which does parallel the aftermath of the Technology Bubble the market saw in 2000. Now it isn’t a “false” sense of security by any means, but keeping in mind that the stock market is a forward pricing indicator, can anyone say that in 6-9 months time that these ideal conditions will still exist?

I batted around the idea a few posts ago that Santa may have already visited and frankly I am not sure. Common market knowledge holds that once the general public becomes aware of a particular phenomenon, in this case the “Santa Claus Rally,” it generally is no longer valid. I think the same can be said for “The January Effect” which will become the talk of the financial press a few weeks from now.

Investors also need to become more aware of the political situation at home, as democrats retake congress. We are also in the wake of a last ditch legislative effort by republicans, whom passed a Christmas Tree Bill, that extended some popular tax cuts (college tuition deduction), created some new ones (private mortgage insurance) and a host of other measures (energy drilling off the gulf coast).

President Bush also has his hands full over the next few weeks, as his team reviews the recommendations of the Iraq Study Group, State Department and Pentagon. Recent poll numbers suggest that less than 10% of the public is happy with the way the war in Iraq is being conducted, suggesting that the President absolutely has to make some major changes.

In summary, investors have a lot on their plates to digest over the coming two months, with today’s FOMC meeting an appropriate way to kick things off. I will be updating less frequently as the holidays approach.



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Dollar Drop

The US Dollar has come under considerable pressure since the beginning of 2006, with the selling accelerating in the fall. As it stands, the greenback is near the all-important 2 number with the GBP and 1.33 with the Euro.

There are a few reasons I have put together for the slide:

1. Speculation the Federal Reserve will begin easing the Fed Funds rate soon
2. Continued hawkish commentary from the ECB and British Exchequer on their lending rates
3. A continuation in the federal deficit
4. Substantial drop in new housing starts, as well as the residential market as a whole
5. Weak holiday forecasts from Wal-Mart
6. The U.S. is engaged in a war which is being portrayed by the media as anything but winnable

My response:

In my opinion, the FOMC will not begin the easing process anytime soon. In fact, the last series of increases should have taken hold already (the lag) and GDP remains strong, with inflation abetting only slightly.

The Europeans and British are more apt to target price stability and therefore will always be more on the hawkish side. Few instances to the contrary are available, as bankers abroad are fixated on inflation.

The deficit is under control and requires examination beyond just a number—in fact, as a percentage of GDP it is rather tame and is among the lowest in terms of first world countries. This point actually dovetails with #6, as spending for the war is quite a large component of the deficit.

In addition, most states are in the green—I believe that 48 of the 50 have a budgetary surplus (I know Michigan is in the red, the other may be Alaska), which is quite a nice backstop in fiscal policy. It would be nice to see social spending reduced in tandem with the extension of the Bush Tax Cuts, but with democrats running the Hill it’s quite improbable.

The housing market runs in cycles, but the overall trend has been higher. Home ownership is still at a record number, especially among minorities. As rates moved higher it was inevitable there would be a slowdown, as in many cities/areas the market got ahead of itself, i.e. Florida, Boston, Chicago, Southern California and Las Vegas to name a few.

Finally, Wal-Mart is no longer the single best barometer of sales. Many people are quite averse to shopping there for a myriad of reasons: the perception they hurt “mom and pop” stores, the struggle with their workers and their “right” to unionize, etc.

Consumer electronics are off to a monstrous start to the holiday season, with new game consoles, I-Pods, digital cameras, smart phones, flat-panel displays/ TV’s, PDA’s, etc. stealing the show. Sony forecasted a barn-burner of a December just this morning, as they see record demand across the board for their products.

All in all, I think a collapse in the Greenback is patently ridiculous. GDP is strong, unemployment remains at a record low of 4.4%, Interest rates aren’t coming down anytime soon and the consumer has not thrown in the towel (as been predicted many a time) and the housing market will not crash, should the above hold



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