January Does Implementation of the Death Penalty lead to higher costs February Less Competition and Higher Hospital Costs March Millionaires Who Get Subsidies from the Affordable Care Act April The Unintended Obama Legacy May The NY Times and $15 Minimum Wage
Blog Topics 2014 blog topics for 2013 are at page bottom
January Will Lake Meade become another Aral Sea February Does Taxing the rich hurt the economy March The Cause of the Great Depression April Temporary Agricultural Subsidies lead to wealthy Farmers and Higher Prices May The Presidents Stance on Gun Control leads to Increased Gun Ownership June Is there really a Gender Pay Gap July Did the Supreme Court decision in Roe v. Wade lower the crime rate August Department of Education and wasted Money October The Financial Follies of the EPA November Social Security and Portfolio Diversification December The White House and Terrorism
JULY jobs report 8-7-2015 The Economy created 215,000 jobs in July and the unemployment rate remained steady at 5.3% which matched expectations. Average hourly earnings increased by 0.2% for July and the labor force participation rate was up slightly to 62.6% (the reason why the unemployment rate remained the same with job creation. Th U-6, the real unemployment rate (which includes marginally attached, 1.9 million workers, and part-time workers) was down slightly to 10.4%, which is the lowest since June 2008, among the marginally attached, there were 668,000 discouraged workers in July, little changed from a year earlier. . The long term unemployment rate was at 26.9% (the percentage of unemployed who have been unemployed more than 26 weeks). Among the major worker groups, the unemployment rate for teenagers declined to 16.2 percent in July. The rates for adult men (4.8 percent), adult women (4.9 percent), whites (4.6 percent), blacks (9.1 percent), Asians (4.0 percent), and Hispanics (6.8 percent) showed little or no change.
I'm on a little mini vacation so just a quick update. The Dow advanced nearly 1000 points in the past two days as a result of China's central bank lowering interest rates, a FED FOMC policy making stating that the climate isn't right for an interest rate hike and an oversold condition where there are some great deals (OPK, HCLP, BTU AAPL to mention a few). In addition, oil advanced 10% in sympathy with the market in addition to weekly inventories coming in lower than expected. It is currently trading at over $41/barrel. National average price of a gallon of gas is $2.51/gallon, I gassed up for $2.27 yesterday and there are 19 states that have some stations that are selling gas for less than $2/gallon.
Updates/Advisories 8-25 2015
DOW 1 day Chart
It was another nonsensical day on wall street that saw a 600 point swing. All was well at the open as the Dow was up over 400 points as a result of good buys and the Chinese central bank announcing an interest rate cut to help prop up the economy. Wall Street was also reacting to a strong reading on consumer confidence in August and a solid read on new home sales in July, which rose 5.4% to an annualized sales pace of 507,000 new homes. The Dow then settled back to up 250 points and spent most of the day up around 300 points. Within the last hour of trading the Dow tanked 500 points to finish the day at 15,666, down 204 points. This was the biggest Dow reversal since 2008. Many market veterans believe the damage done by the selloff in the U.S. was overdone considering the American economy doesn't appear to be tanking at this point. At this point, many analysts are still scratching their heads as to why the last minute selloff, I believe it was investors wanting to lock in earlier gains and to no surprise there is still significant fear in the market. Oil was up over a 1$ today to finish at $39.31 as a result of yesterday's oversold condition. At 10:30 tomorrow, weekly oil inventories will be released which generally is market moving. Expectations of another build in U.S. crude stockpiles last week amid refinery outages could pressure oil prices again, traders and analysts said. A Reuters poll forecast stockpiles rose a million barrels last week, adding to the previous week's 2.6 million-barrel build. The price of a gallon of regular gas is $2.577 and gold is relatively stable at $1138/oz.
DOW ONE DAY CHART
The greatest one day percentage loss for the Dow was in October of 1987 when the Dow dropped 508 points in one day, which represented a 23% loss. If we had that today, that would represent a loss of close to 4000 points. So even tho the Dow sank 588 points today, that only represented a loss of 3.58%. The Dow has dropped over 10% in one week and it is clearly irrational panic selling. However, Keynes said it best when he stated, "the market can remain irrational longer than you can remain liquid." Many investors went home Friday night, saw the 530 point down day and immediately placed orders to sell at the market at the open on Monday. This was clearly evidenced by the Dow being down over 1000 points within 10 minutes of the open. Some semblance of sanity prevailed and the Dow struggled to within 125 points of Friday's closing before profit taking settled in (chart). The Dow is now at an 18 month low. A couple of bright spots for consumers is this almost guarantees the FED won't raise rates until 2016 and oil plunged more than $2 to finish at $38.23 shattering the psychological $40 barrier. Looking at the stocks on the NYSE, there were 3100 that went down and only 120 that were up for the day. According to USA Today, "of more than a dozen stock market strategists that were asked by USA TODAY if the current selloff will morph into a full-fledged bear market, or 20% or worse drop, all but one said no. Most are still in the correction camp," which means further losses may not occur. Part of today's downturn was attributed to the Shaghai (China's stock market) sinking 8.5% and a down day on the Nikkei and various European Markets. The price of a gallon of gas nationwide is $2.59 (I filled up for $2.33 today), gold stayed the same, surprisingly, at $1153/oz and $1.16 = 1 Euro.
The Dow tanked 530 points to finish the day and week at 16,460 and is in official correction territory as it is down 10.4% from it's May highs, and it has been down 13 of the past 17 sessions.. If it should go down 20%, it is then considered a bear market. First and foremost, Relax! Stop checking your 401K's, 403B's etc. The largest asset you own is probably your home and you don't get that appraised every day. If you look at the charts below, you can see that the stock market mirrors the American economy, and while there are a few bumps in the road, both have gone up through the 20th century and will continue to go up over time. Losses were broad based and all sectors of the S&P 500 were down. The concerns are the usual suspects: China, the worlds 2nd largest economy is slowing and has devalued that Yuan, uncertainty about the FED raising rates, plunging oil prices, and a European recession. Oil going down is generally good for the economy, but in this instance, it is indicative of a slowing economy and diminished demand. Crude dipped below $40 Friday but finished the day $40.26. However, the biggest culprit is fear. People want to lock in gains and minimize losses, however, many stocks represent the baby that is thrown out with the bathwater. My advice is to batten down the hatches and weather the storm. I believe that the possibility of a recession exists later this year. I also feel that the Fed raising rates 1/4% is not a big deal, but, you don't raise rates in an uncertain economy. What they should do is make a clear statement that they won't raise rates until next year (remember, the market hates uncertainty) and make a statement to the effect that they will provide whatever liquidity is needed to ensure a healthy economy. On Friday afternoon, I bought stocks and I will reveal them tomorrow in my weekly stock picks. One of them is an energy stock and while the energy sector has been beaten down, particularly coal, I believe it will see a recovery next year with the exit of the Obama administration.
The Dow suffered its worse loss of the year as it tanked 358 points to close below 17,000 at 16,991. It was down triple digits at the open and kept on sinking as global growth concerns (45-50% of revenue from the Dow comes from abroad) and, I'm going to say it, the possibility of a looming recession which dominated the street. This makes 12 of the past 16 sessions that the Dow was down and it is off 7% from its May highs. When and index corrects by 20%, it is considered a Bear market. America's central bank hasn't been particularly clear on its plans to raise its key interest rate. Many investors and economists had bet on a Federal Reserve rate hike in September. But in the Fed's minutes published Wednesday, the Fed's committee members sent the market mixed messages. the market hates uncertainty and this is exactly what the FED is doing. I still fail to see the necessity for a rate hike with no recession and a economy that is heading towards stagnation. Oil fell to a new, six-and-a-half year low Thursday morning before bouncing back up a little in the afternoon as it dipped below $40/barrel but rallied slightly to finish at $40.80/barrel. A major concern of the following Dow is what economists refer to as a negative wealth effect. The wealth effect is the tendency for consumers to spend (consume) more and save less as their assets (mainly a home and stock holdings) increase in value. This helps an already expanding economy. However, is assets start to decrease in value, the consumer will save more to offset the equity loss; if the consumer is saving more, he/she is spending less which hurts a struggling economy. This can lead the way into a recession (see FED speak for an explanation of a recession). Both the Dow and S&P are in negative territory for the year. In Asia, 10 out of 11 markets closed lower (Shanghai Comp. -3.42%), and in Europe 11 out 12 of markets are trading lower (DAX -1.22%).
In case you're keeping score, the Dow has been down 11 of the past 15 sessions and finished the day at 17355, down 162; but at one time it was down over 200 points. Stocks initially plunged on volatility in China, the Shanghai was down over 6% and plunging oil prices as a result of inventories increasing by 2.6 million barrels when only 1 million barrel increase was expected. Generally, oil decreasing in price is a good event, however, it is indicative of diminished worldwide demand which could be indicative of a recession both in the US and abroad. Oil was down to $40.49/barrel. There are very few fracking wells that are profitable below $40 as can be evidenced by the attached graph. The last time oil was below $41 was 2009. The falling prices sparked selling in energy stocks. They were the biggest losers in the S&P 500 on the day, with Marathon Oil (MRO), Chesapeake Energy (CHK)and Apache (APA) tumbling between 4% and 7% a piece and generally, all oil related stocks (except refineries) have been slammed. Ultimately, the best thing for low prices will be low prices. What saved the market, somewhat, was the release of the minutes of the FED's last FOMC meeting at 2 PM. These showed that many members of the FOMC (see FED speak) felt that conditions weren't right for a rate increase. The market recovered to down under 50 points before it plunged to -162. European shares were sharply lower Wednesday, with Germany’s DAX index 2.1% lower, France’s CAC 40 down 1.8% and Britain’s FTSE 100 index 1.9% lower. U.S. stocks were lower Tuesday as investors reacted to an earnings miss from retail giant Walmart. The average price of a gallon of gas remains high thanks to the mid-west and California (see 8/14 advisory) at $2.656/gallon
Shortly after the open, the Dow was down over 100 points as a result of a sharp decline in the Empire (State of NY) manufacturing index. However it was soon reversed after the National Association of Home Builders said more builders viewed market conditions as favorable than not and the Dow finished the day at 17,545, up 68 points. With 92 percent of the S&P 500 companies having reported so far, second-quarter earnings are expected to have edged up 1.2 percent, while revenue is expected to have fallen 3.5 percent, according to Thomson Reuters data. However, earnings were better than expected. What is disconcerting, is that revenues have fallen for many companies. Tesla Motors rose 3.3 percent to $251.20 after Morgan Stanley raised its price target on the stock to $465 from $280 and said Tesla was its top pick among U.S. automakers. Personally, I want some of what the analysts at Morgan Stanley are smoking. I just don't see it, especially with the low price of oil/gas. What will be driving the market later this week will be inflation data (currently under 1%), and the release of the FED minutes which will give investors some indication as to whether the FOMC will raise rates sooner rather than later. The last time the Fed raised rates was in 2006. Oil is down to $41.85/barrel, gold was relatively flat at $1117/oz and the price of a gallon of regular gas is at $2.67/gallon.
In other News You may have noticed the price of eggs skyrocketing with some analysts predicting $6/dozen due to the nation's worst-ever outbreak of bird flu in poultry, U.S. Department of Agriculture data issued on Wednesday showed. In the fourth quarter of 2015, eggs will average $1.73 to $1.87 per dozen, up from about $1.63 a year earlier, the USDA said. Last month, the agency predicted a dozen eggs would cost $1.33 to $1.45 in the fourth quarter. This represents a 100% increase in prices. Nationwide, about 5% of the chicken crop has died and egg imports are up over 30%.
Even tho the Dow was up slightly on Friday, it was down 104 points for the week ending at 17,477. Considering some of the head winds, it could have been much worse. China devalued the Yuan which makes their goods to foreign countries cheaper and American goods more expensive. Compounding that is the strength of the American dollar which is up 7% this year ($1.11 = 1 euro),. A strong dollar makes are goods more expensive and given the fact that the largest companies in America have 50% of their sales abroad, this is significant. And lastly, the price of oil tanking has hurt the entire industry( see post 8/10). The week's domestic economic data did not appear to drive markets strongly in either direction. On Thursday, the government reported a good gain in July retail sales, and solid payroll gains and moderate wage increases are coming to provide a significant boost to total labor income, which should sustain further increases in spending. What I find a little disconcerting is that in addition to the death cross, the Dow has broken out of it's trading range to the downside. From a technical analysis view, it wouldn't surprise me if the Dow hits 17,000. Oil finished the week at $42.18/Barrel, gold at $1113/oz and the price nationwide of regular gas is up to $2.67, but in the New England it is $2.55 except for NH where it is $2.51.
Refinery/Gas Shortage Who is to blame for the refinery shortage? As I've said previously. we've gone from over 300 refineries in the 1970's to under 150 now (tho in the past 10 years we have seen capacity increase primarily because of technology). The main culprit is the EPA and its regulations and requirements. Ten years ago, Shell increased the capacity of an existing refinery by 300,000 gallons/day. Before construction even started, they had to fill out over 5000 permits which took 3 years. That's why we have a gas shortage and why gas has spiked from 20-50 cents/gallon in the midwest.
With all the talk of interest rate hikes, I've received a number of e-mails concerning an explanation of what interest rates are relevant to us as consumers. The Federal Funds Rate This is the interest rate that is followed most closely and affects all other short term interest rates. It is the rate that one bank charges another bank on an overnight loan and has a direct effect on the prime rate. The current rate is .25%. Prime Rate This is the rate that the larger banks charge their best customers on short term loans (under 3 months). Once the federal funds rate is changed, the prime rate is changed by, usually, the largest bank, JP Morgan-Chase, and all other banks follow. The prime rate is generally 3% higher than the Federal Funds rate. The current prime rate is 3.25%. This affects all other short term loans: HELOC's (Home Equity Line Of Credit), boat loans, car loans, etc. What it does not affect directly is the mortgage rate.
Yield on the 10 Year Government Bond The government finances it's deficit by borrowing money and it does this by issuing bonds that have a maturity value anywhere from 30 days to 30 years. Technically, Treasury bills are issued for terms less than a year.Treasury notes are issued in terms of 2, 3, 5, and 10 years and Treasury bonds are issued in terms of 30 years. The price of a bond is inversely related to its yield and the mortgage rate is usually 2-3% higher than the 10 year yield.
California Drought California is in the middle of a drought; it must be global warming or now the more politically correct term (spare me), climate change. In case you haven't noticed, the climate is always changing. It is in a constant state of flux. If you notice the chart above, California had a number of mega-droughts during the medieval ages and this was considerably worse than it is now. Oh yea, and probably the father of these climate alarmists were predicting an ice age in the 1960's (click on pictures below).
Obamacare Revised Costs
More on Obamacare In a recent survey by the New York FED on businesses, the median increase in healthcare premiums is expected to be 10%. More than a quarter of the manufacturing and service firms surveyed said they either have or will boost prices for goods and services "because of the effects that the ACA is having on your business." About 20 percent of respondents said they were reducing their number of workers and/or raising the share of part-time workers as a result of the ACA. His is in stark contrast to the presidents remarks earlier this year that healthcare costs are decreasing. Maybe CEO's were right when they said the president "Just doesn't get it".
Commentary on Minimum Wage
There is currently a debate in the state of NH on whether to increase the minimum wage to 8.25 from 7.25. The main argument is that it will help to alleviate poverty. That is clearly not the case. As you can see from the chart at the left, the poverty rate dropped dramatically in the 1960's. This was a function of great society legislation; specifically, increase in Social Security benefits in addition to the inception and implementation of Medicare and Medicaid. Since then, the poverty rate has fluctuated between 9-15% and is highly correlated with the unemployment rate. The vertical grey area's in the graph represent periods of recessions in the US. As can be expected, unemployment rises during recessions and peaks at the end (unemployment is said to be a lagging indicator). As you can also see from the chart, so too does the poverty rate. There is no indication whatsoever that the poverty rate is affected by increases in the minimum wage. Generally, this is quite the contrary. As can be evidenced from the below left chart, increases in minimum wage can contribute to unemployment and as we can infer from the above chart, as unemployment increases so to does poverty. If you look at NH, they have the lowest state poverty rate in the nation and it generally parallels the national unemployment rate. By raising the minimum wage, you increase business costs. As a result; businesses either pass these costs onto the consumer (in which case inflation nullifies any wage increase), substitute capital for labor, or simply go out of business. If you look at the chart below right, UAW (United Auto Workers) membership has decreased in the late 1970's from 1.5 million to 350,000 in 2009. The reason for this is simple. Detroit isn't making fewer cars, they are making more, but they have made their assembly lines more robotic and have substituted capital for labor, which became cheaper in the long run. This can also happen to those fast food workers who want a $15 minimum wage. There is currently a machine on the market that can make 300 burgers/hour. In other words, capital can be substituted for labor. Someone please e-mail me and explain how someone is better off unemployed at $8.25/hour as opposed to being gainfully employed at $7.25/hour
You cannot legislate equality. If you want to decrease poverty, implement policies to insure that higher levels of education is available to all.
The Congressional Budget Office predicted this week that more than 2 million people will leave the labor force because of Obamacare. Specifically, more people will leave the labor force or reduce their hours, to stay under the cap for federal subsidies. If you are a family of 4, and household income is under, WAIT FOR IT, $94,000, you are eligible for a federal subsidy. The number of part time/temporary workers has already increased by 35% since Obamacare was passed in 2010; and yes it will get worse, wait until 2015 when it becomes mandatory for businesses.
For a good laugh on Obamacare, go to this web site and watch this video; http://www.youtube.com/watch?v=qpa-5JdCnmo. It shows the president on 36 different occasions stating that if you like your healthcare plan you can keep it. Obviously there are 1 of two explanations for this misunderstanding. He was ill advised on the 2700 page, 4500 provision Affordable Care Act, or he knew about it and lied. According to a study by Forbes magazine, the ACA will increase premiums to men under 27 by 77%, 40 year olds, 37% and 64 year olds by 37%.
When Obamacare was 1st released, The Congressional Budget Office predicted that it would cost $900 billion over 3 years. At the time, I made a prediction to my students that I estimate the final cost would be closer to $3 trillion. Three years later, the CBO has raised it's estimate to $1.6 trillion. At this rate, we are on pace to reach the $3 trillion mark. www.healthcare.gov, the official website to sign up for Obamacare had an original cost of $100 million. That cost is now up to $292 million dollars and rising. If the government can't manage the costs on a web site, and these costs have trippled since it opened on October 1, how can it possible manage a 2700 page, 4500 provision bill. The words of Nancy Pelosi (see above) are acting as a harbinger of doom: "We have to pass the bill, so we can find out what's in it."
BLOG Topics 2013
January Do Protected Seals lead to Depleted Fish Stocks February Prohibition: Profits to Cartels & Increased Violence for Americans March Increased Minimum Wage & Extended benefits lead to Higher Unemployment April Ethanol from corn & Agflation May Cash for Clunkers lead to Higher Used Car Prices & Wasted Tax Dollars June The Affordable Care Act; Anything but Affordable Part 1 July The Affordable Care Act; The poster Child for False Advertising August Detroit: Higher Taxes + Liberal Benefits = Bankruptcy September No Keystone Pipeline leads to more pollution October Global Warming! Or is it Global Cooling! November Poverty & Benefits December Does Affirmative Action lead to Reverse Discrimination?
The United States has amongst the lowest savings rate for all technological nations. The iOMe challenge is a nationwide competition between Colleges where teams submit a 10,000 page essay on how Americans can improve their savings rates. In addition, teams must produce an approximate 60 second video which complements the essay. If you click on the iOMe logo above, it will take you to Bentley University's 2012 video submission. The faculty adviser for the challenge is John Tommasi and is offered during his Fall EC 351 course, Contemporary Issues in Economics. I'm pleased to announce that on February 15, Bentley was declared the winner of the iOMe video portion of the contest. Congrats to the team members and great job!
EC 3900 Energy Economics
EC 3900, Energy Economics and International Markets, is a 3 credit, Short Term Program, that is offered during Spring semester. After 7 weeks of lecture, the class takes a 10 day educational/cultural tour to France where 80% of their electricity is produced by nuclear power. During the 10 day trip, students travel to, and tour various nuclear facilities Last year's class visited; Marsailles, Aix en Provance, Lyons, Brest and 4 days in Paris.
If there were ever words that can strike fear into the hearts of any man women or child, it's: "I'm from the Government and I'm here to help". On a monthly basis my blog, from an economic standpoint, will explore government laws, decisions and actions, which while well intentioned, had inadvertent results that were either disastrous, or made a bad situation worse. It wouldn't surprise me if you reached the conclusion that congress does two things well, nothing and overreact; and you may ask yourself, do Congressional members vote for what is best for the economy, or what will get them re-elected.