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Overall, economic reports were positive today showing tame inflation, strong housing starts and a big drop in initial claims for unemployment benefits. The reports helped to bolster the dollar, bonds were basically unchanged, and stock prices struggled in negative territory throughout the session. Mixed earnings reports and disappointing forecasts for the balance of 2005 outweighed the positive economic news and pushed stock prices lower for the day.

A drop in energy costs pulled the Consumer Price Index down 0.1% in December, however, excluding food and energy, core consumer prices moved up 0.2% for the third straight month. For the year as a whole, consumer prices have moved higher by 3.3% (please note two-year Treasury Notes only yield 3.25%, a loss against inflation) and the core-rate is higher by 2.2%. Though the core-rate appears low, the gains in the core-rate of inflation are the biggest since 2001 and double the rate in 2003. The trend favors an increasing rate of inflation.

In a separate report the Labor Department said initial jobless claims fell 48,000 to 319,000 in the week ending 1/19. The report was better than the forecast of 345,000 initial claims. The Labor Department made their weekly announcement a day early due to the presidential inauguration scheduled for tomorrow.

The Commerce Department said housing starts surged in December by 10.9%, but remember this follows a decline of 12% in November. I see the two numbers as a “wash” and would suggest the month to month volatility is not something to use as a basis for a large investment position (short or long) with the homebuilders. If you shorted the Ryland Group because of the big decline in housing starts in November (and with the thought that mortgage rates “should” be moving higher) you got killed the last two weeks with the stock moving from $54 to almost $64 in the last ten trading days.

Though the Fed is determined to raise short-term interest rates, long rates remain stubbornly low. In the face of the Fed talking about continued increases for the target Fed Funds Rate, the Mortgage Bankers Association reported the 30-year fixed mortgage rate fell six basis points to 5.64%. (This can only happen because they say there is no inflation.) The MBA also said its application index rose 16.2%, with the purchase index higher by 14.0% and the refinance index higher by a larger 19.1%. Refinancing is starting to show some signs of life! I would guess that many consumers ran up their credit cards to pay for Christmas, so now it’s time to re-fi the house to pay off the credit cards…again! These low interest rates seem to be getting more and more people in trouble with their debts…debtors will have to pay the piper at some point! What happens when there is no equity left in home prices to help facilitate consumption?

For now, long-term interest rates are staying low. This morning bond prices began to sell off (higher interest rates/yields) with the reports of the firming labor market and booming housing starts, but it didn’t last for very long. Once the CPI numbers came out, bond traders were put to ease because inflation is perceived to be “well contained.” For now it looks like the Fed will continue with their “measured” increases to short rates that will work to curb some of the hot money speculation, but they still need to keep long-term rates low to keep housing and the economy moving.

Currency exchange rates didn’t change much today. The U.S. Dollar Index gained 0.23% to 83.65 with the euro at $1.3002 and the yen at $0.9759. The Australian dollar, U.S. dollar and British pound strengthened today with weakness coming from the Canadian dollar, euro, yen and Swiss franc. I find it interesting that the global consensus is still calling for the dollar to move lower, but at whose expense? The European authorities are pointing the finger at the Asian economies to step up to the plate and help shoulder the burden of a falling dollar, but Japan is saying they don’t want to change their stance in weakening the yen in order to remain competitive with China in their export businesses.

From a Bloomberg article, “Currency sales by the BOJ limited the yen’s advance versus the dollar in the past three years to 22%, compared with a 47% appreciation in the euro versus the dollar. European Central Bank Chief Economist Otmar Issing said on January 11 that Asian nations should play a greater role in the dollar’s adjustment.” Today we heard the response from Japan. “The euro gained the most in three weeks against the yen and rose versus the dollar after Bank of Japan Governor Toshikio Fukui suggested Japan will resist pressure from European officials for stronger Asian currencies.” They agree the U.S. dollar is destined to be “adjusted” lower because of the enormous imbalances with the federal budget deficit and the ever-growing trade deficits. The battle is now between the other nations to see who will allow their currency to appreciate without intervention. The G-7 finance ministers and central bankers will meet in London on February 4 and 5 in an attempt to come up with a fair way to let the dollar down easy.

I said earlier that stocks struggled in the red throughout the day, but they really got hammered in the last hour of trading. The NASDAQ Composite was down 15 points with an hour to go, and the index ended up losing 32 points for the session to close at 2,073. In similar fashion, the Dow Industrials dropped 88 points to 10,539 and the S&P 500 fell 11 points to close at 1,184. Motorola tumbled 7% after saying first-quarter earnings would be lower than analyst’s estimates, J.P. Morgan missed the target for fourth-quarter earnings, and General Motors net income fell to $630 million ($1.11/share) from $1 billion ($2.13/share) for the same quarter a year ago. Net income fell by $370 million while top line revenue rose 5.1% to $51.3 billion. They attribute the lower bottom line to health-care costs, losses in Europe, Asian competition and other unidentified cost increases. The way I see it they are simply not competitive with their high overhead structure. Toyota has been taking market share from GM, but just wait ‘till China starts selling their cars here in the U.S. To make matters worse for GM, Standard and Poor’s Rating Service, which cut the automaker’s debt rating to one step above junk bonds (BBB) on October 14, is now saying they need to review the “appropriateness” of the outlook as competitive pressures increase. Would you have ever thought GM’s debt paper would be reduced to “junk” status? Something to think about…

On the eve of President Bush’s inauguration for a second term I would like to make a few comments via the BBC World News. I don’t want to get real heavy-handed on political issues, but it sure looks like Mr. Bush and America as a whole have lost face with the international community. You probably won’t hear these things in the mainstream U.S. media, so here’s a few snippets from the first BBC article: 

Global Poll Slams Bush Leadership

“Negative feelings for Mr. Bush extended to Americans as a whole.

More than half of people surveyed in a BBC World Service poll say the re-election of US President George W Bush has made the world more dangerous.

Only three countries - India, Poland and the Philippines - out of 21 polled believed the world was now safer. The survey found that 47% of the 21,953 people questioned now see US influence in the world as largely negative, and view Americans negatively as well. None of the countries polled supported contributing their troops to Iraq.

'This is quite a grim picture for the US,' said Steven Kull, director of the Program on International Policy Attitudes (PIPA), which carried out the poll with GlobeScan. 'Negative feelings about Bush are high and are generalizing to the American people who re-elected him.' On average across all countries, 58% of people - and 16 out of 21 countries polled - said they believed Mr. Bush's re-election to the White House made the world more dangerous.

Traditional allies:

Most negative feelings were found in Western European, Latin American and Muslim countries. They include traditional US allies such as Germany, France, Britain and Italy as well as neighbors Canada and Mexico. The only European country to buck the trend was Poland, one of the new members of the European Union, which gave the thumbs up to both President Bush and the US. Turkey topped the anti-Bush list, with 82% believing his re-election would be negative for global security."

Now please take a look at a few snippets from the next BBC article. When you do, please put yourselves in the shoes of someone NOT living in the USA. 

“No Expense Spared at Inauguration” by Kevin Anderson, BBC News website, Washington.

“With an estimated price tag of $40m, the three-day celebration that is President Bush's second inauguration will be the most expensive ever. The lavish dinners, parties and fireworks began on Tuesday and will continue through his swearing-in on Thursday, followed by a parade and nine official inaugural balls. The cost will be paid by individual and corporate donations, while the city of Washington is being asked to pay for an estimated $17m in security costs.

Some have criticized the expense, questioning the propriety of a flashy celebration as US troops are dying in Iraq and South Asia still recovers from last month's deadly tsunami. The overt criticism of an inauguration is unusual, but a Washington Post poll found that a majority of Americans would prefer a smaller, more subdued event.

Big Money Donors: On Wednesday evening, President Bush will host three candlelight dinners with the individual and corporate donors who helped pay for the festivities.

The list of donors is full of big-name corporations and top Bush fundraisers - the campaign's 'pioneers,' who raised $100,000, and the 'rangers," who raised $250,000.

Political reform advocates say the corporations stand to benefit from Mr. Bush's proposed energy policy, his efforts to reform immigration and proposals to partially convert Social Security, a state pension scheme, into private investment accounts.

Defence giants Northrop Grumman and Lockheed Martin each gave $100,000 to the inaugural committee, and oil companies ChevronTexaco and Exxon Mobil each gave $250,000. Both Coca-Cola and its rival Pepsi gave $100,000, and the Marriot and Ritz-Carlton hotel groups each gave $250,000. Those who contribute $250,000 will receive tickets to a number of events over the celebration, including the swearing-in ceremony, the inaugural parade, and an exclusive luncheon with President Bush and Vice-President Dick Cheney."

You can draw your own conclusions based on the info from the BBC. There is untold human suffering happening all around the world and we end up spending $40 million to swear in the president for another four years. It is no wonder why we are losing respect from our foreign neighbors. Me thinks we as Americans need to devote some serious time to pray for our country and pray that our leaders get some wisdom in a big hurry!

Have a Thoughtful Evening!

Mike Hartman

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