Baseball? It’s that time
of year again. Some say football is more popular, and others
believe NASCAR is revving up to pass both. Actually, politics
has overtaken them all. That game has a never-ending season.
Try as we might, it is almost impossible to avoid the daily
carping that goes on between the two major parties. Doesn’t
really matter in the world of investing. Basically, it’s
a wash. The stock and bond markets have a life of their own,
and any change in leadership only has a temporary effect.
Actions by the Federal Reserve have more impact as they can
set the course for money supply and short- term interest rates.
But that can be political also.
Alan Greenspan would like to be appointed to a fifth term
as head of the Federal Reserve, so some of his decision making
process has to be in accommodating the current administration.
Fortunately, he has been accommodative in keeping the money
supply healthy and interest rates low while waiting for signs
that the economy is on stable footings. The recent release
of economic data showing an increase in new jobs of 308,000
last month is a very encouraging sign. Granted that is only
a one-month number, and it is unlikely that new job creation
will continue at that pace, but we only need to see an average
of 200,000 a month over time to show vibrant economic growth.
Inventories are low, and companies are hiring to meet increased
demand for goods and services. So now the worry shifts from
recession to inflation.
The inflation of the 1990s was caused by excessive monetary
expansion which led to a surplus of productive capacity. We
now see signs that this excessive surplus has been wrung out
of the economy, and we are starting a new cycle of growth.
However, the painful memories of the stock market collapse
and recession are too fresh for companies to believe it’s
back to business as usual, and they will be hesitant to expand
too quickly. Therefore, we do not expect inflation to accelerate
too rapidly. Yes, we are seeing increasing costs in healthcare
and insurance, but these are being offset by lower prices
for TVs, autos, DVD players and other hard goods.
OPEC (Organization of Petroleum Exporting Countries) recently
decided to cut oil output by 4%. This will obviously add to
the inflation side of the coin. However, we do not believe
OPEC members are stupid. They know that a spike in oil prices
would cause a worldwide recession and bear market. They are
trying to offset losses they have incurred in the dollar.
As oil is priced in dollars, they have experienced a loss
of over 30%. They have experienced hard economic times like
everyone else, and they need to sell oil to survive. It is
unlikely the cartel will hold together on this production
cut.
How now Dow Jones? Are the powers that be trying to put
a positive face on the Dow Jones Industrial Average? Of course.
The Dow has been comprised of thirty stocks going back to
1928. Changes have been made since that time. IBM was first
added in 1932 and dropped in 1938 only to be added again.
GE has been removed and added back twice. American Telephone
(good old AT&T) was dropped as were Eastman Kodak and
International Paper. Added as replacements were American International
Group, Verizon and Pfizer. Other recent additions were Intel,
Microsoft and Home Depot. The world changes as does our style
of living so the Dow must reflect those changes.
The Japanese stock market is showing signs of life. The
Nikkei Index closed over 12,000 yesterday (April 6), its highest
level since August 2001. The Nikkei peaked at 40,000 in 1990
and finally dropped below 10,000 in 2003. Japan has been in
a decade long deflation exacerbated by poor monetary strategy.
Interest rates dropped to near zero to no avail. The government
has finally resorted to injecting money into the pipeline
and made corrections in the banking system both of which finally
bode well for their economy. Is this important to us? Well,
Japan boasts the world’s second largest economy after
the US, so it is very important to our economic growth as
well as that of the rest of the world. Japan has paid a heavy
price for the excesses of the 1980s when it was feared they
would bury us economically. Welcome back Japan.
Random thought for April 2004:
If you are looking at the Social Security issue for the fall
election, consider this:
1. Our Congressional representatives do not pay into or receive
benefits from Social Security.
2. When they retire, they continue to draw the same pay until
they die.
3. This pay will increase from time to time for the cost of
living adjustments.
4. No wonder politics is a never ending season.
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