The Tycoon Report

Double Your Money?

Monday, May 14, 2007 | Jason Jovine

Double Your Money?

It was a warm Tuesday morning several years ago, and I was sitting in my apartment in Queens, New York.  My brother, stepfather, girlfriend (at the time), and many friends and former colleagues were in Manhattan (upper and lower).

I took a shower and got dressed to get ready to go to the nearby school to vote.  That day in New York was a day to vote for local politicians.  Maybe mayor as well as other city politicians.

When I arrived at  the school (Public School 26), I showed the lady my voter ID card before I signed in, and then I heard a message on her little radio that she kept next to her that said that a plane had hit a building in Manhattan.

I thought it was just the normal media hype and ignored it.  After I voted, I went back to my apartment and saw what was going on by watching the news.  If you haven’t figured out by now, I am talking about 9/11, folks.

Unless you have been in a cave somewhere, I am sure that you have heard this story over and over again, so I don’t want to rehash it.  What I do want you to do is to take a very close look at what happened to the stock market pre- and post- 9/11.

The Aftermath

On September 10, 2001, the Dow Jones Industrial Average (“DJIA”) closed at 9,605.1.  When the stock market reopened on September 17, 2001 after the longest closure since the Great Depression in 1929, the DJIA stock market index fell 684 points, or 7.1%, to 8920.7, its biggest ever one-day point decline.  By the end of the week, the DJIA had fallen 1369.7 points (14.3%), its largest one-week point drop in history.  U.S. stocks lost $1.2 trillion in value for the week.

As you all know, the market closed at 13,326.22 this past Friday!  It has been hitting many new highs lately.  If you look at the market in historical terms, it goes up and goes down (just like all things in life), but the great thing is that over the long term, it trends higher.

Despite wars, plagues, and any other nightmare you can think of, the U.S. economy may get clobbered, but has been resilient and comes back.  This economy is reflected in the U.S. stock market.

Although I believe that you should be diversified, no other asset class compares to the returns of the stock market - commodities and real estate included.

The Rule of 72

The rule of 72 is a rule of thumb that tells you how long it will take for you to double your money given a certain rate of return.  Take a look:




As you can see, if you are getting a 3% return (e.g. a bank), it will take you 24 years to double your money.  If you are getting 6% (e.g. a bond), it will take you 12 years to double your money.  Now if you are getting a 12% return, it will only take you six years to double your money.  The math is simple:  72 divided by 12 equals 6.  Are you with me?

Guess what, folks?  The average return of the stock market has been about 12% per year.  This is despite the terrorist attacks, diseases, impeachments, etc.

Where do you think your money needs to be?

What will you do after the next catastrophe happens?  Will you sell and get out of the market, or will you buy more?

Until the next time, folks, spend your hard-earned money wisely.




Jason Jovine
Contributing Editor
The Tycoon Report



Tuesday, May 15

8:30 - CPI: Consensus 0.5%, Core CPI: Consensus 0.2%

Big Picture: The core rate of consumer inflation reached a decade high of 2.9% yoy in September and has eased off to 2.5% yoy in March -- in line with the Fed's 'comfort zone'.  The sticky prices for shelter and medicine and tuition will continue to hold firm as flat yoy core commodity prices offer no pressure.  Energy prices provided the drop in overall CPI in late 2006.  In the big picture, it's aggregate demand which provides the price direction as sub-potential (near 3%) growth is easing the core inflation pressures over time.  The Fed more closely watches core PCE prices as an inflation guide, which stands at 2.4% yoy.  Overall CPI reached a 14 year high of 4.7% yoy in Sept '05 given the push from energy prices and now stand at 2.8% yoy.

Implications: The Consumer Price Index is a measure of the price level of a fixed market basket of goods and services purchased by consumers.  CPI is the most widely cited inflation indicator, and it is used to calculate cost of living adjustments for government programs and it is the basis of COLAs for many private labor agreements as well.  It has been criticized for overstating inflation, because it does not adjust for substitution effects and because the fixed basket does not reflect price changes in new technology goods which are often declining in price.  Despite these criticisms, it remains the benchmark inflation index.  CPI can be greatly influenced in any given month by a movement in volatile food and energy prices.  Therefore, it is important to look at CPI excluding food and energy, commonly called the "core rate" of inflation.  Within the core rate, some of the more volatile and closely watched components are apparel, tobacco, airfares, and new cars.  In addition to tracking the month/month changes in core CPI, the year/year change in core CPI is seen by most economists as the best measure of the underlying inflation rate.


Wednesday, May 16

8:30 - Housing Starts: Consensus 1485K, Building Permits: Consensus 1520K

Big Picture: Housing starts reached a 9-year low in January 2007 after hitting a 33-year high a year earlier.  The plunge has been a significant drag on growth, as further risk surrounds the defaults coming from sub-prime borrowers.  As mortgage rates rose, underlying demand and speculative investment faded as sales declined, inventory built and strong price growth turned to declines.  The correction for the inflated housing market was expected (and needed) but with a more gradual decline.  Fixed long term mortgage rates now in the low 6%'s and downward price pressure on homes leave sales finding some stability as a return to positive construction waits for the huge supply of unsold homes to be thinned.  National Assoc of Realtors expects the bottom in housing starts in Q2 2007.

Implications: Housing Starts are a measure of the number of residential units on which construction is begun each month.  A start in construction is defined as the beginning of excavation of the foundation for the building and is comprised primarily of residential housing.  Building permits are permits taken out in order to allow excavation.  An increase in building permits and starts usually occurs a few months after a reduction in mortgage rates.  Permits lead starts, but permits are not required in all regions of the country, and the level of permits therefore tends to be less than the level of starts over time.

9:15 - Industrial Production: Consensus 0.3%, Capacity Utilization: Consensus 81.5%

Big Picture: Industrial production is weakening with soft manufacturing demand as weather conditions provided volatility over the first quarter through utilities output.  A strong December, and March gains in manufacturing output, fight off the declines to leave 6 month growth back in the black after declines in early 2007.  Weak factory orders provide the risk.  Slowed vehicle and construction related output is added to by weaker capital investment and the wide range of industries affected.  We believe the falloff will only be considered a mid-cycle stall a few quarters from now, but concern is growing.  Weaker business confidence in the economy is creating the slowing in capital investment.  Capacity use stands at 81.4% -- below the level historically consistent with inflationary pressures -- as manufacturing shows a growing amount of excess capacity at 80.1%.

Implications: The index of Industrial Production is a fixed-weight measure of the physical output of the nation's factories, mines, and utilities.  Manufacturing production, the largest component of the total, can be accurately predicted using total manufacturing hours worked from the employment report.   One of the bigger wildcards in this report is utility production, which can be quite volatile due to swings in the weather.  Severe hot or cold spells can boost production as increased heating/cooling needs drive utility production up.  In addition to production, this monthly report also provides a measure of capacity utilization.  Though the rate of capacity utilization is seen as a critical gauge of the slack available in the economy, the market does not completely trust this measure.  Capacity is very difficult to measure, and the Fed essentially assumes that growth in capacity in any given year follows a straight line.  One can therefore predict the capacity utilization rate quite accurately based on the assumption for production growth.  The 85% mark is seen as a key barrier over which inflationary pressures are generated, but given revisions to these data and the difficulties with capacity measurement, the 85% mark should be viewed cautiously.  It would be appropriate to look for corroborating inflation indications from commodity prices and vendor deliveries.


Thursday, May 17

8:30 - Initial Claims: Consensus 310K

Big Picture: Initial claims follow a subtle upward trend as the aberrations are watched for clues on the labor market and economy.  The slow upward trends in both initial and continued claims reflect some slight loosening in the labor markets.  Claims provide a nearly real time read on layoffs and the labor market, as the low 4.5% unemployment reflects the broader read of layoffs and hiring.

Implications: Initial jobless claims measure the number of filings for state jobless benefits.  This report provides a timely, but often misleading, indicator of the direction of the economy, with increases (decreases) in claims potential signalling slowing (accelerating) job growth.  On a week-to-week basis, claims are quite volatile, and many analysts therefore track a four week moving average to get a better sense of the underlying trend.  It typically takes a sustained move of at least 30K in claims to signal a meaningful change in job growth.

10:00 - Leading Indicators: Consensus 0.0%

Big Picture: Six monthly declines in 2006 reflect the weaker economy in late 2006 as declines made up two of the first three months of 2007.  The 6 month growth fell to a -0.8% low in July but has firmed up since.  Over the last 16 years the index correctly signaled the 1990 and 2001 recesssions while providing a false signal during the 1995 soft-landing.  The recession alarms go off when the cumulative 6 month decline exceeds -1% amid a string of three or more consecutive monthly declines.  No recession warning bells yet.

Implications: The Leading Indicators report is, for the most part, a compendium of previously announced economic indicators: new orders, jobless claims, money supply, average workweek, building permits, and stock prices.  Therefore, the report is extremely predictable and of very little interest to the market.  Though this series does have some predictive qualities, it is a common criticism that it has predicted "nine of the last six" recessions.

12:00 - Philadelphia Fed: Consensus 2.0

Big Picture: There are many regional manufacturing surveys, and they tend to be ranked in order of timeliness and the importance of the region.  The Philadelphia Fed's survey is first each month, actually coming out during the third week of the month for which it is reporting.  Several smaller surveys are then released before the Chicago purchasing managers' report on the last day of each month. 

Implications: These surveys can be of some help in forecasting the national NAPM - particularly the Philadelphia and Chicago surveys which are more closely watched due to their timeliness and the fact that these regions represent a reasonable cross section of national manufacturing activities.


Friday, May 18

10:00 - Michigan Sentiment (preliminary): Consensus 87.0

Big Picture: The push to a two-year high in January is largely tied to the drop in gasoline prices as the recent equity drop and renewed fear about recession and sub prime mortgage lending leave the April index at a seven-month low.  Fears are partly offset by the strong labor market.  The expectations component is up 12% since the August high in gasoline prices.  The University of Michigan survey is significantly smaller (500 phone calls) than the Conference Board's, includes a longer outlook (for expectations) as questions are focused on the household compared to the business heavy CB survey.  The index far better tracks the consumers' mood than spending habits better indicated through interest rates and  income growth.

Implications: The Michigan index is almost identical to the Conference Board Consumer Confidence index, though there are two monthly releases, a preliminary and final reading.  Like the Conference Board index, it has two subindexes -- expectations and current conditions.  The expectations index is a component of the Conference Board's Leading Indicators index.


Source:  www.Briefing.com