The Economy Guy

Stocks fell from the start today, ending down 130 points.  There was basically no stock moving news today, so yesterday’s poor FED pronouncements kept downward pressure on the market (all of them around the world.)

Bonds fell a lot today (increased interest rates).  This is a bad sign of upcoming inflation.  

The Dollar got hammered again today.  It started with a gain in the morning, like I had hoped would happen, but ended was a great decrease in value as it went throughout the day.

Oil and gasoline fell slightly – basically a sideways move – but at an elevated level showing higher prices.

Gold has broken out of its trading range to the upside.  The next test is at the $975 level.  If it breaks through $975, the price is set to make new highs.  I consider gold a “buy” at current levels.  Gold’s recent movement is very bullish for gold, and is also a sign of inflation.

In the news today…..

Lehman Bros – executives are being questioned by the SEC to see if they defrauded their customers when selling those toxic securities that brought the banks down.

Leading Indicators – rose 1% in April.  This is an indicator of what could happen in the next 6 months.  It is composed of 10 components like stock prices, money supply, jobless claims, new factory orders, etc.  So, think about this indicator.  If you think that stocks are currently overvalued (as I do) then you would predict that this part of the components would drop in the future.  Also, money supply is definitely booming – so why only a small amount of increase in the indicator?  Because the other components are going south.  As an economic predictor, the leading indicators are not that great, and should be viewed over a several month period.

Jobless Claims – came in a 631,000 claims last week.  This was down from 643,000 the previous week.  These numbers are so high that the drumbeat of unemployment increases can be heard long before they are announced.  Remember the magic number of 400,000 claims was the “steady state” condition prior to our economic demise, i.e. 400,000 claims means no increase, nor any decrease in unemployment.  The number of people continuing to claim unemployment insurance rose 100,000 to 6.7 million people.  Michigan’s unemployment rate hit 12.9% in April – one of the hardest hit states.

$50M Stimulus Money – is being given to cities hit by auto industry layoffs.  The money is to be used for retraining people into energy efficient and renewable energy jobs.  A city must have an auto industry or supplier and have experienced significant layoffs to qualify for some of the money.  (Too bad the money can’t be used for any other retraining fields – but that’s our government in action.)  Remember that anyone taking the retraining is automatically eliminated from the unemployment roles – even though they don’t have a new job.

UK Credit Rating – S&P has said they are watching the UK’s credit worthiness, and consider it is weakening. S&P are worried about the massive debt that the UK is building to cause their economy to recover.  It is the normal course for S&P to announce a “worry” before it downgrades a rating.  Lesson for today: The US is in the same position as the UK, and if the UK gets downgraded, you can bet that the US will too.  A downgrade means higher interest rates and more interest to pay on debt.

GMAC – is set to receive a bunch more money – $7B -from the US Treasury.  GMAC has already received $5B of TARP money.  GMAC (changed its name to Ally Bank to protect the “innocent”) will become the government’s auto lender of choice for GM and Chrysler.  GMAC merged with the financial arm of Chrysler.  Ford could/will be added if it ever takes TARP money.  The government will be able to dictate the terms of lending by GMAC, and encourage or discourage car buying by manipulating lending terms for this key ingredient of an auto sale.  My speculation – can you think of how the government could “sell” its agenda by controlling GMAC???  How about special terms for buyers of 50 mpg autos???  How about high interest rates on SUVs and Trucks???  Do you think the government is going “too far” in its control of private industry – now nationalized industry???  Remember that the classic method of government encouragement in the past was the use of tax incentives.

Tonight’s Dinner Conversation…..

Alan Greenspan is still on the world stage and talking about the US economy.  He says that our big banks have a large amount of capital to raise – much more than indicated by the “stress tests.”  I wonder what Geithner thinks about Greenspan badmouthing his performance.

Naturally, that doesn’t give me my confidence in the stress tests, but I never had much in the first place.

Greenspan went on to say that the banking crisis won’t end until the housing market stops falling.

These comments continue to give me great respect for “The Maestro” as he continues to speak the truth, as I see it, and has the guts to speak in the politically charged arena of Washington DC.

What are your thoughts about Greenspan???  Do you agree or disagree with his comments?

Here are the last numbers for today:
Dow Jones 30 Industrial – 8292 (down 130 points)
10 Year Treasury Bond – 3.35% (up 0.15%)
Euro – $1.3897
Gold – $951 (up $14)
Oil – $61.05 (down $0.99)
Gasoline $1.80 (down $0.01)