The wonderfully esoteric consumer confidence index showed an 83.5 rating today for the month of June, better than the expected number of 82.4.
"... Expectations for the next six months are up," said the Conference Board's Lynn Franco. "In fact, consumers have grown increasingly optimistic over the last three months. The recent turnaround in the stock market and an easing in unemployment claims should keep consumer expectations at current levels and may signal more favorable economic times ahead."
Stocks pretty much yawned at the news today, however, finishing the day largely unchanged.
In today's Motley Fool Take:
- Do Rate Cuts Help?
- Quote of Note
- Stop Blaming SARS
- Discussion Board of the Day: Fools Fighting Fat
- Feds Sue Merck
- Motley Fool Visa Card
- Quick Takes: Freddie Mac & Fannie Mae, Vivendi, Microsoft, more
- And Finally...
Do Rate Cuts Help?
Will it be 25 or 50 basis points? That's the question most of the financial media is hovering over in anticipation of tomorrow's policy announcement from the Federal Reserve Open Market Committee. So far, Fed watchers are torn over which outcome is more likely.
The more important question, however, is this: How long will the financial markets hang their hopes on yet another rate cut? We've already had 12 cuts since January 2001, and the federal fund rates is at a measly 1.25%. Short-term interest rates are already lower than anytime since 1958. Let's face it, the rate-cut lighter fluid just isn't stoking any economic flames.
The problem isn't a lack of credit, but too much credit. Easy and abundant credit has caused the economic logs to be inexorably soaked with excess capacity. You can see this in the capacity utilization figures, which recently have been stuck at a 20-year low of less than 75% (where anything below 80% prevents new investment). There's no amount of easy money that can inspire businesses to build what's already been over-built.
What the economy really needs is a reduction in capacity via bankruptcies of marginal companies. Obviously, such a notion is politically unspeakable, but it's the destructive side of capitalism that frees resources to fuel the business cycle's next constructive phase. As it stands now, though, marginal players can't go out of business because so much easy money is sloshing around.
Everyday, we hear about companies "strengthening their balance sheets" through lower-rate financing, as if that's supposed to be good. It's good to a point, but not when it allows companies that should go bankrupt to stay alive. When less-efficient companies stay alive, their more-efficient competitors get less business. For any given industry where this dynamic is at play, the result is less efficient, overall average production. Extended economy-wide, inefficient production leads to below-potential output, or subpar economic growth.
Nevertheless, the Fed is committed to its course of trying to stimulate demand rather than allow supply to contract. One can only hope that the Fed's easy-money policies begin to work before zero-interest rate scenarios come into play. If interest rates go to zero, the Fed won't have any traditional arrows left in its quiver. And the last thing anyone should hope for is the use of unconventional (that's a kind word) policies such as those recently explored by the Dallas Fed.
Quote of Note
"What would life be if we had no courage to attempt anything?" -- Vincent Van Gogh
Stop Blaming SARS
Advanced Micro Devices
Robert Rivet, AMD's chief financial officer, attributes the shortfall to "the decline in personal computer and handset sell-through in China and other Asian markets, largely related to the SARS epidemic."
That information comes the same day the World Health Organization lifted its Beijing travel warning and USA Today is running an article titled, "Economy in post-SARS China taking off 'like a rocket'."
China's economic activity is so hot, in fact, that "some economists now worry crucial sectors are at risk of overheating." After growing nearly 10% in the first quarter, the world's most populous country is expected to post 7% first-half growth despite the SARS outbreak. USA Today points to a surge in exports; investments in factories, machinery and equipment; and electricity demand as indicators of China's strength.
Yes, SARS had a negative impact on many industries. But with such a rosy Asian growth forecast now, it would be reasonable to expect AMD and other companies that have blamed the outbreak for subpar performances -- Texas Instruments
Just don't hold your breath.
Discussion Board of the Day: Fools Fighting Fat
Are subs really healthy fast food, or is that Jared guy from Subway a piece of marketing fiction? Six months removed from your last New Year's resolutions, are you looking to shed a few extra pounds? What's the skinny behind the latest wave of fad diets? All this and more -- in the Fools Fighting Fat discussion board. Only on Fool.com.
Feds Sue Merck
There's nothing like being probed and sued by the Feds to bring you down.
Medco is the country's largest manager of prescription drug programs. It serves more than 1,000 company health-care plans with the promise of lower drug prices through bulk purchasing. The inherent conflict of interest isn't surprising. Lawsuits claim that Medco unnecessarily switched patients from non-Merck drugs to Merck drugs, usually costing patients more money.
The federal suit also claims that Medco fabricated records and didn't explain prescription changes to doctors. This may sound ominous, but the reaction from Merck's stock is benign. Why? Because Medco's problems emerged long ago and Merck has been looking to dump the subsidiary.
A Medco initial public offering planned for July was aborted after revelations of $12 billion in misstated revenue at the division. Now the plan is to spin off Medco to Merck shareholders.
Also today, shares of Pediatrix MedicalGroup
Pediatrix joins a slew of health-care-related firms recently under investigative pressure, including King Pharmaceuticals
Motley Fool Visa Card
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Sony Ericsson, a joint venture of Japan-based Sony
Rep. Richard Baker (R-La.) introduced legislation that would abolish housing finance quasi-governmental entities Freddie Mac
Groups led by Edgar Bronfman, Jr. and Marvin Davis, as well as Liberty Media
A former Microsoft
Today on Fool.com:
- For updated stories throughout the day, bookmark our ever-changing News section.
- Putting Risk in Its Place: Tom Jacobs turns to the fun part of his portfolio: high risk.
- Idec and Biogen Marry: The second-largest biotech merger produces a too-pricey company.
- FedEx's Strong Year: The delivery giant closes the books on a good fiscal 2003.
- Restaurant company Schlotzsky's shareholders vote to go it alone.
- In Fool's School, contrarian investing. Going against the crowd can pay off.
Bob Bobala, Robert Brokamp, Mathew Emmert, Jeff Fischer, Tom Jacobs, LouAnn Lofton, Bill Mann, Selena Maranjian, Rex Moore, Rick Munarriz, Matt Richey, Reggie Santiago, Kate Southerland, Dayana Yochim