9/14/07

Economics

fiscal profligacy (Government spending as a percent of GDP is too high and the looming explosion in entitlement expenditures will make it worse. There is no good solution save spending discipline.). The transportation bill:

http://www.captainsquartersblog.com/mt/archives/013024.php

A couple of very positive pieces of news yesterday:

(1) in the last week, approximately $8 billion in commercial paper was not able to be refinanced--which compares with approximately $70 billion a week in CP that couldn’t be rolled over during the last three weeks. This follows the news Wednesday that American Express had refinanced approximately $2 billion in CP with little trouble, and

(2) the weekly data released by both the Fed and the European Central Bank indicated that each had injected substantial funds into their respective monetary supplies.

If you have been following our rantings about the need for liquidity injections by the Fed to forestall a recession, then it is easy to deduce how important we think that these developments are. Item (2) above directly addresses our concern; item (1) above is anecdotal evidence that either (2) is working and/or that markets are adjusting and isolating the sub prime problem. We clearly need to await further data to be sure that these developments aren’t just flukes; but taken together the AXP refinancing, the dramatic increase in this week’s CP roll over rate and the central bank injection of liquidity are fairly significant signals that the freeze up in non sub prime business financial transactions is thawing.

This, of course, means that we have to completely re-write the Economics section of this week’s The Closing Bell in which we strongly condemn the Fed for its lack of response to the liquidity problems in the commercial paper market and conclude that if the Fed didn’t take action by the end of next week, the chances of the US economy avoiding a recession were, in our opinion, no better than 50/50--but the alternative (not re-writing it) is so much worse.

If we are correct this won’t mean that the economy isn’t slowing more than we originally expected; but it will mean that there is a decent probability of avoiding a recession.

One final point: long time subscribers will recall that at the beginning of Bernanke’s reign we constantly complained about the ineffective way the Fed was communicating with the Street. Well, here we go again: the credit markets have been in vapor lock, the Fed takes steps to correct it but for no apparent reason remains mute; certainly, once the data is out everyone will know--but that is beside the point. That point being that a word from the Fed that it recognizes the problem and is taking action just might prevent credit market participants who are under psychological as well as financial stress from making potentially harmful decisions that they otherwise wouldn’t make.

Politics

Domestic

International War Against Radical Islam

The Market

Technical

Fundamental

Here is an opposing view on what the Fed should be doing with regards to the credit crunch:

http://www.poorandstupid.com/2007_09_09_chronArchive.asp#4536475116948792401

And here is one on what happens to stock prices after the Fed cuts the Fed Funds rate (must read):

http://www.hussman.net/rsi/fedfundscut.htm

News on Stocks in Our Portfolios

Staples’ (Aggressive Growth Portfolio) Board of Directors will propose amending the company’s charter removing the provision that requires a 2/3 majority versus a simple majority to approve a significant corporate transaction; in other words, the company would be making itself easier to acquire.

EPS: 2006 $1.26, 2007 $1.47, 2008 $1.70; DVD: $.29 YLD 1.6%

http://finance.yahoo.com/q?s=SPLS

Microsoft (Aggressive Growth Portfolio) has raised its quarterly dividend per share from $.10 to $.11.

EPS: 2006 $1.20, 2007 $1.42, 2008 $1.70; DVD: $.39 YLD 1.4%

http://finance.yahoo.com/q?s=MSFT

UPS (Dividend Growth Portfolio) has been granted authority to expand operations in Japan.

EPS: 2006 $3.86, 2007 $4.15, 2008 $4.50; DVD: $1.68 YLD 2.2%

http://finance.yahoo.com/q?s=UPS

A positive article on the outlook for gold:

http://www.seekingalpha.com/article/47072-is-gold-ready-to-break-new-cycle-highs

More Cash in Investors’ Hands