Surprises, bailouts, and the future costs

For all that happened this week, the market ended relatively unchanged. On Tuesday, the Fed cut rates (again, surprise, surprise), from 1% to a range of 0 - 0.25%. Okay, so the cut wasn't a surprise, but the scale of it surely surprised me. Going into Tuesday, all the talk was that they would cut by 50 basis points. That in itself would have been big, slashing rates in half. But dropping it all the way to zero....

The stock market reacted very positively out of the box, skyrocketing 360 points to end the day up 4.2%. But it didn't last. Ongoing arguments about auto maker bailouts, TARP overhauls, general unrest and distrust in Washington, and other "noise" combined to take away all of Tuesday's gains over the successive 3 trading sessions. The week ended down, albeit very slightly (about 50 points on the Dow).

Inflationary pressures are easing, with overall US consumer prices showing a record decline for the second month in a row. Energy prices are obviously a big part of that, with gasoline in most parts of the country now selling below $2 per gallon. In fact, the price of gasoline declined 29.5% in November alone. Core CPI, which tracks changes in consumer prices without food & energy, was unchanged last month for the first time in 25 years (according to the Wall St. Journal).

The auto maker bailout looks like it is going to happen. This afternoon the White House announced a $17.4 billion package for Chrysler and GM. Ford has stated that it does not need short-term assistance. However, the deal requires that the companies show that they are "viable" by March 31st. If they cannot, the loans are immediately called and the funds must be returned. I would not expect that this is the end of the auto maker discussions. Much, if not all, is going to be left to the incoming administration to work through.

The government is doing what it deems necessary to prevent further economic erosion. And much of what is being done is indeed necessary, both psychologically and financially. The issue we have with it is that at some point the tap must be shut off (but when?), and more importantly, the bill is going to have to be paid (but by whom?). Paying for what has been done is not likely to be easy. It will likely result in higher taxes, not just for "the wealthy", but across the board. Moreover, the drag of taxation and the expense of the government's current activities could weigh on the economy for some time to come.

If you have any questions, feel free to contact me at nsnodgrass@evanstonadvisors.com

Normal is being redefined

This was a week that could have been worse, given all the data that came out. Sure, we had a rough day on Monday, with the Dow giving up 680 points, but with all the negative information coming into the market this week, I see the relative lack of volatility (well, relative to recent history at least!), as a somewhat positive sign.

And here's an even more positive sign. When I logged on to the online version of the Wall St. Journal today, the highlighted headline wasn't about the jobs data (533,000 fewer jobs in November, the highest job losses since 1974). The focus article wasn't about Chrysler hiring bankruptcy counsel (they did), the arguments over a proposed auto industry bailout, or even anything regarding finance or economics. The title of the article? "How Southern Football Reflects Nation's Shift".

Which brings me to the topic of this week's blog posting. "Normal" is being redefined. In discussion with a number of clients we've explored this idea, and the more I see articles like the one referenced above, the more I believe that the concept of what is "normal" is changing. The realignment of expectations is occurring faster than I expected. What I mean by this is that what was previously considered "out of the norm" is now considered almost commonplace. For example, the Dow Jones Industrial Average climbed 259 points today, representing a 3.1% move. Six months ago that would have been newsworthy. In the first eight months of 2008, only 5 trading days had moves of 3% or more. Since September 15th, we've had 31 that met that qualification (more than half of the trading days).

And people aren't just readjusting "normal" in terms of the market. People are becoming accustomed to the idea of one of the weakest economic cycles we've seen in years. They don't like it, but they're becoming used to the idea. A month or so ago, the fear of how bad it might get caused people to panic. Today, people still aren't comfortable, but the fear has largely been replaced by a sense of "well, it's coming, I can't avoid it, so I'll just have to deal with it".

In some ways, this is healthy. Dealing with it changes habits. The lavish night out with the spouse may have occurred more frequently last year, but given the current environment, frugality is more common. Spending habits get changed, credit gets used less, or at least more judiciously. This is the healthy part, at least for the individual. For the economy, it makes things worse, at least in the short run. My reduction in spending is someone else's reduction in income.

So where does this realignment take us? Toward an end to the mess. Maybe not quickly, maybe not without bumps along the way, but it gets us closer to the end. When the volatility is presumed to be normal, then eventually the fear subsides, the emotion is quelled, and eventually, the volatility itself will be lessened. I've been wishing for a series of 50 point days back to back - when we see those, I believe we can begin looking for the old norms to come back into the market.

But in the meantime, I suggest taking a look at what "normal" means to you. Have you changed your concept of "normal"? Are you doing it inadvertently, or is it something you are purposely doing in reaction to the current environment?

We welcome your comments and questions. Please feel free to contact me at nsnodgrass@evanstonadvisors.com