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.) Republican leadership’s position on the omnibus budget bill:
http://www.clubforgrowth.org/2007/12/mcconnells_bad_budget_plan.php
protectionism (Free trade is a major positive for world and
http://article.nationalreview.com/?q=YTIxY2UxY2Y0NjUxMGI3MzMyNTRmNThlOTk4OGI1NTI=
Fed policy (reading the data correctly).
Well, that didn’t take long. Yesterday morning the Fed announced several measures to address the freeze up in the credit markets.
Point one: nice try. Granted the steps announced are ones that any academic could be proud of. Unfortunately, the Fed chose to ignore (1) an inverted yield curve (remember banks don’t make money and hence don’t make loans when the cost of money [short term interest rates] is higher than its sale price [long term interest rates]) and (2) the very sluggish growth rate in the monetary base [slow growth of monetary supply = slow growth of loans],
Point two: the Fed’s new measures. But to understand them, I think it important to understand the specifics of problem these measures are designed to solve. First, for reasons of trust and confidence brought on by the sub prime crisis, corporations that normally use commercial paper to finance short term credit needs haven’t been able to do so. This forces them to go to their banks to obtain that financing--which they do; but then for reasons of diversification of risk, fee generation and need to finance additional loans, the banks sell all or part of those loans to other financial institutions. However, for reasons of trust and confidence brought on by the same sub prime crisis that prevented the corporations from selling their commercial paper in the first place, those other financial institutions haven’t been buying those loans. That means that if the bank in which the loan originated can’t sell the loan (re-liquefy its balance sheet), it can’t make new loans--hence, the ‘freeze up’.
Now to the Fed’s new measures; they are (1) to auction money [it creates] to those banks who originated the loans described above; that is allow them to ‘buy’ money that they can then lend to other corporate customers who also have be unable to sell commercial paper to meet short term financing needs, (2) an agreement to provide funds to the European and Swiss Central Banks [called ‘swap lines’] which will in turn funnel them to their member banks [who just happen to be purchasers of US bank originated loans].
What does this all mean?
(1) It means that prior to the Fed’s meeting on Tuesday it was working on solutions to the credit ‘freeze’ problems and therefore was not unsympathetic to the risks it posed. After all, it would have been impossible to get those European banks involved in this solution on a couple of hour’s notice--so let’s give them at least partial credit for reading the data correctly.
(2) Unfortunately, it also means that the Fed used a complex, technocratic approach [auctions and swap lines] when a simple more easily understood solution [lower the Fed Funds rate and increase the growth rate of the money supply] might have been better and in the process angered a huge chunk of the financial community. Yeah, the new measures might work; but for the moment color me skeptical.
(3) It means that in Tuesday’s ‘guidance’ statement, even if the Fed couldn’t have gotten specific about the details of these new measures to alleviate the liquidity problem in the short term credit markets [as they claimed in a subsequent news release], they nonetheless could have followed the references to the difficulties in financial markets with a note that they would soon announce new measures to solve that problem--so, in my opinion, the Fed made the same mistake it made in the initial months of Bernanke’s reign--the failure to communicate its policy to the Markets which is particularly egregious at a time when the US economy is faced with serious problems.
Point three: The importance of all of this is the loss of investor confidence. In the long term, if investors, in general, can’t trust the Fed’s communications and judgments, then they will price additional risk (lower price/earnings ratios) into security values. In the short term, the last two days have resulted in some sizeable losses to the hedge fund managers (they shorted stocks after the Fed meeting, then got whipsawed yesterday morning). While I may not feel a lot of sympathy for this group of folks, I do have a lot of friends in that community and they are universally disgusted (which by the way is not the words, none of which are repeatable, that they used) by the Fed’s actions. (Their position is that the Fed is completely out of touch with economic realty which will result in a slow and ineffective response to the credit crisis and that will lead to recession.)
The point here is that as a group they have been active participants in the recent rally and anticipated buying more stocks through the end of the year; if they do as they now say, they are big sellers of stock in general and short sellers of the financial stocks, in particular. If this results in a sharp sell off, it may mean that the improvement in investor psychology that occurred since the November low has been squandered by an out-of-touch Fed bringing a halt to the year end rally and possibly initiating yet another leg down in the financials. Bottom line: While our Price Disciplines warrant no action, the needle on my caution meter, particularly in respect to our holdings of financial stocks, is near the red zone.
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Subscriber Alert
The stock price of Oshkosh Trucks (OSK-$48) has once again fallen below the lower boundary of its
Aggressive Growth Buy List
Company Close 12/12
Expeditors Int’l 46.40 42-48
American Eagle OF 21.66 21-24
Reliance Steel 54.12 49-55
Fastenal 41.97 38-43
Rockwell Collins 71.96 65-75
Simpson Mfg 27.63 26-30
Abercrombie & Fitch 81.50 71-81
Harley Davidson 45.72 44-50
Company Highlight
Nordstrom’s is a specialty retailer which operates a chain of department (101) and outlet stores (58) selling clothing, shoes and accessories for men, women and children. In addition, JWN sells merchandise through its website and direct mail catalog. The company has grown profits and dividends between 10-15% over the last 10 years earning an impressive 25-30% return on equity. It carries an A rating from Value Line and has a debt to equity ratio of 22%. JWN should continue its above average rate of earnings and dividend growth as a result of:
(1) its focus on upper middle class customers who are less likely to be impacted by the problems in the home equity loan difficulties,
(2) its strong emphasis on customer relations, superior service and distinctive merchandize,
(3) management’s continuing emphasis on margin expansion opportunities,
(4) Its aggressive stock buy back program--in the third quarter alone, the company bought back 16.4 million shares.
With an expected dividend growth rate of 13-15% and a 1.5% current yield on its stock, Nordstrom offers an attractive value.
EPS: 2006 $2.55, 2007 $2.80, 2008 $2.98; DVD: $.54 YLD 1.5%
http://finance.yahoo.com/q?s=JWN
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