The Big Game

Like fans at a big game, the constant chant on Wall Street has been rising like a storm …

One and done! One and done!

The power pin-stripers are rooting for the real “monsters of the midway,” the hippest of hip hoopsters … the Fed. As the Fed's Open Market Committee meets today and tomorrow, investors and traders are hoping that as Ben Bernanke brings his team down court in the final drive to revive the ailing economy, they cut interest rates one last time.

Since summer, the central bank has incrementally reduced the key federal funds rate by 3 percentage points to 2.25 percent from 5.25 percent. On top of rate cuts, the Fed has been lending more money to banks, while the government is preparing to send out tax rebates.

What difference six weeks makes. Prior to the last Fed meeting, the markets were anxious about the implosion of global banks. Now, the “Wizards” are betting that the credit markets are on the mend, and that they can get back to business as usual. Are they daft or just deluded?

A quarter or even a half point cut by the Fed is not going to significantly alter conditions that have precipitated the current market malaise. The S&P’s Case-Shiller Index is reporting that home values have dropped 12.7 percent from a year earlier and foreclosure rates have doubled over the same period. To make matters worse, consumer confidence is at a five year low, fueled by mounting job losses, and soaring gasoline and food prices. Federal Reserve policy-makers may cut interest rates again in an attempt to shore up the financial markets and boost consumer spending. But cutting interest rates at this point may be like trying to cap a well fire with a thimble.

In a recent interview at the Milken Institute in Beverly Hills, Eli Broad, co-founder of KB Homes, the nation’s fifth largest homebuilder, said that he believed that home prices would likely decline another 20%. “I don’t think we’re anywhere near the bottom,” warned Broad. He went on to say that he believed that it may take 3 to 4 years before the market can clear out the huge and growing volume of unsold and unoccupied homes.

The economy lost 80,000 jobs in March, the most in five years. Consumer spending which accounts for two thirds of the economy rose only .07 percent, the slowest pace since 1991. Although government rebates are now being sent out, it’s not likely that this cash infusion combined with another rate cut will be enough to overcome the current consumer caution. The greater concern should be the impact that this action will have on rising inflation.

Historically, it’s not uncommon for consumer prices to flare early in a recession, only to settle back on slack demand as the economy weakens. But considering the prices of basics such as wheat, corn, rice and gasoline, discretionary consumer spending could be dampened until there is a significant shift in commodity prices. During this past week, crude oil surged near $120 per barrel and prices at the pump reacted accordingly.

Unlike past recessionary cycles, however, commodity prices are not simply governed by U.S. demand, but by the global appetite for oil and other raw materials. While Asian countries such as China and India are dependent on U.S. consumer behavior, their thirst for raw materials has not abated. Apparently, they’ve got a wad of cash burning a hole in their collective pockets, and they’ve got a hankering to spend it.

Even the high flyers are feeling the pinch. In a sign of the times, expense accounts for employees at some of the world’s largest investment banks have been drastically curtailed. Last month in a memo to its employees, Goldman-Sachs issued an edict that tabs for business lunches were not to exceed $100 per person without prior approval and that first class air travel only would be permitted for flights over 90 minutes. In further evidence of this clamp down, Deutche Bank told its employees that it would not longer approve the use of company credit cards for adult entertainment or brothels. Ouch!

In point of fact, there appears to be a real disconnect between Wall Street and world. Although the Fed has been a valiant foil for President Bush and his cadre of crack advisors, another rate cut will do little to soften the body blows to U.S economy. The recession must run its course. Cutting interest rates may boost Wall Street’s confidence, but it will do little to bolster the most important component of the economy … the American consumer.

None and done … None and done!



To learn more about my market recommendations, visit my website at:www.globewestfinancial.com.

Earth – Love or Leave it to Beaver

"If it weren't for electricity, we'd all be watching television by candlelight."

— George Gobel

The problem with Earth Day, is it’s just not funny.

Do you chuckle when you think about the likes of Ralph Nader or Al Gore? Does the Sierra Club make you guffaw? Do folks sit around the campfire telling funny stories about John Muir?

In a rare comic reference to his 1965 tome about auto safety, and specifically the dangers of the Chevy Corvair, Nader’s staffers would often lament that, Ralph was "unfunny at any speed."

When the recent Academy Award winning ex-Vice-President was in office, the running joke among Washington insiders was: "If Al Gore was in a room with ten secret service agents, how do you which one is the VP?" Answer: "He’s the one who looks stiff!"

Maybe if the environment told jokes or was video game, we might pay more attention. As Groucho Marx was once heard to say: "why should I care about future generations … what have they ever done for me?" My guess is if you query most Americans, they probably feel the same way about he environment.

We could save the planet, but the problem is that most of us are unwilling to make the necessary sacrifices. We don’t want to pay the freight. Without our SUV’s, how will we arrive in style at our next camping trip, let alone to the dry cleaners? But in the end, Mother Nature doesn’t really care about which tax bracket you’re in or what you drive. You can even move to "Green Acres," but like your real mom, when she’s pissed, she’s going to find you.

As the saying goes, "the way to a man’s heart … is through his wallet." With oil topping $118 a barrel, and gasoline prices headed over $4 a gallon, all of sudden, everyone’s an environmentalist. Toyota can’t push enough of its Prius' off the assembly line, while mid-western farmers lining up at the “piggy trough” to get their ethanol subsidies. Even the Hummer’s gone hybrid.

Wall Street gets it. No one is saying that the captains of industry are "tree huggers." Nothing could be farther from the truth. Being the ultimate opportunists, however, they understand the bottom line ... going green is simply good business.

In the 38 years since the first Earth Day, what’s really been accomplished? Other than President Bush, who believes that we can solve the global warming problem by switching from Fahrenheit to Celsius, everyone agrees that climate change is a real threat to the survival of our planet. But as Mark Twain was often quoted as saying, "everyone talks about the weather, but nobody does a thing about it." Sadly, much the same can be said about the genuine progress we have made in protecting our environment.

Whether we’re really willing to admit it or not, all of us make decisions in our own best interests. Maybe economist Milton Friedman got it right, "corporate responsibility" [read personal] is an outgrowth of economic self-interest and preservation.

It’s no coincidence that Japanese and European cars have historically been more fuel efficient than our own. Since the early seventies, gasoline prices in Europe and Japan have been nearly double what we pay. With limited open space, suburban sprawl, a fixture in our universe, is virtually unknown to these nations. As a result, conservation and resource efficiency are an economic imperative.

Although all of us are feeling the pinch at the pumps and the grocery store, compared to prices in the rest of the industrialized world, Americans still are on easy street. Future Earth Days will come and go, but unless we as Americans decide that the real costs and consequences of our conduct are too high, nothing will ever change. In the words of English philosopher-economist Kenneth Boulding, "Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist."

Happy Earth Day!



To learn more about my market recommendations, visit my website at:www.globewestfinancial.com.

If You Ask Me ...

Here it is Tax Day again. If you haven't filed, you aren't reading this. If you have filed, you're most likely getting drunk to ease the pain.

Like me, you’ve probably become numb to the news --- oil at record levels pushing up prices at the pump; sticker shock over the price of bread and eggs; a deepening housing slump driven by the ever-widening subprime meltdown. Recession … stagflation … deflation … the weakening dollar. The worst inflation in 17 years. Whew!

Around every corner, there’s a new Nostradamus, adding to the confusion. The airwaves and e-waves are filled with expert predictions and advice. But, opinions are like … well you know … everyone’s got one.

As an investor and consumer, my head is spinning. Do I buy --- do I sell --- do I hold --- or do I simply duck and cover until the storm passes?

The simple answer is ... yes.

To survive or even thrive, in current market climate, you’ve got to be flexible. One size does not fit all!

In the end, sometimes the best course is fall back on the lessons you've already learned.

Lesson 1 - Don’t put all your eggs in one basket - If, for example, your portfolio is comprised primarily of equities or real estate --- diversify. David Swensen, Yale University’s money guru, has averaged better than 16% returns over the past 21 years. Through asset diversification, he has built an 18 billion dollar endowment that is the envy of the investment community. Swensen’s Yale portfolio holds a full suite of assets ranging from stock market indices to emerging market equities and even real estate. The key, according to Swensen is to hold assets which are either inversely or non-correlated with one another.

Lesson 2 - Follow the money – As we have seen time and again, big money goes where big money grows. Commodities are trading at all time highs. Rising global demand for raw materials and a weakening dollar have led to record prices for commodities including corn, rice and gold. Despite sharply rising costs, diesel fuel imports to China surged 49% in March. Jim Rogers, co-founder with George Soros of the Quantum Fund and best selling author of the books “Investment Biker” and “Adventure Capitalist,” believes that the bull market in commodities will last through 2017. From 1999 through March 2007, his Rogers International Commodities Index has posted returns of 281%, and 21% through the first quarter of the year. As Rogers puts it, “if this market were a baseball game, we’re only in the fourth inning.”

Lesson 3 – If its broke, fix it – The math is simple … if you’re not winning, you’re losing. If you called your broker back in 2000, as the bottom started fall out your portfolio, he probably tried to calm your jitters by saying “look, we may be down, but remember you don’t loose unless you sell.” A truism yes … but in a tumbling market, not very comforting. Good markets always are followed by bad markets. If you've got a profit take it. If you’re bleeding equity, stop the bleeding. Being right isn’t worth the risk. As one savvy trader put it, "marry to your wife not your trades!"

Lesson 4 - Buy when there is blood in the streets – Legendary European banker Meyer Rothchild built his family dynasty on the notion that you “buy on the sound of cannons and sell on the sound of trumpets.” When prices fall, whether in the stock or real estate markets, there will be bargains-a-plenty at the bottom. As famed corporate raider Carl Icahn has shown time and again, buy into weakness --- sell into strength.

Lesson 5 – Go to the mattresses – In times of war or siege, Italian families would abandon their homes for safer surroundings. Soldiers would sleep on the floor in shifts. In the “Godfather,” this term became synonymous preparing for battle. The key is to apply this same mentality to your investments. The market is not a garden party. Your brokers are not your friends. Don’t be afraid to make hard choices even if means that you must part company with a long-term advisor. In truth, you are the only one who truly has your best interests in mind.

Lesson 6 – Cooler heads will prevail – Knee-jerk reactions are a natural response as the markets appear to unravel. Recent stock market gyrations can shake the confidence of even most seasoned investors. The natural response is to convert to cash. While this may seem to protect your hard-earned equity, it’s not always the best course. With interest rates low and the dollar losing value against other major global currencies, not even cash is a sure bet. It's sensible to retain cash to pay bills or to have the flexibility to rebalance your portfolio with other assets. Instead of viewing the current shake-up as crisis, however, try to see it as an opportunity …

Lesson 7 - Don't accept candy from strangers - Need I say more?

HAPPY TAX DAY!



To learn more about my market recommendations, visit my website at:www.globewestfinancial.com.

Truth or Dare

Truth or dare. You remember this game. We all played it when we were young. When your turn comes round, someone in the group gives you a devilish choice … tell the truth about your deepest darkest secret or face a trial by fire. If you refused to fess up by divulging your confidence, then you were forced to do something unspeakable … you know … like running around the room in your boxers, while belting out the lyrics to “I Feel Pretty” from “Westside Story.”

Whether you knew it then, this adolescent challenge was preparation for the morality play that we would face countless times as adults.

Okay … Truth or Dare.

When you heard that the Fed rescued Bear Stearns by underwriting the failed firm to the tune of $30 billion dollars, did you do a jig? Did you secretly stand up and cheer because those poor bastards --- Bear Stearns execs --- could keep their billion dollar bonuses? If you didn't applaud the Fed's action, were you willing to let the Wall Street giant collapse under the weight of its own ill-conceived risk? Did we dare?

Now Congress and the President are proposing to bail-out hundreds and thousands of borrowers across the nation facing foreclosure. This is where the rubber meets the proverbial road.

Truth or Dare.

Is there a greater risk to the economy if we let these borrowers fail or does the real peril come from taking the seemingly most compassionate course?

Risk transfer is the gist of modern economies. The vitality of the any economy is predicated on the notion that some players will prosper while others will fail. A “moral hazard” arises when an individual or institution does not bear the full consequences of its actions, and as a result, has a tendency to act less carefully than it otherwise would, leaving a another unanticipated party to bear to some or all of the loss. In other words, if investors are led to believe that there is a “safety net” ready to catch their fall, then it more likely that their perception of risk will be distorted. As a consequence, they more freely undertake levels of risk that they otherwise would eschew.

Consider this … if I build my house in a heavily forested area, knowing the risk of wild fires, should I expect the government to rebuild my ravaged home if I didn’t carry adequate insurance to cover my full loss? The same may be asked of borrowers and speculators who took advantage of historically low interest rates to purchase property at record high prices. Just like the homeowners on the mountaintop, they had to know that eventually they would face a wall of flames.

While a government rescue may be politically expedient in this an election year --- or the compassionate course --- the fundamental threat to our economy could be magnified if our public institutions step in to save the day.

The reallocation and transfer of risk have become booming industries. Governments, capital markets, banks, and insurance companies have all entered the fray with ever-evolving financial instruments. Pundits praise the creativity of these often exotic risk spreading devices. In the greater marketplace, these risk dispersion mechanisms allow entrepreneurs to assume more of it, banks to get rid of it, and traders to hedge against it.

But this is precisely the peril of these new developments. They mass manufacture moral hazard. They remove the only immutable incentive to succeed --- market discipline and business failure. They undermine the very rudiments of capitalism: prices as signals, risk and reward, opportunity costs. Risk reallocation or transfer of the type being proposed for this class of investors produces an artificial universe in which synthetic contracts replace real ones and where moral hazards replace genuine business risks.

It’s no surprise new investors and home buyers were lured into the real estate market. The sirens’ song of cheap money is a temptation difficult to resist. New borrowers were blinded by teaser rates, the prospect of purchases without down payments and the seeming ability to set their own initial monthly obligations. Market propagandists spun a world in which property values would rise without end. In short, the makings of a “perfect storm.”

The first concept that most economics and business students learn is that for every benefit, there also is a cost --- for every reward, there must be risk. Much as we’d like to believe otherwise, there is no free lunch! Unfortunately, as tragic as this may be, if our economy is to thrive in the natural course, these borrowers may have to be casualties of “Economics – 101.”



To learn more about my market recommendations, visit my website at:www.globewestfinancial.com.