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Jill Schlesinger is the Editor-at-Large for CBS MoneyWatch.com. Previously she was the Chief Investment Officer for an independent investment advisory firm and is a former options trader on the Commodities Exchange of New York. E-mail Jill your thoughts at jill.schlesinger@cbs.com.
I used to live in Rhode Island, which is why I still take an interest in what's happening there. Little Rhody has gotten crushed in the recession. The last vestiges of its manufacturing base have been vaporized and the contraction in housing have contributed to the state's dismal employment situation.
You'll note from this seal, that "hope" is the motto of RI, as in "I sure do hope the unemployment rate starts to drop soon!" Today, Rhode Islanders poured themselves a little coffee milk to celebrate: according to the Bureau of Labor Statistics' Regional and State Unemployment rate report, RI unemployment fell for the first time in nearly three years, dropping by a 0.1% to 12.9% in October.
Yes, RI still sports the nation's third highest unemployment rate behind Michigan and Nevada and one month shouldn't be cause for real celebration, but just for the moment, let's grant Little Rhody a small victory.
When is a loss good news? When you're General Motors and the loss could have been worse. Call me a cheerleader or a concerned citizen, but I have been rooting for GM throughout the financial crisis.
This morning, GM announced that it lost $1.2 billion in Q3. Yes, we'd like to see profits, but the news is movement in the right direction. Pessimists might note that it's a lot easier to get back on track when you wipe out a boatload of your outstanding debt and the taxpayer pumps billions of dollars into the endeavor. True enough, but GM had some good news on that front too–the company said that intends to re-pay the $6.7 billion US taxpayer loan by the middle of 2011. Here again, the more cynical will remind you that those loans represent something like 13% of the $52 billion of the government's infusion over the past year, still, I'd prefer to get the money back, wouldn't you?
What's next for GM? During the earnings call, CEO Fritz Henderson said that the company is seeing signs of "stability" in the in the auto sector and that vehicle sales should increase from about 10.7 million vehicles annually today to 11-12 million next year. The company has also seen some success in China and is trying to address problems in Europe, especially after backtracking on the sale of Opel.
GM's progress will be predicated on taking small steps like today's news. For some reason, there are people out there who want GM to crash and burn, as some lesson in union negotiation or some kind of libertarian claptrap. Considering that we have fronted the bill on both GM and Chrysler, I'd prefer success.
Image by Flickr User lacie babenco, CC 2.0
I should have expected the massive stock market rally–after all, at the end of March, I had heard that the guy who I consider one of the great "contra-indicators" (let's call him "Mr. Wrong") was predicting a steep decline to Dow 5000. Before you brush aside that notion as nonsense, remember that at that time, we were still worried about the implosion of the financial system.
But when I heard that Mr. Wrong was predicting massive riots in the streets and falling equity prices, I forced myself to consider the bull case for stocks. I had made the mistake of betting against massive liquidity once before–in 2002-03, I remained underweight in risk assets for too long and paid the price. I'm pretty sure that Mr. Wrong is making the same mistake and here's why: there still remains deep pessimism over the recovery and the stock market.
As stocks make new highs, I'm not saying that there will be a straight line up (hard to imagine that when we're up 60%), but there are still far too many bears like Mr. Wrong who are clinging to their case without considering the alternative. Just because global markets have rallied doesn't mean that there isn't more room on the upside. Mr. Wrong is always so intent on proving his thesis, it prevents him from seeing that monetary and fiscal policy are working; manufacturing is in full-fledged recovery mode due to export growth; and job loss is tapering off. The re-flation trade is on Mr. Wrong, and chances are, it won't reverse until you capitulate and dive back into risk assets.
Image by gwire, CC 2.0
I love this chart from this morning's Wall Street Journal. It's a quick comparison between today and 1983, which was the last time the unemployment rate was 10.2% (and the last time I was considered a formidable power forward on the basketball court).
The unemployment rate's the same, the stock market bounce is close and Michael Jackson was in the headlines, but after that, lots has changed 26 years hence. Specifically, stocks are more expensive, the cost of borrowing is lower, inflation is nowhere to be found (at least for now) and Americans owe a boatload more money.
The last part of that laundry list disturbs me. While everyone was hyper-focused on the jobs report, later in the day, the Fed said consumer credit fell $14.8 billion in September (a 7.2% annual rate). It was the eighth straight monthly credit decline.
Of course this makes sense–for two decades, Americans binged on cheap credit and now find themselves in a pickle. But the overall debt level remains stubbornly high. Until household debt as a percentage of disposable income regresses to the mean, there's likely to be a continued drop in demand for new borrowing. It also means that the average American is going to be digging out of this mess for a long time.
We knew that the Fed wouldn't change interest rate policy, but as my favorite teacher Mr. Maloney used to say, "words matter!" The Fed surely gets mired in word-smithing, but as the economy comes to a critical juncture, can't the central bankers speak in plain English?
Just tell us something like this: "the outlook has improved, but we're concerned that the fragile player still needs an injection of steroids to play in the big game." Sorry if you don't like baseball metaphors, but we're in the midst of the Fall Classic, so why not?
Maybe then, the Fed could tell us that the player was a high-performing athlete before we juiced him and he'll eventually get back to his top form, but in order to get there, we need to wean him off the stuff over time. When will our player be able to go it alone? My best guess is that we can expect to see the real deal on opening day of 2010…that is, Monday April 5th.
Image by Flickr User Muffet, CC 2.0
Time will tell whether Berkshire Hathaway's acquisition of railroad operator Burlington Northern Santa Fe is a money-maker, although I would be the last one to doubt Warren Buffett.
The deal is not just momentous in terms of size, but it also includes the first ever 50-for-1 stock split of its smaller, class B shares (for the record, Class A trades at approximately $100,000 per share.) The B shares fetch over $3,300 each today, which means that after the split, the cost of one share will be around $65. I remember my brother in-law asking me about his holding in Berkshire Hathaway some years ago. My response was that owning the shares was akin to having a fairly inexpensive value fund in your portfolio.
So, the deal is the largest ever for Berkshire and Buffett said it was an "all-in wager" on economic recovery, which made me chuckle. This guy is what broadcasters like to call a bite machine! Here are some of my favorite Buffett quotes:
Image by Flickr User dok1, CC 2.0
After telling the world that assuming your personal financial conditions allow for it, the time is ripe for a home purchase, I started to actively look about a month ago. The process has been an excellent way to experience the highs and lows of the real estate market.
We found a smart and savvy agent, whose greatest asset was that she had entered the real estate market during a persistent period of weakness. She started our first outing by asking what we were looking for and then she said, "I'm going to spend the first half of the day showing you where the market is, so you can refine your search."
We quickly realized that no amount of on-line research can compare with physically walking through a home. After further narrowing our parameters, we found a few excellent options. As someone who was in the business of executing transactions on a daily basis, here's where the process got interesting.
One afternoon, we saw a house that we liked. While there, the owner's agent said something that made me stop in my tracks. "We've gotten a lot of interest in the house, so the owner is considering RAISING the price." I looked at him and said, "Did it occur to you that you're finally getting action on the house because it's within striking distance of market conditions?" This is the moment when we should have walked away, but we didn't.
Here's the seller's history of the house:
The closest comp that I could find was 15% lower than the most recent price. Sure, the comp wasn't perfect, but it's what the appraiser would use, so why not roll with it?
Our opening bid on the house was a big enough number that the seller knew we were serious. Seller then countered with a drop of 3.85% from his offer. We increased our bid to within 12% of seller's asking price, which was a little bit higher than the nearest comp. Here comes the moment of maximum insanity: seller INCREASES his counter by $5,000.
"We're done," I said to our agent. She agreed and we have since moved on to other options. This must be the very definition of how not to sell a house. The big take away: as soon as you understand that the seller is unmotivated and/or crazy, walk away.
Image by Flickr User TheTruthAbout…, CC 2.0
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