Outrageous ideas for speeding up economic recovery and job creation

Posted by Shyam Moondra

This Thursday, the Federal Reserve Board (FED) is likely to announce a new Quantitative Easing program (QE3) through which they will infuse liquidity into the monetary system, inducing investors to go after more risky assets rather than park their money in fixed-income instruments that they consider as safe haven in the present uncertain environment. The earlier similar programs (QE1 and QE2) have had some positive effect on economy but they provided only a temporary lift. What if the FED takes a different approach this time?

Here is a recap of where things stand right now:

• The stock prices are historically low with S&P 500 PE hovering at around little over 15. At the last market peak, it was over 30. When the market goes up, the investors feel wealthy and more secured about the future. That leads to their increased spending which fuels the economy.

• The housing prices are improving, but they are still very depressed from their historic averages. Higher housing prices have the same wealth effect as higher stock prices; homeowners start borrowing against home equity which leads to increased spending that boosts the economy.

• The corporations have the best balance sheets in a generation, hoarding cash of the order of $3 trillion. They are ready to invest in capital projects and hire more workers, but two things are holding them back: gridlock in the Congress that creates uncertainty (and corporations hate uncertainty) and tepid consumer spending.

• Having lost tons of money in the 2008-2009 market crash, the investors have parked their cash in government securities that pay almost no interest and corporate bonds that are barely keeping up with inflation. So what we have is a fixed-income bubble that would eventually burst, as all bubbles do.

Given the above facts, this is what we can do to increase the rate of economic recovery and speed up job creation:

• The voters need to take a decisive action in November and give control of all three government entities, the White House, the Senate, and the House of Representatives, to the same party so we can finally get rid of gridlock. Under Obama, we have made progress in terms of job creation from the depth of severe recession left by the former President George W. Bush (4.5 million new jobs created in the last 30 months compared with 2.6 million jobs lost in the final year of the Bush presidency). Obama has demonstrated that he is the absolute champion of the middle-class (that accounts for 70% of consumer spending) and protector of Medicare and Social Security safety-net programs. Therefore, the voters should put Democrats in charge of all three parts of the government. In the past, the voters preferred a divided government to have checks-and-balances and to avoid ideological domination by any single political party. However, in the current circumstances, getting rid of gridlock is much more important than worrying about ideological domination. In the absence of gridlock, the government will be able to swiftly move on tax reforms and adopt a long-term balanced plan to reduce federal budget deficit and debt.

• The FED has been buying treasuries and mortgage-based securities to infuse more liquidity into the system with the hope that investors would go for more risky assets such as equities. The FED actions have had limited success in achieving their goals and these actions have largely benefited the financial sector which is in much better shape today than it was in 2008. Therefore, may be the FED should buy equities instead of treasuries and mortgage-based securities to encourage the investors to move their money from less risky instruments to more risky equities. The previous government investment in equities by the Treasury Department under the bailout program TARP (e.g., in auto companies and financial companies) has produced good returns for the taxpayers; FED’s equity purchases now when the market prices are relatively low should prove to be profitable for the taxpayers as well as beneficial for the overall economy. The FED purchases of equities (they could buy the stocks in various indices such as Dow Jones, S&P 500, NASDAQ) will move the stock market up and create wealth. By the same token, the FED should snap up foreclosed properties (rather than buy mortgage-based securities that benefit only the banks) to reduce supply of homes and thus give a boost to the housing prices, thereby creating the wealth factor on that front as well. The Congress would have to revise the Federal Reserve Act authorizing the FED to buy equities and foreclosed properties and also increase funding for the FED so that it will have the necessary resources to effectively execute the plan of investing in equities and foreclosed properties.

• The FED has stated that it will keep interest rates close to zero at least through 2015. The idea was to nudge investors away from fixed-income securities and towards more risky assets and encourage corporations and consumers to borrow and spend. Unfortunately, the low interest rates are not having an appreciable stimulative effect on economy; corporations don't need to borrow much because of their huge cash pile and consumers are reluctant to borrow because they don't feel secured in the current economic environment with high unemployment rate. Also, the potential home buyers are putting off their real estate purchases thinking that interest rates will remain low for some time so it's better to just wait for lower real estate prices. Therefore, the FED’s low interest rate policy is actually having unintended negative impact on economy. May be the time has come for the FED to try a different tack and start increasing interest rates and force these waiting potential homeowners to start buying homes now which will have a big impact on job growth. Higher interest rates will also increase the spreads for banks that will allow them to make fatter profits and thus become financially more stronger than they are now.

Since the 2008 recession, we have had the slowest recovery on record. It’s time the voters and FED try different approaches to improve economy and create lots of jobs faster.

Fixing the financial sector is the key to our economic destiny

Posted by Shyam Moondra

In February, when major commercial banks reached a settlement with the state Attorney Generals and federal regulators concerning mortgage related issues, many analysts thought that the worst was behind and the banks could look forward to a sustained recovery. The bank stocks zoomed up in the expectation that the banks would soon start realizing their normalized earnings. As is often the case, the rally in the bank stocks created a bullish sentiment in the overall market. But then, in May, came a hastily arranged extraordinary conference call with the media in which Jamie Dimon, the CEO of J P Morgan and Chase (JPM), announced that traders in the bank's Chief Investment Office in London had engaged in some complex trades to hedge against possible losses from the bank's bets on credit-default swaps that went awry and that JPM will lose at least $2 billion. However, the loss estimate has now gone up to $5.8 billion and may possibly end up at around $7.5 billion when these trades are completely unwound. This unexpected development unsettled the investors who thought that after the 2008 financial crisis, the banks had implemented procedures to vigilantly guard against taking excessive risks. The JPM revelation crashed the bank stocks as well as the overall market; within days after the conference call, the JPM's market cap declined by more than $35 billion. Before investors could digest this unpleasant surprise from JPM, another shocking news came that the traders at the British bank Barclays had conspired with the traders at other major banks around the world to manipulate the benchmark Libor (London Interbank Offered Rate) interest rate to benefit their respective banks. Barclays was fined a record $453 million and its top three officers resigned. The news provided a strong negative catalyst for the crash in bank stocks as well as the overall market. It's almost as if the cursed financial sector will not let the market breathe easy and these hits keep coming in waves. A cross-continent criminal investigation is still continuing. Some big U.S. banks have reportedly been also implicated in the Barclays scandal. Class-action lawsuits have been filed against the U.S. banks by shareholders and investors who may have lost money because of this illegal interest rate manipulation. Unlike in Europe, the U.S. laws permit punitive damages; therefore, it's impossible to phantom how much money the U.S. banks may eventually have to cough up to settle these charges.

The JPM trading fiasco and the Barclays' criminal manipulation have shaken the faith of investors and some are now beginning to wonder if the culture at major financial institutions has really changed since the go-go years leading up to the 2008 crisis. That crisis caused the collapse of some of the well-known financial institutions and it led to severe economic recession, necessitating the largest bank bailout by the federal government in recent history. Subsequently, the Congress passed the Dodd-Frank Act, which included a new regulatory regime designed to ensure that we will not have a repeat of the 2008 crisis. However, these recent nerve-breaking bank scandals beg the question if banks have really learned anything from the 2008 crisis. Is it really possible to fix the financial sector, given that no law can ever change the human nature and greed?

Why can't banks find a sound and stable footing?

There are four reasons why the financial sector is not showing any signs of stability and orderliness:

· In the aftermath of the 2008 financial crisis, the big banks became even more big. JPM acquired the troubled Wall Street firm Bear Stearns and the banking assets of Washington Mutual. Bank of America acquired Merrill Lynch, MBNA Corp., and Countrywide Financial. Wells Fargo acquired Wachovia. Bigger banks mean more operational complexity and more difficulty in managing them effectively. It's almost impossible for the CEO to know everything that's going on in a big bank and, therefore, it's unrealistic to expect that a single person at the top can possibly guarantee that all the bank policies and procedures would be strictly followed by the greedy investment bankers at all times.

· Since the 2008 crisis, banks have, in general, become more conservative in their primary business of lending to businesses and consumers. In the face of astronomical losses in the mortgage business, the banks became way too cautious in approving new mortgage applications (which is making it harder for the housing sector to recover). So that means big banks have a lot of money lying around doing nothing. Too much money makes people do careless and stupid things, as we saw in the case of JPM's hedging bet. In that sense, the big size itself has become a drawback that is making bankers do unpredictable things, creating a volatile environment.

· During the 2000's, the banks made tons of money in sophisticated "innovative" products such as mortgage-based securities and credit-default swaps. Excessive bank profits led to oversized compensation packages for traders, portfolio managers, and other investment bankers. The more money they made, the more risk seeker they became. The traders suffered from impulsive betting disorder in the mode of gamblers. They would do anything to turn a profit, blurring the line of demarcation between what is ethical and unethical or what is legal and illegal. However, when the housing bubble bursted, the financial crisis ensued which led to the tough Dodd-Frank regulatory bill. Unfortunately, while banks have become somewhat cautious and they have implemented claw-back rules (excessive trading losses mean traders forfeiting past bonuses and other forms of compensation such as stock options) to discourage the traders from taking excessive risks, the culture of greed and excess is proving to be slow to change and that's what led to the JPM and Barlclays incidents. Manipulation and insider trading are rampant on the Wall Street. In general, the banks have lower ethical standards today than they did during the 1990's and prior. One of the reasons why traders would cross the line and engage in unethical or outright illegal activities was that the regulatory bodies were unwilling or unable to catch them. The absence of effective enforcement only encouraged the traders to continue their illegal activities unabated. Some of that attitude is still continuing on the Wall Street even today. The enforcement agencies either lack resources or are unequipped to uncover illegal activities committed by high-tech savvy traders.

· Computer algorithm driven trading in stocks, bonds, options, credit default swaps, and commodities is catching on. Because of the complexity of the assets being traded, even the professional traders don't always know what they are doing, as was evident in the JPM fiasco where traders thought they were hedging their risky bets; but as it turned out, their strategy was flawed and the hedge itself became too risky. High-speed computers have also led to new techniques such as high frequency trading and quote stuffing that are often combined with the extensive use of short selling and options trading to turn a profit. The traders call this strategizing but others say it's manipulation. Most observers believe that the markets today are rigged by big players such as investment banks and hedge funds. These new trends have made the individual retail investors leave the markets altogether, which is evident from the declining trading volume on the public exchanges. It appears that the markets have become a game played by big financial institutions against each other which adds absolutely nothing in terms of capital formation and job creation. The market goes up and then down and then up again, as if it's manipulated to coincide with options expiry dates.

Where do we go from here?

In view of the non-stop bank scandals and market volatility, the question is what can be done to bring stability and transparency to the financial sector which is essential for future economic growth and prosperity. The Dodd-Frank Act is a major step forward, but the recent JPM and Barclays incidents show that more needs to be done. Here are a few suggestions that would help bring more stability and orderliness in the financial markets, which would, hopefully, bring back the retail investors who deserted the markets thinking that they were rigged by big players:

· While there is no easy formula for reducing the size of banks without excessively meddling in the functioning of the private sector, we could increase the capital ratio required beyond what has been proposed in Basel Capital Accord. With stringent capital requirements, the banks will have less "free" money with which to gamble. The government could also force the banks to divest certain non-core businesses to reduce their size.

· Strengthen the role of regulators. Apparently, there were on-site regulators in JPM's London office but somehow they didn't catch the trades that led to massive losses. May be Congress needs to provide more funding for regulatory bodies such as SEC, CFTC, and FDIC, and impose tougher punishment, beyond monetary fines, for violators including mandatory jail terms for the top officers of the institutions engaged in criminal activities.

· In the last ten years or so, trading in all kinds of risky derivatives has become a norm. These trades have brought volatility and unpredictability in the financial markets. Warren Buffett once called these derivatives as equivalent of financial weapons of mass destruction. In fact, trading in derivatives precipitated the collapse of some prominent financial institutions such as Lehman Brothers. The government should consider limiting the amount of trading permitted in derivatives by any single bank or hedge fund.

· To discourage computerized trading, the government could impose a hefty transaction fee for day trades and a much higher income tax rate on profits from day trades (as high as 75%), or impose a minimum holding period (e.g., three business days) for all asset purchases. Quote-stuffing should be banned. We could also put limits on short selling (e.g., no more than 3-5% of outstanding shares) and options trading in any given stock. These limits will take away the tools that big players use to manipulate the markets and cause extreme volatility. The margin requirements, especially for commodity trades, should be increased to discourage highly leveraged trades that lead to disasters when the markets make unexpected big moves, up or down.

The banks provide credit that lubricates the economy. Therefore, it's vitally important that the financial institutions are healthy and are free from frequent scandals that negatively affect the faith in the system. The investors need to have confidence that the financial markets are not being manipulated by big players and are not as volatile as they have been in the last decade or so. While the government needs to do more in the area of enforcement, the banks must also do more to change their corporate culture by strictly enforcing their own procedures to guard against their employees taking excessive risks or engaging in illegal activities.

Why wouldn’t investors treat the Apple stock with respect?

Posted by Shyam Moondra


Recently, when Apple Inc. reported its financial results for the first quarter of 2012, the investors were in total disbelief. Apple’s revenues grew by a whopping 60% and profits almost doubled from last year’s first quarter. And yet, the current Apple stock price is about 7% lower than what it was before the earnings were announced, at a time when the overall market is hovering near the recent 12-month high. How can this anomaly be explained?

Per Yahoo Finance, based on the estimates of 50 analysts that follow Apple, the average 2013 sales revenue is projected to be $195.47 billion (20.4% increase over 2012) and the average EPS is projected to be $53.93 (15% increase over 2012). At the current share price of $603, the trailing PE comes out to be 14.68 (compared with S&P 500 PE of 15.06) and forward PE comes out to be a meager 11.18. Since the financial crisis of 2008 and subsequent severe recession, Apple has consistently produced record profits and yet its PE today is the same as what it was more than ten years ago. So the question is why Apple doesn’t get the respect it deserves.

The investors find Apple’s astronomical revenue and profit growth as surreal, given its huge size. With the current market capitalization of $564 billion, Apple is the most valuable company in the world. Apple has amassed a cash hoard of $110 billion, exceeding the national budgets of some of the industrialized countries. Only a couple of weeks ago, at a share price of $644, the market cap swelled to over $600 billion, a distinction achieved by only two other companies in the history - Microsoft and Cisco (they both have, however, declined in value over the recent years because of dramatic slowdown in their growth rates). If Apple were accorded the same FPE as those of other high-growth technology companies, as the following Table shows, the Apple share price would be in the range of $655 to $4,635.

Company	2013 Revenue Growth	Forward PE	Apple Share Price
Amazon	28.2%	85.93	$4,635
Baidu	41.6%	20.91	$1,128
Priceline.com	21.0%	19.52	$1,053
Ebay	14.5%	15.16	$818
Google	19.0%	12.14	$655
Apple	20.4%	11.18	$603
Microsoft	8.5%	10.52	$567
Cisco	6.0%	10.09	$545

                                                    (Source: Yahoo Finance)

The above Table shows that even though Apple is still growing at twice the rate of those have-beens, Microsoft and Cisco, the market seems to peg the Apple stock as if it were already a has-been. This is in spite of the fact that, in the foreseeable future, most analysts project that Apple’s growth would be around 20% a year, twice the average rate for S&P 500 companies. For the first quarter of 2012, based on the reported decline in the number of iPhones sold by Verizon and AT&T, many analysts feared that Apple would miss the consensus estimates for the quarter. However, iPhone’s initial penetration of the Chinese market more than offset the softer U.S. market, thereby yielding unexpected blowout profits for the quarter. Presently, Apple is in the process of negotiating a deal with China Mobile, the world’s largest mobile telecommunications company, which would open up a huge new market for several years to come.

Apple represents an unparalleled success story in the corporate world. It started out as a small computer company (even today it has only a tiny 5% share of the worldwide computer sales). However, thanks to its genius founder, the late Steve Jobs, it came out with an array of fascinating electronic products that quickly dominated the consumer market. Apple's ingenuity lies in seamless integration of hardware and software to provide enhanced user experience. Its iPod decimated SONY's Walkman music player that was all hardware and lacked iPod's software capabilities that enabled the users to not only store music but also digitally organize the music folders for quick access to any specific song. That success was quickly followed with iPhone with touch screen capabilities that revolutionized the smart phone business, putting Nokia, Research in Motion, and Motorola on the defensive. They also introduced iTunes that totally changed the way recorded music is marketed and sold. Finally, Apple came out with the hugely successful tablet, the iPad, for which consumers would wait in lines running for blocks in major cities around the world. It’s almost as if Apple could do no wrong; their executions of all product development, production, and distribution phases were flawless.

The question now is what could Apple do to make its stock realize its full and fair value, which many analysts believe to be around $1,000 within the next couple of years. The following are the ways to unlock the Apple stock value:

• Keep producing exciting products and impressive profit growths. A new iPhone 5 is rumored to arrive some time this year. An initial iTV could be the next new product which will combine hardware and software to provide tremendous user experience and make the present TVs obsolete. Next year, we could see the new iPad 4 that will keep the sales of immensely popular tablet in high gear for a few years. The iPad market is rapidly expanding beyond the traditional enterprise applications to include military, education, and health care segments. Apple's iMac continues to grow at a faster rate than the overall computer market. Apple is also aggressively working to create an iCloud ecosystem with all of its product lines working together seamlessly. On the recent quarterly conference call, Apple's CFO Peter Oppenheimer said "we have got some fabulous new products in the pipeline." There is every indication that Apple will continue its exceptional growth saga for at least five more years.
• Recently, Apple announced that it will use part of its cash hoard of $110 billion to pay dividends to common share holders and also buyback its own shares in the open market. This amounts to roughly $10 billion a year. Apple has the resources to do better than that; next year they should increase the dividend by at least 10% and make more substantial buybacks (to the order of 10% of the float rather than 1% that they just announced). These actions will give a significant boost to the stock price.
• Apple should consider splitting the stock 10:1. While the stock split doesn't directly increase the value of the investors' holdings, the split does broaden the shareholder base. Besides, it's much easier for the stock to go up from $60 to $90 rather than from $600 to $900. A stock split would also demonstrate the management's confidence in the continuing growth of the company.
• In the next few years, as the company continues to grow, the market cap would also grow to the $1 trillion range. A company of that size would naturally become less efficient and difficult to manage. Apple should start thinking about splitting the company into two or three separate companies (which would lead to higher growth) vs staying as a single company that keeps producing compatible products under the umbrella of a cloud technology ecosystem.

Apple is on a roll and for the foreseeable future it has enough in the pipeline that will keep producing healthy profits for its shareholders. Apple stock is undervalued and as the company announces impressive quarterly results going forward, the stock would have no where but to go up and reach the magic number of $1,000 sooner rather than later. It's conceivable that Apple would be the first company to ever achieve the $1 trillion market cap mark.

Disclosure: The blogger is long on the Apple stock.

Dow Jones Industrial Average headed to 11,000

Posted by Shyam Moondra

In the past few days, the stock market has been very volatile, up 200 points one day and then down 200 points the next day. Some of this volatility may have been caused by the year-end window-dressing by mutual and hedge funds whose fiscal year ends in October. The market had gone up quite a bit since it bottomed out last March, so it was inevitable that some investors would want to take profits and short sellers would move in aggressively to create a downward momentum.

There are people who think that the market correction of the last few days may in fact be an exceptional buying opportunity for the long-term. Some of the stocks, that did exceedingly well since March, have been hammered down in recent days by as much as 25%. The bulls point out the following positive trends that suggest that the market is headed much higher:
· The recent quarterly earning reports exceeded analyst expectation by a wide margin. Most companies increased their guidance for the future.
· The latest GDP report showed that the economy grew at a faster rate than anticipated.
· The corporations have strong balance sheets, hoarding a lot of cash to support future capital investments.
· The corporations did a marvelous job in managing their cost structure during the recession and they have never been more lean and mean. That means their profit margins will expand rapidly as the economy recovers.
· The inventories are at historically low levels, suggesting that the industrial production may move into a higher gear (even if demand does not increase significantly), which means more jobs down the road. Recent industrial production report, showing better than expected increase, supports that belief.
· The stimulus spending was back loaded; as much as $585 billions worth of stimulus still remains to be spent through 2010.
· The Federal Reserve Board has indicated that money supply will remain bountiful and interest rates will remain low for the foreseeable future. Historically, liquidity and low interest rates have always favored the stock market in general and the financial sector in particular.
· Weak dollar has enhanced competitiveness of multi-national corporations that will garner a bigger market share as the global economy recovers. Weak dollar is also helping to reduce the trade deficit.
· Recent labor force reductions have considerably improved productivity that will expand the profit margins of the corporations in the near future.
· Since the capacity utilization remains low and demand is still weak, inflation is not going to be a problem in the foreseeable future. This gives the Fed some flexibility to keep interest rates low at least until the second-half of 2010.
· Recent housing reports suggest that the housing market has bottomed out, as indicated by the recent increases in home sales and home prices.
· The consumers have done a much better job in controlling their spending and saving more during this recession than any other recession in the past. This bodes well for the economy because as soon as the economy picks up some speed, the consumers will be ready to start spending freely again.
· The stocks are by no means over-valued with the average forward PE ratio in the low 10's. Recent merger and acquisition activity and share buyback announcements (e.g., by IBM) affirm that equity valuations are very attractive.

The bears have their own reasons for being pessimistic for the near-term. They cite the following trends that make them cautious:
· The stock market has gone up over 50% since March, making it the largest up move in a short period ever. It should be kept in mind though that the market went down too much in March because of the fear that some of the biggest financial institutions could go bankrupt, causing a systemic breakdown of the entire financial sector. However, that never happened and we are past that possibility now. One could argue that the market should not have gone down so much in the first place, and, therefore, it's misleading to keep harping on the 50% appreciation. Had market not gone down as much as it did because of sheer panic, the resulting appreciation would have been quite modest and considered normal in the aftermath of a severe recession.
· The unemployment rate will remain high at least through 2011, making it a jobless recovery. High unemployment rate will keep consumer spending in check. Since consumer spending fuels two-third of the economy, we may not see a quick recovery from recession any time soon. The counter argument would be that, while it's true that the lagging employment indicator would be slow to recover, the consumers are not going to wait for full recovery before they start spending again. All they are waiting for are the signs of a recovery-trend which will become obvious within the next six months, a lot earlier than 2011.
· Recent government spending (e.g., stimulus package and bailouts) has significantly added to the federal debt and budget deficit is widening. This will eventually lead to higher interest rates, choking off the economic recovery. We should, however, note that as the recovery takes hold, treasury revenues will increase and the budget deficit will eventually abate. Nevertheless, President Obama and the Congress would have to come up with a credible plan to address the issue of debt and budget deficit through a combination of spending cuts and tax increases for the wealthy individuals and corporations (shutting down off-shore tax havens and closing tax loop-holes).
· Weak dollar will lead to higher inflation because imports will become expensive which, in turn, will induce the domestic producers to increase their prices.
· The credit card losses and commercial real estate losses will keep the financial sector under pressure for the foreseeable future.

The stock market always looks ahead and most economic indicators (GDP growth, corporate earnings, housing sales and prices, industrial production, etc.) point to economic recovery from the worst recession of our times. While the recovery may be erratic, its direction is not in dispute. Early this year, industrial production was declining which led to layoffs, which, in turn, led to lower consumer spending, and that led to lower corporate profits, thereby creating a downward spiral in which each economic calamity was feeding into the others. But now we are in the process of an upward spiral that will restore employment, corporate profits, and stock prices over time. While there are very few plausible hazards that could choke off the recovery, there are many more potential catalysts on the horizon that could in fact propel the stock markets to new yearly highs in the coming months. The Dow Jones Industrial Average at 11,000 before the end of 2009 is not a far fetched possibility. One thing unique about Americans is that they are driven by a sense of optimism and hope. They thrive in adverse conditions and turn calamity into opportunity.

Investment strategies for the near-term

Posted by Shyam Moondra


Emerging economic trends are very encouraging. While unemployment rate remains high and consumer confidence is still in the doldrums, there are many signs that suggest that the recession may be over. For example:
· In the second quarter of 2009, the GDP declined by only 1%.
· New and previously owned home sales in June increased, thanks to low mortgage interest rates and about 30% lower prices from the peak set in 2007. The latest housing report showed a small increase in the average home price, indicating that the long slide in home prices have finally come to an end.
· Leading indicators went up three months in a row, strongly suggesting that the economic recovery is underway.
· Inflation remains under check, enabling the FED to keep interest rates low for the foreseeable future. Low interest rates will fuel the economic growth.
· The banking system has stabilized, as is evident from better than expected profits reported by many banks and steadily improving credit markets. Some banks are still in poor condition (but less critical than six months ago) because of continuing foreclosures and losses in commercial real estate and consumer credit card markets.
· In general, in the first half of 2009, corporate profits far exceeded analyst estimates. The private sector has done an excellent job in controlling inventories and costs. The mean and lean private sector is well positioned to rapidly expand profit margins as demand perks up in the coming quarters.

Looking forward, the federal stimulus program will continue to boost the economy. The $787 billion stimulus package was to be spread over the 2009-2010 period; therefore, as much as 80% of the stimulus money still remains to be spent in the coming six quarters. A big part of the remaining stimulus program will be directed to infrastructure projects that will create new jobs. The Congress just added another $2 billions to the enormously successful "cash for clunkers" program, which gives as much as $4,500 to consumers if they trade-in their old gas guzzlers for new fuel-efficient cars. This program will give a much-needed boost to the auto industry. In spite of the encouraging economic trends, the unemployment rate will not decline any time soon. However, consumers, who have been lately saving more than spending, will loosen-up the strings of their purses and thus provide the fuel for the economic growth engine.

Given that we are on our way to recovery, the stock market is again attracting investors that have trillions of dollars sidelined in safe investment vehicles such as Treasury bills and notes. That money will steadily move into the equity markets. A Dow Jones Industrial Average of 12,000 by early 2010 does not seem far fetched.

Many stocks are currently priced very attractively for the long-term gain, starting with the companies in the consumer sector. Companies that have had the steepest decline in their stock prices over the last twelve months will likely appreciate the most. Investors should start nibbling at selected stocks every time the market dips. Following are some of the segments to focus on:

· Consumer non-durables and discretionary goods/services including fast food restaurants.
· Travel and leisure: Airlines, hotels, and casinos.
· Machinery: Stimulus spending for infrastructure projects will increase profits for heavy machinery companies.
· Industrial: Aluminum, chemical, aircraft manufacturers.
· Media: Television networks and Internet companies (ad revenues will gradually increase).
· Selected financials: Financial companies that were beaten down hard will provide the best returns, although they may still be somewhat risky.
· Transportation: As the economy improves, air frieght, railroad, shipping, and trucking companies will do well.

Future challenges remain just as daunting as they were six months ago. As the economy starts growing, consumer and industrial demand will steadily grow, increasing inflationary expectations. Starting next year, the FED will have to start raising interest rates; it will be a challenging job for the FED to not increase interest rates too fast or too early that might choke off the economic growth. That balancing act will require the brilliance of the FED Chairman, whoever that might be coming January of 2010. The Obama administration and the FED will have to wind down financial stabilization programs and stimulus expenditures, and start focusing on how to reduce the budget deficit. Increasing income taxes for the super rich and closing-down tax loopholes for the corporations (e.g., off-shore tax havens) will be necessary to balance the federal budget.

Obama's poor execution may sink his approval rating

Posted by Shyam Moondra

Since Barrack Obama became the president, he has been saying all the right things. However, Obama's mode of operation has become an obstacle in achieving the desired end-results of his policies. Consequently, Obama's popularity has declined somewhat and is about to crash down unless he improves his execution.

Bill Clinton's presidential campaign strategy was based on "it's the economy, stupid" that led to his astounding victory over George H. W. Bush. After the election, Clinton exclusively focused on economy and he especially avoided making foreign trips. He even resisted getting involved in Kosovo as long as he could. His hands-on approach in formulating and executing economic policies paid off handsomely - he turned the budget deficit into a surplus and the American people enjoyed the longest period of prosperity in the modern history. Now we have a much more serious economic crisis but Obama has been spending way too much time traveling around the globe. When people are losing their jobs and homes at the fastest rate since the depression of the 1930's, it's hard to justify Obama's extensive travel plans. Surely, Obama has improved the image of the U.S. that was battered during the Bush years, but, at the moment, that's not what the American people want him to focus on - they want him to stop the bleeding of our economy.

One of the other operational problems Obama has is his desire to be in front of the cameras at all times. He suffers from overexposure because of his constant interviews, press conferences, speeches, video blogs, etc. The American people would rather see him working at his desk in the oval office and be focused on execution of his economic policies. Obama likes to tell Congress that he wants this or that by so and so date, and then becomes somewhat aloof from the process. The Congress then writes the legislation with the help of lobbyists, who are likely to insert all kinds of loopholes, diluting the reforms that were expected from the legislation. The case in point, the health care legislation - we keep hearing that Obama's original vision has been riddled with all kinds of concessions sought by the lobbyists that raise the question if the proposed legislation will achieve its originally stated goal of significantly reducing costs (in fact, the Congress is talking about imposing new taxes worth $1 trillion to pay for this proposed plan!). During the campaign, Obama promised he would reduce the role of lobbyists in the government, but right now just the opposite is happening. Why not Obama roll up his sleeves and sit down with the Congressional leaders and hammer out legislation rather than let the lobbyists write the laws? The American people want a more hands-on approach from Obama in lieu of his non-stop TV appearances and pronouncements.

Obama has been busy proposing a million different things but in the absence of focus and hands-on approach, nothing much is being accomplished – his emphasis is on quantity of things he proposes as opposed to getting things done right in a timely manner. Congress is not used to working on multiple things that fast, so what will come out would be half-baked goods that will not achieve the reforms that were originally envisioned. May be Obama could get done more by focusing on a fewer things at a time so that he can devote more time in executing things as opposed to proposing things.

Here are some examples of how Obama's poor execution is becoming an obstacle in achieving the desired results:

· In spite of huge stimulus spending, the economy continues to lose jobs and the unemployment rate continues to rise. The loss of jobs means more and more homeowners are joining the ranks of who can't keep up with their mortgage payments. That leads to more foreclosures and lower home prices. The American people would like to know why economy is not getting a lift from increased government expenditures – is it because the stimulus money is not being spent fast enough or the stimulus package was flawed? The proposed budget will sharply increase the national debt, so it is important to properly analyze why increased expenditures are not generating more jobs. Shouldn't Obama be focusing on analyzing the stimulus package and deciding what to do next?

· Foreclosures continue to be at near record levels. Shouldn't Obama take another look at homeowner assistance programs and come up with changes in the approach? Mortgage rates went up in recent weeks shutting down the refinance market - shouldn't Obama do something to bring down the mortgage rates to stimulate the demand for the houses? Economic turn around is contingent upon stabilizing the housing industry first.

· Oil prices have doubled in the last few months. Congress had a lot of hoopla when oil hit $150-a-barrel and it talked about reforming CFTC, limiting investment by speculators in oil and other commodities, eliminating the "Enron loophole" etc but nothing has happened. Why is Obama not doing anything about this? When commodity prices on the futures market go up and down by 100% or more in short periods without any change in the underlying fundamentals, then clearly something is very wrong with the way the markets operate.

· The outlandish executive compensation was a major issue during the campaign, but Goldman Sachs and Morgan Stanley just announced that they would put aside tens of billions of dollars for 2009 bonuses that is 50% more than the amount set aside for 2008 bonuses. Why has Obama not done anything on this issue? We need a law to limit CEO compensation at all publicly held companies, not just TARP companies.

· Everybody knows that investment banks and hedge funds manipulate the stock markets. There have been a lot of talk about twenty-first century regulatory reforms but nothing concrete has yet come out and market volatility continues to be an obstacle in getting the economic house in order. We need to clamp down on computerized day trading by investment banks and hedge funds that are destroying our markets.

· With the huge increase in government spending, the budget deficit is ballooning rapidly that almost guarantees that interest rates will go up in the coming months. Why has Obama not announced concrete plans on how the budget deficit and national debt would be brought down?

If Obama doesn't change his mode of operation and exclusively focus on deteriorating economy, his approval rating will crash in coming weeks and months. Obama has a real opportunity to be a great president but he is blowing it away by not being on the top of things in seeing that the economy rebounds quickly.

Headed for a second round of economic slowdown?

Posted by Shyam Moondra

Economy seems to have stalled. Look at the following trends:

· While the number of new weekly unemployment claims is going down, it is still very high (in the 600,000-range) and the total number of people receiving unemployment benefits continues to rise, currently standing at little under 7 millions. It's now almost certain that the unemployment rate will exceed 10% and may even go over 11%.
· While the latest retail sales data for May shows an increase of 0.5%, that increase reflects a burst of auto demand generated by the tremendous bargains being offered by the auto dealers many of whom are going out of business and are in the process of liquidating their inventory (but these bargains can't be sustained indefinitely) and higher gasoline prices (consumers are buying the same amount of gasoline but paying more). Therefore, the consumer demand is not quite as robust as the retail sales data might suggest.
· In recent weeks, the prices of oil and other commodities have increased substantially, raising the specter of inflationary expectations. These price increases are being driven not by any demand-supply imbalances but because of speculative purchases by investors. Oil and gasoline prices are now double of what they were a few weeks ago, crimping consumer spending.
· Interest rates have started to increase with the 30-year fixed mortgage rate now almost 25% higher than what it was a few weeks ago. Higher interest rates have already stalled the mortgage refinance activity. The number of foreclosures continues to be at near record levels and as the interest rates rise even more, this number will only get worse. All of these trends will have a negative impact on the home sales and home prices in the coming weeks and months. Recent stress tests conducted by the Department of Treasury may require financial institutions to raise additional capital in the future, thereby slowing the financial market's recovery.
· Dollar is plummeting, diminishing its role as the world's reserve currency. The creditor countries such as China may be reluctant to invest in the U.S. securities at the same level as they used to, driving up the interest rates even more which will delay the economic recovery. While a weak dollar may stimulate exports, it will also lead to higher import prices which will aggravate the inflation problem.
· The trade and budget deficits are increasing which means weaker dollar, higher oil and commodity prices, and higher interest rates down the road.

The Obama administration has been too slow in spending the stimulus money. Congress has been too slow in finalizing the regulatory regime for the twenty-first century. Deteriorating economy combined with speculative trading by investment banks and hedge funds could trigger an economic crash. President Obama has been spending too much time on overseas trips and his absence has hurt the economy. In the beginning he was a hands-on president, but lately his execution on economic matters has been sub-par. Obama and Congress need to come up with a new plan, perhaps another stimulus package, or else we are likely to have a relapse of an economic slowdown.

Obama's leadership, sense of optimism, and competence will boost the stock markets

Posted by Shyam Moondra

The person who occupies the White House has enormous impact on how the country, and for that matter the world, fares. Below is a synopsis of what has happened during the recent presidencies and what could one expect during the Obama administration.

Ronald Reagan (1981-1988): The Dow Jones Industrial Average increased from 900 to 2,500 or 178%. President Reagan believed in smaller government, strong defense, and lower taxes. He introduced trickle-down economics, i.e., prosperity of the rich people will trickle down to the poor (George H. Bush called it "voodo economics"). Reagan's strong and decisive leadership and inspiring communications skills led to optimism on the Main Street and Wall Street. However, lower taxes combined with increased defense spending led to large budget deficits.

George H. Bush (1989-1992): The Dow Jones Industrial Average increased from 2,500 to 3,200 or 28%. Bush is noted for his successful execution of Desert Storm war campaign that led to the expulsion of Iraqis from Kuwait. However, Bush tried to reduce the deficit caused by Reagan's policies by increasing taxes, breaking his pledge of "read my lips - no new taxes" and lost his re-election bid. The Reagan momentum carried into the Bush presidency and the stock market went up to a new high, but huge budget deficit remained a big drag on Bush's presidency. Bush also suffered from his lack luster communications skills.

Bill Clinton (1993-2000): The Dow Jones Industrial Average increased from 3,200 to 11,000, or whopping 244%. Clinton brought more centrist style government. His practicality, competence, superior intellectual abilities, uncommon political skills, and superb communications skills enabled him to grow economy, strengthen national defense, turn budget deficit into budget surplus, and entice people to move off the welfare rolls and become productive working members of their communities. Clinton demonstrated what a pragmatic and non-ideology driven government can accomplish. Clinton shied away from rash decisions on using the military power. His more cautionary approach in foreign affairs enabled the U.S. to achieve its goals in Kosovo without overextending the military while keeping our alliances strong. Even though Clinton's second term was marred by the Monica Lewinsky affair, overall he showed that a smart government can make a big difference in people's lives.

George W. Bush (2001-2008): The Dow Jones Industrial Average declined from 11,000 to 8,800 or 20%. The Bush years were the most incompetent, incoherent, visionless, and destructive years in the history of the United States. He led a government based on ideology and stubbornness (even if he made a mistake, he would refuse to change the course). His administration represents one of the most corrupt administrations in our history - he appointed incompetent and unqualified people in important government positions as political payoffs that led to disastrous results as was evident from how badly his administration handled the Katrina disaster. The award of no-bid contracts and missing billions of dollars in Iraq show how pervasive was corruption in his administration. His overemphasis on deregulation and lack of enforcement by the SEC led to a complete breakdown of our economic system. He spent money like a drunken gambler and turned the biggest budget surplus into the largest budget deficit. He hurriedly pumped hundreds of billions of tax payers' money into the financial system, only to be misused by the corrupt financial institutions. Bush misled the country by using manufactured intelligence to justify the invasion of Iraq that turned out to be a major blunder. He sacrificed thousands of American lives (many more wounded and now forced to live limbless lives) and hundreds of thousands of Iraqi lives, and he wasted $800 billions that could have been used right here to do good things for the American people. All of that was to get rid of Saddam Hussein, who, as Bush explained, "tried to kill my dad." This unnecessary war brought Al Qaeda to Iraq (and thus made us less secured) and fractured our alliances. Bush will go in the history as the worst president we ever had.

Barack Obama (2009-2016?): The Dow Jones Industrial Average is expected to grow from 8,800 to 18,000, or 105%. Obama is already showing many of the presidential characteristics that will help restore confidence in the country's future and our prestige around the world. Obama's inspiring written and oral communications skills (often compared to those of Lincoln, Kennedy and Reagan), his intellectual capacity and competence (often compared to those of Kennedy and Clinton), his emphasis on making life better for the low- and middle-class Americans (often compared to those of Roosevelt, Lincoln and Clinton), and his ability to think big (often compared to Lincoln who abolished slavery and Kennedy who called upon NASA to land a man on the moon). Obama, being a young man from the generation of Blackberry, e-mails, and YouTube, brings something new that is unprecedented - his strong belief in using technology to solve many of our problems. His focus on using green technologies to create new high-paying jobs and achieve energy independence, aggressively pursuing stem cell research to find cures for many diseases, and making extensive use of IT technologies to reduce the health care cost will help our economy start growing again. Obama represents a composite view of many of the desirable presidential characteristics, as exhibited by many of our past great presidents, that bode well for the future of our country.

Lack of confidence in government officials causing turmoil in financial markets

Posted by Shyam Moondra

The losses of 5% or more in stock markets have become a sort of routine daily event. This economic crisis is man-made and the people around the world are paying an unimaginable price. They are losing their jobs, homes, and retirement savings. The first time in a long time, we now have reports of hunger among the American children.

The leaders in the government, including President Bush, Speaker Pelosi, Senate leader Reid, many of the committee chairmen in the Senate and the House, Treasury Secretary Paulson, Federal Reserve Chairman Bernanke, and SEC Chairman Cox, failed the country beyond belief. They failed to properly regulate risky "innovative" financial products that turned out to be "toxic." They failed to recognize the scope and consequences of the sub-prime mess. Once it became evident that the world was headed towards credit meltdown, these officials failed to respond effectively. They kept trying different things at enormous cost to the tax payers at a time when we are up to our ears in terms of the national debt. It was very unsettling to hear Paulson announce that he was discarding the idea of buying-up the "toxic" securities from financial institutions, the idea that he fought for and for which he secured the Congressional nod only days prior. All of this unsteady management of the crisis led to the loss of their credibility, which in turn led to investors' lack of confidence in the financial markets. While stock markets were plummeting, SEC was eliminating the "up-tick" rule for short selling and permitting naked short selling that only exacerbated the slide of the markets. Lack of leadership and mismanagement by Cox should be viewed as criminally negligent.

At the moment, the key problem is one of leadership and lack of credibility. All of the present government officials are tainted. The day it is announced that Pelosi, Reid, Bernanke, Cox, and some of the Congressional committee chairmen are being replaced (other incompetent and failed officials, Bush and Paulson, are leaving soon), the stock markets will go through the roof. The American people desperately want these power-hungry government officials to think hard about what's in the country's best interest. If they step aside and let a brand new leadership team at all levels led by President-elect Obama address the crisis, the confidence of the people will be restored and it will go a long way to restore the normalcy in the markets.

Pelosi, Reid, Frank should resign and Bernanke and Cox must be replaced

Posted by Shyam Moondra

Given the credit market turmoil and the stock market crash that led to people losing their jobs, homes, and half of their retirement savings, it's imperative that people who were in a position to prevent this catastrophe step aside to bolster the confidence of the people in the government. As President-elect Obama assembles his new administration, it's important that we have new leaders in the Senate and House as well as new committee chairmen.

I call upon Nancy Pelosi, Harry Reid, Barney Frank and other committee chairman to take moral responsibility for the major government failure to protect the people and step aside so that we have new leaders and a new beginning.

FED Chairman Bernanke should also be replaced. He unnecessarily increased interest rates, at a time when inflation was not a problem, which precipitated housing foreclosures. He continued to insist that sub-prime was not a problem. He waited too long to address the problem once it became clear that it had the potential to become a major crisis.

SEC Chairman Cox and his key people should be fired. He allowed hedge funds and investment banks to manipulate the markets and failed to enforce the laws. He eliminated the "up-tick" rule for short selling and naked selling became wide spread under his chairmanship that made it easier for hedge funds to manipulate the markets and make money at the expense of small investors. Cox did not serve his country well and he must be removed immediately.

The road ahead for President-elect Obama

Posted by Shyam Moondra

Barack Obama's election as President is not only historic but it instantly restores America's image as a beacon of democracy, freedom, and ideals. President-elect Obama ran an exceptionally competent campaign, he showed tremendous perseverance, calmness and steadiness on the long campaign trail, and he used the power of his words to inspire the country and the rest of the world.

It's interesting to note that while it took America 232 years to reach to the point of electing a minority as the President, India, that became independent only 61 years ago, has elected a Moslem as the President (Abdul Kalam), a woman as the Prime Minister (Indira Gandhi), and a Sikh, another minority in Hindu-dominated country, as the current Prime Minister (Man Mohan Singh).

President George Bush blundered by invading Iraq, mismanaged economy, and left our relations with the allies in ruins. Now President-elect Obama has the task of not just repairing the craters and pot-holes that Bush created in our road to peace and prosperity, but creating brand new pathways to better life for all the citizens of the world.

Since economic issues played a major role in Obama's victory, that's where the focus would have to be. Obama's first task would be to select a first-rate economic team that should include former FED Chairman Paul Volcker as his WH Economic Advisor. Obama must appoint a brilliant Treasury Secretary and replace FED Chairman Bernanke and SEC Chairman Cox, both of whom failed to recognize the brewing sub-prime credit problems early on (how many times Bernanke appeared before the Congress and proclaimed it was not a serious problem?) and stock market manipulation, and act in a timely manner to prevent the economic meltdown. The first step in winning the confidence of the people is to install a brand new economic team. Reducing taxes for the middle-class (and not renewing Bush tax cuts for the super rich) should be a top priority.

The second priority would be to end the Iraq war and increase the troop deployment in Afghanistan. Obama must also get tough with Afghanistani President Karzai to stop the drug trade and redouble the efforts of reconstruction of the war raged country. We also need to redefine our relations with Pakistan; we should suspend military aid unless it's specifically tied to the war on terror.

On the broader issue of the Pentagon, Obama needs to retain Defense Secretary Gates, who is doing a good job, and appoint Sen. Chuck Hagel as the deputy Defense Secretary with one mission - transform the Pentagon. The Pentagon is a wasteland of tax dollars (remember $100 hammers and $300 toilet seats ordered by the Pentagon?). We need to start from scratch and build a new defense organization with adequate controls to prevent waste and fraud involving large amounts of tax dollars and no-bid contracts. I like to joke that the best way to transform the Defense Department is to move it out of the sprawling Pentagon and into a smaller building, which will force the DoD to do away with wasteful bureaucracy.

I would also like to see Colin Powell brought back as the Secretary of State. Powell is not a right-wing ideologue, but a skilled conciliator, and that's exactly what we need to repair our tattered relations with our allies and initiate vigorous diplomacy to deal with our adversaries. Powell is supremely qualified to play this role.

I think the EPA and Energy Departments should be combined into one Department and Al Gore be appointed as its head and charged with the task of putting energy independence and global warming on the same track and creating millions of new jobs related to renewable energy sources. Al Gore made a name for himself talking about the issues, so it seems appropriate that he be given a chance to now walk-the-talk and prove to the world that he deserved all the Nobels, Oscars, and Emmys he won.

The time has finally come to tackle the health care problem. Sen. Hillary Clinton should play a major role, whether as a cabinet Secretary or in some other capacity, to get this done as quickly as possible. Let's once and for all create that Health Security Card, that President Bill Clinton flashed during his first State of the Union message to the Congress.

Our economy is in a dire condition. We need a stimulus package. We should initiate a major infrastructure improvement program, which will create millions of new jobs and give a boost to the sagging construction industry.

The current economic meltdown is partly because of the lack of Congressional oversight that led to inadequate regulation of the sub-prime market. I think Speaker Nancy Pelosi and Senate Majority Leader Harry Reid, along with some of the Congressional Committee Chairmen, should step aside. Because of their failures, people lost their jobs, homes, and half of their retirement savings. It's the American way to hold the people, who were in a position to prevent this catastrophe, accountable.

Stock markets headed higher prompted by global coordinated actions

Posted by Shyam Moondra

The stock markets were oversold around the world primarily because of fear and uncertainty. However, coordinated actions by the governments of major economies are beginning to have a positive impact on investor sentiment. This kind of coordination is unprecedented and is a direct result of interdependencies of world economies caused by increasing global trade.

Although the 3Q08 earnings reports of many companies were much better than expected, they generally gave a cautious guidance for the 4Q08 based on the negative impact of the global credit squeeze. However, aggressive infusion of liquidity by the governments around the world and lowered interest rates seem to have worked and the credit markets appear to be inching towards normalcy.

The housing market in the U.S. has been in a downward spiral, but the latest reports of an unexpected increase in new home sales and increase in mortgage applications seem to suggest that the housing sector may have hit a bottom. Recent rapid decline in home prices and lower mortgage interest rates are finally bringing new home buyers to the market. More and more existing homeowners are also flocking to the refinance market.

The stock market started its decline after DJ index hit a peak of over 14,000 at a time when the average PE ratio was around 17, significantly less than 30 when the 2001-2002 bear market began. With a dramatic stock market decline of almost 45% since the beginning of 2008, the average PE ratio has come down to a level not seen since the early 1970's. The current extremely low valuations of many companies make the overall market so attractive that an explosive up move of almost 1000 points on DJ, like the one we had yesterday, doesn't seem that surprising.

Many analysts blame Alan Greenspan, the former FED Chairman, for keeping the interest rates too low for too long that fueled the housing bubble. I don't think it was the low interest rate that led to the housing excesses; the main culprit was the lack of regulations that led to risky lending practices and to the unregulated mortgaged-based derivative securities. Had we been more diligent in recognizing the risky nature of unregulated practices, we might have seen continued prosperity for many more years to come.

The recent polls indicate a land-slide victory for Sen. Barack Obama, who will become the next president of the United States. His priorities on reducing taxes for the middle class, creating new jobs in the construction industry through a massive infrastructure improvement program, pursuing an aggressive energy policy that will not only stop the flow of money to OPEC countries but also create high-paying jobs here in the U.S., and significantly reducing health-care cots could spark the next bull market which could last for many years.