" Where economics isn't just a job, but an adventure"
Quote of the Week
“I don't make jokes. I just watch the government and report the facts.” -Will Rogers
Click on the pictures to enlarge
BLOG Topics 2013
January Do Protected Seals lead to Depleted Fish Stocks February Prohibition: Profits to Cartels & Increased Violence 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?
Blog Topics 2014
January Will Lake Meade become another Aral Sea February Does Taxing the rich hurt the economy $1 for the day after March The Cause of the Great Depression April Temporary Agricultural Subsidies lead to wealth 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
At midday, the Dow is down 35 points at 17,138 after retreating 58 points yesterday. The downturn is based on a storm of concerns: overvaluation, FED interest rate hike fears and geopolitical fears predicated by the US bombing of ISIS strongholds in Syria. Both Yahoo and Alibaba are gaining back some lost ground and are off session lows. According to Mohamed El-Erian,"It's a scary world out there, but the stock market is exuberant." This has also contributed to the downturn, and in lieu of favorable macro-economic news, profits will be taken off the table at all time highs. But beyond the doom and gloom, El-Erian pointed out that it's a good sign that investors have enough confidence in the economy to be in the market in the first place. "For a long time after the global financial crisis, both companies and individuals holding onto their purse strings. What we're seeing now is money coming back in," he said, pointing to the recent Alibaba IPO as an example. I still stand by my price target of $200 for Alibaba. Alibaba is comprised of 12 different companies and has a market cap close to $250 billion, which is quite astonishing given Apple's market cap (the largest firm by market cap) of $612.1 billion.
Alibaba one day chart
Alibaba (ticker baba) didn't start trading until 11:45 but it was well worth the wait. After the IPO price was upped to $68, it opened at $92.70, went to a high of $99.70 and closed the day at 93.89, up over 25 points for the day. Yahoo, surprisingly, was down over $1 for the day in spite of the fact that it became over $6 billion richer because of the baba IPO (Yahoo owned @@.3% prior to the IPO and sold about 5% which it stated it would return to shareholders). Personally, I think this was quick profit taking and you will see Yahoo continue and upwards move. One analysts on Bloomberg put a 1 year price target on Alibaba of $200 and Yahoo at $70. I don't know if Yahoo will go to 70, but I easily see 50 to 60 and agree with the $200 for Alibaba (it is a Chinese firm that is a combination of Ebay, Amazon and Paypal). I think baba will follow a similar chart pattern of GoPro, where it undergoes a slight correction (profit taking is inevitable) and then off to the races. The Dow was up 13 points for the day to close the week at another record close at 17,280. A national survey says the average price of a gallon of regular gasoline has dropped another 9 cents over the last two weeks, to $3.37, bringing the decline to 34 cents over the last 13 weeks. Jackson, Mississippi, had the lowest price among cities surveyed in the Lower 48 states, with $3.03 a gallon. San Francisco had the highest at $3.79 a gallon. The decrease in gas is a function of lower crude oil prices, a decrease in the price of ethanol and winter gas is cheaper to produce. Ethanol is down because the U.S. Environmental Protection Agency reduced the amount of biofuels that oil companies must blend into gasoline and diesel from 18.15 billion gallons to 15.21 billion gallons.
After being up 100 points on Tuesday, the Dow advanced another 25 points on Wednesday to reach another record high of 17,156 compliments of Janet Yellin and the FED. The FED re-emphasized its catch phrase of "low interest rates for a considerable period" which most analysts are interpreting as the Federal Funds rate (the rate one bank charges another on an overnight loan) will remain at 1/4% or lower until mid 2015. As consumers we like this since it affects all short term loans we would use such as car loans, boat loans, personal loans and HELOC's (Home Equity Line of Credit). This does not have a direct effect on the interest rate on mortgages but does influence it. Mortgage rates are a function of the interest rate on the US governments 10 year bond which is currently at 2.6%. Mortgage rates are generally 2-3% higher than the rate on the 10 year bond.
It looks like the bull is going to continue running. Markets are up in pre-market trading with the Dow indicating a positive open of 55 points. Alibaba interest, make that mania, continues with Jim Cramer of CNBC predicting it could hit $90 its 1st day of trading. One analyst on Bloomberg predicted that Yahoo, now trading at 42, could hit $70 (Yahoo owns about 23% of Alibaba and was my June 30th stock pick when it was $35). I own Yahoo and I probably won't chase Alibaba.
If you look at the web page for the National Institute of Health (a government funded agency), you will see that they refer to themselves as one of the world's foremost medical research centers. So just how are they spending taxpayer dollars? In a recent article in the Washington Times, they are spending $3.9 million of taxpayer dollars to see the effect on monkeys when they get drunk. Seriously? Researchers say that this will "bridge the gap" between studies that focus on rodent and human research. The ultimate goal, according to the Times and Fox news, is it will "allow the alcohol research community to better understand alcoholism". I have a better idea; lets put a GoPro on a college student for the weekend, it'll be a lot cheaper and give better results. After doing a little more research, I was able to find other taxpayer funded projects of what I would call, at the very least, of a dubious nature: $800,000 was spent to construct an outhouse on Mount Denali (it better have a heated seat), $750,000 to the University of NH to study the possibility of capturing and using cow flatulence as energy, $1 million to study why people ride bikes to work, and my personal favorite, $219,000 to teach college students how to watch TV. I just wonder what they were feeding the monkeys to get them drunk, Banana Daiquiris?
The Dow was down the previous few sessions and a number of analysts believed that investors are selling some of their holdings in order to have a bundle of cash for the Alibaba IPO. In case you've been living under a rock, it is predicted to be the biggest IPO ever and it's offering price has been increased by $60 to $66 to currently $68/share. Today on CNBC, Jim Cramer predicted that Alibaba would reach $90 on its 1st day of trading because of all the hype and interest. If all goes well, the IPO date is set for this Friday, September 19. If you look at Yahoo, the Internet giant is one of just two publicly traded companies with a stake in Alibaba and its 22.4 percent share could be worth at least $36 billion at Alibaba's IPO price range of $60 to $66, more at $68. That giant amount -- plus cash on hand of $1-2 billion, only $1 billion in debt and a nice stake in Yahoo Japan -- adds up to a value of about $42 billion, notes Marketwatch. And its business is pretty stable, earning $1.2 billion in profit last year.
The Dow is expected to be down on pre-market trading based on news out of Asia and the Chinese economy. Asian stocks are trading at a 5 week low after disappointing news out of China and this is expected to affect American markets also. Data released on Saturday showed China's factory output grew at the weakest pace in nearly six years in August, while growth in other key sectors also also weakened. There has been strong demand for the greenback as investors positioned for a slightly more hawkish shift from the Federal Reserve this week at its Sept. 16-17 policy meeting. This has driven U.S. Treasury yields higher, with the 10-year popping above 2.6 percent on Friday in its biggest weekly rise in over a year. When the dollar gets strong (see FED Speak), this also affects the price of oil (it lowers it) since barrels of oil are traded in dollars worldwide. All eyes will be on the FED this week as the FOMC (Federal Open Market Committee) meets this week on Tues and announces the result of the meeting Wednesday at two. Investors are hoing for signals that the FED won't raise interest rates until mid 2015. If the FED does raise rates, it will be the 1st interest rate hike in more than 8 years. In the euro zone, however, the European Central Bank is moving in the opposite direction in a desperate bid to rekindle growth and inflation.
After a slow start, the Dow finished the day at 17069, up 55 points. The markets slow start was due to weaknesses in the energy sector. The price of a barrel of oil dropped to under $92/barrel, and energy stocks followed suit. With just 1/3 of the month over, the sector is down 4.1%. The technology sector finished in the lead with Apple (AAPL 101.00, +3.01) fueling the strength. The top-weighted sector component jumped 3.1%, while social media names also did some heavy lifting. Twitter (TWTR 52.91, +2.30) rallied 4.5% following an upgrade at UBS, while Facebook (FB 77.43, +0.76) and Yelp (YELP 82.64, +1.76) gained 1.0% and 2.2%, respectively.
Elsewhere, health care received significant support from biotechnology as the iShares Nasdaq Biotechnology ETF (IBB 274.41, +4.93) jumped 1.8%, which factored into the strong showing for the Nasdaq Composite.
In case you haven't noticed, health care is going up and in ways you may notice (yes you can blame Obamacare). The average deductible on an insurance policy has increased from $1000 in 2006 to close to $2000 in 2014. Your co_payments to your primary care and specialist have increased by 50% on the average and since 2001, premiums have doubled.
August job numbers are in and the market liked what they saw. Analysts were predicting that the economy would be creating 209,000 jobs in August and when the actual figure came in at 142,000, significantly below expectations, the Dow, in pre-market trading, went from negative 60 to plus 7 within two minutes. Why then was bad news for the economy interpreted as good news for the financial markets? There is concern that the FED will raise interest rate prior to mid 2015 (this is what the FED minutes suggest), and if job creation was greater than expected, this could signal that the economy is overheating, which could lead to inflation (more people are working and spending money) which could in turn lead to the FED raising interest rates ahead of schedule. Higher interest rates lead to higher borrowing costs for businesses which in turn lead to lower profits. In other area's, the long term unemployed decreased by 192,000 to 31.2% of those unemployed. As I predicted in January, the Long Term Unemployment rate has decreased every month since the suspension of long term unemployment benefits. The teenage unemployment rate decreased to 19.6% , finally under 20%, the real unemployment rate decreased to 12.6% (the real rate includes part time workers and discouraged workers) and the Labor Force Participation rate remained relatively unchanged at 62.8%. You may be asking, how can unemployment decrease, especially the long term unemployed, and the labor force participation rate remain unchanged. Simple, baby boomers are retiring at the rate of 10,000/day and therefore leaving the workforce. Amongst ethnic groups, the white unemployment rate was 5.3%, blacks at 11.4%, Hispanics at 7.5% and Asians had the lowest rate at 4.5% (think high education and good work ethic amongst Asians)
Yesterday, the Dow finished the day down 7 points but not after it reached an intraday high of 17,157, compliments of the European Unions Central Bank cutting rates. The rest of the day saw profit taking.
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 level 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."
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.