Small Business Outlook
I should make a section today that
discusses Jane Yellen's testimony yesterday.
Instead, I'll comment on interest rates.
I find myself wondering how much
the elected representatives in the Senate and Congress know about interest
rates. The questions to Dr. Yellen seem pretty
ludicrous from most of them. The
Democrats asks questions that seem to come from Paul Krugman. The Republicans have a seriously hard time
asking anything; rather blathering about nothing in most cases.
·
The economy continues to make progress toward
maximum employment and price stability.
·
Real gross domestic product (GDP) is estimated
to have declined sharply in the first quarter. The decline appears to have
resulted mostly from transitory factors, and a number of recent indicators of
production and spending suggest that growth rebounded in the second quarter,
but this bears close watching.
·
The housing sector, however, has shown little
recent progress.
·
Recovery not yet complete.
·
Hourly compensation is falling, and the labor
participation rate is improving buy well below what one would expect.
·
Inflation is below the FOMC's 2% target, and
that means interest rates need to remain low.
·
Q1 GDP was an temporary downturn, but the
committee expects growth over the next several years.
·
considerable uncertainty surrounds our
projections for economic growth, unemployment, and inflation.
·
On Monetary Policy - promote maximum employment
and price stability. Therefore, FOMC
will remain accomodating. Interest rates
will remain low for a considerable period of time.
·
Financial Stability: Investors are reaching for yield. This could increase vulnerabilities in the
financial system to adverse events.
However, asset price increases remain generally in line with historical
norms. Lower value junk bonds (corporate
debt) " appear stretched and issuance has been brisk. Accordingly, we are
closely monitoring developments in the leveraged loan market and are working to
enhance the effectiveness of our supervisory guidance."
Comments:
Dr. Yellen's words are not
quantifiably measurable. FOMC committee
itself seems to be more undecided on a whole what to improve and how to do
it. She is trying to walk the line
between increasingly divergent camps at the Federal Reserve, and these comments
reflect that. Look at this:
"If
the labor market continues to improve more quickly than anticipated by the
Committee, resulting in faster convergence toward our dual objectives, then
increases in the federal funds rate target likely would occur sooner and be
more rapid than currently envisioned. Conversely, if economic performance is
disappointing, then the future path of interest rates likely would be more
accommodative than currently anticipated."
This un-measurable and undefined
wording if one is planning for a small business. The is way different that the autopilot
policy being followed over the last few years.
Look for large moves in equities and treasuries when economic news is
released; news such as labor utilization, jobs reports, housing and so-on.
She seems to be retreating from a
uber-dove to more hawkish. She repeated
in her comments over and over the signs of economic strength outside
housing.
Yesterday as the testimony came
out, the stock market went from positive to negative.
She is beginning to recognize as
she stated in her section on financial stability that cheap money drives
investors to investing in riskier assets in order to improve yield. "recognizes
that low interest rates may provide incentives for some investors to ‘reach for
yield,' and those actions could increase vulnerabilities in the financial
system to adverse events."
She went on to say she would not
raise rates to stop bubbles. She wants behind the scenes work by regulators or
targeted cease-and-desist actions rather than action of interest rates.
As a small business owner I will
do the following.
1.
Eliminate debt as quickly as possible.
2.
Any investments in stocks and bonds will be
liquidated, and turn to cash or cash equivalents. I suggest interest rates will rise much
sooner than any main-stream media is going to suggest.
3.
The dollar will appreciate against the Euro, but
depreciate against our businesses largest supplier - China. The Fed appears to be ahead of the European
Central bank in terms of how close it is to hiking rates.
4.
I'm not a believer in gold as a store of value
for small business. It is not liquid,
and the cost of storage eats up any almost any appreciation in value except
with gold's price hits irrational exuberance.
Gold goes up real fast, goes down even faster, and usually languishes
for years before spurting up again. You
cannot run a small business on that kind of flux; at least yet.
Summary:
·
Once again, the market followed the basic
pattern I laid out yesterday before the opening. The market opened up, fluctuated in a very
narrow range until Dr. Yellen's pre-testimony paper was released. then the
market took a nose-dive (however, not a crash).
At 9:00 AM the price recovered in S&P 500 and DOW. Overall, the market could not make up its
mind.
·
China's Q2 GDP rose. This is the first time in 3 quarters that the
Chinese economy has improved.
·
Dr. Yellen will continue her testimony
today. There is no expected fireworks.
·
PPI report came in higher than expected, but it
was mostly energy related. Demand was
up. The PPI is showing little trend in
my opinion. If there was a trend, it
would have to be considered very mildly up.
·
The market will open way up. News out of Europe and China could drive the
market higher after the initial reaction down after Dr. Yellen's remarks. However day-traders, a large opening gap like what will happen is
usually followed by a move down attempting to close the gap. It usually leads to choppy price action.
·
The number 1 thing to remember as traders or
investors. No one can tell when the market
will correct, or how much it will correct by.
In hindsight, there will be many newsletter authors and other pundits
that declared they called the high. BS -
is my take. Investing is about taking
the long term view of assets and diversifying those assets. Trading is about going with price within your
time frame. In trading, the importance
of the time frame cannot be stressed enough.
What looks good for a trade on a 5 minute chart, may be a terrible trade
on a 1 hour chart. The same can be said
for swing-trading (where the trade lasts a few days or a couple of weeks).
