Equity Pimps

Interest Rates

Short-term Treasury techs are bullish so we believe that we will see modestly lower yield in the coming weeks. This coming week has CPI and anything greater that +0.2% core will not be tolerated by the Treasury markets.

Import prices were +1.6% in May. Core Import Prices were +0.7%. This is of concern for inflation abatement. The question remains: to what extent are higher energy prices responsible for higher prices of other goods? The big issue here is that there is little that the Fed can do about the price of crude. The choice to consume less gasoline, for example, takes place on the individual or family level and we are paying the price for many years of bad choices of vehicles which use too much fuel. Add in 30 years of disregard for things such as nuclear power and there is little mystery.

Equities

With little market action and little to talk about regarding Treasuries I will attempt some comments on equities. I know that I know little about equities. From my perspective, it is easy to understand the forces that drive fixed-income securities and especially Treasury rates. They are all about inflation and they are the most secure investment in the world. Equities are strange because they are driven to a large extent by greed, herd mentality and other quasi-rational forces not to mention funky accounting. Equities seem to be suffering at present from the effects of two forces: 1) the belief that corporate profits will diminish and 2) concern about inflation. The corporate profits thing is indeed strange. Equities have been flat for something like 7 years. They seem to be only loosely correlated to profits. It used to be that case that a company's value was correlated to its profits and the dividends disbursed to the shareholders but times have changed.

The inflation thing is strange. Read what I wrote in last Friday's newsletter: "Morning brain-dead radio spin says that the Fed may stop hiking but I do not think so. The problem with media news about the economy is that it is geared to equities. It expresses what equity dealers want not for the economy but for their own gain. They equate a lower Fed Funds rate with higher equity prices." Wall Street (the equity business) tries to "wag the Fed." When it does not work as Monday’s Bernanke speech they have a hissy-fit.

Wall Street equity traders are hilarious. Their pitch is, "Hey, if the Fed does not do what WE want we will throw ourselves under a subway train. Really, we will. If you keep talking about hiking we really are going to keep selling and kill ourselves. We really, really, really mean it this time. We are not kidding." The Fed pays no attention. Markets sell and then recover. The reality is that the economy is in good health and corporate economy is in better shape than the average Joe.

What happened is that the equities folks made a case for "no more hikes" based on the BLS Employment Situation Report of last Friday and the Fed did not buy it. What is most noticeable here is that the Fed does not cater to Wall Street or any political party. It is looking our for the general health of the American economy. The economy consists of much more than equities and the day-to-day trading thereof. The media fails in its attempt to convey the complexities of the economy because it chooses to dumb things down. To the media high equity prices are good, low equity prices are bad.

We're coming up on one of those times when the Fed will be done hiking but we have not yet seen the effects of 16 (or however many) hikes. What is needed is a conspicuous display of the lack of inflation.

Mr. Greenspan - you remember Mr. Greenspan - spoke on Wednesday to the Senate Foreign Relations Committee and expressed concern that the US economy might finally suffer from the impact of higher oil prices. He noted that the buffer between balance of supply and demand is so thin that any abatement in supply or production causes price shock. In short there is too little global refining capacity. Also this enables speculators to push on the margin and drive the price up even further. With all respect, while Greenspan's comments certainly matter his observation has as much value as "the sun will rise in the east tomorrow."

I have talked about this extensively before but we need the following: in the short term - more crude supply and more refineries, and in the longer term more alternative sources of energy - nuclear, solar, wind and whatever. We also need folks to make sensible decisions about their choice of motor vehicles. In the meanwhile we need more refinery capacity for gasoline. We do not need Congress passing inane tax credits for SUV's. (Actually I don't think we need Congress but let's make that another newsletter.) The discussing is silly. The answers to the energy problems are all right here. This is not like finding a cure for cancer.

This past Tuesday was, for me a statement about the massive stupidity and lack of vision on the part of media. It was June 6 - D-day as in Normandy but we seemed to hear more comedy about 6/6/06 and its satanic implications than about D-day. Something is wrong. I have the notion that young folks know practically zero about the history of World War II. If they know more about satanic cults than about D-day I would be troubled. But, hey, I live in San Francisco a place where the Board of Stupidvisors decided to change the name of Army Street to Cesar Chavez Way. Thankfully, this was before they knew about Hugo Chavez.

Also in California we had a primary election. Two guys fought over who would face Arnold in November and each one campaigned on a "the other guy is a bigger scumbag than me" platform. This was confusing because all the ads for "A" mentioned only "B" and all the adds for "B" mentioned only "A." There was an election in San Diego to replace the crooked Republican Congressman and the Democrat's "Culture of Corruption" message seemed not to hold sway. Maybe folks are actually getting sick of negative campaigning. I am. I have found the "Culture of Corruption" message strange. To me, there really are several places where there is a genuine corruption of political culture: Louisiana and New Jersey. And I am not referring to the dude with the cash in his freezer. He is a chump change wannabe. Corruption in Louisiana was raised to an art form by Huey Long - one on the most truly interesting people in the history of American politics. Huey would never have put cash in his freezer. He would have invested it.

I think that Newt Gingrich - a guy with a lot of political savvy - may indeed have the message for politicians: for whatever reason the main issue seems to be immigration or illegal immigration or immigration reform or whatever you want to call it. A Democrat winning an election in conservative San Diego County would have created a different political calculus. The issue in that election seemed to be immigration. Gingrich, a more conservative guy than even the average Republican voter is clearly sending a message to Senators and Congressmen and it is a "Don't give these folks amnesty" hard-line message.

I did read one line this week which I thought strange, "an attorney with the Mexican American Legal Defense and Educational Fund, warned that the cameras [installed on the S. border of the US] could lead to racial profiling." Uhh, right.

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Dick Lepre

Comments

[Stan]

I agree...."we can do without congress" and a multitude of other people (?) in various offices, (government & business), who are more interested in promoting self interest instead of doing what a bunch of uninformed idiots, (us), thought we elected them to do.

Have a nice day....

[Alex Censor]

Hi Dick,
Under this topic, you wrote in part:
"...I have talked about this extensively before but we need the following: in the short term - more crude supply and more refineries, and in the longer term more alternative sources of energy - nuclear, solar, wind and whatever. We also need folks to make sensible decisions about their choice of motor vehicles. In the meanwhile we need more refinery capacity for gasoline. We do not need Congress passing inane tax credits for SUV's. (Actually I don't think we need Congress but let's make that another newsletter.) The discussing is silly. The answers to the energy problems are all right here. This is not like finding a cure for cancer.
..."

I was tempted to reply under the related topic "The Hydrogen Economy" where you and others kicked this issue around before.

But this is a "meta-issue":

I completely argree that the data is all in and the solutions are really pretty obvious. Not withstanding the fact that I don't share your comfort with the nuclear energy option, I basically agree with your quote.

In fact what you state has been stated by many credible analysts for at least the last 40 years. Can you imagine how much better positioned we'd be now (and how much less it would cost and how much lower the risk) if we'd started systematically building our alternative energy sources 40 years ago?

So the question is, if it's so obvious, why is it STILL not happening (hardly), and what can we do to either light a fire under our "leaders" or to bypass them?

Any bright ideas?

Alex Censor