PortFolio: Ignore the Headlines

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Advice: Income Investing

Taking It to (or From?) the Street

by Roger Conrad
Published September 15, 2009

A year ago, the Lehman Brothers implosion and John McCain’s response to it provided Barack Obama great material to close his case for change. It was the largest bankruptcy in US history--Lehman held more than USD600 billion in assets--but the Republican nominee coughed up the observation the “the fundamentals of the economy are strong.”

Yesterday, in observance of the one-year anniversary of The Filing Felt Round the World, President Obama visited Wall Street to ask the high-flyers to cooperate in their own wing-clipping. This task won’t be as easy as cutting the McCain footage into snappy 30-second campaign ad.

On one hand, recent economic reports suggest we’re progressing from the “green shoots” phase into actual growth. This morning, for example, the US Commerce Dept reported a 2.7 percent month-over-month jump in August retail sales. The headline number includes, of course, the impact of the federal government’s “cash for clunkers” program.

There can be little doubt now that government intervention--by fiscal as well as monetary authorities--has juiced the US economy, just as similar actions in other countries have boosted activity.

Fiscal efforts such as the USD787 billion package in the US and the USD585 billion in China have lifted activity well above what otherwise would have taken place, and central banks have pumped trillions of dollars of new money into the financial system over the past two years in an effort to prevent a depression.

The concern--still, at this point, more important than the specter of inflation--is what happens once these extraordinary measures are removed.

At the same time, there are still problems that require serious attention. As a report from the Bank for International Settlements (BIS), the central banks’ central bank, suggests, all is still not well at the epicenter of the crisis.

The BIS said Sunday that interbank money markets are recovering to levels not seen since early 2008. However, although financial institutions are once again dealing with one another, they remain hesitant to extend credit to businesses.

Banks are benefiting from liquidity injections, but they’re speculating with the largesse, not lending it back to “the real economy.” The incentive structures left over from the pre-Lehman days still guide the banks; rosy quarterly numbers reported by banks are more the result of the revival of equity markets, and such trading profits are notoriously unreliable indicators of long-term health.

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Roger S. Conrad is editor of Utility Forecaster, the nation’s leading advisory on essential services stocks, bonds and preferred stocks. His proprietary safety rating system evaluates the prospects of every significant electric, natural gas, telecommunications and water company, including utility-based mutual funds and foreign utilities. Roger’s penchant for detailed research and his studied insights into utilities markets have garnered him a wide audience of subscribers—not to mention a bevy of industry awards for his perceptive reporting, commentary and investment advice.

He brings the same enthusiasm and intelligence to Roger Conrad’s Canadian Edge, an Internet-based publication devoted to uncovering lucrative investment opportunities in Canadian royalty trusts. Roger is also associate editor of Personal Finance.

He holds a bachelor’s degree from Emory University and a master’s degree in international management from the American Graduate School of International Management (Thunderbird). In addition, he is the author of Power Hungry: Strategic Investing in Telecommunications, Utilities and Other Essential Services and coauthor of The Agile Investor and Market Timing for the Nineties with Stephen Leeb.

Here’s a nice summary of the top economists and financial experts who believe the economy won’t recover unless insolvent banks are broken up--a who’s who that spans the ideological spectrum--and those who appear to want to let theses too-big-to-fail institutions to get bigger. This group includes the names that matter right now: Bernanke, Geithner, Summers.

The BIS concluded in June that “The reluctance of officials to quickly clean up the banks, many of which are now owned in large part by governments, may well delay recovery.” The report added that government interventions had left certain banks believing they were, in fact, too big or too interconnected to fail and that government will inevitably save them.

The Obama administration, the Federal Reserve and governments and central banks around the world have difficult needles to thread on several levels: scaling back fiscal spending programs to restore budgets to balance; unwinding extraordinary liquidity provisions; crafting a regulatory framework that prevents a similar situation from happening in the future.

This Week in Green Shoots

An updated Canada Mortgage and Housing Corp (CMHC) forecast for Alberta is a positive sign for the energy-focused province: CMHC is now calling for 3,000 new single family homes in Calgary in 2009 and 4,000 next year, a 33 percent jump in the forecast from a few months ago. CMHC’s forecast is based on the view that higher average energy prices and more confirmed energy projects should continue to generate healthy immigration to Western Canada.

And Canadian payrolls actually increased by 0.2 percent in August, driven by gains in retail and wholesale trade and in financial services. This, however, is a piece of the good news/bad news genre of economic data to which we’ve become so accustomed lately: Full-time employment actually decreased for the month, but at least jobs were added.

This is further evidence that Canada has weathered this recession better than most because of its conservative financial system, its relatively healthy federal budget situation and its reliance on commodities.

Things on the employment front are better up north, but they’re not all bad here: The Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey for July reveals an increase in hiring by private companies. The rate rose to 3.5 percent of total jobs from 3.3 percent. Companies are still getting rid of more workers than they are hiring, but this shows that the number of hires may finally be rising. Although the hiring rate remains lower than it ever was during the 2001 recession and its aftermath, the increase is another favorable sign.

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