by Hal Eddins , Managing Director, Capital Investment Council
There’s nothing like a fresh start. As we all know in this business, last year is irrelevant after January 1. It’s all focused on how you are going to perform this year. That brings up an interesting point. The S&P 500 had a good year last year didn’t it? Well, that depends on what currency you use to count the return. In U.S. Dollar terms, the S&P 500 was up 14.02%. However, if you look at the S&P return in gold, you will find that the market was actually down 6.5%. Much of that gold decline is tied in with an overall decline in the U.S. Dollar, and much of the strength in oil over the last few years also comes from a Dollar decline. We always like to look at the other side of the trade and wonder who will benefit if the Dollar goes the other way and actually starts going up. After all, the Dollar Index has dropped over 30% over the last four years. It’s about time for a Greenback resurgence.
The man with the hammer finally caught up with Bob Nardelli. When we last wrote about Bob last year, he was in trouble over his $100 plus million dollar pay package. Bob did everything he was supposed to do. He doubled Home Depot’s earnings, but Bob’s old school attitude is sorely out of step with today’s environment and Bob was sent packing. However, don’t shed any tears for Mr. Nardelli; he’s walking away with a golden parachute of $210 million.
It’s interesting how critical people have been of the lower taxes imposed by the Bush White House over the last several years. I would like to see them explain this fact away: Treasury withholding for W2 employees nationwide is up 7.6% year over year. The really jaw dropping number is the increase for self employed people who perform their own withholding. Their withholding showed an increase of 44% in Q4 of 2006!
We all know the effect that the warmest January on record has had on oil prices. However, the warmer weather may be having a positive impact on some other sectors of the economy. For example, warmer weather has allowed home construction to continue much deeper into the winter than usual. The completion rate of many home builders is up, and while positive, this may be masking weakness down the road. The situation is similar to the cars that GM and Ford sold back in 2001 and 2002 on zero financing. People were not buying additional cars. They simply accelerated a car purchase they would have made in later to take advantage of the deals on offer. Similarly, employment has stayed robust much longer than normal in the winter. For example, the economy created an average of 149,000 new jobs over the last two months. This is higher than usual and the warmer weather may be masking deeper weakness in the economy. I for one don’t think the wheels will fall off the wagon. I do believe we have seen a peak in corporate profitability, and that growth will moderate but not drop precipitously.
Another positive from lower gas prices is the increased purchasing power given to the consumer. On a personal note, our heating cost for December dropped from $411 to $216. That’s a drop of 47%. The warmer weather played a role in the pricing drop, as the average temperature for the period was up 19% over 2005. However, the majority of the decrease came from the general collapse in short term pricing of oil and gas. As the price of those commodities has dropped another 12% in the first three weeks of the year, I can’t wait to see my bill for January!
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