Friday, November 28, 2008
In a shortened week that received absolutely dismal economic news, Washington awoke from its most recent policy slumber and made real progress in the War on Scarcity.
President-elect Obama must be receiving my emails (if you would like to email him yourself simply go to www.change.gov), because he has started to assert his leadership and reveal some of his economic plans. With the announcement of Tim Geithner as the incoming Treasury Secretary, Lawrence Summers as the head of the Economic Council, a commitment to moving forward with a large stimulus plan post inauguration and an aggressive new jobs program, the Dow has had plenty of reason to rally.
Concurrently, Citigroup received another intravenous shot of capital that elevated their ratios substantially, and did so without scalping the equity holders, perhaps modeling the way for kinder, gentler government interventions. And just when you thought we couldn’t handle any more positive news, Paulson announced that another $800 billion facility would address the completely frozen consumer and mortgage securitization markets. Consumer credit cards (700 million or so) will once again be swipable, and mortgage rates fell by record margins. This much good news at once can only be a master conspiracy to ensure that Thanksgiving 2008 will not default.
Mission accomplished! The Dow has rallied a consistent and orderly 15% in the last 4 days. We haven’t had a four-day rally in months. Pass the peas!
Sowing the seeds
The Fed & Treasury began a program this week that more directly addresses where the problems lay. With an effort known as “quantitative easing,” the Fed has lowered real market interest rates. While the Federal Funds rate has influence on the short term credit markets, the longer dated securities markets have barely responded to rate policy changes for a number of years. Simply stated, the algorithm that prices 10-year paper takes a lot more into account than the price of overnight money.
How can the Fed influence the rates on longer dated securities? They can buy them…lots of them. On Tuesday, the Fed committed to buying $600 billion of mortgage backed paper. Rates on 30-year mortgages fell .50% instantly to about 5.5%. This drop makes purchasing houses less expensive for new borrowers and monthly payments more affordable for refinancers. Additionally, the Fed committed $200 billion to revive the ailing consumer loan markets. Rates on student loans, auto loans and consumer credit loans will come in as a more complicated combination of public/private investment capital re-enters these markets. These programs reduce borrowing costs for Main Street directly. While this doesn’t address the lower quality assets that remain trapped within the system, it reinvigorates the markets of higher quality assets that have been held hostage by them.
Focus on the Future
Just to reiterate that markets are forward looking, allow me to depress you with the economic data releases of the day:
- Unemployment claims stand at a 25 year high, with another 529,000 individuals filing for claims within the last week.
- Consumer spending fell 1% in October.
- Durable goods orders fell 6.2%.
- Overall, housing prices have fallen 17% from a year ago.
- 3rd quarter GDP fell by .5%; expectations for 4th quarter declines have increased to as much as 5%.
It would be hard to draft an economic script more dismal than that, and yet the market has completely ignored it by rallying 15%. I emphasize this only to again assert that markets have already priced in our current woeful realities. What the rally suggests is that this week’s government actions increase the odds of economic recovery. Investment strategies must address future, not current, conditions. This welcomed Thanksgiving rally hints at better days.
I find that difficult times help me refocus on the truly important things, and Thanksgiving presents the reflective opportunity to do just that. I am grateful for my family and their support and for my extended family of associates and clients at W&A. As we have always said, “we are all in this together,” and we thank you all more than ever for your continued trust and loyalty.
David S. Waddell
Senior Investment Strategist
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**This blog represents the opinion of W&A and is for informational purposes only. It is not intended to be construed as tax or legal advice by the recipient. Past returns of investment are no guarantee of future results.
***Any data reported in this blog has been compiled from the Wall Street Journal, Morningstar, Investors Business Daily, or various other informational internet sites.