Barron’s July 5th lead article in The
Trader began with: “The most coveted talent on Wall Street right now
might be an ability to tell a pause from a peak. Just as investors
gained assurance that the Federal Reserve would only gradually wean the
market from its free-money diet, Wall Street found reason to worry that
the economy itself might be slowing to a similarly ‘measured’ growth
pace.”
On July 2nd June’s job creation was reported at
112,000, which was less than half the median forecast. Unemployment
stayed at 5.6%. Of course neither the economy nor employment grow in a
straight line, and the jobs figure will be subject to revision. For the
first six months of 2004, job creation was 1.3 million, the largest
six-month gain in four years.
Sales at Wal-Mart, Target and GM slowed. The slowing of
those sales may be attributed in large part to recent record gasoline
prices that have the effect of a tax. More money paid for gasoline
results in less money in the consumer’s pocket. Less money in the
consumer’s pocket results in less money to be spent at Wal-Mart. Weather
was also blamed by Wal-Mart.
The strong economy has slowed a bit.
The stock market continues to wallow in lethargy. The
Dow Jones Industrial Average is minus 0.18% for the year to June 30th.
The S&P 500 index began the year at 1111.92 and as of this writing it is
1112.82 – flat. It is still down more than 25% from its 2000 peak.
Inflows into mutual funds were $564 million in May, down from $23
billion in April.
It is interesting that Bill Gross, head of Pimco, the
world’s largest bond fund managers – almost $400 billion - bought $35
billion of US Treasury bonds and other high quality bonds before the
Federal Reserve’s ¼% increase in the federal funds rate on June 30th.
Gross, for about a year, had been an extremely outspoken bond bear and
is widely listened to as a result of his record and the size of the
fund. He obviously thinks that inflation will not be the near-term
problem many think.
In Bill Gross’ monthly Investment Outlook, July 2004,
it is pointed out that total credit market debt (all sectors) as a % of
U.S. Gross Domestic Product is now higher (299%) than in the 1929 era
(270%).
I would like to quote one of many interesting passages
in his letter: “And then there’s the Fed. Wednesday’s interest rate hike
is just the beginning of a journey as to who knows where or when. Not
only our housing market, but the financed-based profits (40% of all
profits as shown below) of American corporations are at risk. This in
turn speaks to the stock market, P/E ratios, and wealth/paper-based
prosperity, that depend on the continued low cost of excessive debt
taken on in recent years.”
“While Greenspan ‘speak’ points towards gradual and
measured hikes to return to a more neutral interest rate policy, he as
well as other global central bank chieftains must acknowledge that
‘neutral’ in a levered global economy is a yield shrouded by fog and
fraught with uncertainty.”
For the Pimco Web site and Bill Gross’ monthly
Investment Outlook go to www.pimco.com and then select US.
The question for the economy, interest rates and stocks
– Is it a Pause or a Peak?
John W. Hamilton
July 8, 2004
