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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