• Economist Expect Rates at 4.5%
    Posted by on August 12th, 2005 at 10:43 am

    The Wall Street Journal reports that a survey of economists expects the Federal Reserve to raise interest rates to 4% by the end of the year, to 4.25% by the middle of next year and eventually to 4.5%. Goldman Sachs thinks that the Fed will go all the way to 5%.

    Economists also expect the economy to grow by 4.2% this quarter and 3.6% next quarter. That’s really strong growth. But the real mystery is what will happen with interest rates, especially long-term rates.

    While the Fed has been lifting short-term borrowing costs, longer-term interest rates, as measured by bond-market yields, have remained stubbornly low — a development that Fed chairman Alan Greenspan famously described as a “conundrum.” The problem is particularly vexing for what it might say about future economic conditions: as the spread between short- and long-term interest rates narrows, the prospect of an inverted yield curve – a phenomenon associated with recession — grows.
    But few of the economists surveyed say economic weakness is responsible for the lack of movement in long-term rates. About 43% of the economists say the main reason long-term interest rates have stayed low is because inflation is expected to remain low. A number of others say that foreign central bank demand for U.S. debt, or an excess of saving in the global economy, has tamped down long-term bond yields.
    “It was difficult to see what would cause the economy to perform as weakly as long term yields would suggest,” said Mr. Hooper. “It just didn’t make sense in terms of the economic fundamentals.”
    Still, the economists don’t expect the yield on the 10-year Treasury note to increase by much. They predict, on average, that the yield will reach 4.67% by the end of this year and climb to 4.90% by next summer. The 10-year note finished trading Wednesday at 4.398%.

    This is where I disagree. The yuan revaluation will have a larger impact than most people realize. Also, the Fed has never been able to manage a soft landing for interest rates. The market always gets away from them. Interest rates are going higher, and it’s not going to be pretty.

  • 23 Years Ago Today
    Posted by on August 12th, 2005 at 10:05 am

    On August 12, 1982, the Dow fell 0.29 points to close at 776.92, marking a two-year low. At that time, stocks had been lousy investments for over a decade. In fact, this was only slightly above where the Dow was when President Kennedy was assassinated 19 years before.

    On February 9, 1966, the Dow reached 995.15. So in 16-1/2 years, the Dow fell 21.9%. By the summer of 1982, the country was sliding into the worst recession since the 1930s. Before the end of the year, the unemployment rate would reach 10.8%, more than twice what it is today. On August 13, 1979, Business Week published its famous “Death of Equities” cover.

    Despite all the gloom, we now know that this was one of the greatest buying opportunities in history. With a few months, inflation would subside, and except for a few minor outbreaks, it hasn’t been a problem since.

    On Friday, August 13, the Dow began its remarkable bull market by soaring 11 points. Believe it or not, 11 points was big money back then. In today’s terms, that’s over 150 points.

    By the way, Fast Times at Ridgemont High opened in theaters that day. The movie made about $2.5 million dollars that weekend, one of the poorer showings that summer. Thanks to the miracle of movie rentals, it would become a cultural milestone for my generation.

    The following Tuesday, the Fed cut interest rates to 10.5%. The Dow jumped nearly 40 points. Then on the following Friday, the Dow added another 30 points. The rally was on, and it would never look back.

  • Will Cisco Pay a Dividend?
    Posted by on August 11th, 2005 at 6:56 pm

    It’s almost hard to believe now, but Cisco Systems used to be the glamour stock. I’m not exaggerating when I say that people loved Cisco. Not matter how awful their own lives were, they always had Cisco. Spouses could leave them, jobs could suck, but Cisco was dependable. It was the one thing that never let us down. It was the financial North Star. It did its job simply by being there.

    At one time, Cisco beat Wall Street’s expectations for 43 straight quarters. It was Cal Ripken in corporate form. The stock went up and up and up. It was (sniff) such a beautiful thing.

    But now…it’s all gone. Cisco is no longer a star. It’s a wash-upped has-been. It’s fat and bald. It’s some guy wearing gold chains and driving a ’78 TransAm. It calls itself Cisco. It has the same symbol as Cisco, but it’s just not the same. I’m not ashamed to say that I (almost) cried at their latest earnings report. Not only was it a lousy report, but it gave a pretty bleak picture of the future.

    The company’s sales grew by just 11%. And its earnings-per-share went from 21 cents to 25 cents. I’m not sure which is worse, the 25 cents or that 25 cents was inline with expectations. The old Cisco would have laughed at 25 cents. It would have grabbed that quarter, bit it, and spit it back in Wall Street’s face, and then, maybe eaten a light bulb. That was my Cisco.

    Do you remember back in December when the CFO said he expected 12%-15% sales growth through 2008? Well, you can forget about that. Now the company says that sales will grow by 10%-12% next year. I get the feeling that John Chambers said to the Street “You want a forecast. Fine! Here’s a rotten forecast. Are you happy now?”

    Well, no. We’re not. I’m going to make a prediction. No, not like my other lousy predictions. This time, I’m nearly serious. I predict that Cisco will start paying a cash dividend. Really, it makes perfect sense. The company generates gobs of cash, but they waste it on buying their own stock (just like everyone else who buys Cisco’s stock).

    There are two reasons why Cisco buys so much stock. They issue tons of stock, and they give out tons of options to their employees. They bought nearly $20 billion of stock in the last two years and the stock hasn’t done a thing. Forget fighting the market: Just give it to shareholders.

    The market simply doesn’t trust Cisco to spend its own money wisely. Here’s a nice little factoid: If you adjust for stock-option expenses, Cisco’s 2004 earnings would have been 45 cents a share, not the 62 cents that the company reported. I think the rumor that Cisco was about to buy Nokia was started by the Street just to get Cisco thinking about how it invests its money. I knew there’s no way that Cisco would buy Nokia. Too much of their own cash flow is flowing down the drain. They don’t seem to realize that that’s not a good thing.

    John Chambers & Co. must seem baffled by the market’s displeasure with Cisco. After all, the company has reported decent profit growth for the last two years, but the stock hasn’t done much of anything. Just pay a dividend, and the market will forgive you.

  • Sullivan Gets 5 Years
    Posted by on August 11th, 2005 at 11:27 am

    The prisons are getting crowded with the WorldCom gang. Scott Sullivan, WorldCom’s former CFO, was just sentenced to five years in the old gray bar hotel. He’s the sixth WorldCom employee to be sent up river. Earlier, David Myers, the former controller, was sentenced to one year and one day. Have fun, fellas!

  • Asia Rising
    Posted by on August 11th, 2005 at 10:05 am

    There’s been interesting news from Asian markets. The Japanese Nikkei hit a four-year high yesterday. China reported its second-largest trade surplus ever. For July, China’s trade surplus was over $10 billion. The trade surplus is growing by more than 50% this year. What I find interesting is that Beijing is slowing letting the yuan rise. Yesterday, it made another post-revaluation high. There’s clearly a desire to move the yuan higher, but I’m curious as to how much Beijing will fight it.

  • The Biggest Surprise of 2005
    Posted by on August 10th, 2005 at 4:48 pm

    Brad Setser has a good post today. He calls the U.S. economy’s resiliency to higher oil prices, “the biggest surprise of 2005.”

    I suspect it also has to do with the fact that the US economy has become very credit-intensive and, at least for now, it seems that most of the petrostates’ oil windfall is being recycled (one way or another) back into the US credit markets.

    I think he’s right. We’re not in the 1970s anymore. OPEC is much less powerful than it once was.

  • Google Watch
    Posted by on August 10th, 2005 at 4:27 pm

    The Googloids are at it again. Not only is the stock overpriced, but management is thin-skinned as well. It turns out that CNET posted some personal information on Google’s CEO, Eric Schmidt. How’d they get this top-secret info? They Googled him.
    Their product has become “verbed,” which, you would think, is a good thing.

    Well, the Google Dolls are not amused. The company has banned CNET from all official communication for one year.

    If something this silly causes them to get all East German, I hate to see what a real controversy will do.

  • Mmmm…Earnings Restatement
    Posted by on August 10th, 2005 at 4:14 pm

    Last year, Krispy Kreme Doughnuts blamed a sales shortfall on the popularity of the Adkins Diet. That may be partially true, but it covers over another problem. That being, the stock is Krap.

    Krispy was simply getting kreamed and it started playing fast and loose with the books to try and catch up. Krispy was trying to “manage” its earnings. It wanted to tell Wall Street what Wall Street wanted to hear. The accounting soon grew out of hand, and the company could never match the image they wanted to project.

    So, they lied.

    Today, Krispy Kreme said that it’s going to restate earnings for the last four years. The company overstated profits by about $22 million. A committee reporting to the board of directors found that the “number, nature and timing of the accounting errors strongly suggest that they resulted from an intent to manage earnings.” The committee pinned the blame on former Chairman Scott Livengood, and former COO John Tate.

    The company has hired Stephen Cooper as the new CEO. He’s made some dramatic moves so far, like firing one-quarter of the work force. He even sold the company jet. (Krispy Kreme had a jet?)

  • Oil Over $65
    Posted by on August 10th, 2005 at 3:35 pm

    The market is down again today thanks to oil fears. Oil is now over $65 a barrel. I just don’t get how oil can be this high.

    Crude for September delivery touched $65 a barrel in New York, an all-time high. Oil futures have climbed more than 7 percent this month as the death of Saudi Arabia’s King Fahd and a threat to the U.S. embassy there raised concern about supplies from the world’s largest exporter.

    I would definitely not be long oil right now.

  • 10-for-10
    Posted by on August 9th, 2005 at 3:49 pm

    The Fed just raised interest rates for the 10th straight time. The fed funds rate is now up to 3.5%. It was 1% just last year. The central bank also restated its intention to increase rates at a “measured pace.”

    According to a survey of economists, more rate increases are on the way.

    The target for the benchmark overnight bank rate will climb to 4.25 percent by the end of next year’s first quarter, a quarter percentage point more than predictions last month, and reach 4.5 percent by June, according to a Bloomberg monthly survey of economists. The overnight rate is forecast to reach 4 percent by the end of this year, the survey showed.

    Economists at Goldman Sachs Group Inc. said yesterday the target rate may rise to 5 percent by the middle of next year.

    The world’s largest economy will grow at a 4.1 percent annual rate this quarter, the most since the first three months of 2004 and up from the 3.5 percent estimated last month, based on the median forecast in the monthly survey. Growth for October through December is predicted to reach a 3.5 percent pace, up from last month’s prediction of 3.4 percent.

    The other good news is that oil finally backed off some today. It reached an all-time of $64.27 a barrel. There are still worries about oil supply, but few traders seem interested in the fact that oil supplies are already above average.

    U.S. oil inventories at 318 million barrels for the week ended July 29 are 7.3 percent higher than the five-year average, according to the Energy Department.

    Domestic supplies of heating oil at 49.9 million barrels are up 4.9 percent from the five-year average, government figures show.

    Long-dated bonds actually rallied this afternoon, and the major stock indexes are poised to closer higher for the first time in four sessions.