The Unknown Ideal

Since September was such a volatile month for stocks and bonds, I decided to update the Asset Class Return spreadsheet to see how everything is faring. Here's a blurry picture of it:

Every category of stock got bludgeoned in October, with stocks from developed economies in the Asia/Pacific region taking the least of the beating. By our proxies, only gold and short-term bonds picked up any gain, the latter only through a fluke in posting of interest payments.

Stock-long portfolio managers are happy that most of them billed on Sept. 30 returns. They are also hoping for the traditional fourth quarter rally that has saved so many a bacon strip.

Posted by The Unknown at 3:32 PM | Permalink

As noted previously, the past six months of consumer inflation imply that new issue I Bonds will probably be yielding at least 6.7% for the next six months, come Tuesday, and some older issues will be paying around 9.4%.

Tom Adams thinks the rates will be even higher.

Some of the older EE Bonds, which before May 2005 were pegged to 90% of a six-month average of the Five Year Treasury Note yield, will probably adjust to around 3.6% on Tuesday, given that the average close of the Fiver's yield for the past six months has been 4%. I'll continue to hold my old EE Bonds, whose earnings are still compounding nicely enough without losing principle, but I won't be buying any new ones. The earnings on these bonds haven't beaten inflation over the past year, but the long-term record of EEs in preserving purchasing power has been good.

Treasury may set the new issue EE Bond yields a little higher than 3.6%, but the newer EEs, whose arbitrarily set rates do not adjust over the life of the bond, strike me as a pretty bum deal in a rising interest rate environment. Let foreign central banks loan the Federal Government money for extended periods at low interest rates. That's not your job.

Posted by The Unknown at 11:01 AM | Permalink | Comments (2)

Atrios has an understatedly funny post about Friday's market action, Libby's indictment, and media coverage. Paging Dr. Shiller: you'd love this one.

Before we cut to the chase of what happened while we were distracted by rock and roll, and the continued denouement of Team Bush lies in service of Team Bush Disasters, we'll just note that there's something they never warned you about in coffee-house blogging school: the counterperson might be playing a CD by the ineffably twee Belle and Sebastian. Gacky poo.

Okay, big number: GDP growth for the third quarter of 2005 surprised on the upside, coming in at 3.8% annualized. That is all ye know on earth and all ye need to know. Well, not really. Bloomberg adds these helpful notes:

"Growth in the U.S. has exceeded 3 percent for 10 straight quarters, the longest string since the 13 three-month periods that ended in March 1986 and the best performance in the Group of Seven industrialized nations, which includes the U.S., Japan, Germany, the U.K., France, Canada and Italy.

The U.S. economy grew 3.6 percent in the 12 months ended in September. By comparison, only the economies of Japan and Canada exceeded 2 percent growth during the 12 months ended in June, according to the latest available data.
. . .
The government's personal consumption expenditures index, a measure of prices tied to consumer spending, rose 3.7 percent after a 3.3 percent gain in the second quarter. The index excluding food and energy, a measure favored by Fed policy makers, rose at a 1.3 percent annual rate, the slowest since a 1 percent pace in the second quarter of 2003."

More junk to keep outside of your brainpan: The Fed will raise them gol-darned short-term rates to 4.00% next week. The 10-year Treasury Note stands at 4.57%, and the S&P 500 stands at 1198. Jeremy Siegel thinks this means stocks are undervalued, or so he said in a note to subscribers today. Well, he's the Prof.

But I continue to be dismayed by the Prof's seeming insistence that preserving the dividend tax cut is the end-all of good government, and the lynchpin of good economic policy. Siegel seems to want a popular Bush administration so that these tax cuts can stay in place.

Perhaps good policies, fiscal and otherwise, would have led to a popular Bush administration.

As it is, Bush is a weak, worried little manny man. He is weaker than a squished worm on a drying sidewalk. May we be rid of his disastrous administration quickly.

And as I sign off, the counterperson is playing a live version of the Clash's "Complete Control". That's more like it.

Posted by The Unknown at 4:48 PM | Permalink

Bill Gross let's 'em have it in his November Investment Outlook
. . .
"The reason that W is on the hot seat of course has nothing to do with whether Karl Rove or Scooter Libby “outed” CIA agent Valerie Plame, and everything to do with the Iraq War, and perhaps even a growing dissatisfaction with America’s course in general – our changing perception as the world’s leader as well as the unbalanced distribution of wealth within our own borders. The war, Katrina, gas prices, and Republicans’ continuing focus on tax cuts as the elixir to cure everything are getting ordinary citizens downright depressed. “Plame-gate” is the result. Their dissatisfaction’s focal point is the war: the pretenses under which it was initiated, the lack of visible progress despite the recent approval of an Iraqi constitution, and the absence of a timeline for an exit of U.S. troops.

My position on Iraq was well publicized before the war and doesn’t require repeating here. In the 2+ years since I last wrote, much has come to the public’s attention and it is obvious at least to me that there is blame aplenty, including not only the President and his advisors, but an uncritical Congress and the press, conservative and liberal alike. But it doesn’t change things now that we didn’t discover weapons of mass destruction (WMD). What that realization should change, however, is how we approach the future – hopefully with greater scrutiny from all parties including the public, which just sort of trusted its elected first and second estates and assumed that the fourth estate was doing its job. What America needs now are more reporters like Frank Rich and fewer Judith Millers; more politicians like former Governor Howard Dean and fewer like the “go along to get along” John Kerry. I think we should also be looking for the first authentic presidential candidate – Republican or Democrat – to stand up and recommend a future course of action that offers Americans a choice at the polls beginning in 2006. We deserve a leader with the willingness to at least address the possibility of a policy change in Iraq, and who is willing to risk disapproval from a vocal minority or even a silent majority to lead his or her party and this great country of ours towards a resolution in future years."
. . .

Posted by The Unknown at 3:59 PM | Permalink

The Tennessean reports these words from the always amusing Senator Bill Frist:

"There are people who are going to say, 'You said this, you said that,' and that's all legitimate. I could be more precise, but at any point in time I don't know how much, and that's the point. That's the blind part of the trust."

Posted by The Unknown at 10:01 AM | Permalink

Business Week claimed that some people were surprised by today's drop in Consumer Confidence. I wonder what world these surprised people are living on.

At least somebody mentioned in the article seems to live on the same planet that I do:

"Much of the decline in confidence over the past two months can be attributed to the recent hurricanes, (gas) pump shock and a weakening labor market," Lynn Franco, director of the private research group's Consumer Research Center, said in a statement.

She said the "degree of pessimism, in conjunction with the anticipation of much higher home heating bills this winter, may take some cheer out of the upcoming holiday season."

In a separate report,
Existing home sales hung right in there, with the median home price up 13.4% over last September.

Posted by The Unknown at 2:04 PM | Permalink

Rumors are aswirl that Bush will announce his pick to replace Greenspan today at 1 Eastern time. The betting at online futures markets and bookie shops heavily favors Ben Bernanke.
. . .
Update: Everbody is confirming Bernanke. The stock market, at this hour, is breathing a big sigh of relief that it won't be the OEOB's accounts payable clerk.
. . .
Update 2: It's Bernanke. Mark Thoma has a good analysis.

Posted by The Unknown at 8:03 AM | Permalink

Gee, we had our suspicions, but had no idea that Frist had been informed of the addition of a million or two in HCA stock to his "blind trust" in such a formal manner.

So reports the Washington Post:

Senate Majority Leader Bill Frist (R-Tenn.) was given considerable information about his stake in his family's hospital company, according to records that are at odds with his past statements that he did not know what was in his stock holdings.

The letters seem to undermine one of the major arguments the senator has used throughout his political career to rebut criticism of his ownership in HCA: that the stock was held in blind trusts beyond his control and that he had little idea of the extent of those holdings.
. . .

Posted by The Unknown at 9:40 PM | Permalink

Gross Domestic Product growth for the third quarter will be reported Friday, with averaged herds of economists expecting annualized growth in the neighborhood of 3.6%.

The week will also bring us two measures of how US consumer's are feeling: Tuesday's Consumer Confidence report from the Conference Board, and Friday's survey on Consumer Sentiment, from the University of Michigan.

Stats for home sales, old and new, will be released on Tuesday (old) and Thursday (new), to give us a little clue as to how gaseous that housing bubble may still be, and Thursday's Durable Goods Orders report will give us another window on how the US manufacturing sector is faring.

Posted by The Unknown at 3:42 PM | Permalink

Who knows? Maybe everybody has their strategic asset allocations just how they like them now, but I doubt it, since most people don't have strategic asset allocations. Trimtabs says US investors are reining in their foreign equity investments:
. . .
"The exuberance of American investors for foreign stocks is coming to an end," says Charles Biderman, president of fund-flow tracker TrimTabs.

Biderman started seeing the bulk of U.S. dollars flow into international funds last December when Americans grew jittery over a weakening dollar and a shaky U.S. economy. He says many investors took their cues from famed value investor Warren Buffett after he made negative comments on the U.S. economy and placed big bets against the U.S. dollar.
. . .
So many US investors and funds are far too light on international stocks, if you believe people like Burton Malkiel and Jeremy Siegel. A pullback now is a dumb move, particularly for long-term investors. Global growth is going to happen globally. That's why they call it global.

Posted by The Unknown at 9:02 AM | Permalink

via Eschaton

FAIRBANKS, Alaska (AP) - The federal government could sell bonds to cover the cost of disaster recoveries under legislation introduced by U.S. Rep. Don Young, R-Alaska.
. . .
"Buying bonds that are specifically designated for these types of disasters can help bring together Americans and create a sense of patriotism."
. . .
"We must find a way to meet the inevitable needs that will arise after future disasters," he said. "We cannot continue deficit spending."

Note to the Gentleman from Alaska: selling bonds = borrowing money.

Posted by The Unknown at 3:31 PM | Permalink

The Conference Board's Index of Leading Economic Indicators lost ground for the third straight month, with a consensus-beating decline of 0.7% in September. Thus spake the Board: the largest negative contributors to the leading index were the index of consumer expectations and initial claims for unemployment insurance. A double Katrina bummer, in other words, though the index had begun its descent prior the arrival of the hurricanes.

Today's unemployment claims reports were a bit more mellow than those that helped sink the Leading Indicators: Initial claims fell to 355,000, down 35,000 from the prior week. Continuing claims continuing rose to 2,894,000, 36,000 more than last week, as some of the nearly half-million estimated Katrina-related claimants flow through the benefits systems.

A few years ago, Wall Streeters maintained a superstition that initial claims below 400,000 correlated with an expanding job market. I'm not sure when exactly that faith collapsed, but nobody talks about it much any more.

Another big deal today was the decline in crude oil futures, with NYMEX crude below $60/barrel. Energy stocks took a beating, as did the broad market, which lost everything it had gained yesterday.

Cheer up, everybody: we're almost two-thirds of the way through Octoberfest on Wall Street.

Posted by The Unknown at 2:52 PM | Permalink

My goodness:

. . . Bush is a second-rater. He's not even a good liar. He has a tin ear and his urge to dictate is not tempered by any realistic frame of reference. He has no knowledge of economics, has never vetoed a single bill, has reportedly talked out loud of America as an "empire,' tolerated military torture, ruined even more of the country's ailing freedoms with such obviousness and carelessness that even the dimmest citizens are somewhat uneasily aware of it. In addition to all that, his designation of bureaucracies ("Homeland Security,' for instance) after 9/11 has been horrendous. Does he believe the institutional memory of World War II and Nazi terminology has faded from American consciousness? It has not. He is wrong. But he is wrong about many things.

Posted by The Unknown at 7:25 AM | Permalink

The Federal Reserve issued its "Beige Book" today, finding that "Economic activity continued to expand in September." Retail sales, particularly auto sales, were noted as slowing, though manufacturing, services, and even employment were said to be growing in most regions. Inflation, of course, provided no surprises. It exploded in September. We knew that.

Housing Starts report was surprising, though, growing 3.4% month-over-month in September. Bloomberg helpfully notes that "30-year fixed mortgage rates that are still within a percentage point of a four-decade low fueled demand."

US stocks had quite a run today, with the S&P finishing up some 17 points to close at 1,195.76, possibly helped by today's positive economic assessments, and an earnings reporting season that has not been too bad.

Looking at our valuation worksheet, we see a price-to-earnings ratio for the US large-cap market that is still quite close to the long term historical average, and still well below the average P/E of the "irrational exuberance" years.

Posted by The Unknown at 1:37 PM | Permalink

First, Economist John Schmitt on the long-term, broad outlook, in a new paper from CEPR:

After controlling for improvements between 1979 and 2004 in the “human capital” of the U.S. workforce —American workers today are, on average, older and much better educated than they were at the end of the 1970s—the economy now produces 25 to 30 percent fewer good jobs than it did 25 years ago.

Then, John Challenger, on recent decimation of Tech Sector jobs in the US:

Technology sector job cuts for the first three quarters of the year were up 18.8% over the same period in 2004, according to Challenger, Gray & Christmas Inc., a global outplacement company.
. . .
Unlike other U.S. industries that have seen cuts -- even as new jobs were being added -- the tech segment has lost jobs without a similar rate of hiring to offset the cuts, John Challenger, CEO of Challenger, Gray & Christmas, said in a statement.

"The gradual slowdown in job cuts would be more encouraging if it were complemented by a rise in hiring, but job creation simply has not materialized," Challenger said. "The industry may indeed be recovering when it comes to revenue, profits and earnings, but certainly not when it comes to employment."

Posted by The Unknown at 8:00 PM | Permalink | Comments (1)

Growth in the Producer Price Index for September was expected to be high, but this morning's report beat a lot of expectations, coming in, month-over-month, at 1.9% and 0.3% at the core level (excluding food and energy). Inflationary pressures and flow-throughs, particularly from energy prices, are beginning to manifest themselves in the production of goods.

The Fed will march on, in its crusade to Whip Inflation Now.

Posted by The Unknown at 9:51 AM | Permalink

The Conference Board said some things today, among them that the US economy would rebound as early as Q1, 2006 from Katrina's bludgeoning.

But the Board seems to have made a weird assumption:

Unlike many private economists, the Conference Board said its outlook assumes the Federal Reserve Board will not raise the federal funds rate higher than 4.0 percent.

"Should the Fed continue to hike rates and the yield curve invert, the outlook will be significantly worse," [the Conference Board] said.

Huh.

Posted by The Unknown at 3:11 PM | Permalink

The high cost of energy not only figured into Friday's CPI whopper, but also assuredly factored into last week's retail sales number from the Commerce Department, where higher spending on gasoline was behind much of the increase.

That American consumer, short on savings and high on debt, just keeps on spending, though the retail sales increase for September of 0.2% was short of the consensus estimate of a 0.5% increase. August's US Trade Deficit number, at $59 billion for the month, the third highest in history, underscores the profligate consumption of resources, goods, and services by the United States; the "global imbalances" drumbeat is now heard almost daily in the previously oblivious mainstream media's finance reports.

The Fed reported that Industrial production dropped 1.3%, due largely to the two hurricanes and resultant ripple-through impacts. Industrial capacity utilization fell to an anemic 78.6%, after taking the same hits from the storms.

Longer interest rates rose last week, with the Ten-year Treasury Note yield closing at 4.48% on Friday, erasing again, according to some, almost half of Greenspan's "conundrum."

This week, Tuesday gives us the Producer Price Index (PPI), Wednesday gives us new home construction and the Fed's Beige Book, and Thursday gives us the Conference Board's Index of Leading Economic Indicators. Will the Beige Book and the Leading Indicators tell similar or contradictory stories? Will the PPI send the markets into a tizzy? And what will be the longer term impacts of the hurricanes, energy prices, and the coming winter heating crunch on economic growth? That word "stagflation" is getting some play these days, as is the word "recession."

Posted by The Unknown at 10:17 AM | Permalink

Bureau of labor statistics reports a 1.2% increase in consumer prices for urban consumers in September, over August levels. This is the largest month-over-month increase in 25 years. The core inflation number, though, which the Fed and the markets look at most closely, stayed very tame, with a 0.1% month-over-month increase. Stocks are heading up, as I type this, possibly buoyed by the tame core number, though also not discouraged by GE's earnings report.

Post-Katrina energy prices led price category increases with a 12% surge over August levels. Not surprisingly, transportation also had a big jump, coming in at 5.1% above August.

Year-over-year topline consumer inflation is running at 4.7%, with core inflation (no food, no energy) rolling along at a cool 2%.

Jumping categories here for a second, it looks like I Bond holders will have some hefty yields come November 1. It's anybody's guess what Treasury will do to the fixed rate component of new issues with inflation numbers like these, but holders of existing I Bonds will, for the next six months, probably be paid yields ranging from 6.7% on recently purchased I Bonds all the way up to 9.4% for I Bonds bought around 1999 and 2000, if Treasury keeps its promise to holders of these issues.

Update: Tom Adams, the author of Savings Bond Alert has similar numbers in mind for the I Bond yield.

A lot of economic numbers have flowed through the pipe this week. We'll try to have a round-up this evening.

Posted by The Unknown at 6:28 AM | Permalink

Willamette Week Reports that a big player in a massive pension fraud is back behind his desk (after collecting a $2 million bonus and $350,000/year salary while behind bars):

After what he referred to in a statement as a 14-month "leave of absence," financial wunderkind Andy Wiederhorn walked out of federal prison Tuesday in Minnesota. Four months shy of his 40th birthday, Wiederhorn will re-assume the reins of the Portland-based Fog Cutter Capital Group. Contrite after his June 2004 guilty pleas to charges of filing a false tax return and paying an illegal gratuity to a pension plan official? "I believe it was wrong for the government to prosecute me," Wiederhorn says.

An update: The Oregonian reports on October 16 that the Bureau of Prisons is stopping Wiederhorn from going back to work until his release from custody in a Northeast Portland halfway house. Meanwhile, the New York Times business section echoes the Willamette Week story.

Posted by The Unknown at 1:30 PM | Permalink

It has been an well-known for a long time that many individual investors have a tendency to sabotage their returns by chasing after market leaders, hot-performing mutual funds, stocks, etc., and abandoning laggard investments in favor of newer hot performers. Using this technique, these individuals buy high and sell low.

Well it turns out that a lot of pension plan sponsors are doing a similar thing - losing worker pension money by chasing after hot-performing managers and firing current managers.

Amit Goyal and Sunil Wahal looked at nearly 10,000 hiring decisions by about 4,000 plan sponsors, and published their results in the paper "The Selection and Termination of Investment Management Firms by Plan Sponsors." The authors note, "Using a matched sample of firing and hiring decisions, we find that if plan sponsors had stayed with fired investment managers, their excess returns would be larger than those actually delivered by newly hired managers. "

Posted by The Unknown at 8:34 AM | Permalink

Do Bad Liars Beget Bad Liars as well, or is Bill the first in a new line?

Bill Frist, Republican Senate Majority Leader, anachronistic haircut model, sometimes reluctant White House rentboy, long-distance video diagnostician, lucky stock liquidator, Splendide Mendax:

AP: Frist Accumulated Stock Outside Trusts
By THE ASSOCIATED PRESS
Filed at 9:55 p.m. ET

However, ethics experts say a partnership arrangement shown in documents obtained by The Associated Press raises serious doubts about whether the senator truly avoided a conflict. . . .

But back to the matter of those so-called "blind trusts" about which Frist received regular holdings reports:

Kathleen Clark, a government ethics expert at the Washington University in St. Louis School of Law, said she doesn't believe the Senate trusts or the Tennessee trust insulated Frist from a conflict because the senator or his brother were advised of transactions and could influence decisions.

''What I find most appalling is the Senate calls it a qualified blind trust when it's not blind,'' Clark said. ''Since the Senate says it's OK, the Senate has made it a political question. It's up to the voter. But there's no doubt it's a conflict of interest.''. . .

Posted by The Unknown at 7:27 PM | Permalink | Comments (1)

Reading this online at Pensions & Investments:

U.S. institutional investor ownership of the U.S. equity market rose to 59.2%, or $7.9 trillion, of outstanding U.S. equities in 2003, up of from 51.8%, or $6.6 trillion, in 1999, according to the latest data in The Conference Board’s Institutional Investment Report of U.S. institutional investor ownership and control.
. . .
“Activist public pension funds continue to amass relatively more control over companies,” a Conference Board statement said. Their public pension funds’ownership of total equities rose to 9.7% in 2003 from 7.6% in 2000, the report said.
. . .
"This means that, despite a brief hiatus, the economic power and clout of U.S. institutional investors continues," Carolyn Kay Brancato, director of The Conference Board's Global Corporate Governance Research Center, said in a statement. "These investors tend to be the most activist in demanding corporate governance reforms and will continue to have a profound impact on every company not only in the U.S. but also in global markets, since U.S. investors have tended to be out in front of global shareholder activism."

reminded me of this bit, which I read while riding the bus this morning, from William Greider's The Soul of Capitalism:

Pension funds, it is argued, must become active investors who pressure and punish copanies for their deleterious practices, not as a gestrue of social conscience, but because the corporate antisocial behavior damages a pension fund's own wealth. . .

The individual company improves its profits by "externalizing".. costs, and so these actions are accepted practice in American management. But the costs will be paid by someone and thus injure the growth and efficiency of the broader economy in which the pension fund is invested.
. . .
This new concept - understanding pension funds as the "universal owner" of America's major business corporations - provides an economic rationale, unsentimental and self-interested, for why the funds should enforce social objectives; that is, they should punish corporations for irresponsible behavior by moving their capital elsewhere. The discipline would be exercised through the stock market. The wealthy enforcers simply would be fulfilling their fiduciary duties to their beneficial owners.

Speaking of the "soul of capitalism," John Bogle has a new book out. It's called The Battle for the Soul of Capitalism, and Publisher's Weekly blurbs it as a "worthy jeremiad against corporate excess."

Posted by The Unknown at 11:35 AM | Permalink

Steve Clemons brings us economist Pete Morici's note on the money Delphi execs hope to give themselves at the expense of bondholders. Excerpt:

Delphi CEO Robert S. Miller is proposing a sweetheart severance packages for 21 top executives and improved compensation for 600 executives in the form of stock options. This is a raid on bondholders and should be disallowed by the bankruptcy court.

These top managers bear considerable responsibility for Delphi's sad situation. As experience in the airline industry demonstrates extra pay for failed managers will do little to improve their performance. There is no reason to believe, as Miller claims, these executives are being paid less than they are worth right now. In fact, they are likely not worth what they are currently being paid.
. . .
Ultimately, the extra pay for executives will come out of what goes to bond holders. That's legalized pilfering.

Posted by The Unknown at 7:30 AM | Permalink

US stocks ground down even lower today, with the S&P 500 closing at 1187.33, leaving it with a price-to-2005-earnings ratio of just about 16, barely above the P/E ratio's historical average since 1935, and almost a full percentage point below the average P/E since 1960. The market may not be screaming "buy" based on its long-term history, but we are at one of the tastier price-to-earnings points in recent history.

The weekend bankruptcy filing of auto parts supplier Delphi both reflected and compounded the trouble of US automakers, and recent earnings guidance by other US companies didn't make anybody smile. Estimate-beating earnings reports by Alcoa and Genentech may lighten the mood tomorrow, but reporting season is just beginning.

More economists and finance types are taking notice of the recent performance divergence between US and foreign stocks, with US stocks flattening out and international stocks, particularly in emerging economies and on the Pacific rim, outshining their stateside couterparts. If only more US portfolio managers could abandon their home country biases and insecurities, perhaps their clients would do better. Many backward-looking stock portfolios are still only allocating a small percentage of their investments to international issues.

The barn-door may be closing on international stock outperformance for the short-term, but a hefty international allocation seems necessary for long-haul success, at least according to the likes of Burton Malkiel, Jeremy Siegel, and anybody else who has been paying attention to the direction of the global economy.

What profiteth it a portfolio manager's clients to beat the S&P 500 when the S&P 500 is getting trounced by the world?

Posted by The Unknown at 2:03 PM | Permalink

Series I Savings Bonds are indexed to inflation, and pay rates that are adjusted every six months. They don't trade on the open market, and unlike open market bonds, they don't lose value when interest rates go up. They're good for small savers because you can buy them in increments as small as $50, and you can have the purchases auto-debited from bank accounts if you like.

And if the consensus is right about Friday's Consumer Price Index (CPI) report, brand new I Bonds are likely to start paying at least 6 percent come November 1, when rates are adjusted. Without getting into the boring explanation of how I Bond rates are adjusted by Treasury, we'll say that there are two wildcards going into the November rate adjustment: the fixed component and the inflation component.

Treasury may just lower the current 1.2% fixed component to 1%, so it won't have to pay small savers so much interest to finance the gargantuan Bush/Frist/Hastert deficits, but even if Treasury does that, if the inflation forecast comes through, buyers of new I Bonds will still probably earn a 6% compound interest rate for the next six months. Otherwise, 6.23% is the new rate.

Of course if the top-line CPI isn't so bad as we are all thinking it is while we buy groceries and fill gas tanks, the rate could be a bit lower. For example, if the semi-annual inflation rate turns out to be 2.3% instead of the expected 2.5%, the I Bond buyer will only earn 5.8%. But guess what? That's a hell of a lot more than the big shots (and the Chinese central bank) are earning on Ten-year Treasury Notes. And it's also a lot more than the S&P 500 stock index has earned so far this year.

The really good news will probably be for holders of I Bonds that were purchased when the fixed component, which lasts for the life of the I Bond, was higher, say 2%, 3% or even 3.6%. Those Savings Bond holders may find themselves earning as much as 8.6% on their homely old I Bonds, at least for the next six months.

The bad news is, of course, that this is all driven by inflation, the erosion of our purchasing power. There are also some serious concerns about how the Labor Deparment computes the Consumer Price Index, concerns that DOL underestimates the actual impact of inflationary pressures upon Americans.

I Bonds may not be for everybody, but they have done me no wrong. Unlike the other assets in my portfolio, there has not been a single investment period in which both the nominal and "real" (as conventionally measured: as against CPI) values of my I Bond holdings have not gone up.

More information about how I Bonds work (minimum holding periods, rate calibrations, investment minimums and maximums) is at Treasury Direct.

The Consumer Price Index for September 2005 will be announced Friday. If it is 0.9% over August, we will have a semi-annual inflation rate of 2.5%. Treasury will announce the new fixed and composite rates for I Bonds on November 1. We'll be back on this subject then.

Posted by The Unknown at 4:10 PM | Permalink

Morgan Stanley's Steve Roach has worries about Bush's coming appointment of a successor to Greenspan. A brief excerpt:
. . .
In other words, America’s dependence on the “kindness of strangers” is likely to increase significantly at precisely the point of an historically-delicate transition to a new a new Fed chairman.

As I look to January 31, 2006, those are precisely the risks I see in the immediate phase of the post-Greenspan era. The rocky financial market history of recent Fed chairmen transitions is a warning, in and of itself. America’s heightened vulnerability to the foreign confidence factor amplifies those risks. And President Bush’s appointment record points to a candidate who could seriously compound the perception problem. This is potentially a very tough combination. It leads me to believe that the curse of the Fed transition is about to strike again.

Posted by The Unknown at 8:36 AM | Permalink

"I think I might like to buy me some of them stocks."

Posted by The Unknown at 7:26 PM | Permalink

US Stocks got smacked, and at least some of CNBC's yellers are blaming all the inflation talk from Fed officials these last few days. Others are pointing fingers at the ISM services report. The S&P 500 has lost more than 2.5% of its value this week, putting it below 1200 and below it's starting price for 2005.

Well, at least we still have our dividends. All 1.7% of 'em. Have you reinvested yours?

Naturally, I thought that this would be a really cool moment to update the valuation spreadsheet, which now shows a trailing P/E ratio of 16.76, and a Year-2005-earnings P/E of 16.19 (which might mean something if 2005 earnings don't collapse under the weight of spooked consumers and mounting energy prices). For perspective, the average P/E ratio for US stocks from 1935 through March 2005 was 15.65. From 1960 forward, the average is 17. And from 1996 forward, a period which includes the crazy tech bubble, the average P/E was 28.25.

So today's US stocks are right there in the average price range, and certainly a lot cheaper than they were during the recent period of irrational exuberance.

One thing seems clear to everybody: the Fed isn't going to stop their rate-raising at 4%. Some don't even think they'll stop at 4.25%.

Posted by The Unknown at 2:33 PM | Permalink

ISM's September survey shows a slowing of growth in the US's dominant "services sector," with bad news on employment, inflation, and "new orders" indicators included in the report.

The services sector accounts for around 80% of the US economy.

Not surprisingly, John Challenger's layoff report showed an increase in job cuts. Reuters reports:

U.S. firms planned slightly more layoffs in September compared to August, led by the struggling airline sector and a consolidating retail industry, a report said on Wednesday.

Employment consulting firm Challenger, Gray & Christmas Inc. said employers announced 71,836 planned layoffs in September, 33 percent lower than September 2004, but more than the 70,571 announced in August.

Looks like the skinny manufacturing sector hogged all the good news in September.

Posted by The Unknown at 7:52 AM | Permalink

(N.B: Even though the title of this post refers to 401k plans, the info is relevant for most any kind of long-term investment portfolio (IRA, Roth IRA, 403b, taxable account, etc.)

A famous study first published in 1986, with a follow-up in 1991, by Brinson, Hood, and Beebower, shows that asset allocation accounts for over 90 percent of a portfolio's return. In other words, the mix of asset classes (stocks, bonds, commodities, etc.) a hypothical investor chose to invest in (for a period of 10 years, in the original study) ultimately accounted for a far greater share of that investor's portfolio performance than other factors, such as the selection of specific stocks in a portfolio.

But it turns out that asset allocation is not the end-all in portfolio performance. There is an even greater factor impacting the ultimate outcome of retirement investments: contributions.

One item that hit my email inbox this week was an article by AP business writer Meg Richards emphasises the contribution imperative forcefully:

Countless studies underscore the fact that successful investors don't wait for the market to inspire them — including a September survey of 401(k) balances conducted by ICI and the Employee Benefit Research Institute. It found that Americans who continuously maintained 401(k) accounts from 1999 to 2004 saw their balances rise by an average 36 percent, despite enduring one of the worst bear markets since the Great Depression. In 2004 alone, the average account balance increased by 15 percent. A big reason for this success was consistent participation, said Jack Van Derhei, EBRI's research director and co-author of the study.

No matter what scenarios were used, "It was absolutely, without a doubt, the case that the most important thing was people just continue to participate in 401(k) plans year over year," Van Derhei said. "Doing that is much more important than just being lucky or being born in the right year."

A summary of a differently constructed study (by Putnam), highlighed on page 38 of the October 3, 2005 Pensions and Investments magazine reached, in a quite ho-hum coincidence, my actual real inbox this week:

Participant contributions to 401k plans have a far greater impact on retirement wealth than mutual fund performance and asset allocation . . . The study, which compared those three components of defined contribution savings over a 15-year period, found that mutual fund performance had the least impact.

However, increasing participant contribution to 4% from 2% of salary had 90 times the impact of changing to top-quartile funds from bottom-quartile, over 15 years.

So one more time: far more important than the individual stock or bonds or funds or whatever one picks for a portfolio, even far more imporant than the asset allocation strategy of a portfolio, the most important factor in a portfolio's success, according to these studies, is consistent participation, steady contribution, year after year, of new investment funds to the portfolio. Saving and investing. That seems to be the boring old truth of the matter.

Posted by The Unknown at 7:05 PM | Permalink

From a letter to Pensions & Investments magazine, October 3, 2005 issue, sent by reader and portfolio manager Kenneth S. Phillips:

"For better returns, free the money managers," by Vince Calio describes a JPMorgan study that advocates directing traditional long-only managers to go short because such flexibility will add more value. The gaping error in this logic is that it assumes the managers have skill, which history has shown to be a spectacular leap of faith.

Posted by The Unknown at 1:46 PM | Permalink

". . . the US stands alone in the excesses of consumerism, with personal consumption averaging fully 71% of GDP since early 2002 -- well above the 67% norm that prevailed over the 25-year period, 1975 to 2000. That’s a record for America, and undoubtedly a record for any leading economy in modern history. By comparison, other major economies are clear laggards: Europe’s consumption share is only 58%, Japan’s 55%, and China is at the bottom, with private consumption amounting to just 42% of its GDP."

Morgan Stanley's Steve Roach

Posted by The Unknown at 8:31 PM | Permalink

Hilariously inept pseudo-patriot Larry Kudlow repeatedly referred to US Senator Conrad Burns as "Governor Conrad Burns" on Kudlow's always awful CNBC show today. It's worth noting that Burns is a crony of indicted Republican money-man and apparent hit-squad associate Jack Abramoff and is facing at least two tough Democratic contenders in March: State Auditor John Morrison and State Legislator Jon Tester (favored by bleating rockers Pearl Jam, as well as by the blogospheroids at The Swing State Project, who really haven't really explained why Tester is their man, set aside this condescending read on the apparent hicks from my home state, written by a guy who fled Montana for San Francisco -- Hello, Mr. Brigham? A "big city lawyer" from Missoula? One suspects the Swing State Projectors are Pearl Jam fans, or are perhaps simply starstruck by the link to their blog from the platinum rockers' official site).

Posted by The Unknown at 6:29 PM | Permalink

ISM's Manufacturing Index surged most unexpectedly in September, indicating a robust expansion in the sector, which by some accounts represents around 20% of all US economic activity. US stock and bond markets were spooked not only by the 59.4 reading, which is seen by some as a clear signal that the Fed will keep tightening, but also by some scary inflation news embedded in the report. Some wags see Katrina figuring into the top-line number, while some see Katrina being ignored by the factories.

Meanwhile, the yield on the 10-year Treasury Note is over 4.38% now, rising as it slowly eats away at more and more of Greenspan's old conundrum.

Posted by The Unknown at 11:03 AM | Permalink

Caroline Baum noticed in her most recent column Greenspan's recent reversion to his Randian discipleship, something pointed out, with a shudder of aversion, on this very page last week.

Baum, though, seems just a bit miffed that Greenspan seemed to stray so, during his public service, from the principles of one who had once been in Ayn's hallowed inner circle.

Moving on from this sordid business, though, what would a Caroline Baum column be without some gurgling by James "Dow 36,000" Glassman?

Who knows what earnings metric Glassman used to come up with this assertion, conveyed by Baum : "The price-to-earnings ratio of the Standard & Poor's 500 Index averaged 19.21 in 1996 compared with 19.59 in the first nine months of 2005."

You might be able to torture some spreadsheet enough to come to such a conclusion, or you could compare 1996 "operating" earnings to 2005 "core" earnings to get close to the Baum/Glassman assertion, but if compare Price-to-trailing-as-report-earnings ratio for 12/31/1996 to today's P/E ratio using the same metric, you get a 1996 P/E of 20.6 comparied with a P/E today of 17.2. Apples to apples, with today's P/E nearly equal to the average market P/E since 1960.

But it's probably unreasonable of me to expect a rational comparison from the author of Dow 36,000. Especially in the column of a free-market fetishist and sometimes Bush apologist.

Posted by The Unknown at 9:15 AM | Permalink

PIMCO's Paul McCulley summarizes his group's cyclical outlook for the US economy:

As a group, we marked down our growth forecast and marked up our inflation forecast, which is precisely what you would anticipate that we would do in the face of an oil price shock, because that’s what an oil price shock does. For an oil-importing country such as the United States, it’s a negative for growth and also a negative for inflation.

I guess you could say that we projected a "stagflationary soft landing," if that’s not a contradiction in terms—and I don’t think it is. The outlook is stagflationary, but the outlook is for a soft landing of a stagflationary character as opposed to a stagflationary recession, which is what happened after the oil price shocks in 1973 and 1979.

for the Japanese economy:

We think Japan is in a genuine recovery. That recovery is grounded in the boom that’s going on in China, but it’s real nonetheless. And we don’t anticipate a hard landing but a soft landing for China, so Japan’s recovery has legs. We’re also anticipating that residual deflationary pressures in Japan will fade, leading to a small but positive inflation rate in Japan.

and for Europe:

I guess we’d characterize it as a stagflationary slow grind, with the most important implication being that the European Central Bank is on hold. Given that the stagnation in Europe is going to be exacerbated by the energy price issue, the ECB has no reason whatsoever to tighten policy. The most likely case is that the ECB does nothing, but there is a higher probability of easing rather than tightening, primarily because the core inflation rate is finally grinding down in Europe.

Posted by The Unknown at 7:35 PM | Permalink

As promised, here's a snapshot of the returns of various asset cl