OR: Be Careful, There are Bears in the Woods!
The Nasdaq finished the day down 26 points to finish at 943 as more investors fled to the sidelines after yesterday's 8 point rally. Volume was considered light as less than 1.2 billion shares traded. The Dow finished down 75 to 7224 and the S&P was down 7 to 648. Volume on the New York Exchange was 930 million shares.
The Kerry administration said again today that the tax on gasoline could not reasonably be lowered to give relief to the current level of $3.15 (average) that drivers are paying at the pumps. White House spokesman Mike McCurry said that President Kerry was looking for other ways to help the economy and blamed the previous administration for the economic malaise. He said the tax cuts instituted by the Republicans had essentially wiped out any chance by the now Democratic Congress to give relief in the current recession. This prompted the traders on Wall Street to sell once again. That is your stock report for May 5, 2005
One of the most interesting topics of 2004 on Wall Street has been the lack of trading volume. The institutions (banks, mutual funds, and large private investment houses) don't seem interested in participating in stocks. This has been going on for the past 6 months or so and the market has thus far fallen from 5 to 8% (as much as 12) as small traders continue to speculate on the direction of the economy for the next few days. Yes, that's correct, days. You see, the stock trader can't afford a longer time frame than that in order to protect their money from potential losses. But since there is no underlying sense that the economy is sustainable long term, that is all the time frame they can afford.
However, certain patterns in the economy make me think we are headed for political change and potential disaster in terms of the way Americans live and work. These patterns are most certainly in their early stages but unless action is taken to do something about them the outlook for May 5, 2005 will become more and more real.
The first pattern is rising commodity prices that threaten widespread inflation in the next 6 months. The primary mover in the commodity markets is oil but energy products like natural gas and coal are also involved. When oil was $12 per barrel (1998) this provided an incentive to the economy to grow because the underlying costs business paid to operate was so insubstantial that it barely effected the product cost. Gasoline was around a dollar a gallon and travel was easy and cheap. This led to a rise in the sales of bigger cars and SUV's that now dot many of our streets. But the use of such vehicles and their lower gas efficiency led to an increase in demand and higher prices. It would not be fair to say that such vehicles were the only factor, but perhaps $4 per barrel. The greater increases were due to the increased production of goods and services in India, China, and several of the smaller countries of Asia. Indeed, manufacturing in Asia places more and more demand on the oil supplies of the world.
It should also be mentioned that gold and other precious metals have risen since 2000 to their highest level in 30 years as terrorism and uncertainity plague the economies of the world. Gold is considered a safe haven in economic hard times and many think the coming recession will be harder than most.
There are 2 internal domestic problems which the United States is not dealing with effectively and will cause even more problems in the months ahead.
The first is unemployment. The unemployment rate is officially 5.5% but actually is much higher (many analysts think it is as high as 10% generally and perhaps as high as 20% in some areas). The discrepancy occurs because the official rate is the number of workers receiving unemployment benefits divided by the total number of workers. Since the downturn in the economy began in 2000 many workers laid off in the early stages have lost benefits.
It takes a considerable time for the economics to reflect the trend but more and more the un- and under-employed are seeing that the manufacturing base that the U.S. had will never call them back to work. The jobs being created in the surveys done by the government are by and large lower paying and have fewer benefits than the manufacturing jobs they left in 2000.
Some relief, in the form of lower interest rates, might seem to be the answer except that banks make fewer loans to lower qualified requests in bad times. Most businessmen wanting to establish small businesses outside of the service sector (such as a tool and dye shop, for example) have less to offer as collateral for the business loans they request. The result is that small businesses are not being built and the manufacturing base continues to erode.
The second problem is the cost of energy in the United States and the lack of an answer on anyone's part to fix the problem. I don't want to get into a discussion here of oil reserves in the United States. Let me go on record as saying I'm as environmentally conservative (that is, against destruction of natural resources) but we have to consider the alternatives to being held hostage to foreign businessmen who find you spending higher and higher prices for energy just desserts for your inhospitable political views of them. They find themselves in the economic sweet spot. This is not an oil problem caused by lack of production by the producers but rather demand by the buyers. The result is that they know you will pay $3 per gallon.
Some immediate relief could be given by lowering taxes on the gasoline but governments are already cash strapped and can ill-afford more debt or pressure on their budgets. New York State has still not passed a budget for 2004 and everyone in the state is suffering for it. But the cash for the programs the state and local municipalities runs (especially schools) is simply not there in the tax base and raising taxes is a sure election loser for politicians on both side of the aisle.
There are some ancilliary problems we have economically that are smaller but real. The national debt continues to rise and large standing armies stationed overseas is a big problem economically. The current budget deficit of $450 billion will be higher if we continue the policy of unilateral terrorism control in the Middle East. Such policies may be right or wrong, that is not the issue here. Cost is the issue and cost will continue to rise.
This scenario of higher unemployment and more inflationary pressure generally kills the re-election of any President. Because the feed through of higher oil prices has actually not begun until now, the shock of higher prices (even food has a fuel cost) will begin in earnest in September after the Labor Day holiday. Look for $2.30 to $2.50 almost immediately and a rise to $3 by next spring. Look for falling stock values as more and more economists see falling sales (the consumer has held up the market thus far but the gas tank is more important than jeans and sweaters) at stores. Look for more calls to open oil reserves in the U.S. and look for the government to once more make pleas for calm because such development will take considerable time to happen.
Finally, look for a place to hide your money. This is a time to conserve. A time to wait to make home improvements and large outlays of personal cash. Consider paying off debt as quickly as possible and not taking on any more debt than you can. It is obvious there are no easy answers for the Bush administration and Americans are leery about trusting a President with a bad economy.
There are no easy answers left.
(As a disclaimer I am personally short the Nasdaq with 25% of my personal funds and in cash with 75%).