Zaiteku, American Style, or Everyone's A Closed-End Mutual Fund Now
As Mark Twain said (or someone said he said), history might not repeat itself, but it does rhyme. Back in the late 1980s, when it was the Japanese stock market's turn to "be different this time," Japanese nonfinancial corporations were augmenting their earnings from operations by playing the stock market. Why not? The Bank of Japan was hemorrhaging cheap credit, enabling these corporations to pick up shares, in effect, on inexpensive margin. The BOJ's cheap credit increased the demand for Japanese shares, driving up the prices of these shares, the increased prices of previously-purchased shares by Japanese corporations boosted their profits, which, in turn, helped rationalize stratospheric Japanese P/E ratios. In effect, Japanese corporations were leveraged closed-end mutual funds.
Look in the past and you will see the future. Or look at the front page of today's Wall Street Journal and the Lex Comment in today's Financial Times and you will see that American corporations today are doing what Japanese corporations were doing 12 years ago. Stock portfolio gains helped Microsoft and Intel beat their Street estimates. SmithKline Beecham has a venture capital fund. Delta Airlines boosted its earnings from the sale of its stake in priceline.com (I wonder when Delta sold in that priceline.com as of January 19 was down 62.2% from its 52-week high set back at the end of April 1999.) These corporations may not have borrowed specifically for the purpose of buying equity in other companies, but funds are fungible. The borrowing that they did to buy capital equipment or carry inventories might have come from retained earnings had they not used those earnings to buy stock in other companies.
I'm certainly not opposed to corporations dabbling in the stock or venture capital markets. That's between senior management and the stockholders. All I'm trying to point out is that the Fed's provision of cheap credit is stoking stock prices in a variety of ways, American-style zaiteku, being the latest example. Ten years ago, it was said that America was in danger of becoming a nation of hamburger flippers. Wrong! More like a nation of stock flippers.
"The Fed Would Be 'Foolish' Not To Focus On Rising Energy Prices..."
So reported BridgeNews today of comments made by a Ms. Rae Rosen, New York Fed senior economist. Truer words may never have been spoken by a Fed representative. Goods shippers, be they of the land, air or water variety, are raising their rates because of higher energy prices. Yesterday, it was announced that people "shippers" also are raising their rates for the same reason. Major airlines announced a $20 round-trip surcharge because of increased costs of jet fuel. Not to worry. I'm sure that the "there's no inflation" propagandists will redefine the core CPI to exclude airfares - or any other price that dares to increase.
As an aside, Ms. Rosen also was reported by Bridge to have said that Alan Greenspan has "done everything but stand on his head" to indicate that higher interest rates are on the way. Ms. Rosen is a breath of fresh air from the Fed in terms of her forthright speech. I wonder how long before she is required to take a workshop in official vacuous Fedspeak.
November Trade Deficit Sets New Record
The trade deficit widened to $26.5 billion - a new record - in November. The trade deficit in the first eleven months of 1999 sums up to $244.6 billion, a sharp increase from a trade gap of $164.3 billion in 1998. Nominal exports of goods and services increased 0.7% in November, while imports of goods and services rose 1.4%. Excluding non-monetary gold, exports were nearly flat. The 21.0% drop in exports of civilian aircraft exports also helped to raise the trade gap. Despite an increase in oil prices, the sharp drop in quantity led to a 4.1% decline in oil imports. The inflation adjusted trade gap of goods widened to $36.4 billion in November from $36.2 billion in the prior month. Exports of goods, after adjusting for inflation, grew 2.1% in November, following a 2.1% drop in the previous month. Imports of goods, after adjusting for inflation, grew 1.6% in November vs a 2.9% increase in previous month. Based on the October-November data, an improvement of the fourth quarter trade gap is tied to more favorable exports in December. From details about countries, the trade gap vis-à-vis Japan and China narrowed to $6.4 billion and $6.5 billion, respectively, after record high readings in October. Exports to the Pacific Rim countries advanced nearly 10.0% on a year-to-year basis during November, following a 1.4% increase in October. The continued growth in imports reflects the strength of the U.S. economy. The burgeoning trade gap was one of the problems Chairman Greenspan cited last week as one of the sectors of supply and demand imbalance in the economy.
Jobless Claims Continue To Trend Downward
New jobless claims dropped 39,000 during the week ended January 15 to 272,000, taking the 4-week moving average to 292,000. Continuing claims fell 129,000 to 2.009 million during the week ended January 8. The continuing claims figure is the lowest since December 3, 1988. The Labor Department noted that the insured unemployment rate dropped to 1.6%, the lowest reading since 1971, when the Labor Department began tracking these numbers. The demand supply imbalance in the labor market was another troublesome factor Chairman Greenspan cited in his speech last week.
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