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Friends and Colleagues

Will they or won’t they? Here is one economist’s view on what the Fed will do with the Fed Funds rate when they meet next Tuesday.

Scott Anderson, Ph.D., Senior Economist at Wells Fargo Economics shares his thoughts on what the Fed should do, what the Fed will do, and why.

Per Dr. Anderson, here is why the Fed should not lower rates on Tuesday:

The Federal Reserve has been fulfilling its mission of being the “lender of last resort” to institutions who are having short-term liquidity issues but are deemed to be solvent under normal market circumstances.
However, the Federal Reserve should not be increasing liquidity to the overall U.S. economy, because it is not needed at this time.
Lowering the Federal Funds rate will do just that.

Well Dr. Anderson, why is it not needed at this time?

The U.S. economy is not booming, but it is not collapsing either.
Retail sales, industrial production, consumer confidence and early reports on the manufacturing and service sector point to an economy that is growing at a low but stable rate.
U.S. retail sales, while weaker than expected in August, still came up positive vs. the prior year
Initial unemployment claims came in lower during the first week of September.
U.S. industrial production continued to expand (albeit slowly) in August according to the Federal Reserve.
Industrial capacity utilization remained very high in August, not showing any signs of weakening.

Dr. Anderson’s view on why the Fed will lower rates anyway on Tuesday:

The fact that consumption is slowing down combined with the sub-prime issue could hit investors’ confidence, causing them not to invest or consume due to their pessimism.
Per Dr. Anderson, the only reason to lower rates is for the psychological effect it could have on financial markets, specifically on the commercial paper credit market.

More from Dr. Anderson on why he believes the Fed lowering rates on Tuesday is a bad idea:

Wall Street believes that what is good for them is good for the rest of the U.S. economy.
A Fed Funds cut will not bring back the U.S. housing market.
A Fed Funds cut will not bring back the commercial paper market.
If the Fed cuts the Fed Funds rate and the housing market remains depressed, then the markets will ask for another rate cut, and another, and another, and another…and then what?
The sub-prime mess resulted from bad investment decisions combined with a prolonged period of very low interest rates. The only way to move ahead is to flush out the losses, not to bring back more of the same.

Well, there you have it….one man’s view in advance of next week’s meeting.

Whatever happens, we remain convinced that the only thing that is constant in life is change…..and so our story continues.

As always, stay tuned…….

THOUGHT FOR THE WEEK

Diversity and Mutual Respect….

This week marked the beginning of the Jewish High Holy Days with the observance of Rosh Hashanah (the Jewish New Year) to be followed next Saturday by Yom Kippur (the Day of Atonement). This is intended to be a period of introspection for people of the Jewish faith to reflect on what they have done in the year gone by, what wrongdoings they need to atone for, and what they want to change in their lives for the year ahead.

Today is also the start of Ramadan, the holy fasting month of the Muslim religion. During Ramadan, Muslims do not take food or water from dawn to dusk. They devote their time to worship and studying the Quran. They seek the blessing of the Almighty for peace and prosperity of the Islamic Ummah (nation of the believers) and give alms to the needy.

All religions have unique observances that are not universally understood by people of other faiths. In our global, multi-cultural society, we have many areas of religious/cultural ignorance and prejudice that can serve to divide us rather than unite us.

Despite our differing rituals, there are some common threads throughout our religions that bind us together.

For example, the central writings of many of the world’s religions share the following fundamental religious theme:

· Baha’i: “Desire not for anyone the things you would not desire for yourself.” Gleanings, from the Writings of Baha'u'lah

· Buddhism: “Treat not others in ways that you yourself would find hurtful.” The Buddha, Udana-Varga 5.18

Confucianism: “Do not do to others what you do not want done to yourself.” Confucius, Analects 15.23

Christianity: “In everything, do to others as you would have them do to you; for this is the law and the prophets.” Jesus, Matthew 7:12

Hinduism: “This is the sum of duty: do not do to others what would cause pain if done to you.” Mahabharata 5:1517

Islam: “Not one of you truly believes until you wish for others what you wish for yourself.” The Prophet Muhammad, Hadith

Judaism: “What is hateful to you, do not do to your neighbor. This is the whole Torah; all the rest is commentary.” Hillel, Talmud, Shabbath 31a

It is so easy to dislike or distrust the stranger…the one who is different.

As our world grows smaller, we each have a responsibility to learn more about one another in order to develop the understanding that will promote our communication.

In the weeks ahead, may each of us reflect on our inner biases. May we each commit to learning more about the ways of “the stranger”, and in doing so, may we each be a source of understanding that will promote mutual respect for one another.

Have a good week.

David

David Rosenthal, MAI
President & CEO

Curtis-Rosenthal, Inc.
5959 W. Century Blvd., Suite 1010
Los Angeles, CA 90045

Offices in Los Angeles, San Francisco and Newport Beach

Proudly serving the California Marketplace since 1983

310-215-0482 ext. 225
drosenthal@curtisrosenthal.com
www.curtisrosenthal.com

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BACK

Friends and Colleagues

“The sky is falling….The sky is falling!!!”……Or is it?

This week we take a look at some of the panic-driven headlines in the news, as well as some fundamental economic analysis.

First, some sobering input on the capital markets and the commercial real estate market from the Wall Street Journal:

Credit Crunch Takes Its Toll, Wall Street Journal (08/01/07) P. B11; Chittum, Ryan; Dunham, Kemba J.

“Commercial property prices have been soaring in the past three years or so thanks to easy lending terms and cheap debt, two elements that are beginning to run in short supply. The boom has been fueled by the commercial-mortgage-backed securities markets, which permits banks to issue mortgages and then pool them and sell them as bonds. In recent weeks, though, skittish buyers of these securities have shied away from the market or have begun demanding substantially higher yields out of concern that transactions were becoming too risky. This has led to a shakeout in which fewer bidders are jockeying to acquire buildings and the market for collateralized debt obligations has slowed. As a result, commercial property prices could begin to move south and the number of commercial real-estate firms going private may slow in the months ahead.”

Next, some alarming news reported today in Bloomberg:

Aug. 1 (Bloomberg)

“European stocks declined after Bear Stearns Cos. stopped investors from pulling money out of a hedge fund and Macquarie Bank Ltd. of Australia said two of its funds may post losses as the U.S. sub-prime market rout spread.”
“We are starting to see contagion spread and that is making investors worry,” said Jonathan Monk, who oversees $1.3 billion of U.S. equities at Aerion Fund Management in London. “Things will get worse before they get better.”
“Macquarie, Australia's largest securities firm, tumbled the most in five years in Sydney after saying investors in some of its high-yield funds may lose as much as 25 percent of their money.”
“Bear Stearns, manager of two hedge funds that collapsed last month, stopped investors from pulling money out of a third fund. The risk of owning corporate bonds soared today.”

On the other hand, here are some sound-bytes on the health of the economy from Scott Anderson, Ph.D., Senior Economist of Wells Fargo Economics:

· “We received a full plate of economic data this morning that should help quell the “sky is falling” mentality on Wall Street.”

· June’s personal income growth rose a solid 0.4%, with wage and salary growth jumping 0.5%, which is strong enough to push year-on-year wage and salary growth up 6.7% over the past year.

· Net of inflation, disposable income rose 0.3% last month, and is rising at a respectable 3.1% annual pace, which should provide consumers with sufficient ammunition to sustain their spending in the 2nd half of the year.

· As was widely anticipated, personal spending took a break in June, with the spike in energy and food inflation clearly sapping the consumer’s willingness to grow real spending over the past three months.

· The consumer confidence index jumped from 105.3 in June to 112.6 in July, the highest level in nearly 6 years.

· Inflation moderated further in June as the Core PCE deflator dropped to 1.9%, below the top end of the Fed’s stated target range of 1.0 to 2.0%. The 3-month moving average is running at an even tamer 1.4% on an annualized basis.

· Housing price declines continued to intensify, down 2.8% in the 20-city composite. However, in May, home prices actually rose in Charlotte, Denver, Seattle, Portland, Cleveland, Boston, Dallas, and Atlanta, while they fell again in Los Angeles, Chicago, Minneapolis, San Francisco, San Diego, Washington D.C., and Phoenix. Dr. Anderson expects home prices to continue to fall on average through much of 2008.

Dr. Anderson’s conclusion:

“There is little…to alter our view that the U.S. economy is likely to continue to grow at a moderate pace, 2.5 to 2.7% range over the next few quarters. Expect the Fed to hold the Fed funds target rate steady at 5.25 at their August meeting.”

And finally, from an interesting article in Bloomberg on US Treasury sales and the Federal Deficit:

U.S. to Sell $22 Billion in 10-Year, 29 3/4-Year Debt (Update3). By Brendan Murray, Aug. 1 (Bloomberg)

The U.S. Treasury said it plans to sell $22 billion in longer-term debt at quarterly auctions next week, the smallest total since 2001, as job and income growth help narrow the budget deficit.
Tax collections are rising as corporate profits increase and hiring keeps the jobless rate close to a six-year low.
“The federal government's fiscal balance continues to improve as individual and corporate tax receipts surpass expectations,” a committee of bond market dealers and investors said in a letter to Treasury Secretary Henry Paulson.
The current administration forecasts the budget will be balanced by 2012 for the first time since 2001.
The budget gap has narrowed so quickly that economists such as Chris Wiegand at Citigroup Inc. suggested the Treasury may consider restarting a debt buyback program. Buybacks were suspended in April 2002 as the deficit widened, eventually reaching a record $413 billion in 2004.
The Bush administration projects the U.S. budget deficit will total $205 billion in the fiscal year ending Sept. 30 (down from the record $413 billion in 2004).
Stephen Stanley, chief economist at RBS Greenwich Capital Markets in Greenwich, Connecticut, predicts the deficit will drop to $140 billion next year.

So…is the sky falling?

Are economic fundamentals sound?

Where will all of this lead us?

As always, the future remains to be seen…..so stay tuned…..

THOUGHT FOR THE WEEK

Sunscreen….

It’s summertime…fun in the sun…the warm sun on our face….got a healthy tan….

But hey, we are getting older, and that same warm sun can be damaging as well.

A great tan today can lead to the dreaded “C” word tomorrow.

Skin cancer is more common than we may think.

I know…..

At my recent visit to the dermatologist, I learned that what looked like nothing on my face was in fact a Basil-cell carcinoma.

After a Mohs surgery, and 45 stitches later, I have become much more careful about going out in the sun.

So….here are a few sun-savvy tips:

Put on sunscreen whenever we are going out in the sun.
Wear a wide-brimmed hat.
Learn to appreciate shade.
See a dermatologist for regular check-ups.

May we all do the simple things to take care of ourselves today, so we may be blessed with the ability to grow old together.