Monday, 8/5 Market Wrapup

FinancialSense.com ^ | 08/05/2002 | by Scott Middleton

[Lazamataz]

 
Weekday Commentary from Scott Middleton
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Don't Count on the Fed

Source:  CNN/Money

 

 

Storm Watch Update for 7/26/2002

Monday Market Scoreboard  August 5, 2002
Dow Industrials		269.5	8043.63
Dow Utilities		1.55	224.52
Dow Transports		69.76	2132.27
S & P 500		29.64	834.6
Nasdaq		41.91	1206.01
US Dollar to Yen			119.64
US Dollar to Euro			0.9812
Gold		0.6	309.6
Silver		0.04	4.63
Oil		0.26	26.58
CRB Index		1.79	208.6
Natural Gas		0.18	2.678
All market indexes The Week in Graphs Storm Watch Geopolitical News in Focus Energy Resource Page Precious Metals
	08/05	08/02	Change
HUI (Amex Gold Bugs Index)
Close YTD	109.04	113.08	4.04 67.70%
52week High	147.82	06/03/02
52week Low	59.86	11/26/01
XAU (Philadelphia Gold & Silver)
Close YTD	59.17	63.23	4.06 7.97%
52week High	88.65	05/28/02
52week Low	49.23	11/19/01

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 Market WrapUp for the Week 
Monday  l  Tuesday  l  Wednesday  l  Thursday  l  Friday

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^{Monday, August 5, 2002 Market WrapUp}

Double Dipping
The past few days of economic data is driving concerns of a double dip recession. So much to the tune that Goldman, Sachs & Co. economists are convinced that the Fed may consider another rate cut during their meeting next week in order to avoid recession. Remember, it was only five weeks ago the bank said growth was strong enough to warrant an increase, so to make a sudden 180-degree turnabout is probably unlikely. However, should consumer confidence and the economy continue to deteriorate in the coming weeks, the Fed will surely act swiftly.

Consider this--for some time now it has been the belief of many that when the Fed cuts rates the markets will rebound. Will that happen this time around? With rates currently at 1.75%, what effect is lowering it going to have? The markets could very well react positively to a rate cut. Surely the media is going to pump it up and convince everyone that what the Fed is doing is right for your portfolios. What they won’t tell you is that by cutting rates further, they are running the risk of further alienating foreign investors in the U.S. markets. Without foreign investment dollars the market is unable to support itself. Henceforth, the rally will, no doubt, be brief and many people will just use it as an opportunity to eliminate positions and the market will continue in the general trend downward.

The Economy
The ISM’s index of retail, financial services, construction and other non-manufacturing companies dropped to 53.1 during July from 57.2 in June. A number above 50 still means expansion, but this was the second straight month the pace of growth slowed.

Financial Markets
The Dow slid 269.50, or 3.2% to 8043.63. The Standard & Poor's 500 Index fell 29.64, or 3.4% to 834.60. All 10 of the benchmark's industry groups dropped. The Nasdaq slid 41.95, or 3.4% to 1205.97, led by shares of Cisco Systems Inc. Trading fell to 1.4 billion shares on the New York Stock Exchange, the slowest day in a month. More than three shares fell for every one that rose on the exchange.

Financials and pharmaceutical companies led today’s decline as Lehman analyst, Brock Vendervliet, lowered his rating on Citibank and JP Morgan Chase & Co. from strong buy to "equal weight."

Overseas Market
European stocks slumped as more evidence economic growth is stalling prompted investors to sell shares of companies such as BHP Billiton and Imperial Chemical Industries. The Dow Jones Stoxx 50 Index closed 3% lower at 2526.33 as 49 of its members declined. All eight major European markets were down during today’s trading.

Taiwan stocks tumbled and the TWSE Index had its biggest drop in 21 months after President Chen Shui-bian described the island as a separate nation and supported a referendum on independence. Japan's Nikkei 225 stock average lost 0.05%.

Treasury Market
Treasury bonds traded significantly higher in response to continued weakness in the equity realm. Yields on a benchmark 10-year remain at their lowest levels since early November. The 10-year Treasury note was up 22/32 to yield 4.205% while the 30-year government bond gained 30/32 to yield 5.16%.

© Copyright Scott Middleton, August 5, 2002

[Dog Gone]

Here. You'll enjoy this column, I think.

Three investments best bets for fixed-income yields

By SCOTT BURNS
Universal Press Syndicate

You can't say we don't have choices. We can lose our money in a quick, disastrous way by investing in common stocks. Or we can lose our money in a slow, methodical way by investing in short-term fixed-income securities.

While the agony of the stock market is understood, the tiresome misery of fixed-income investing is less clear. So let's do a quick scan of the fixed-income universe relative to inflation.

According to the Department of Labor, the consumer price index, excluding food and energy, was rising at a 2.3 percent annual rate at the end of June.

This means a taxpayer in the 27 percent tax bracket would need to earn 3.15 percent before taxes to "stay even" with inflation.

Unfortunately, 3.15 percent is difficult to find.

You won't find it in money market mutual funds. They earn a bit over 1 percent, an average of 1.30 percent.

You won't find it in short-term certificates of deposit, either. You have to commit to a two-year CD, according to www.banxquote.com, to get a 2.62 percent yield.

Ditto U.S. Treasury obligations. The yield on a two-year treasury is only 2.28 percent.

Long term? The yield on a 10-year treasury is a measly 4.39 percent.

So where do we invest for yield?

My three suggestions are GNMA funds; adjustable-rate mortgage funds; and, for tax-deferred accounts, treasury inflation-protected securities funds.

· Ginnie Mae funds: Government-backed mortgage securities have the same credit quality as treasury obligations.

They yield more than treasuries of the same maturity because of uncertainties about when mortgages will be refinanced. If interest rates rise, people will hold on to their mortgages. If rates fall, people will refinance. As this is written, Government National Mortgage Association securities, Ginnie Mae's, are yielding 1 percentage point to 2.4 percentage points more than treasuries of the same estimated maturity.

Vanguard GNMA currently has an effective maturity of six years. Over the last 12 months, according to Morningstar, the fund has provided a yield of 5.96 percent. This fund requires a $3,000 minimum initial investment. It has done better than 90 percent of its competitors in time periods from three to 15 years.

You can learn more by visiting the Vanguard Web site at www.vanguard

.com, the Morningstar Web site at www.morningstar.com or Money Central at www.moneycentral.msn.com.

Others with strong top-quartile records are American Century Ginnie Mae, trailing yield 5.55 percent; Fidelity Ginnie Mae, trailing yield 5.37 percent; and T. Rowe Price GNMA, trailing yield 5.23 percent.

· Adjustable-rate mortgage funds: These funds also invest in government-backed mortgage securities. And they limit their investments to pools of adjustable-rate mortgages. This means they should be less vulnerable to rising interest rates. Unfortunately, the minimum investment in many of these funds is relatively high -- try $200,000. Also, there are fewer of them, their track records are shorter and they tend to have lower yields.

That said, Monterey PIA Short Government has a five-star rating from Morningstar, requires only a $1,000 investment and has provided a trailing yield of 3.83 percent. Asset Management Adjustable Rate Fund requires a $10,000 minimum investment and has had a trailing yield of 3.81 percent.

Goldman Sachs Adjustable Rate Government Fund institutional shares require a minimum investment of $50,000 and have provided a trailing yield of 4.65 percent. One Group Ultra Short Term Fund has a $200,000 minimum and has provided a trailing yield of 4.05 percent.

· Treasury inflation-protected securities funds: Nothing will guarantee an after-tax return that beats inflation, but there are now four mutual funds that invest in the treasury inflation-protected securities, called TIPS. These securities were introduced in 1997. Quirks in their taxation make it best to own them in a tax-deferred account.

That said, the 10-year TIPS was recently offering a return just under 3 percent plus the change in the consumer price index. If inflation rises because of a falling dollar, surging oil prices, massive increases in the money supply or a jump-started economy, these securities may be one of the few havens.

American Century Inflation-Adjusted Bond Fund has no minimum for an IRA purchase and provided a total return of 6.61 percent in the first six months of this year. The fund has an expense ratio of 0.51 percent. Vanguard Inflation-Protected Securities has a minimum $1,000 IRA purchase and provided a total return of 7.37 percent in the first six months of this year. This fund has an expense ratio of 0.25 percent.

In July, Fidelity introduced its entry, Fidelity Inflation-Protected Bond Fund, with a retirement account minimum investment of $500 and a capped expense ratio of 0.5 percent.

These are funds everyone should consider for a retirement account; a 3 percent real return, guaranteed, is far better than the 2 percent real return traditional bond investors earn.

[truthkeeper]

I certainly did enjoy it. Thank you!

[SteamshipTime]

A very astute observation. If the market were predictable and there was such a thing as a macroeconomy that works like a Swiss watch, prices would equal cost and all speculative endeavors would cease. The analysts can do no better than educated guesses.

[SteamshipTime]

excluding food and energy

This is the biggest con on earth. With housing likewise excluded (fuel too, I think) and hedonic adjustments, the CPI is so understated, it is rumored that The Great Greenspan himself no longer tracks it. I've read Austrian school economists tracking the growth of MZM who put the rate of inflation at never less than 5% - 10% in a given year.

[headsonpikes]

Good points.

"The analysts can do no better than educated guesses."

The analysts can do no better than trained chimps. ;^)

[arete]

The barn door is open.

Guess the PPT decided to close the door in the middle of the night. The manipulation has become overwhelming. They're using Rubin's tactics of getting in early, getting in big, and staying in throughout the day.

Richard W.

[AdamSelene235]

Looks more and more likely that the only (cure) left is a world war.

How exactly does blowing up infrastructure and killing people help the economy?

[AdamSelene235]

When you get the blue screen of death on your computer you re-boot. Its the same principle with the world economy except with the winner of the war gets to re-write the code.

This is a a myth resulting from our WWII. Experience.

Wilson and FDR caused the Depression. When they stopped trying to fix things, the economy improved.

Furthermore at the end of the war every major industrial center ie Japan,Germany and England was reduced to smoking rubble.

Our industry was untouched.

Did Vietnam or the Gulf War help the economy?

That said I think the Iraqi attack should start by taking out the Saudis. I've friends in the 10th Mountain division and I want them alive...Screw the UN, open up with nuke tipped artillery shells & cruise missles.

[AdamSelene235]

Sorry, I meant Hoover not Wilson....ack...

[Wyatt's Torch]

Man are the markets looking for a rate cut. Lehmwn is predicting 75 bps by EOY.

Lehman Says Fed to Cut Interest Rates

Stocks Score Big Gains on Rate Cut Hopes

These guys are terminally hopeless. They have gotten it exactly wrong over the last 3 years. It's almost unbearable to watch.

[arete]

They're desperate and desperate people do stupid things. The FED has been in the market more than a daytrader. They just keep digging the hole deeper.

Richard W.