The Federal Reserve rides to
the rescue once again indicating that there is no crisis so
severe that the Fed can’t fix. The Fed cuts the Fed
Funds rate 50 basis points to 4.75 and prints gobs of new
money to halt the mortgage market crisis. Then, in a fit of
conscience, several financial institutions own up to having
invested in huge amounts of sub-prime loans, write off millions
of dollars and promise not to do it again – until the
next time. The stock market rose to new all time highs, and
everyone lives happily ever after. The Fed’s actions
were not so much an economic boost as they were a psychological
ploy to assure investors that the Fed would always be there.
The problem with their actions is that investors will take
more risk the next time knowing they have a safety net. But
do they? The world economy is so large and complex today that
the Fed has become more of a participant than a mover and
shaker. Plus, interest rates were not too high to begin with,
the world is still awash in money, and investors were quick
to pour that money into common stocks. So, here we are back
to where it started in July. Now good old fashioned fundamentals
will have to carry the bull, and we have been confident that
the economy has been on sound footing all along. Nevertheless,
there will continue to be a shift to stocks with more predictable
earnings.
Lower interest rates lead to different problems for the
Fed. Lower interest rates coupled with the new influx of dollars
once again raise the specter of inflation. The dollar continues
its slide in this environment as investors sell it for currencies
offering a higher yield. The weak dollar also pushes oil prices
higher (oil is traded in dollars) and imports become more
expensive here. The plus side to the weaker dollar is that
US manufacturers who stayed home will reap increased sales
both here and abroad. However, don’t fear for the dollar,
as it is not making new lows versus a basket of currencies
against all countries we trade with. This index was at a low
of 30 in 1973 and reached a peak of 130 in 2002. The index
is currently at 105, the level last seen in 1995. Currencies
do fluctuate and having climbed steadily for the last thirty
years, the dollar is due for a rest. We are still the largest,
strongest and most stable country in the world, and we would
not fret over the recent weakness in the dollar.
Recession? What recession? The August jobs report (a minus
4000 jobs) the first decline in more than four years had analysts
using the “r” word. The September report dispelled
that cry as new jobs increased by 110,000. Not only that,
but the August numbers were revised up to a plus 89,000. A
total of 8.4 million new jobs have been added in the last
forty-nine months with 1.6 million in the last year alone
(Investors Business Daily).
Like it or not, nuclear energy is back. On September 7,
NRG Energy (a New Jersey energy company) applied to build
and operate two new nuclear reactors in Texas, the first in
this country since 1973. Also, three other companies are likely
to apply for licenses by year-end (New York Times). Despite
the fears over nuclear, France (which derives 80% of its energy
from nuclear) has never had an accident. Nuclear has become
safer because of new technology and design features. At the
moment, 439 nuclear reactors in 31 countries supply 15% of
the world’s electricity (Economist). Renewable energy
sources (food, wind or solar) do not appear to be a long term
solution and oil prices remain high. In addition, much of
the world’s current oil sources are held by countries
hostile to the US. Maybe a new source of energy will be developed
(hydrogen) that will provide clean efficient energy, but in
the meantime expect more nuclear reactor applications.
Random thought for October 2007:
During the eight minutes it takes you to read this market
letter or less:
60 babies will be born in the US
244 babies will be born in China
351 babies will be born in India
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