Archive for December, 2008

Rate Cut Rally

Tuesday, December 16th, 2008

The chart above shows you that the rally we've had off the November lows is following the clearly defined uptrend line that I have drawn in (positive). You can also see that we popped above the 50-day moving average line (positive). It, however, didn't make a new high for December (not positive).

There are several reasons for it (positive sentiment about: the accomodative Fed, belief that we will have a stimulus package ready to be signed when the administration takes office, hope that the housing crisis can bottom in coming months as the Fed now is planning to buy securitized mortgages from banks so that they can use their new capital to make loans) , but I believe we are into a rally that will push to the 950 S&P level by year-end and potentially 1010 or even 1050 by Inauguration Day.

You'll notice that volume today was a bit higher than in recent days. The technical indicators (MACD and OBV) are both pointing upwards toward a continuation of the rally. And, probably most hopeful, you can see the upper Bollinger Band begin to curl up. A rally where the market runs up the upper green band – similar to how it ran down the lower green band on the left side of the chart during September/October – for the next five weeks until Inauguration seems like a very good possibility.


Governor Arrested – What's Next?

Friday, December 12th, 2008

The article below came from the Business Empowered PAC a subsidiary of the Champaign County Chamber of Commerce. Given the interest in what the future holds for the governor, I thought you might like to read it.

If you are interested in the political process and how it impacts the business climate, you may want to consider membership in the PAC. Contact the Chamber for details.

Governor Arrested – What's Next?

With the arrest of and criminal complaint filed against Illinois Gov. Rod Blagojevich, many Illinois residents and lawmakers are calling for the immediate removal of the governor. The governor could simply resign his position, which would elevate Lt. Gov. Pat Quinn to the office of governor. However, Blagojevich has already stated that he refuses to resign. Other than a resignation, there are two options to remove the governor from office, impeachment and Supreme Court Rule 382.

Article IV Section 14 in the Illinois Constitution states that the impeachment process starts in the House of Representatives. This is where an investigation begins, and a majority vote is needed to approve bringing formal charges of wrong doing against an elected official. If the charges are approved by the House of Representatives, the official in question is considered impeached. It is important to note that the constitution does not require any specific reasons to justify the impeachment of an official.

The process then moves to the Senate where deliberation of the impeachment charges begins. The Senate convenes a process similar to a courtroom trial where witnesses are brought in to testify on the merits of the charges. The Senate President acts as the presiding officer of the proceedings for impeachments of most elected officials, but in the case of the impeachment of a governor, as would be the case with Gov. Blagojevich, the Chief Justice of the Illinois Supreme Court is the presiding officer.

A two-thirds majority in the Senate is needed to convict the official of the charges. According to the Illinois Constitution, the only sentence the impeached official can receive from the Senate is the removal from office and disqualification to hold future public office in Illinois. Any additional criminal charges would have to be filed by a law enforcement agency, such as the FBI.

Supreme Court Rule 382
Supreme Court Rule 382 has been brought to light by Illinois Attorney General Lisa Madigan as another option to remove Gov. Blagojevich from office. The somewhat obscure rule allows an individual to file a request to the Supreme Court for the court to conduct a hearing to determine if the governor has the ability to serve or resume office.

GM Bailout

Thursday, December 11th, 2008

The House passed the bailout plan yesterday, but the Senate is not likely to be as accommodating. Look for the Senate to potentially reject the bailout, then later pass it with some significant compromises that make the package more like a bankruptcy plan.

I know it sounds harsh, but for any plan to be effective, all parties will have to feel the pain. The equity holders should be wiped out and the bond holders should be converted into the new equity holders. The union contracts and the management compensation packages should be voided and reinstated with equivalent packages that Honda and Toyota have for their US plants.

Here is the statistic that speaks louder than anything being said in Congress, proving that the current business model for GM, Ford and Chrysler needs to be broken apart and rebuilt:

In 2007, Toyota (TM) and General Motors (GM) each sold 9.37 million vehicles.
In 2007, Toyota made $17 billion, while General Motors lost $38 billion!

GM can sell cars just like Toyota. Clearly, if they are selling the same number, its not as if buyers are shunning the models produced in Detroit due to esthetics. The problem is their cost structure – too much debt and too much salary. Until those are fixed any bailouts will be money flushed down the drain since it just postpones the inevitable day of reckoning.


Money Supply and Velocity

Thursday, December 4th, 2008
Money Supply: Above on the left is a graph of M2 (Money Supply) as measured by the St. Louis Federal Reserve for 2008. To encourage economic activity to increase, the Federal Reserve increases the supply of money in the system.

You can see that starting in late September, coincident to the Lehman Brothers bankruptcy, the Federal Reserve began pumping a significant amount of money into the US financial system in an effort to jump start it and/or rescue it.

Velocity of Money: the other part of the equation is the actual activity in the economy. As the money supply increases, you need to have people make financial transactions with each other to get the money circulating – that is called the velocity of money.

Jack Wilkinson wrote that "the rate at which money circulates, changes hands, or turns over in an economy in a given period is its velocity. Higher velocity means the same quantity of money is used for a greater number of transactions and is related to the demand for money. It is also called the velocity of circulation.

"Simply put, velocity is the movement of money in the economic system. It is ESSENTIAL to the health and vitality of our system that the money moves. The faster the better. A healthy economy is one in which there is a lot of activity, with its citizens buying and selling goods and services. There are plenty of fancy equations and wordy theories for this, but it all comes down to “activity.”

"If, for example, in a very small economy, a farmer and a mechanic, with just $50 between them, buy goods and services from each other in just three transactions over the course of a year:
• Mechanic buys $40 of corn from farmer.
• Farmer spends $50 on tractor repair.
• Mechanic spends $10 on barn cats from farmer

"$100 has changed hands in the span of a year, even though there is only $50 in this little economy. That $100 level is possible because each dollar was spent an average of twice a year, which is to say that the velocity was 2 / yr.

"Velocity is, in fact, one of the greatest concerns in our current credit crisis. Specifically, the slowing of velocity. Credit is the fuel of an economy. The use of credit enables a business to buy products or services and generate more income, thus fueling its growth. If an operating business cannot buy the goods of a producer, as in the previous example, the supplier will not be able to buy the goods he needs/wants and the chain is broken.

If I have million dollars that I hoard in my mattress, it neither earns interest nor is it loaned, as it would be if deposited in the bank. It really does no one much good. However, if it is deposited in the bank and the bank won’t make a loan how is it different than the mattress? It isn’t. But, should we just lend or borrow simply to keep the system going? I think not. Look at the situation we are in now. Of course, a prudent lender would never make a loan to a borrower who is not able to pay. That lack of prudence on the part of many lenders is at the core of our current economic downfall .

"Many of us are not buying goods from others right now. Retail sales, the most obvious of exchanges, are down. The retailers are constrained from buying goods supplied by the manufacturers, who have to reduce labor. The people who no longer have an income are certainly unable to buy things other than necessities, thus, further reducing the number of exchanges in the economy."

The best forecast for Velocity is generally the Consumer Confidence Index. As confidence begins to increase, then consumers begin to spend. What we are seeing is that confidence crashed along with the economy, but people are starting to get complacent and begin to spend again. Above on the right is a graph showing the most recent data with confidence numbers beginning an uptick.

Probably even more relevant is the Expectations Index. This sub-index of the Consumer Confidence Index characterizes consumers perceptions about the economy over the coming six-month period. This index increased from a reading of 35.7 in October to 46.7 as of November 26th. If this becomes a trend, then we should see consumers begin to spend and the velocity of money in our economy increase.

Given the increased money supply, even a small increase in the velocity of money can have a significant impact on our economy, further raising the Expectations Index and the Consumer Confidence Index.

We are no where close to out of the woods, but these indicators do provide some hope that an economic recovery in mid-2009 is possible.