Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM Wednesday, May 4, 2005: The
Fed raised short-term rates again yesterday.
The Fed doe not raise long-term rates because
they're affected by the supply and demand for money and right now, there's more
money chasing few opportunities. So long-term rates are staying low. This means
it remains a good time to borrow money -- e.g. for real estate investments.
There are two schools of thought on the economy.
First, growth is slowing. Confidence is ebbing. This school is talking about
the "R" word -- recession.
+ Second, the economy is growing, but inflation is rearing its ugly head.
first view is containing the stockmarket.
The second view is obsessing the Fed.
the Fed thinks and says obsesses the stockmarket. When the Fed reduces rates,
that signals it's prodding the economy to expand and the stockmarket to rise.
When the Fed cuts rates, that signals it's prodding the economy to contract.
can see the Fed's impact on the market from this two-minute chart from yesterday
of the Dow:
What caused the gyration is that the Fed screwed up. The
Wall Street Journal explained,
repeated a line from its March 22 statement that "pressures on inflation
have picked up in recent months and pricing power is more evident." But
it omitted a sentence from March 22 that said higher energy prices had yet
to feed through to consumers.
As it did after
its four prior meetings, the Fed said inflation expectations are "well
contained." But in an unusual error, the statement first issued at 2:15
p.m. EDT didn't include that sentence. Wall Street analysts at first pounced
on the omission as evidence of even greater inflation worries, noting a recent
University of Michigan consumer survey found higher expected inflation.
a central bank removes a phrase that long-term inflation expectations remain
well contained from a statement, we should take notice," J.P. Morgan
Chase initially said in a note to clients.
The Fed corrected
the statement at around 4 p.m. A Fed spokeswoman said the sentence was in
the actual draft statement that FOMC members discussed in their meeting. The
omission occurred inadvertently when Fed staff were preparing it for public
release, she said. The omission was noticed by a Fed staffer and corrected
immediately, she said."
The Wall Street
Journal addressed the issue of longer-term rates:
have puzzled over why the yield on the 10-year Treasury bond is lower now
than it was when the Fed started raising rates last June. Yields, which reflect
in part expectations for where the federal-funds rate will be, normally rise
when the Fed tightens. Fed Chairman Alan Greenspan in February called low
yields a "conundrum," suggesting that he thinks the federal-funds
rate would go higher this year than the 3.75% the futures market now expects.
His remarks helped send the Treasury yield from below 4.2% to above 4.6% during
the winter, but it has since returned to below 4.2%.
markets are always a little ahead of the Fed," said Peter McTeague,
interest-rate strategist at RBS Greenwich Capital. "It's less of a
conundrum why rates are here because the trajectory of the economy is different
from what it was a few weeks ago."
market is telling us the risk of recession is higher than the Fed thinks,"
Kevin Hassett, economist at the American Enterprise Institute, told a panel
discussion hosted by the institute. Inflation isn't the risk that the Fed
seems to think it is, Mr. Hassett said, because it reflects global, not U.S.,
demand for oil and other commodities.
Data in the
next eight weeks, including Friday's jobs report, will help determine whether
the Fed or the bond market is right. Continued softness could force the Fed
to reconsider its hawkish stance and its "measured" pace.
The use of "measured"
has been a source of growing debate inside the central bank. Some officials
believe the phrase limits their flexibility, and gives investors a false sense
of certainty about the Fed's actions. Most officials feel it gives the markets
useful information but acknowledge that as inflation pressures mount and the
federal-funds rate approaches a more normal level, the sentence will have
But the word
survives in part out of worries that dropping it would elevate expectations
of an imminent shift to bigger rate increases. The Federal Reserve Bank of
New York's trading desk asked bond dealers last week if they expected "measured"
to change, and how they would interpret such a change.
Bank of America
chief economist Mickey Levy said that rather than scrap "measured,"
the Fed can "just use more and more descriptive language to describe
economic and inflation conditions and let that more colorful language supersede
the importance of the term measured."
said minutes of the Fed's March 22 meeting "suggest measured could mean
anything. ...They watered down the meaning of it, but the fact they left it
in there probably comforts some people in the markets."
is the most precious investment: When you have a job, your priorities
are clear. When you ease back (my dilemma), your priorities are less clear.
Example: If I buy two apartments for rent, how much time will they take from
tennis and afternoon naps? I'm looking at a real estate syndicate investment.
Yesterday 30 megs of exhibits arrives. That's a lot of reading. My erstwhile
partner leaves his investments to the "professionals" and aggressively
Every morning when I worked at a real job (managing my company) I'd draw up
the five most important things I had to do that day and concetrate on doing
them. Now my priorities are less clear -- the family, the new house, capital
preservation, exercise, freedom from aggravation.
This subject requires
more thought. Any ideas?
The world's worst investment: I remain fascinated
by RV buses. These come from the Marathon Coach site. Click
here. Marathon takes Prevost buses and makes them into high-end RV buses,
costing between $1 million and $2 million. This business is booming. Last year,
Marathon's sales rose $20% to $126 million, which is a lot of money (but not
a lot of pricey buses).
On the outside, all the buses look the same. But on the inside...
Yesterday I wrote that RV buses were the absolute worst investment. My friend
Frank Derfler corrected me.
I see that you never bought a big new boat! (Forty or fifty feet or beyond)
I have. It makes your RV look like T-Bills. Particularly because the "holding
costs" on the RV are minuscule compared to the boat. The expenses eat
you alive from the moment you buy a boat and then again when you sell it.
Corrosion, slip fees, cleaning, cleaning, cleaning. The support costs never
end and then you get nothing for it. At least you can park the damn RV for
a reasonable cost (okay, not in Manhattan) and it doesn't deteriorate as fast
as a boat. The RV might get five miles per gallon, but the boat gets two gallons
Intelligence of the Man
An elderly man in Florida had owned a large farm for several years. He had a
large pond in the back, fixed up nice; picnic tables, horseshoe courts, and
some apple and peach trees. The pond was properly shaped and fixed up for swimming
when it was built.
One evening the
old farmer decided to go down to the pond, as he hadn't been there for a while,
and look it over. He grabbed a five gallon bucket to bring back some fruit.
As he neared the pond, he heard voices shouting and laughing with glee.
As he came closer
he saw it was a bunch of young women skinny-dipping in his pond. He made the
women aware of his presence and they all went to the deep end. One of the women
shouted to him, "We're not coming out until you leave!"
The old man frowned,
"I didn't come down here to watch you ladies swim naked or make you get
out of the pond naked."
Holding the bucket
up he said, "I'm here to feed the alligator."
Intelligence of the Woman
A woman and a man are involved in a car accident on a snowy, cold
Monday morning; it's a bad one.
Both of their
cars are totally demolished but amazingly neither of them are hurt. God works
in Mysterious ways.
After they crawl
out of their cars, the woman says, "So you're a man. That's interesting.
I'm a woman. Wow, just look at our cars!
left, but we're unhurt.
This must be a
sign from God that we should meet and be friends and live together in peace
for the rest of our days".
man replies, "Oh yes, I agree with you completely, this must be a sign
The woman continues,
"And look at this, here's another miracle.
My car is completely
demolished but this bottle of wine didn't break.
Surely God wants
us to drink this wine and celebrate our good fortune."
Then she hands
the bottle to the man.
The man nods his
head in agreement, opens it and drinks half the bottle and then hands it back
to the woman.
The woman takes
the bottle and immediately puts the cap back on, and hands it back to the man.
The man asks,
"Aren't you having any?"
The woman replies,
"No. I think I'll just wait for the police...."
This column is about my personal search for the perfect investment. I don't
give investment advice. For that you have to be registered with regulatory authorities,
which I am not. I am a reporter and an investor. I make my daily column -- Monday
through Friday -- freely available for three reasons: Writing is good for sorting
things out in my brain. Second, the column is research for a book I'm writing
called "In Search of the Perfect Investment." Third, I encourage
my readers to send me their ideas, concerns and experiences. That way we can
all learn together. My email address is .
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