GDP up more then 50% of the estimate (revised up to 0.9% from 0.6%). Consumer spending up 1%. Corporate profits up 0.3% to 1.57 trillion (annualized). The trade deficit shrank to an annual pace of $480.2 billion, the smallest since the third quarter of 2002. Trade's contribution to growth jumped to 0.8 percentage point, four times more than previously estimated.

Let the Harvard guys and Canadians argue about the US economy at stall speed. Sure there is some negatives, unemployment up by 4,00 and 3.1 million receiving benefits (highest since Feb 2004).

All in all, I believe a very good report.
Also, “MasterCard Inc. said consumers are continuing to reach for plastic. The company's shares jumped to a fresh high after the credit card processor said it still expects to see double-digit growth in net revenue this year. While it said gross dollar growth in the U.S. is slowing, purchasing is increasing in other parts of the world. Avoiding a big falloff in consumer spending and strength elsewhere in the world could help the U.S. economy avoid a serious downturn, some economists have reasoned.” (Source: http://biz.yahoo.com/ap/080529/wall_street.html)


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May 29 (Bloomberg) -- The U.S. economy grew more than previously estimated in the first quarter as Americans shunned imports and exports climbed to a record.
The 0.9 percent gain at an annual pace in gross domestic product compares with an advance estimate of 0.6 percent, the Commerce Department said today in Washington. Fourth-quarter growth was 0.6 percent. Separate figures today showed the number of Americans continuing to receive jobless benefits rose to a four-year high this month.

``It's basically like an airplane at stall speed, just skimming above the water,'' Jeffrey Frankel, an economist at Harvard University who is a member of the panel that dates U.S. economic cycles, said in a Bloomberg Radio interview. ``I wouldn't rule out going into a recession'' later in the year.

Trade remains the bright spot for an economy that is likely to slow this quarter as surging fuel and food bills and falling home values force consumers to cut back. The economy will expand just 0.1 percent this quarter as spending slows further, according to economists surveyed by Bloomberg this month.

``We are somewhere in the twilight zone between an expansion and a recession,'' said Michael Feroli, an economist at JPMorgan Chase & Co. in New York. ``We will have a poor pace of growth through the year.''

First-time claims for unemployment insurance rose to 372,000 last week, higher than economists had forecast, from 368,000 the previous period, the Labor Department reported. Those continuing to receive benefits jumped to 3.104 million in the week ended May 17, the highest level since February 2004.

Stocks, Treasuries

Stocks rose, with the Standard & Poor's 500 index up 1 percent at 1,404.2 at 12:40 a.m. in New York. Treasuries slid after benchmark 10-year note yields yesterday climbed above 4 percent for the first time since January. The yields were at 4.11 percent, from 4 percent late yesterday. The dollar rose 0.8 percent to $1.5506 per euro.

Honeywell International Inc., the world's largest maker of airplane controls, said last week it is confident in its full- year forecasts as demand outside the U.S. remained robust. Record oil prices have boosted orders for refining equipment and building projects in the Middle East, India and China has pushed up sales of its energy conservation devices.

This year ``is going to be another strong year in a more difficult environment,'' Honeywell's Chief Executive Officer David Cote said on May 19 at a conference in Florida.

Gains Abroad

Eaton Corp., the world's second-largest maker of hydraulic equipment, reaffirmed its full-year profit forecast on May 28 and projected international markets will grow as much as 6 percent. The company's U.S. markets will expand 2 percent to 3 percent this year.

Procter & Gamble Co., the world's largest consumer-products company, said last month that third-quarter profit rose on increased sales overseas and higher prices.

While a recession is often described as consecutive declines in GDP, the National Bureau of Economic Research, the official arbiter in the U.S., defines contractions as a ``significant'' decrease in activity over a sustained period of time.

The group says that in a recession, decreases would be visible in payrolls, production, sales and incomes, in addition to GDP.

For that reason, the U.S. is probably already ``in a mild recession,'' said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. ``The economy will be pretty flat on its back through much of this year.''

The Bush administration is betting the U.S. will keep growing as the economy benefits from the impact of tax rebates and seven interest-rate cuts by the Federal Reserve since September.
White House View

``We think that it will'' avoid a recession, Keith Hennessey, director of the White House National Economic Council, said in an interview with Bloomberg Television. ``We think that growth is continuing in the second quarter'' and will strengthen in the second half of the year, he said.

Today's GDP report is the second of three estimates. The median forecast of 74 economists surveyed by Bloomberg News was for a 0.9 percent pace. Projections ranged from gains of 0.6 percent to 1.3 percent.

Following a 0.6 percent growth rate in the fourth quarter, the reading was the smallest six-month expansion rate in five years.

The trade deficit shrank to an annual pace of $480.2 billion, the smallest since the third quarter of 2002. Trade's contribution to growth jumped to 0.8 percentage point, four times more than previously estimated.

Consumer Spending

Consumer spending, which accounts for more than two-thirds of the economy, rose at a 1 percent annual rate in the first quarter, the same as estimated last month. The gain was the smallest since the 2001 recession.

The revisions also showed bigger gains in incomes than previously estimated, easing concern that spending will collapse.

Personal income increased at a 5.1 percent annual pace from October through December, compared with an initial projection of 4.2 percent. For the first quarter, income growth was revised up to 4.7 percent from 4.4 percent.

Income growth may slow in coming months as the labor market softens. The U.S. has lost jobs for four consecutive months this year, and payrolls may post another decline for May, according to the
Bloomberg survey.

Inventories Drop

The gain in growth last quarter would have been even larger if not for a reduction in estimates for inventories.

Companies cut stockpiles at a $14.4 billion annual rate, compared with an initial estimate of a $1.8 billion gain. The figures added 0.2 percentage point to growth, less than the previously estimated contribution of 0.8 percentage point.

A measure of total sales, which strips out stockpiles, was revised to a gain of 0.7 percent at an annual rate rather than a 0.2 percent drop. Sales rose at a 2.4 percent pace in the fourth quarter.

There are signs that demand is slowing even more. Auto sales in April slid to a 14.4 million annual rate, the lowest level since 1998, industry figures show.

Spending this quarter will grow at a 0.5 percent pace, the smallest gain since 1991, according to the median estimate in a monthly Bloomberg survey.

Fed policy makers last month trimmed their economic growth projections for this year by about 1 percentage point to 0.3 percent to 1.2 percent.

``A number of participants were of the view that financial headwinds would probably continue to restrain economic activity through much of next year,'' minutes of the Fed's April meeting showed last week.

Construction Slump

Residential construction decreased at a 25.5 percent pace, less than previously estimated, though still the biggest drop since 1981.

Reports this month showed declines in home building will remain a drag on growth. Builders began work in April on the fewest single-family houses in 17 years.

The figures today also included a first look at corporate profits for the quarter. Earnings adjusted for the value of inventories and depreciation of capital expenditures, known as profits from current production, increased 0.3 percent to an annual rate of $1.57 trillion.

Source: http://www.bloomberg.com/apps/news?pid=20601087&sid=aKYWc5_8EEbY&refer=home

In a previous blog, I linked to an article about some quick on the back of a napkin ratio that you could quickly see if you are on target or not. These ratio are just meant as a quick sanity check,

Well, one of the ratios is savings to income. The debate then rages as to whether to include or exclude your house. The only way you could realize that equity in the house is to downsize or move to a less expensive area of the country. Neither one of these are in my near future.

The only way then to tap the equity is through a loan on the equity, which really isn’t taking the equity out but securitizing the load with the equity in the house. Therefore, I don’t include my home equity in the calculation.

However, if you plan on moving in the next few years and will be getting cash between the sale of the old and purchase of the new, I would include that in savings. Also, if you have investment properties, I would include that in savings.

For debt, I do include the mortgage. First, it is a debt. Second you have to live somewhere.

In my net worth calculations, I do include home equity but not cars.

I look at these as quick numbers to get a sense of where I am. If your income jumped recently, then the ratio are very different then they were last year. Maybe, you removed a huge debt and your income is far less now then you needed in previous years.

The idea is to be honest with yourself to see if you are on track. Where are you? Where are you going? And to a less extent, where did you come from?

Right now, I am in the forest and concentrating on my debt to income ratio. You may be further along on the journey concentrating on the savings numbers. Or you might be doing both.

So, I came into work this morning and it was a little slow at 7:00. So I decided to cruise the web a little and found an interesting article on retirement ratios from the Financial Planning Association.

The article talks about looking at three financial ratios. They are all based on income and are savings to income, debt to income, and savings rate. There are 2 tables in the article: one for a 5% real rate of return (think 8% return on portfolio) and 4% real rate of return.

The author doesn’t include home equity into the savings ratio, which I agree with. You have to live somewhere and most of that equity is going to be tied up in that home, so better not to include it.





Anyway the article is at: http://www.fpanet.org/journal/articles/2006_Issues/jfp0106-art6.cfm

So are you on target?

Personally my savings is a half what it should be, I am carrying 50% more debt, but I am looking at saving 12% - 15% this year. I got a lot of work but I got 1 year before I hit the age milestone.

Time to get cracking!!!

In an emergency meeting today, the Fed cut the discount rate by a quarter to 3.25% and approved Chase's purchase of Bear Sterns.

The street is also looking at the Fed dropping the fed funds rate to 2% on March 18th (a full percent).

I personally believe this is the other shoe dropping and this deals directly with confidence in the market.

We moved from credit quality issues (sub prime, CDOs, SIVs, municipal bond insurers, and CDS where the counter party was Bear Sterns, to solvency issues (Countrywide, muni insurers which led to issues in ARS, Bear Sterns), to the fed now flooding the market with liquidity.

I still haven't rebalanced my portfolio as I have been waiting for the market to settle. I believe this is the last shoe to drop and will wait for the dust to settle.

Most of my rebalancing was selling international to invest in my US stock portfolio and my small REITs. I believe this week we will see downward pressure on stocks (especially financials) and downward pressure on the dollar.

Good luck all!!! And cash is king (just not US ).

Source: www.bloomberg.com/apps/news?pid=20601087&sid=asg0H5x.VQ4g&refer=home

I have been thinking of writing this for some time now. I figured today is as good as any day. A lot of you are feeling the pain of the stock market. It’s been down for 6 days and looking to go down again. The Fed lowered rates from, I feel, a position of weakness and not strength. The financials are leading the markets lower (even though yesterday was pretty good for some).

So what do I do now? Bury my head in the sand? Move everything to cash and put it in a mayonnaise jar?

Did you do that when you were creating a budget? No, you took a deep breath assessed things and came up with a plan. When times started getting tough with the budget, did you abandon it? No, you worked through the pain.

So what should we do?

1) Continue to put money in your retirement accounts. Remember, this to shall pass. Dollar cost averaging is a powerful concept.

2) Review your funds. Are some of these dogs that have been under performing for years?

3) Review your allocation.

The best way to illustrate this is the internet bubble. Internet stocks are growth stocks and in the late 90’s just took off. Chances are your portfolio was overweight technology and mostly likely you were taking on more risk then you wanted or intended.

It might make sense to review your portfolio and make sure your allocations are in line to your target allocations. I know for my portfolio, I am currently overweight international and emerging market, while underweight domestic stock and REITs. I reallocate every 6 months and am scheduled to do so in the next 3 weeks.

There are 2 ways to rebalance your portfolio:

1) Buy and sell shares in your accounts.

2) Tweak your buying so you buy more of your underweight and less of your overweight.

Lastly, don’t panic. Come up with a game plan that works in good and bad times and stick with it.

This was the other shoe I was talking about a few posts ago.

“The seven AAA rated bond insurers place their stamp on $2.4 trillion of debt. Losing those rankings may cost borrowers and investors as much as $200 billion, according to data compiled by Bloomberg. The industry guaranteed $127 billion of collateralized debt obligations linked to subprime mortgages that have plunged in value as defaults by borrowers with poor credit soar to records.”

The article continues….

“MBIA and Ambac both said they were surprised by Moody's decision to start a new review, less than a month after affirming their ratings. The flip-flop by the ratings companies is making investors wary of buying stock or bonds of the insurers, Giordano said.
``You have a market that has zero confidence in anything financial right now,'' Giordano said. ``You have the agencies who, in my opinion, have continued to make a comedy of errors. And you have very complex companies that are very hard to understand. It's easy for investors to just sit on the sidelines.'' “
Source: http://www.bloomberg.com/apps/news?pid=20601087&sid=aoQISj8w4Z90&refer=home

I believe that the whole market will be in a panic this week. I believe that the Fed emergency rate lowering is coming from a position of weakness and not strength. I am looking at financials to start bottoming out. Besides a total meltdown of the financial infrastructure, I don’t see much more bad news. I would look at today setting up some lows in the financials and then testing these lows later this quarter.

I am starting to reevaluate my list of financials looking at the strong ones like GS. Not buying yet, but getting closer. I need to make my list and then look at some entry points.

Breaking news....

Fed lowered rates by 75 basis points at 8:20 today. Federal Funds rate at 3.5%.

For those looking to refinance, this week might be the week to do it. Keep an eye on the treasuries.

I expect with today's meltdown, money will be flowing into treasuries causing prices of treasuries to rise and the yields to plummet (proce and yield have inverse relationship, like seesaw). So, you should see mortgage rates down this week.

Merrill reported their earnings and just like Citi, the reports were not good. Merrill had a write off of $15 billion, which lead to a net loss of $9.83 billion. Or, $12 a share.

Since May, the banks and Wall Street have written of over $100 billion since May. Greatest quote - Chief Executive Officer John Thain called the results “clearly unacceptable”'. Do you think?

$11.5 billion was for subprime and $3.5 was related to bond insurance contracts when ACA Capital Holdings Inc’s ratings were sent to CCC (junk). When ACA got slashed, Credit Agricole and CICBC took write downs of over $7 billion combined. The culprit was bond insurers branching out from guaranteeing municipal bonds to getting in the structured finance products, like CDOs (basically a collection of mortgages, loans, and other things).

All the major bond insurers (MBIA, FGIC and Ambac) have been put on notice by the major rating agencies. MBIA just got an injection of $1 billion from Warburg Pincus. So what does this mean, if you have insured muni bond funds, they just got a lot riskier.
“Many CDOs were downgraded by Standard & Poor's and Moody's Investors Service as an increasing number of borrowers fell behind on home-loan payments, sending prices on some of the securities plunging to as little as 30 cents on the dollar.” (Source: Bloomberg)
Citi also took a writedown of $18 billion and reduced the dividend by 40%.
So to recap the last 6 months, we have had write downs of over $100 billion because of subprime, we have had cash enhanced and cash plus funds caution about trading below a $1, we have CDOs write downs that could affect bond insurers and hence muni insured bond funds.
At the moment, cash is king. I am and will continue to stay away from the financials. I think there will be more write offs around CDOs. In other words, I don’t think all the bad news is out there yet.
Source: http://www.bloomberg.com/apps/news?pid=20601087&sid=aWfl7kVEmU_k&refer=home

Source: http://www.tradingmarkets.com/.site/news/Stock%20News/939115/

Today’s headlines from Bloomberg:

1) Retail Sales in US Unexpectedly Fall 0.4%, Capping Worst Year Since 2002
2) Citigroup Posts Record Loss, Cut Payout
3) Dollar Drops to Lowest Since 2005 versus Yen
4) Merrill, Citigroup Get $21 Billion From Outside Investors to Boost Capital

Yes, an additional $21 billion. Citi raised $14.5 billion and Merrill raised $6.6 billion. That brings the Wall Street bail out to $59 billion, mostly Middle East investors.

Citi said it was to shore up their Tier 1 capital ratio. This is the number that regulators look at to assess if a bank can withstand loan losses. With the injection of capital, the Tier 1 ratio will be 8.2%. Citi likes to see it above 7.5%.

So what does this mean? To me, US stock market should continue to be volatile with pressure to the down size. I expect to see more layoffs on Wall Street. Citi was talking about laying off 45,000 a few months ago.

I already heard that bonuses are way down. Looks like BMW and Mercedes dealership will be disappointed.

But I do expect financial to bottom out in the first half. I wouldn’t buy yet. Subprime mortgages are still out there. Also, some of the bond insurers are having issues, even though Berkshire Hathaway announced they were getting into the business.

Bottom line: Cash is king. And, it an excellent time to build up your cash position and your emergency funds.

These are pretty much my opinions and what I think about the current market.

Source: http://www.bloomberg.com/apps/news?pid=20601087&sid=anjGWhqi0PSE&refer=home

Top Treasury money market funds have yields at about 4.58%, but top performing prime money market funds have yields of 5.18%. What gives? Aren’t all money market funds created equal.

Alas, the answer is no.

To achieve the performance over treasuries, these prime money market funds, also called enhanced or plus cash funds, invest in asset backed commercial paper and SIVs.

What is a SIV? It is a fund that borrows short and buy long term securities at a higher rate. Well, there are 2 risks with SIVs: solvency and liquidity. Solvency has to deal with risk of the long term debt failing below the value of the short term debt (read subprime mess). Liquidity deals with outflows to the short term borrowers coming due before the long term assets pay (read credit crunch).

Everyone knows that a money market account won’t go below a dollar, right? GE Asset Management fund (an enhanced cash fund) hit $0.96.

Other headlines include SunTrust buying SIVs for a money market account from Cheyne Finance that defaulted last month. Bank of America is planning on providing as much as $600 million to fund debt from SIVs. Blackrock sent a letter to shareholders specifically stressing that “enhanced” and “plus” cash funds were not money market accounts. (http://literature.blackrock.com/eStudioContent/public/BRLF_Cash_Mgmt_082007_Client_Lttr.pdf?PubDate=/1_8_2008_BRLF_Cash_Mgmt_082007_Client_Lttr.pdf)

So what does this mean? The higher the yield, the higher the risk. But, I am not suggesting that money market accounts are going to be imploding all over the place. I do expect that most financial institution will put capital into the funds to maintain the $1 price.

So what should you do? If you are in an enhanced or plus cash fund, you should see what type of investments the funds are. For the AAA money market funds invested in treasuries, you should have no worries.

You could also park your money in 3 month CDs. They are FIDC insured up to $100,000 (I believe) and earn around 5%. If you need the liquidity, you might want to review the holdings of your money market account.