I held off releasing this month's Commentary until this week figuring the Fed's report would give me some additional topics to discuss beside last week's unemployment report. I was rewarded beyond my expectations. Since it is now mid-month, and Spring break, I will try and keep it brief.
The S&P notched gains for the third month in a row. No sooner had some TV talking head gushed that we hadn't had a single 1% down day in the markets this year, we had one. The Dow Industrial's 204-point drop on March 5th was almost 1.6%. The Dow then took almost 5 days to recover the pre-drop level, but since then has been able to push through the psychological barrier at 13,000 and push higher.
Keep in mind we're now looking at the Dow having not seen a correction of at least 5% since late November. The trend is definitely up, but a couple rough days with some fairly heavy profit taking would not surprise me as we near the end of the first quarter. We mentioned recently just how poorly some of the fund managers had done in 2011. They'll be looking to pump up their returns with some realized gains.
The private sector added 233,000 jobs in February, and government employment fell only 6,00, for a net 227,000 jobs created by this economy, making it the third straight month with gains over 200,000. December and January revisions added another 61,000. So...we're halfway there. We need to see multiple months where 400,000 jobs are created to see substantial reductions in unemployment, but we're always happier to see more jobs than less.
The unemployment rate remained constant at 8.3%. How did we create jobs and not see the rate drop? If you've paid attention to earlier commentaries, you know because this is what I've told you to watch for. The labor-participation rate increased. A half-million folks whose benefits had expired and were no longer considered "unemployed" returned to the work force. We still have 23.5 million Americans either out of work or underemployed, but more jobs, regardless of the official number means the economy is moving in the right direction. If 3 million people returned to the workforce and 500,000 jobs were created next month the unemployment rate would go up, but it would be a good thing.
The Fed's report, released on Tuesday of this week contained few surprises. Rates will be held at between 0% and 0.25%, where they have been since December of 2008. This means corporations who are able to borrow money from banks can count on their borrowing costs to remain low. It also means those relying on fixed-income portfolios can continue to count on historically low rates of return for a while longer. Only one voting member believes they'll have to raise rates before the end of 2014.
The Fed's summary statement is: "Information received since the Federal Open Market Committee met in January suggests that the economy has been expanding moderately. Labor market conditions have improved further; the unemployment rate has declined notably in recent months but remains elevated. Household spending and business fixed investment have continued to advance. The housing sector remains depressed. Inflation has been subdued in recent months, although prices of crude oil and gasoline have increased lately. Longer-term inflation expectations have remained stable."
The Fed also said the inflation caused by rising oil and gas prices is temporary. On the bright side, the warm winter has reduced demand for natural gas and home heating oil, so those prices fell and consumers got a bit of a break on those bills while paying about a dollar more a gallon at the pump.
The Fed on Tuesday also accelerated the release of their recent "stress" test of 19 major banks and four: Ally, Citigroup, MetLife and SunTrust were deemed not to have sufficient capital reserves to weather another deep recession. In the event of another deep recession, the Fed calculates those four banks would have lost roughly $534 billion. Others features of this hypothetical recession include unemployment at 13% and the Dow falling almost 60% to 5,668.
Citi, Met and SunTrust saw their shares fall after hours yesterday while the likes of Bank of America, Wells Fargo and JPMorgan saw broad-based support. The Fed decided to push up the release date so as not to be too far behind JPMorgan's announcement of increased share buybacks and a dividend increase. Wells Fargo and US Bancorp also announced dividend increases.
A couple of things to consider...MetLife is converting from a bank holding company to an insurance company and claims to have been held to an inappropriate set of standards, but the Fed insists that's not the case. Ally, the former GMAC, is 74% government-owned (taxpayer-owned) and is not publicly traded.
The Fed also intends to continue its $400 billion "operation twist" program, replacing maturing short-term debt with longer-term debt, and maintaining its (our) exposure to the mortgage-backed securities market. They're basically "locking-in" lower rates for a longer period of time. This will help keep long-term rates from rising too quickly if and when they do.
A couple of excerpts from President Obama in a February 13th, 2012 address at Northern Virginia Community College in Annandale, VA. "Right now, we're scheduled to spend more than $1 trillion more on what was intended to be a temporary tax cut for the wealthiest two percent of Americans. We've already spent about that much. Now we're expected to spend another $1 trillion."
Did you catch that? He describes the current tax rates, now over ten years old, signed into law by Bush as a form of government spending. Really? Only someone who believes everything you make belongs to the government can call allowing you to keep more of your money is "government spending."
Between that and Obama's Secretary of labor, Hilda Solis saying that people who get welfare checks and spend them helps stimulate the economy it's little wonder we will never reach political agreement on economic issues. I don't even know where to begin when the media allows Secretary Solis to say that taking money from taxpayers, stripping out government overhead and handing it to welfare recipients to spend is economic stimulus.
Elsewhere in the same speech he said "We need to reduce our dependence on foreign oil by ending the subsidies for oil companies, and doubling down on clean energy that generates jobs and strengthens our security." He later reiterated the point, "It means we've got to keep on investing in American energy. We've got to double down on the clean energy that is creating jobs. But, it also means we've got to renew the American values of fair play and shared responsibility."
Meanwhile, government-subsidized Solyndra goes bankrupt, government-subsidized Ener1 goes bankrupt, and government-owned GM shuts down the production line for the Chevy Volt for a few weeks due to poor sales. Not a lot of jobs being created here.
I didn't even touch on Greece, Iran or the republican primaries, but I said I'd keep it short, so in closing...we'll file the following under the "American values of fair play and shared responsibility," and lament that it has become anything but fair or responsible.
Amanda Clayton, a 24-year-old from Lincoln Park, Michigan, won $1 million from the Michigan state lottery... But she's still collecting $200 a month in food stamps... "I thought that they would cut me off, but since they didn't, I thought maybe it was OK because I'm not working," Clayton said. She did, however, find money to buy a new house and car...
When a local TV interviewer in Detroit asked Clayton if she thought she had a right to the public assistance, she responded, "I feel that it's OK because, I mean, I have no income and I have bills to pay...I have two houses."
We'll do this again in less than a month. In the meantime, please call if you have questions.
