Wednesday, June 25, 2014

Wednesday, June 25, 2014

Good Morning America, How Are You?

Yesterday was a good day in the markets for yours truly.  After trading, I took my mother back home. 

While I attempt to make everyday a good day, yesterday was a nice day with rain purifying the air and taking the dust down.  The sun came out at sunset.  The air warmed, and the evergreens (pine, fir and spruce) provide a clean fresh fragrance.  It seems to me the plants rejoice in the rain after a dry spell.  It was a magical time, as the sun reflected off the river's waters and into my front room.

I can hardly believe it is nearing the end of June already.  Where did the days go? 


Small Business Outlook

I suspect our leaders in the Federal Government and the State of Washington realize that small business provides the bulk of employment in the USA.  I know President Obama talks about the need to help small business, but the rhetoric never seems to have much positive effect. 

In my opinion, the leaders are misguided when they raise the minimum wage.  Small business cannot pass the costs along to the consumer like the big businesses can due to customers just turn to big companies like Home Depot and WalMart.   The results of rising minimum wage in a stagnant economy is less jobs where most of the population is employed - small business. 

As a small business owner, I study as much information as I can on banks and interest rates, since our cash flow (and control of expenses) depend on our approach to short term cash flow needs. 

Small banks (such as in our area) depend on deposits and savings.  (Large banks due the same, but are much less dependent on deposits and savings of the average joe.) 

Banks borrow short and lend long.  They take checking and savings deposits.  These are very short term debts (that for the most part today pay no interest to the "loaner" the bank's customers).  They in turn lend the money out in long-term debt such as mortgage or shorter term loans to small business.  Most of the money lent is tied up up, and the small banks run the risk of losing money if unexpected changes occur between short term money from customers and long-term debt they lent out. 

If you are a small business owner, you should be concerned with banks at this point (especially small banks).  They are in a rate risk situation at this point where interest rate risk is caused by the mismatch between asset and liability maturities.  The prolong period of low interest rates (nearly zero on savings) causes duration risks - the money lent at 4-5% on 30 year mortgages and the possibility long term rates going much higher than the currently are, and that the banks have to start paying more to the people they borrow from.   

We saw this kind of risk in 1980s with the savings and loan crises.  Of course, the financial situation is much different today than it was then. Yet the same "duration risk" arises when interest rates rise quickly from the current low levels.  Yes, interest rates are low right now, but they are expected to rise.

Are small banks prepared for interest rates to return to a more normal environment?  I contend that small banks are at risk, and that worries me.  Banks must be forward-looking and focus on mitigating this risk now.

However, our small bank's managers have no idea how to even discuss this issue.  The head quarters in Walla Walla, Wa. may know, but they are not providing "training?" to the small business they service in rural areas of Washington State.  Since our small bank is not a publically traded company, they do not report public information that may provide insight into a specific bank's duration risk.

The FDIC www2.fdic.gov is helpful when looking at banks, but provides little (or no) help with the duration risk of small banks.  They do provide valuable information on an FDIC insured bank.  The small banks in our area are not on FDIC problem bank list.

Summary: 

·         Stocks on Tuesday were way up then way down.  Ultimately the DOW and S&P posted very modest losses (Dow -.7% and S&P .6%). 
·         Economic news at 7:00 AM PDT provided some strength.  As I suggested yesterday, the market would open down and likely fill the gap.  Well it did that, and then continued on up until around 9:30 AM PDT when the markets lost ground and the down turn gained momentum until near the close.
·         Wall Street Journal posted an alert that a Syrian fighter jet struck targets in Western Iraq, and that seemed to coincide with the selloff.  The more likely scenario is that the markets reached a high for 2014, and after consolidation, profit taking took hold.  If that is true, the market may turn back up today.  However, do not bank on it.  The markets have a propensity to trade 3 days down in a bull market, and rebound on the third day. (Look at daily charts to observe that phenomenon.  However, about the time a gambler bets on such patterns, they get clobbered.)
·         The USA and Europe are still fighting deflationary forces set in motion by the collapse of Lehman.  I find it hard to understand what tools the Federal Reserve and the European Central Bank (ECB) have left to maneuver.  If anything, anything at all negative happens, there is no room to maneuver when interest rates are essentially zero.
·         Grant Williams had another Seuss inspired ditty on the Fed. Let's see what he had to say now. There isn't a bubble in equity prices, nor housing, nor bonds, there will be no surprises.  The Slip 'n' Fail Mutts have their eyes on the ball, There's no need to worry, there's no need at all.  But wait just a second here, what if they're wrong? What if they've had no idea all along?  The tech bubble fooled them, the market got caned, remember when Ben said subprime was "contained"?  These people are clueless I'll venture to say, Not that they'll listen (to me anyway).  But time after time when they face a new bubble, They never once think they're the cause of the trouble. - Grant Williams.  (If you don't know of Grant, Google him and his blog, and sign up for his free newsletter.)

·         I expected the market to open down, and not make a move to close higher. (Only time will tell.)  Instead, this is still a profit taking day, which should make the $$$ move higher as well.  Money is not moving to gold, so "real fear" has not entered the equity markets, I think.  

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