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Does a Higher Payroll Equal More Wins?

2010-03-10T02:48:15Z

One of the pillars of conventional wisdom when it comes to sports is that spending more equals more wins. If that were the case, then the New York Yankees, also known as the Yankee$, would have a lot more than two World Series rings in the past decade. So obviously, there is more to it than spending a lot of money. One of the reasons that this doesn't work as well now is that it is usually the older players who command the most money. They are the ones with the track records and histories to justify the big salaries. But they often are the ones who have past their primes, and who won't deliver as much as they have due to their skills declining as they age.

But that's baseball. The NFL has a hard salary cap, and it has a floor. So, the question is, in a more level playing field, does spending money equal success on the field?

Surprisingly, the answer is no. The top five spending teams in the NFL and their payrolls are:

New York Giants, $138.4 million
Houston Texans, $128.3 million
Miami Dolphins, $126.9 million
New Orleans Saints, $121.6 million
Chicago Bears, $120.7 million

Of these teams, only the Super Bowl winning Saints made the playoffs.

The bottom five teams as far as payrolls go are:

Kansas City Chiefs, $81.8 million
Tampa Bay Buccaneers, $84.6 million
Seattle Seahawks, $89.1 million
Dallas Cowboys, $90.3 million
Cincinnati Bengals, $93.8 million

On this list were the division winning Cowboys and Bengals.

So it's clear that in a more level playing field, spending does not equal winning.

That brings us to another question. Which team gets the most bang for its buck? In order to determine this, what we did is break down the cost per win among NFL teams. The leaders here are:

Indianapolis Colts, $7.4 million per win
San Diego Chargers, $7.5 million per win
Dallas Cowboys, $8.2 million per win
Minnesota Vikings, $8.3 million per win
New Orleans Saints, $9.4 million per win

Now we're seeing a pattern here. The teams that spent their money wisely, and who spent the least per win all made the playoffs.

On the other hand, the teams that squandered their money and paid the most per win? Not a playoff team among them. They are:

St. Louis Rams, $99.7 million per win
Detroit Lions, $50.0 million per win
Tampa Bay Buccaneers, $28.2 million per win
Washington Redskins, $25.0 million per win
Oakland Raiders, $22.3 million per win

The key to winning in the NFL appears to be spending wisely. This is likely due to the salary cap and floor. General managers in the NFL have to balance their needs with the cost of filling those needs. And everyone has a budget. It's not like MLB, where teams like the Red Sox and Yankees can just outspend teams like the Twins and Devil Rays.

Want a league where everyone has a shot at winning? Implement a hard cap like the NFL has, and make general managers spend their money wisely. That will put a premium on intelligent decisions on players, and it will help alleviate competitive imbalances that exist in MLB.

Small Business Optimism Falls in February

2010-03-09T14:06:06Z

While larger businesses are starting to show optimism and some of them have resumed hiring, small businesses remain pessimistic. The National Federation of Independent Business released its small business optimism index for the month of February, and it showed a drop of 1.3 points to 88.0.

Seeking to place blame, the chief economist for the NFIB blamed the "Washington DC agenda" for the negative sentiment among small businesses. First, someone's got to define what that agenda is. Second, what is it about, say, restricting large banks from prop trading that will affect small businesses? If they were affected by the rule, then they wouldn't be a small business, would they?

It is disappointing to see what should be an economic data release tainted by political rants from the organization releasing the data. Regulation is something that the NFIB rails against even though most regulations exempt its members, and the organization is seizing on this negative survey to push its agenda. Nevertheless, there is useful information in the report.

While optimism has dipped among small businesses, they look like they plan to resume hiring. Employment per firm dropped by 0.13 workers, which is way down from the 0.5 workers per firm average since the recession began. Looking forward, 13 percent of small businesses plan to increase their payrolls, while eight percent plan to cut payrolls. The number of businesses planning to hire more workers increased by three points, while the number of businesses looking to cut them decreased by two percent. Thus, even in the negative survey, there's some good news.

Despite the ranting against the "Washington DC agenda" from the NFIB, the real reason for pessimism among small businesses is decreasing sales. Companies reporting higher sales dropped by two points to 15 percent, while companies reporting lower sales was unchanged at 46 percent. That is the real reason for pessimism among small businesses. It is hard to be optimistic when you see sales falling.

One of of the main pillars of conventional wisdom is that small businesses drive economy. That thinking needs to be examined thoroughly. It is clear that larger employers are the ones who are resuming hiring at a far faster rate than small businesses. Maybe it's the large employers that drive hiring, and small businesses just follow along.

Small businesses and family farms are, in the opinion of this writer, often given a spot on a pedastal that they simply don't deserve. And this comes from an individual who is the sole proprietor of a small business. Who, incidentally, will never join the NFIB because they're so full of crap.

This is something to ponder on a day where there's little economic data to drive the markets.

How to Profit from a Hedge Fund

2010-03-08T03:23:05Z

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Many people have criticized hedge funds and private equity funds for profiting from the big run up in various equities during the time when the bubble was inflating while buying credit default swaps to profit when the bubble burst. While that may be the case, sometimes, investors have a chance to trade a hedge fund stock to profit.

That is the case with Blackstone Group. The company will pay a dividend of $0.30 soon, with the ex-dividend date falling on March 11, 2010. As you know, that means investors need to hold the shares by the day before the ex-dividend date in order to receive the dividend.

The stock is trading at a shade under $15 right now, and it is yielding 8.1 percent. That means that if you buy the stock and hold it until the ex-dividend date, you will receive income of a little more than two percent. You'll receive that income for holding the stock for just four days, and you can profit more from any capital gains that occur. Or, if the share price goes down -- and the shares fluctuated by $0.48 on Friday so that's possible -- you just hold on until you break even. Even if that takes a month, you earn a little more than 24 percent on an annualized basis on your trade.

To boost your earnings, you can sell call options. The $15 March call for Blackstone is trading for $0.19, which means you book that additional income and goose your returns even more. That will increase your earnings to 3.3 percent, and you'll receive that for holding on to your shares for two weeks until the options expire. That's an annualized return of 85 percent, something you should be happy to take.

Many people hate hedge funds, saying that they make money unfairly and don't play by the same rules small investors do. While that may be true, sometimes, you can play the same game as they do, and profit from it.

Jobs and Productivity Numbers Beat Estimates, Spur Rally

2010-03-06T05:41:58Z

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Multiple reports released by the Department of Labor over the past two days showed that the freeze in the labor market is starting to thaw. First, on Thursday, initial unemployment claims declined by 29,000 to 469,000. The four week moving average also decreased, dropping to 470,750 from last week's revised 474,250. The number of continuing claims also fell, dropping by 134,000 to 4.5 million. The four week moving average dropped as well, declining by 29,250 to 4.576 million. This was the lowest number of continuing claims since January 2009.

There were 12 states which saw claims drop by more than 1,000, with California's 12,000 decrease in claims topping the list. On the downside, seven states, led by New Jersey's 4,879 claims, saw more than 1,000 additional initial claims.

Economists had estimated that there would be 470,000 initial claims, with estimates ranging from 440,000 to 515,000 claims, so the actual number was pretty much right on with the consensus. The head of economics for Bank of America Merrill Lynch Global Research said that the initial claims numbers indicate that hiring will resume soon. However, he cautioned that the job market remains in limbo, "where it is not clear if job growth has started yet." When companies resume hiring, the hiring will likely be "broad based" because companies "overreacted and fired a lot of people, more than they needed to, with the news of the recession."

Adding to the positive news on the jobs front was the release of the Department of Labor's employment situation report on Friday. The report showed that the unemployment rate remained steady at 9.7 percent. Employers shed 36.000 jobs in February, a rate that the Department of Labor called "little changed."

Job cuts were spread equally between private sector employers and the government, with each shedding 18,000 jobs. The construction, transportation, and information sectors were the ones losing the most jobs. On the plus side, temporary help and health care showed the most growth. And in a case where a minimal gain was actually a positive, the manufacturing sector showed a very small increase in jobs, following a gain in that sector during January.

It's also important to note that this report was affected by the severe winter storms that paralyzed much of the mid-Atlantic for days. The report, according to the Department of Labor, used data from the week of February 12. Thus, it is possible that the storms affected the report.

Economists said that it is likely that the report would have showed a gain in jobs for the first time in years if it wasn't for the severe winter weather. There's a good chance we're at the turning point for unemployment," said an economics professor at the University of Chicago. The report showed that the decline in the unemployment rate since October was real, and the "decline was not a statistical anomaly," he added.

The report also showed that some companies are starting to back up their words with actions. According to human resources consulting company Towers Watson, 92 percent of all employers said they would add to their payrolls in 2010. While they said they'd do it more slowly than in the past, the employment situation report shows this may be happening.

And in a sign that the growth in jobs is not coming at the expense of productivity, another report from the Department of Labor showed that productivity jumped in the fourth quarter of 2009 by 6.9 percent. There was a gain in output of 7.6 percent that was partially offset by an increase in hours worked of 0.6 percent.

Inflationary pressures from employees are likely to be kept in check, as unit labor costs fell by 5.9 percent in the fourth quarter of 2009. This came as a result of productivity increasing by more than compensation. When compared year over year, unit labor costs declined by 4.7 percent, which was the largest decline since the government started keeping records in 1948.

Productivity was forecast to increase by 6.3 percent according to the consensus estimate. The estimate for unit labor costs was for a decrease of 4.5 percent. Estimates for productivity gains ranged from 5.7 to 7.1 percent.

Economists called the gains in productivity unsustainable. The chief economist at Woodley Park Research in Washington said employers "experienced rising output level without increasing employment to a degree that can't persist." And a senior economist at PNC Financial in Pittsburgh said "productivity gains will not be sustained because companies are operating at a bare minimum in terms of employment and they will need to start increasing employment to increase output and capture additional revenue."

The combination of the good news on the jobs and productivity front caused a rally in stocks. For the week, the Dow was up by 2.3 percent to 10,566. The S&P 500 gained 3.1 percent and closed at 1,139. And the Nasdaq increased by 3.9 percent to close at 2,326.

In an economic recovery, the last thing to recover is typically the labor market. This is because companies do not start to hire until they are sure things are improving. With consumer spending accounting for two thirds of the economy, until consumers think their jobs are secure, they don't really start to open their wallets. And so, the slow recovery process takes place.

However, the better than expected news on initial claims, payroll losses, unemployment, and productivity bode well for an improved job market. That is when we'll see the economy start to grow at a better pace. Still, with 8.4 million jobs lost since the beginning of the recession, even a strong recovery will require years to replace the lost jobs.

ADP, ISM, and Fed Beige Book Indicate Strengthening Economy

2010-03-04T05:26:03Z

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Investors looking at economic data for signs that the economy is improving received some today. The ADP national employment survey for February showed that 20,000 jobs were lost in the private sector, which was the smallest decline in private sector payrolls since they started shrinking in February 2008. ADP reported that private sector service jobs increased by 17,000, which was the second monthly increase in a row. However, as in the previous month, this increase in service sector jobs was not enough to overcome the loss of jobs in the goods producing sector. This segment of the economy suffered a loss of 37,000. Even there, though, there was good news, as manufacturing added 3,000 jobs. This was the first increase in manufacturing jobs since January 2008.

Both large and small businesses cut their payrolls. Large businesses, with more than 500 workers, slashed 10,000 jobs. Small businesses, defined as those with less than 50 workers, cut 18,000 employees from their payrolls. However, medium businesses, which are those with between 50 and 499 workers, added 8,000 employees. This was the first increase in payrolls among medium sized employers since January 2008.

While companies continue to be hesitant to add employees due to the slow pace of recovery in the economy, the ADP report is a sign that the jobs market is improving. The chairman of Macroeconomic Advisers, which produces the report with ADP, said "this report really is pretty encouraging." He added that he expects payrolls to start to show growth in the next month or two. And an economist with Stone & McCarthy Research said the data shows "the labor market is very much on the mend."

The Institute for Supply Management's non-manufacturing index (NMI) was also positive, coming in at 53. That was 2.5 percentage points higher than January's 50.5. Figures above 50 indicate growth. The index was higher than the consensus estimate of 51. Estimates for the NMI ranged from 48.5 to 52.9. Slightly more than half of the sectors in the survey showed improvement, with nine indicating growth, and eight indicating contraction.

The chief economist at Woodley Park Research said that the index indicates "a broadening of the economic recovery." He added the data "are encouraging, to say the least."

Finally, the Fed's Beige Book, which sums up economic conditions in each of the Fed's 12 districts, showed growth in the economy as well. According to the Fed, "economic conditions continued to expand...but in most cases, the increases were modest." There were nine districts that reported gains. In the Atlanta and St. Louis districts, economic conditions were described as "mixed." And in the Richmond district, which was pounded with two huge snowstorms, reported that economic conditions "slackened or remained soft across most sectors."

A former Fed researcher who is now an economist at JPMorgan Chase said that the report increases the chance that the Fed will reiterate its intent to keep interest rates low for "an extended period." While the report indicated that the economy is showing growth, the growth "was described in pretty restrained terms."

The response of traders to this data was restrained. The major indices didn't move much today. The Dow dropped by 0.1 percent, falling to 10,397. The S&P 500 was essentially flat as was the Nasdaq. The S&P 500 ended the day at 1,119 and the Nasdaq closed at 2,281.

The reaction of traders may hve been the right one, as the data shows more of the same conditions we've seen so far in this economic recovery. While the economy is growing, it's not a smooth recovery, and it's certainly not a strong one. And jobs, like in past economic cycles, are going to be slow to recover. However, with consumer credit constrained, without jobs recovering, consumption can't. And that means the economy is likely to grow slowly.

Closing a Position to Add a New One

2010-03-03T04:03:29Z

Those of you who have been regular readers may recall that one of our trades that didn't work out was our trade for Novatel Wireless. While Novatel had a new product, the MiFi, which was a big hit, lower than expected sales of the product caused the stock tp plunge. We said we'd hold on to our position, however, because we believed the product would eventually pay off and we'd be rewarded.

We still think there's a lot of gain to be made in Novatel, but we're going to close our position in that stock in order to make some money in the meantime.

Frontier Communications is a telecommunications company that's headquartered in Stamford, Connecticut. It's got the normal telecom offerings, such as a combination of television, internet, and phone service.

And it's also got a fat dividend. The yield on the stock is 12.8 percent.

Frontier isn't a company that we'd invest in, but it's a company we're more than happy to trade. The company goes ex-dividend on March 5, so that means we need to hold shares of the stock by no later than March 4. We expect the stock to trade up on that day, as people seek to get the dividend.

So we closed out our position in Novatel and we'll use the proceeds to buy Frontier. The stock closed at $7.66 on March 2. The dividend will be $0.25, so just collecting the dividend would give us a 3.3 yield in a few days. But we'll goose our returns by selling a $5 call that expires on March 19, 2010. That option is trading for $2.60. So that means we'll get a total return on our trade of $2.85 on a stock that goes for $7.66. That's a gain of 37.2 percent in 15 days, for an annualized return of 905 percent.

These trading opportunites are very rare, and they need to be taken advantage of when we find them. So we'll close our position in Novatel, and move into this position. We will use the proceeds to make up for some of our losses in Novatel.

The problem too many people make when investing is that they fail to act on opportunities like this one. They are not easy to find but they are definitely worth looking for.

ICSC Goldman Retail Sales Show Decline for Week

2010-03-02T14:12:06Z

In a report that the International Council of Shopping Centers and Goldman Sachs said not to read too much into, same store sales dropped by 0.8 percent in the week of February 27. In a year to year comparison, this figure increased by 0.7 percent. Highlighting the way that data can fluctuate in the month of February for retailers, the ICSC is still calling for two percent growth for the full month of February. Another thing to keep in mind is that much of the Northeast was slammed by a big snowstorm last week, which obviously kept shoppers out of stores.

Still, even if the ICSC figures -- which measure weekly sales at major chain retailers -- do show that projected two percent increase, it still shows that the consumer isn't really opening up his wallet. Spending in the early part of 2009, which came right on the heels of the near collapse of the financial system, was hardly robust. And a gain of two percent off those low figures is not something to get excited about.

While one week's data shouldn't be used to extrapolate too far, when combined with the drop in consumer confidence, housing sales, and increase in jobless claims we saw last week, it's clear that of anemic retail sales is still in place.

That should get investors to think about whether they should take profits on retailers who have had big run ups. Most investors who put their money into the stocks of retailers in the past year or two have big gains. It may be time to take those gains or at the very least, use options to protect against losses.

We will get more economic data today, with auto sales being reported. It will be interesting to see whether Toyota's competitors can take advantage of its problems to gain market share.

Consumer Spending Beats Estimates, Personal Income Does Not

2010-03-01T14:01:28Z

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The trend of mixed news for investors continued today, as the Commerce Department reported that consumer spending increased by 0.5 percent in January, while personal income increased 0.1 percent. Much of the disappointing results in personal income was due to a decline in dividend and interest income, which offset a better than expected increase in wages and salaries. Naturally, since spending increased more rapidly than incomes, that meant that the savings rate declined. Savings fell to 3.3 percent from December's 4.2 percent.

The increase in consumer spending came in better than the consensus estimate of 0.4 percent, with estimates ranging from an increase of 0.2 percent to an increase of 0.6 percent. Economists had expected personal incomes to grow by 0.4 percent, thus expecting expenditures and income to increase at the same rate.

The increase in consumer spending was the fourth straight increase and the increase in personal income was the sixth consecutive increase.

Analysts said that the increase in spending was a good sign, especially given the challenges consumers face with unemployment still running high. "It's a good start," said the chief financial economist for IHS Global Insight, who correctly forecast the consumer spending number. However, he cautioned against reading too much into the results, saying "consumption is not going to be the driver" for the economy.

Retailers concurred, saying that while they expect to see increased revenues this year, they do not expect a robust recovery in consumer spending due to concerns over jobs and the housing market. As the CEO of Home Depot said, "we recognize that we have more work to do as a company and that the economy is not out of the woods yet, particularly in our market, so we're not projecting robust growth."

Still, the growth in consumer spending is good news. While it's difficult to see how spending can grow strongly given constrained credit as well as concerns over housing and jobs, there needs to be at least mediocre growth in order for the economy to do well.

CFTC's Chair Turns on Wall Street

2010-02-28T17:55:55Z

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In high school, one of the plays we had to read for our English class was about Thomas Becket. Becket, as you know, was the former confidant of King Henry. As King Henry's chancellor, he was extremely zealous in collecting taxes due the king from all landowners, including churches. But when King Henry appointed Becket to the position of Archbishop of Canterbury, Becket's position changed. Instead of moving to collect taxes from churches for King Henry, Becket consolidated those revenues for the Church. That essentially was a declaration of war from the Church against the Crown. Eventually, this struggle led to Becket's death and martyrdom, with King Henry at one point reported to have exclaimed "will no one rid me of this turbulent priest?"

While it's highly unlikely that the chair of the Commodity Futures Trading Commission (CFTC) will end up being beheaded, his transformation in many ways mirrors that of Becket's. Gary Gensler, a former Goldman Sachs partner, was portrayed by liberal critics as too tied to investment bankers to be an effective regulator. Gensler was on the staff of then Treasury Secretary Larry Summers when the push to exempt most derivatives from regulatory oversight passed in 2000. Because of this, democratic lawmakers held up his nomination for five months before finally agreeing to appoint him to his current role.

Gensler said that his transformation came about after seeing the havoc that unregulated derivatives trading wreaked on financial markets. In fact, some of the people who Gensler tangled with during the push to deregulate derivatives trading, such as former CFTC chair Brooksley Born, now say that Gensler is "committed to robust regulation." And the director of investor protection for the Consumer Federation of America said that Gensler has "been the strongest advocate of reform" in the Obama administration.

Gensler wants to shine the spotlight on derivatives trading. Many companies that consume commodities use these as hedges to protect them from price swings in the supplies they need in order to function. Southwest Airlines, for example, was aided by its hedges in oil at a time where many of its counterparts were filing for bankruptcy.

However, sophisticated traders at five major banks -- Goldman Sachs, Bank of America, JPMorgan Chase, Morgan Stanley, and Citigroup -- dominate trading and reap billions in profits. Gensler wants to highlight the big margins the traders at these firms enjoy.

Gensler has turned out to be one of the biggest assets that those pushing for regulation have. When banks claim that regulations being considered are too strict and would destroy their ability to function, Gensler has been known to say "that's crazy. I used to do it all the time."

In response to the financial crisis and the role derivatives played in them, Congress moved to enact legislation that would require derivatives traders to work through clearinghouses. These clearinghouses would require the traders they serve to hold capital in order to prevent default on their obligations. And the CFTC would be able to more easily monitor trading.

However, Gensler says this is not enough. He is most critical of an exemption that would allow non-financial companies seeking to hedge against fluctuations in fuel, currency swings, and other typical risks to trade outside of the clearinghouses. He says that even these exemptions, which seem innocent, will allow hedge funds and financial firms to take major risks on derivatives to goose their profits.

This is why Gensler is pushing the Senate hard to enact regulations that clamp down harder on derivatives trading. He wants to go even further than his boss, President Obama, in regulating derivatives trading. The reason for this, according to Gensler, is that "interests [of the banks] are not necessarily aligned with the American public's interests."

Gensler says that while he once shared the goals of the bankers he will be responsible for regulating -- maximizing profits and bonuses -- his obligation is now to the taxpayers. When asked what the biggest obstacle to enacting tough regulations was, he pointed to the bankers in the room and said "you."

Gensler's transformation -- which he hasn't donned a hair shirt like Becket did, it's just as remarkable -- means that the taxpayers and small investors have an ally in the current administration. Let's hope that he doesn't end up with his head being cut off like Becket did.

GDP Provides Investors With Welcome Good News

2010-02-26T14:17:53Z

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After a run of bad economic news on the consumer confidence, housing, manufacturing, and jobs front, investors got some much needed good news. The Commerce Department reported that GDP in the fourth quarter of 2009 increased by 5.9 percent, higher than the 5.7 percent originally reported. This is the second estimate, and a revised one will be released in March after the government gets more data to analyze.

Personal consumption, according to the Commerce Department, increased by 1.7 percent. Real estate was also a driver of GDP growth, with non-residential real estate growing by 6.5 percent and residential real estate climbing by 5.0 percent. Equipment and software sales surged by 18.2 percent. And exports jumped by 22.4 percent. Imports, which take away from GDP, also increased, climbing by 15.3 percent.

Many have said that it's government spending that propelling the economy forward. However, that doesn't appear to be the case, at least in the fourth quarter. Spending by the federal government was essentially flat, dropping by 0.1 percent. And spending by state and local governments decreased by 2.0 percent.

Analysts had expected that the government's revision for fourth quarter GDP growth would come in at the 5.7 percent that was initially estimated. All estimates were for growth, ranging from 4.2 percent to 6.3 percent. The actual growth rate was the best in six years, according to the Commerce Department.

An economist at MF Global in New York said that a lot of the growth seen in the fourth quarter was driven by businesses replenishing their inventories. However, he said that inventory replenishment still can help boost GDP and that "a clear pickup in the labor market" is required to for sustained GDP growth. That pickup in hiring, he said "is coming."

The big cloud over the economy is jobs. We are seeing many things fall in place, but until the jobs situation gets better, it's difficult to see how the economy can grow rapidly. And even if employers start to add to their payrolls, with over eight million jobs lost since the recession began in December 2007, it will take a long time before we get back to the lower unemployment rates we saw in the middle of the decade.

Durable Goods, Jobless Claims Show Signs of Trouble

2010-02-25T13:57:58Z

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Yesterday in testimony before Congress, Federal Reserve Chairman Ben Bernanke said that the recovery underway is "nascent." Today's economic data helped show this is the case.

Initial jobless claims climbed by 22,000 to 496,000, according to the Labor Department. The four week moving average also climbed, increasing by 6,000 to 467,750. The number of individuals collecting unemployment increased by 6,000 to 4.617 million, with the four week moving average climbing as well. That number increased to 4.601 million, an increase of 4,250.

There were 13 states with a decrease of more than 1,000 claims, led by California's decrease of 5,540. On the downside, there were three states with an increase of more than 1,000 claims, with North Carolina's increase of 5,897 the highest.

Analysts had expected that initial claims would come in at 460,000, with estimates ranging from 425,000 to 500,000. According to one economist at High Frequency Economics, the data shows "strong manufacturing is not enough to support the labor market as a whole."

But even the manufacturing sector didn't do well in the last month. Across town from the Labor Department, the Commerce Department released its data on durable goods. This data showed that durable goods orders increased by 3.0 percent. Excluding the volatile transportation sector, durable goods orders decreased by 0.6 percent. Thus, most of the increase in the durable goods number was due to increased orders in aircraft. Transportation equipment, which includes aircraft, increased by 15.6 percent in the last month.

Economists had projected that durable goods orders would increase by 1.5 percent, with durable goods excluding the transportation sector would increase by one percent. Forecasts for the durable goods number ranged from a decline of 0.5 percent to an increase of five percent. Excluding transportation, orders were expected to increase by one percent.

An analyst at JPMorgan Chase said "capital spending is probably still increasing but not at the robust pace we saw in the fourth quarter. It looks like in the first half the recovery is slowing from the pace we saw in the fourth quarter."

The news on jobs and durable goods is likely to make for an interesting day for Bernanke. He will be in front of Congress for a second day, and the politicians that want to show their constituents that they are doing something are likely to seize on this data and use it in their questioning. The problem is that Bernanke's tools to bring the economy out of recession are limited to keeping interest rates low, something that he's done already.

Bernanke Likely to Face Tough Questions on Jobs

2010-02-24T13:57:42Z

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After yesterday's horrible consumer confidence numbers, which were dragged down by concerns over jobs, Federal Reserve Chairman Ben Bernanke is likely to face tough questions in his testimony before Congress. The economy has lost more than eight million jobs since the recession began in December of 2007. Even though a recovery is underway, with GDP showing growth in the third and fourth quarters of 2008, the job market remains weak. While the payroll numbers recently are far better than they were in the days when 800,000 jobs were lost in a month, we are still seeing payrolls cut.

Two of Bernanke's counterparts in San Francisco and Atlanta said that economic growth won't rapidly bring down the unemployment rate, which stands at 9.7 percent. Analysts concur, with a New York University professor of economics saying "it sure looks like we are in the middle of a jobless recovery. In the current recovery, credit market frictions and general uncertainty may be the main factor dampening hiring."

Bernanke is likely to repeat his intent to keep interest rates low for "an extended period." It's likely that he'll say that this will remain his intent until there is a pick up in employment. Since World War II, the Fed has kept interest rates low until about six months after the peak in unemployment. When inflation is in check, they have kept interest rates low for longer.

Congress is going to focus much of its questioning on jobs. Senator Bob Menendez said that jobs "will be a big topic." He added that Bernanke will face questions on "what is he going to do and the Federal Reserve going to do to help grow this economy?" Another Senator, Sherrod Brown, said that he would ask Bernanke "how he's going to rebuild American manufacturing."

It is likely that the politicians will not be happy with Bernanke's answers. The Fed is doing pretty much all it can do by keeping interest rates low. The emergency measures put in place in response to the financial crisis are being removed, which only makes sense since the financial system is no longer at risk of imploding.

Still, the politicians will need to be seen as asking tough questions about jobs so that their constituents feel like they're doing something. The hard truth is that the medicine has been given to the patient, and it doesn't work overnight. The patient is recovering in part due to the medicine given, but he's still sick. And just like with a sick patient, time is needed to cure the disease.

Consumer Confidence Slump Triggers Sell Off

2010-02-23T23:04:51Z

The Conference Board's consumer confidence index, which had been trending up, slumped badly. The index, which came in at 56.5 during January, dropped by more than ten points to 46.0. Analysts expected that the index would come in at 55 for February, with estimates ranging from 50.9 to 59.0.

The research director for the Conference Board said "concerns about current business conditions and the job market pushed the Present Situation Index down to its lowest level" since February 1983. The short term outlook was also down, "with fewer consumers anticipating an improvement in business conditions and the job market over the next six months." Furthermore, consumers were "extremely pessimistic" about their earnings prospects. The net result, will be consumer spending that remains in check.

Jobs were the main factor in driving consumer confidence down, with those saying jobs are hard to get climbing to 47.7 percent from 46.5 percent last month. Those saying that it was easy to find a job decreased from 4.4 percent to 3.6 percent.

The drop in consumer confidence led some analysts to warn that the economy may not be out of the woods yet. "Consumer spending is going to disappoint throughout most of the year," said the chief economist at Mizuho Securities USA in New York. And the CEO of FaithShares said "consumers are still just very confused. Until we get more consistently positive trends, it's like to be choppy like this."

Adding to the negative outlook for consumers when it comes to jobs is the situation in Washington. "The vicissitudes of the political situation in Washington cannot be helping. There has been a lot of sizzle on job stimulus proposals but no meat is coming out of the sausage factory," said the chief economist at IHS Global Insight in Lexington, Massachusetts.

On the negative news, the markets sold off. All of the major indices were off by one percent. The Dow dropped by one percent to 10,292. The S&P 500 was lower by 1.2 percent to 1,095. And the Nasdaq fell by 1.3 percent to 2,213.

While today's news was bad news, it's consistent with the beginning of an economic recovery. Jobs don't pick up until both consumers and companies are confident that the economy is recovering. And consumers don't feel good until they believe that jobs are out there and companies are hiring. So we get a situation where the economy takes two steps forward and one step back instead of steadily progressing.

That is going to be the case for a while. Investors hoping for a nothing but positive economic data are likely to be disappointed. That may be the case with Thursday's initial claims figures if the consumers in the Conference Board's survey are correct.

Bernanke's Testimony and GDP Highlights of Week's Data

2010-02-22T14:00:45Z

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Investors looking for clues on the performance of the economy will get plenty of data they can use this week. The week kicks off with testimony by Fed chairman Ben Bernanke, who will head to Congress twice this week to testify before both chambers. Monday he'll head to the House, and on Thursday, the Senate gets its turn to grandstand. Once again, we'll have members of both the House and Senate, most of whom are clueless on financial issues, try to grandstand for their constituents. If you want to see why Congress can't get anything done, watch Bernanke's testimony.

Sandwiched in between Bernanke's testimony will be the release of data on consumer confidence on Tuesday and new home sales on Wednesday. Since consumers drive two thirds of the economy, if they're not feeling good, then the economy can't really grow. The data on new home sales will help provide more insight into whether or not the housing sector is recovering. That's the sector that dragged the economy into the worst downturn since the Great Depression. Without growth, or at least flatlining, in that sector, it's difficult to see how the economy can grow.

More data on the course of the economy will be released on Thursday. We'll get the weekly data on initial unemployment claims, which will give some insight into the jobs market. In addition, data on durable goods orders will be released on Thursday, thus showing how the manufacturing sector is performing. Investors should look at the durable goods orders as well as the performance of the manufacturing sector in the initial claims data for insight.

Finally, the week closes with data on GDP, consumer sentiment, and existing home sales. This will give traders information on how the economy is a whole is performing as well as the housing sector. It will also give clues on what the consumer might do.

Every week brings us data on what's happening in the economy. This week, we can see how various sectors, which are so critical to the recovery, are performing.

Fed Raises Discount Rate But Inflation Remains Tame

2010-02-19T14:35:43Z

The Federal Reserve's move to raise the discount rate, which is the rate that banks charge each other for overnight loans, was a sign to the markets that they are beginning to return to a more normal monetary policy. The Fed did this despite no signs of inflation getting out of control.

The Labor Department reported that the consumer price index rose by 0.2 percent in January. The main reason for the increase in the CPI was energy, with gasoline, fuel oil, and natural gas moving higher. In fact, after stripping out the volatile energy and food sectors, the CPI declined by 0.1 percent. This was the first decline in core CPI since December 1982.

Housing, new vehicles, and airline fares drove the core CPI down. The decreases in these sectors were enough to offset the increase seen in health care and used vehicles. Food prices rose as well, with the increase in prices driven by dairy products and fruits and vegetables.

Analysts had expected that the CPI would increase by 0.3 percent, with estimates ranging from prices remaining flat to an increase of 0.6 percent. The core index was projected to increase by 0.1 percent.

The CPI numbers bolster Fed Chairman Ben Bernanke's position that inflationary pressures remain subdued, which would allow the Fed to keep interest rates low for "an extended period." Analysts concurred, saying that with unemployment remaining high, companies will have problems raising prices. An economist at Moody's Economy.com said, "the broader picture remains one of subdued inflation, and this gives the Fed ample reason to stay on the sidelines until at least very late in the year."

Despite the low inflationary pressures, the Fed raised its discount rate. This isn't a move to raise the federal funds rate, but it's a way for the Fed to start to remove liquidity from the system. That shows that the Fed is taking actions in line with its belief that the economy is growing.

A former Bank of England official said, iIt's another minor step in a long march towards normalization." The Fed itself echoed that sentiment, saying it was a "normalization" of the lending process, not a precursor to an increase in the federal funds rate. The Fed has taken other actions to move towards normalization, letting many of its quantitative easing programs put in place in response to the financial crisis of 2008 expire.

Still, analysts said that the Fed's action is a positive sign. A professor at the London School of Economics said "the Fed has seen early signs of recovery" and that the actions are encouraging. And the CEO of Lafarge, the world's biggest cement maker, said the Fed's move "shows some confidence in the economic pickup."

Today's economic news and the Fed's action are positives for the economy. The increase in the discount rate shows confidence -- which is key to a recovery -- is growing. And the muted inflationary pressures will allow the fed to keep its federal funds rate low, thus helping the economy recover.