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Archive for September, 2009

Alan Greenspan sees economic growth slowing

Wednesday, September 30th, 2009

Former Federal Reserve Chairman Alan Greenspan weighed in on the economic picture and he said he expects things to “flatten out.” Greenspan believes the economy will grow 3 to 4 percent annually for the next 6 months or so before things start to slow down once again. Greenspan believes the stock market will flatten out and the economy will then follow, though he does say he doesn’t believe the United States economy will fall back into a recession.

The former chief of the Fed also said that the current $2 trillion balance sheet the Federal Reserve has is “not sustainable.” In the short-term Greenspan says that inflation is no concern, but if the Fed fails to reign in the stimulus programs it has used in the past year it could become a problem in the future. On the other hand Mr. Greenspan also said he is concerned that political pressure could prevent the Federal Reserve from doing what they need to do to keep consumer prices in check.

Though Greenspan is no longer the head of the Federal Reserve, his comments certainly still move the market and lots people want to know what he has to say. Basically Mr. Greenspan believes that the current economic growth that appears to be starting will stall out in 2010, but he doesn’t believe another recession is on the way anytime soon. He did note that recovery in the labor market is likely to be quite slow even when the economy is growing 3 or 4% annually.

It will be interesting to see what more of the influential analysts and economists have to say about the potential for a flattening out of the economy shortly after the initial rebound. The bottom line is that the economy appears to be in recovery mode for now, but opinions differ as to whether this recovery will last into next year. Additionally, don’t expect jobs to abundant anytime soon, since the labor market will likely be the last to improve.

U.S. GDP Contracted 0.7% in Second Quarter

Wednesday, September 30th, 2009

GDP (Gross Domestic Product) is a measure of all goods and services produced in the economy. GDP decreased at a 0.7% annual rate from April through June, the Commerce Department said today, revising its earlier estimated 1.0% drop because business spending in the quarter wasn’t as weak as initially thought.

This is good compared to the GDP decline of 5.4% in fourth-quarter 2008 and 6.4% in first-quarter 2009. Economists think the economy expanded modestly from July through September.

All is not rosy today. The Chicago Purchasing Managers Index on Wednesday fell to 46.1 in September rather than rising to the 52 that economists expected. This means that manufacturing industry is weaker than expected. This is why Dow fell down more than 100 points today. I view the market drops like these as opportunities to buy better stocks at better price.

U.S. Real Estate Outlook

Tuesday, September 29th, 2009

U.S. Real Estate market continues to give mixed signals. The data from Commerce Department indicates that new home sales climbed for the fifth straight month in August as sharply lower prices lured buyers into the market. However, the National Association of Realtors reported that the demand for used homes fell unexpectedly in that month from July, the first decline after four months of increases. As always, it all depends on where you want to buy. Some markets (such as Las Vegas) in U.S. are still going down. Some markets (such as Seattle) are stabilizing. Expiration of first time buyers credit in November 2009 may be motivating buyers now. This uptrend may not continue after November if the employment situation doesn’t get any better.

There are continuing positive signals in stock market. We mentioned about pickup in Mergers & Activities few days ago. The return of Mergers on Monday lifted U.S. stocks to their highest levels in five weeks as major acquisition announcements from Abbot Laboratories and Xerox boosted investor hope. We are entering October in few days. I think that U.S. stock market will slow down in October before picking up the momentum in November.

Related Link: U.S. Home Prices Up

Unused Vacation Days Can Help Your 401K

Monday, September 28th, 2009

If you don’t use all your vacation days this year and if your company allows you to cash-out unused vacation days, you can contribute the amount for unused vacation to 401k plan. To encourage savings, the Obama administration recently blessed such transfers. More details are here.

Even a Recovery Won’t Go Straight Up

Friday, September 25th, 2009

It’s a fundamental lesson in economics and a lesson that all consumers and investors should understand. Even if we are in the midst of a healthy recovery it will not be a straight line up. Rather an economic recovery always has plenty of rough spots in it where it may still feel like we are in a recession. Don’t be alarmed the first time the stock market has a pretty strong move to the downside or the first time some of the economic numbers don’t show a very optimistic picture of the economy. An economic recovery is typically full of times where consumers and analysts alike question whether the recovery is real or not.

The recession we have been in was a very deep recession that will take a long time to recover from. The stock market has certainly priced in the fact that a recovery is on its way, but it may not have factored in the economic bumps in the road that are sure to come. Since September and October are typically two of the worst months of the year for the stock market, an investor should probably tread carefully with the stock market at these levels. There will certainly be some pullbacks where you can find stocks at a better price.

It’s fine to be optimistic about the outlook of the economy for your country and the world as a whole, but it is definitely wise to be realistic about the recovery. When there has been such a powerful global recession where so many have lost their jobs and the strength of the consumer has been compromised so badly, you must realize that it will take time to heal those wounds. The recovery may well be taking place now, but don’t expect a straight line up for the economy or the stock market!

IPO Fever

Friday, September 25th, 2009

It’s a sign of changing times. IPO market is picking up again. This week is the biggest week for IPO in the last 18 months. So far this week, five companies raised a total of $2.97 billion making it the biggest for IPO money-raising since the week of April 20, 2008. Another deal from Chinese company Shanda Games is on the way today. The pipeline of companies planning to go public in the U.S. has also been growing over the past two months, with 20 companies filing new registrations with the Securities and Exchange Commission since the beginning of August.

Yesterday, electric-car battery maker A123 systems came out with their IPO and saw the stock soaring 50% on the first day of trading. The company hasn’t made any profits so far. Another hot IPO, Shanda Games Ltd, is coming to market today. It’s expected to trade with the symbol “GAME”. Shanda priced its initial public offering at the high end of expectations and would sell up to $1.04 billion in equity.

If you are getting into these IPOs, keep in mind that first day gains are mostly bubble. Investing in companies with short track record is very risky. It may go in either direction.

U.S. Economy Recovery

Friday, September 25th, 2009

How will the U.S. economy recover? Every pundit in the stock market has own opinion on this. Some experts thought that economy will recover in V shape, meaning that sharp plunge will be followed by sharp recovery. So far, it seems to be the case. Some thought that we will go thru U shaped recovery. Some argued that U.S. economy will recover only in W shape (sharp plunge + some recovery + sharp plunge + sharp recovery).  Some thought it could be L shaped or Square-root shaped.

Just when you think that you heard all predictions from stock market gurus, someone comes out with the prediction of “Reverse square root” shaped recovery! Greg Ip, U.S. economics editor for the Economist, thinks the recovery will be the combination of a sharp fall down, a sharp rise part of the way back up, and a long struggle.

reverse-square-root

I don’t believe in the “reverse square root recovery” theory. Economy is already turning around. Only missing piece is the employment. I see hiring picks up everywhere. We are having difficulty filling in some positions. Number of quality resumes we get also fell down in the recent weeks. My friend in M&A firm tells me that merger activities picked up lot of momentum in the last six weeks. At this point, I will just ignore the “reverse  square root recovery” prediction.

Federal Reserve Offers Optimistic Statement

Wednesday, September 23rd, 2009

The Federal Reserve issued their statement for September today and most on Wall Street found the statement to be a quite optimistic. For the first time since August 2008 the FOMC indicated that it sees the economy accelerating, albeit at a slower pace than they would like. Maybe the biggest news out of today’s statement came from the fact that the Federal Reserve will slow its mortgage securities purchasing program to avoid disrupting the housing market as the economy starts to recover. The Federal Reserve says they anticipate finishing the program by first quarter of 2010.

While the FOMC definitely sounded more positive today, they indicated that they will be keeping rates historically low for an extended period of time, hoping to boost economic growth going forward. The goal of the Federal Reserve at this point seems to be to wind down their programs that have boosted the economy, but do so at a pace that doesn’t upset market conditions or slow any potential progress that will be made in the future. The Federal Reserve announced last month that it would be finishing off its program of buying treasury securities and now it is stating that it will tiptoe out of the mortgage securities purchases as well.

Initially stocks rose to their highest levels of the year after the announcement, but by the end of the trading day the stock market had settled lower after investors decided to take profits following a very nice run in the market over the last few months. Clearly the stock market is starting to expect a recovery and the language from the Federal Reserve has improved quite drastically over the past few months. The main thing that the economy and consumers need now is businesses to start hiring once again and the unemployment rate to begin to fall.

Should you lock in cd rates or wait for better rates?

Monday, September 21st, 2009

A very common deposit account product that is used by the public is the certificate of deposit. A certificate of deposit also brings with it FDIC insurance of up to $250,000.00 at this point. Cd’s are generally seen as an attractive option for those who wish to put their money away and earn a yield higher than a savings account. It is important to remember that you should only deposit as much in a cd as you believe you won’t need for that time period, because there are penalties for early withdrawals.

Currently cd rates are extremely low because the Federal Reserve has the Fed Funds rate at virtually zero. The average one year cd is yielding a little less than 1.75% right now. This is definitely not an attractive deposit option with that kind of yield, but considering the health of the overall economy in the past year it isn’t surprising at all that rates are so low. When the Federal Reserve has set interest rates this low there is no way banks can afford to pay the impressive 4 or 5% one year cd rates we were used to seeing before. Even a five year cd, which locks up your money for a very long time only yields on average 2.93% according to Bankrate.com.

A question that many people have during this kind of economic environment is how long should I lock up my cd rate? The two options at this point appear to be either lock in a very long term cd after your compare cd rates at local banks and online. Even if you find the best cd rate out there for a long-term cd it won’t be very impressive at all. The other option is to use money market savings account specials or short-term cd rate specials and hope for better rates in the future.

Should you lock in cd rates now or wait for better rates in the future? The truth is it depends on your outlook on the economy. If you think the economy should improve drastically in the next several months you’ll want to stick to short-term options and wait for better rates. The definite thing about today’s rate environment is that things aren’t pretty, but they also can’t get much worse. The fact that rates can’t get much worse makes me wonder if it really is a wise move to lock up money for long periods of time.

The Week Ahead

Sunday, September 20th, 2009

Last week was good for the market. This week brings out another set of events that might change the direction of the market. Definitely it just looks like that the market wants to move higher and there is no significant resistance until the S&P reaches 1,100, where the bears may start to make a stand.

As I mentioned earlier, unemployment must go down before we hit the full recovery phase. Thursday morning, CNBC’s Steve Leisman drew from studies by Haver Economics to point out that unemployment peaked 15 months after the technical end to the 1991 recession and 19 months after the technical end to the 2001 recession. Payrolls didn’t regain prior peak numbers until 23 months after the 1991 recession and 39 months after the 2001 recession.

In another 10 days we are going to face October, traditionally not a very good month for stock market. October may bring us sharper and deeper correction. The market is now quite overbought on a longer-term basis. A few more weeks of this and some news could cause traders to rush to all take profits at once. Some of the news coming in this week also would affect the market adversely. Home builder Lennar (LEN) announces earnings on Monday. FOMC statement is due on Wednesday. Research in Motion (RIMM), blackberry manufacturer, reports earnings on Thursday.

If there are earnings misses from high-profile companies or if there are any negative comments in FOMC statement, the market rally will fail miserably. I, like the rest of you, wish that the market will continue its phase so that we will see green in our brokerage accounts at least for some time.

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