Monday, May 02, 2005

Bill Cara: Capital Markets & Social Equity

Bill Cara: Capital Markets & Social Equity

Another good post by Bill. Bill and I agree or disagree about 50% of the time. One reason for the disagreements is that I look for relatively longer-term moves.

Bill is right that there is not much probability of an inverted yield curve any time soon. The 7 increases by the fed have already worked with rising oil prices to slow economic growth and the risk of high inflation. The ten year treasury yield of only 4.2% with the ten year TIPS at 1.6% leaves us with a modest forecast for economic growth and inflation. It suggest that stock returns will be average a relatively modest 8 or 9% over the next several years. With the market currently down, the return from now until the end of the year should be better than 9%.

The only numbers that offer a real near term threat to the fed are the ones concerning unit labor costs and unemployment claims. The fed may need to continue to raise by a quarter point for two or three more clicks if labor pressures begin to mount. Unit labor costs have risen recently and unemployment claims are very low. Chances are that continued growth in out-sourcing will serve to make more than three increases unnecessary. Free trade with China and others is helping our economy more than is commonly perceived.

More of the same? Low long rates imply that the real estate boom still has legs. Baby boomers continue to buy second homes and echo boomers are buying first homes. Speculators are buying homes for resale; many are buying older properties to be remodeled and others are buying pre-construction resort homes and flipping upon completion. Money is being pulled away from stocks to buy real estate. At the same time, corporations are flush with cash and using it for mergers, acquisitions, increasing dividends and share buy backs.

Warren Buffet keeps advertising that he has 43 billion to invest. He reports that he is close to completion of a 1 billion dollar insurance purchase and that he is looking for several 5 to 10 billion dollar deals. He threatens to pay out a large cash dividend if he can't find a big deal to buy but I find that unlikely. Buffet wants to buy one or more big companies. Buying a few million shares in the market are not enough to effect his total return and word that he is buying any stock will push the price too high.

A break in the congressional log jam could be the catalyst for a good stock market move. It is interesting that Bush has adopted the social security plan offered by a John Kerry supporter and Ted Kennedy confidant.

Bush has left the democrat's with the options of doing nothing to fix SS, raising taxes to fix SS or supporting a plan that he can support. Should the Dems do nothing or propose a tax increase, I believe they will be hurt at the next election. No one else seems to believe the Bush plan has a chance but I do! The good news is that the stock market is ready to do well regardless of the SS outcome!