Archive for November, 2009
Bernanke, Obama and the Economy
Posted by Jody Eisenman | Filed under Uncategorized
Yesterday, Ben Bernanke, the head of the Federal Reserve, gave a speech in New York. His central themes were that although the economy was improving, we are still losing jobs, albeit “more slowly”. He also stated that he believed interest rates will remain low for an extended period of time. Despite the job losses (and perhaps because of low interest rates), the stock market continued on its’ dizzying rise to new heights. Yesterday, the Dow rose another 136 points to close at a new yearly high of 10,407. Since the March lows, every selloff in stocks has been met with a virtual deluge of new buying. Of course, there are still many “doom and gloom” analysts who either think the market is well ahead of itself, or are even calling for a new steep decline. Anecdotal evidence seems to indicate that the average individual investor has only participated in this rally if they didn’t sell last year. Otherwise, based on mutual fund inflows and outflows, it seems that most people view this rally with a very healthy degree of skepticism. Meanwhile, the Dow Jones is now up almost 4000 points off the lows in March.
What I find fascinating is the support Obama has considering the state of the job market. One of the major beneficiaries of this rally has been Wall Street. Despite this, Wall Street tends to be Republican, and most people here would probably vote against Obama if he ran for office today. On the other hand, the unemployment rate among the under-24 year old workers is now about 19%, and the rate among African Americans in the same category is about 30% (as quoted by Bernanke). Yet, paradoxically, these groups tend to be among the strongest supporters for Obama! Truly fascinating.
The Government Loses its’ Case
Posted by Jody Eisenman | Filed under Uncategorized
In a stunning defeat for the US Justice Department, two Bear Stearns Hedge Fund Managers were acquitted earlier this week. These two traders, Ralph Cioffi and Mathew Tannin, had been several hedge funds under the auspices of Bear. Although their strategy was somewhat complex, essentially their strategy was to borrow money at relatively low rates and buy mortgage backed securities. When the housing market collapsed last year, their funds went with it. The case was primarily based on personal emails, where the government claimed that while the managers expressed optimism and continued to recommend investors keep money in the fund; their emails supposedly stated just the opposite. Although I don’t have any opinion on their guilt or innocence (the jury has already decided that), the managers were put into a tough position. If they told investors their fears, they would have a run of the funds, under which the subsequent liquidation would hurt everyone. On the other hand, how could they express optimism when they believed otherwise?
In fact, this was a similar choice facing the large banks last year. In the case of Lehman Brothers, the government is still considering whether to file criminal charges against former CEO Dick Fuld. Should he have stated his worst fears publicly, which could have led to a panic? Or was he correct in maintaining a public persona of confidence in order to maintain stability while the walls were collapsing around him? These are very difficult legal issues. In the Bear Stearns case, the jury just didn’t feel that the emails were conclusive enough. The two still face SEC charges, which require a lower level of proof as compared to a criminal case. Had they been found guilty of that latter, they could each have faced as much as twenty years in prison.
In the meantime, the stock market continues to move higher and higher. The Standard and Poor’s’ 500 Index closed yesterday at 1098, which is about 10% higher than it was at the beginning of September, and over 60% higher than the March lows. Despite this, equity inflows into mutual funds are actually still negative this year. What that means is that more people have taken money out of mutual funds than put money in. Thus, most investors still view this rally with skepticism. I believe that this attitude could allow the rally to continue throughout the remainder of 2009. Should inflows start to rise, we could be heading even higher.
Unemployment, the Fed and the Market
Posted by Jody Eisenman | Filed under Uncategorized
Last week, we saw the unemployment rate jump to 10.2%, the highest level since 1983. In addition, if we include the workers who are now part timers but are looking to be full time, and those who have given up looking, the rate becomes an incredible 17.5%.(http://www.nytimes.com/2009/11/07/business/economy/07econ.html?_r=1&th&emc=th)
In addition, the Federal Reserve Open Market Committee (the ones that decide where this country is heading economically) announced this week that although economic activity is picking up, sluggish income growth, tight credit and lower housing prices continue to drag on the overall economy. As such, they anticipate keeping Fed Funds where they are now (0-.25%) for an extended period. What that means in plain English is that low interest rates are here to stay for the foreseeable future.
Despite all this, the stock managed to rise an additional 3% last week, confirming what I have been writing about for the past few weeks. In a way, this is paradoxical. On the one hand, as rates remain low, it is cheaper for businesses to borrow in order to expand, and stocks become more attractive relative to the low interest rates offered on bonds. On the other hand, if we take this to an extreme, the more people out of work will obviously hurt the overall economy in terms of both productivity and buying power. It would seem to me that while the wealthy are doing okay, the job market is really hurting the lower and middle classes. If we want to continue having a vibrant middle class, this must change, and it is up to President Obama and the current administration to effect these changes. I will try to write more about this tomorrow, including the paradox of where Obama’s support comes from.
