Thin Line Between Crime and Sloth

From out of the Tampa Bay area in Florida comes a story of a young man who appeared to be embezzling money from his employer, a phone company called MetroPCS. He was responsible for taking MetroPCS' deposits to the bank, but after a while it became apparent they weren't getting there. Investigators soon found a total of $18,000 in bank deposits stashed in the young man's closet. That represented two weeks' worth of deposits for the company.

He was charged with grand theft, a felony. But at his trial, he came up with an excuse: It wasn't that he was stealing the money, it was simply that he hadn't had a chance to get to the bank yet. We've all had days like that, haven't we? Or weeks like that, as in this case.

The judge apparently had, because the man pleaded his case down to the misdemeanor charge of petit theft. He got away with a year's probation and 50 hours community service. And, presumably, a new habit of going to the bank on time.

Visa's Upswing

We've talked before about signs that credit spending has been increasing, signaling not just a rise in consumer confidence but an expansion in the amount of money American have been spending - which is of tremendous good to the larger economy. This week we got the strongest data point yet: Visa announced that its fiscal second-quarter profit was up 33 percent over the same period in 2009. It also said that payment transactions were up 14 percent from a year earlier.

Visa, remember, doesn't actually issue any credit cards; it's a payments network, processing transactions for member banks like Capital One and Chase. Visa's income for the three months ended March 31 was a relatively paltry $713 million; by contrast, Capital One had revenue of nearly $4 billion in the last quarter. Although we tend to refer to our credit cards as Visa cards (or MasterCards), the Visa side of the equation is not nearly as significant as the issuing bank. So that means Visa's figures are a pretty pure representation of credit card usage, and not a result of jacked-up interest rates or any other factors that go into Capital One's revenue.

Total payments by people using Visa cards rose 3.4 percent in the quarter; this was the first quarter showing an increase since 2008. Credit card payments are kind of a reverse of the tragedy of the commons - it's a bad idea for any one individual to rack up a lot of credit card debt, but it sure can be helpful for society as a whole.

More Bad News for Greece

Despite the positive thoughts we had about the resolution of the Greek crisis last week, the whole situation took another step backwards yesterday. The $60 billion emergency-aid package that seemed to signal a turnaround wasn't enough to keep Standard & Poor's from dropping Greek bonds to junk status. Greece, a member of the powerful European Union, is now considered no more creditworthy than Azerbaijan.

What does that mean for the world's economy? First of all, it means that Greece, already in tremendous debt, is going to have to pay even more money to get investors to buy its bonds. Yields on two-year Greek notes are a staggering 18 percent. That reflects S&P's concern that Greece will default on these bonds and never repay them, which is start to look more and more like a real possibility. 

The worst-case scenario is that Greece - and possibly Portugal as well - defaults on its debt and leaves the euro community until it gets it fiscal house in order. That would be an extreme case, but if the other European nations have no interest in propping up Greece, that would confine the damage to Greece and the poor saps who bought all of its debt (which does include several other European governments). It promises to be a messy procedure, but if Greece and perhaps Portugal are the only nations that end up defaulting, it shouldn't have too strong an effect on the American economy. We shall see.

On Guard Against Irrationality

Do you behave rationally in your financial decisions? A professor at Duke University, Dan Ariely, describes most people's behavior as "Predictably Irrational." He's written a book on the topic and is the subject of an article in a recent issue of Investment Advisor, where he talked about why people make common mistakes with their financial plans. See if any of his findings apply to you:

* Are you asking the right questions? Ariely says that one of the causes of the housing bubble is that people started asking themselves "How much house can I afford?" rather than "How much should I spend on a house?" When you can't figure out the answer to a question, maybe it's' time to step back and ask yourself if you're even looking at the problem in the right way.

* Are you in the proper emotional state? Taking big losses or big gains in the stock market can create an emotional state wherein an investor is willing to take even bigger risks. People make their best, most rational decisions in a cool emotional state. If you've had a substantial change in your financial state, think about whether it's the right time to make the most rational decision.

* Are you using money when you should be giving of yourself instead? If you run a business, money is an expensive way to create worker loyalty. It's easier on everyone to create a social model wherein the business cares about its workers in areas like sick leave and team-building. A rival can always offer your employees more money, but no one can steal them by promising more of a family environment.

Ariely's next book will be called The Upside of Irrationality. That will be worth keeping an eye on as well.

The Crude Oil Question

As other aspects of the economy have gotten stronger lately, the price of crude oil has also been headed upward. Many people in the media are quick to ascribe these prices to the good economic news, and while things are probably not that simple, at the same time there is probably something to it.

The logic goes like this: As the economy comes back to life, more people will have jobs, and be able to afford bigger houses, and drive to work and go on vacation. All those things increase fuel consumption. Following a report last week that new-home sales had risen 27 percent, crude-oil futures jumped 1.7 percent in a single day. A barrel of crude oil now costs more than $85 for the first time since October 2008.

Here we see one of the downsides of the growing economy. No one wants to pay more at the gas pump, or more for heating fuel next winter. And the rise in oil prices may result in an increase in the inflation rate; although energy prices aren't included in what's called core inflation, they are a factor in the Consumer Price Index employed by the Federal Reserve. And of course, rising gas prices tend to cause an increase in other prices, such as for goods that need to be hauled by trucks. So while the rise in crude oil prices may reflect the growth in the economy, it could paradoxically be a factor in its eventual slowdown.

A Housing Rebound?

There are several signs out this week that may be signaling that the housing market has moved past its bottom into a full-fledged recovery. First of all, existing-home sales jumped 6.8 percent in March, and are up 16 percent over the rate of March 2009. We now have roughly an eight-month supply of available homes, down from eight and a half months in February; the rule of thumb is that we need six months' inventory to have a healthy market.

More intriguingly, the Wall Street Journal reported that home builders in Arizona have started buying up land. There was actually a bidding war for some developed land in the Phoenix suburb of Gilbert, and there are reports of big land purchases around the country. At the very least, these people expect the price of land to increase sometime in the near future, if not the price of houses.

Home builders certainly have some of the best knowledge of where the real estate market is headed - and the most to gain from placing their bets properly. It's nice to see that even in an area like Phoenix, which was ravaged by the deflation of the housing bubble, people still see opportunities for growth.

The New C-Note

The Treasury Department announced yesterday that it will introduce a new high-tech $1oo bill next February, with a Liberty Bell that changes color when you look at it from different angles. The idea is to make the hundred even more difficult for counterfeiters to replicate.

Interestingly enough, the hundred is more popular overseas than it is here at home. Fed chairman Ben Bernanke said, "We estimate that two thirds of all $100 notes circulate outside the United States." That's a total of 6.5 billion Benjamins, or $650 billion, of American money in foreign pockets.

It also suggests that holding American hundreds is a choice for these people, who could be carrying around their homeland's money if they so chose. The $100 overhaul may make these bills more secure, and even more attractive, around the world. If so, that's a good reason for the redesign.

Charging Around the World

More information on the globalization of the American economy: According to Bloomberg News, people with Citigroup credit cards have been charging more on their cards everywhere except North America. In the first quarter of 2010, consumers in Europe, the Middle East and Africa charged 17 percent more than they had in the first quarter of 2009. In Asia, consumers charged 23 percent more, and in Latin America, they charged 24 percent more.

But in North America, Citigroup charges dropped by 10 percent since last year. It appears that economic confidence and purchasing power are growing faster in other areas of the world than they are here in the U.S. and Canada.

That's not necessarily a bad thing. All those foreigners are expanding their ability to buy with their credit cards, which means they're able to buy more American goods. And those transactions are certainly good for American financial institutions as well: Citigroup also announced its first-quarter profits had more than doubled.

The Big Picture

The Conference Board - the same people who bring you the monthly consumer confidence reports - also put together an index of leading indicators to assess where the economy is headed overall. The measure for March was up a solid 1.4 percent, marking the 12th straight month that the figure has risen.

Here are the components of the index that were positive for March:

* The interest rate spread

* Average weekly manufacturing hours

* Supplier deliveries

* Stock prices

* Building permits

* Weekly first-time unemployment claims

* Manufacturers' orders for goods and materials

In contrast, the following leading indicators were negative in March:

* The money supply

* Manufacturers' orders for nondefense capital goods

* Consumer expectations

Global Upgrade

We've been talking a lot lately about how the international economic situation will affect the recovery here in the United States. The global economy is not a zero-sum game; as other countries grow their economies, ours will benefit from our ability to sell them our goods and services.

So when the International Monetary Fund increases its predicted global GDP number for 2010, that's good news for our American economy as well. In an interview over the weekend with a Japanese newspaper, IMF managing director Dominique Strauss-Kahn noted that he would be raising his estimate of this year's global growth from 3.9 percent to 4 percent. That's a small move, but as recently as last October, the IMF had pegged global growth at 3.1 percent. The outlook just keeps going up and up.

Looking ahead, for 2011, the IMF has forecast global growth at a healthy 4.3 percent. If that prediction holds - or if it gets revised upward, as has happened to so many IMF predictions - it will go a long way toward pulling the American economy back to full strength.

Should We Be Worried About the Greek Crisis?

The Greek debt crisis seems to be winding its way toward an end, with the IMF scheduled to meet with Greek officials next week to discuss a $61 billion aid package. After many years of profligate government spending, Greece got itself to the point where its debt actually outweighed the value of its entire economy, and the sagging weight of all that debt threatened to bring the whole thing down. Although the debt crisis looked capable at one point of collapsing the euro and wreaking havoc throughout the entire European community, things appear to be headed toward a solution now.

Should we care? Does this crisis have ramifications for the American economy? Yes, in a couple of ways:

* If the value of the Euro falls, that makes it harder for Europeans to buy American products and take vacations here in the U.S. Or if the crisis causes the EEC to fall back into recession, that could hamper their ability to spend money on American goods.

* Many of the European governments have bought up a lot of debt from Greece, which is paying a healthy 7.3 percent on its ten-year bonds now. If Greece defaults on that debt, that too could have ripple effects throughout all of Europe's economies, and ultimately on our own.

* In the most dire of circumstances, there could be more worldwide skepticism of government's ability to pay back their debts. The U.S. is running massive deficits at the moment, too, and the Greek crisis could push investors away from buying government debt.

So while there isn't likely to be any direct effect, the global economy is still precarious enough that any major fiscal problem in a developed nation is worth keeping an eye on.

Stories from the Fed

The Fed's most recent Beige Book report, its eight-times-a-year look at economic conditions around the country, came out yesterday, and confirmed what we've been talking about here for the last few weeks: retail sales appear to be driving the recovery. All around the nation, the Fed found increases in both retail and car sales, while other areas of the economy remain flat - or in the case of the banking sector, downright scary.

Retail sales were reportedly "strengthened" in the New York region, covering the northern half of New Jersey, while Philadelphia and the southern half of the state saw "slight sales gains." (The inexact terminology results from the fact that the Beige Book relies almost entirely on anecdotal evidence.) In New York, merchandise sales were reported as up 10 to 13 percent over the previous year for March, which certainly gibes with other retail reports we've seen. Both areas saw "improved" vehicle sales.

Commercial real estate continues to be slow; in Manhattan, office rents were down 20 to 25 percent from the previous year. In a rare note specifically about our state, the Beige Book notes that home sales are still sluggish but appear to be rebounding somewhat in northern New Jersey, particularly in resales (as opposed to new homes), and for more moderately priced homes as opposed to higher-end properties.

The Chinese Deficit

The problems with the American economy have left many people fearing that we may someday be overtaken by China, which has shown tremendous growth in recent years, as the world's reigning financial power. There's a upside, though, to the growth of the Chinese economy - the more money it generates, the more purchasing power its citizenry has. So the news this week that China ran a trade deficit in the month of March is inspiring news for the rest of the world.

For the month of March, China's exports were up 24 percent from where they had been a year earlier. But its imports were up a whopping 66 percent. All told, China's trade deficit for the month was $7.2 billion, the first time it had run a monthly trade deficit since 2004.

There are some complications to this story. The U.S. still maintains an annual trade deficit with China of around $200 billion, and China has kept its currency artificially low, skewing the trade numbers. But we've mentioned before that the economies of other countries will be a key factor in our recovery, if they're able to ramp up their purchases of American products and services. It's good to see China spending money beyond its own borders.

CEO Confidence

We've talked a lot recently about the consumer confidence outlook, but maybe more important than that is the CEO Outlook, sponsored by a group called the Business Roundtable. Consumers are guessing at where the economy is going, but CEOs are the ones actually calling the shots.

A CEO Outlook from the second half of March, released last week, shows a good deal of confidence on their part. Among the 105 CEOs polled, 73 percent expect sales to rise over the next six months, and almost 50 percent expect to do more capital spending in that time frame. Those numbers are up from 68 percent and 40 percent, respectively, in the fourth quarter of '09.

But only 29 percent of those CEOs expect to be hiring in the next six months, and 21 percent of them expect to lay off more workers. (Half expect no change in hiring.) Those are sad figures indeed for an economy that is supposed to be in the midst of a recovery. One more reason why unemployment is expected to persist at historically high levels even as the rest of the economy recovers.

The Outflow Question

The stock markets have cooled off considerably from their 2009 runup, but they've been generally positive all year. That makes it all the more puzzling that inflows into U.S. stock funds have dropped down so much.

For the week ended March 31, $4.5 billion flowed into bond funds, and another half a billion was invested into international stock funds. But domestic stock funds actually had outflows of $60 million on the week. Does that seem odd? In a bull-market era, why would people choose this time to exit their equity mutual funds?

The biggest loser, though, has been the money market funds. The seven-day average yield on a money market fund is a paltry 0.02 percent, so it's no wonder that people pulled more than $30 billion out of their money market funds in that single week. But the next question is, if that money isn't going to stock or bond funds, where is it going?

Easter Parade

Easter always falls on a Sunday, obviously, but some people are making the argument that the holiday affected some of the economic figures that were released this week. First of all, the number of people applying for unemployment benefits rose slightly last week, in the midst of generally good job-related news. According to MarketWatch, an Obama administration official said the Easter holiday had "clouded" the data, making it difficult to interpret.

We also have a supposed Easter effect for the strong retail numbers we saw for March. Retail sales for the month were up 9.1 percent, according to sales tracker Thomson Reuters, from March of 2009. That's the largest single increase in sales since these records first were kept, in 2000. Again, Easter was credited for impacting the numbers, with the holiday falling at the very beginning of April; an economist from Moody's called it a "special factor."

Did Easter affect either of these numbers? It's possible it had some impact on retail sales, although people don't buy a whole lot for Easter beyond a baked ham and some marshmallow peeps. It's harder to see how it would affect employment, which isn't generally driven by the Easter holiday. Also, there will always be complicating factors in the economy, and no season is ever exactly like another. It wouldn't be unwise to simply take these numbers at face value.

Growth vs. Value

Bull markets don't treat all stock equally, of course, and it's instructive once in a while to take a look at which stocks are reacting to different environments. Our recent bull run is now mature enough to have two different phases: There was the stunning growth from last March through October or so, followed by more of a plateauing we've seen since then.

Those different periods were kinder to different kinds of stocks. Last year, the S&P growth index - featuring highflying stocks of companies that are expected to show strong growth - rose 29 percent, while the S&P value index - featuring stocks of companies that were considered beaten-down or undervalued - rose just 17 percent. But in a quieter environment, the situation has been reversed. Since the beginning of this year, value stocks have risen 7.4 percent, while growth stocks are up just 4 percent.

That's been the pattern for a long time. Growth stocks tend to do better when the market is roaring, and value stocks do better when things have cooled off, or in bear markets. Growth stocks, for instance, did better in the pre-crash year of 1987, and in the dot-com explosion of 1995-1999, but in most years, value stocks take the prize.

Is the Housing Market Driving Inflation?

Despite the fears felt by many who assumed that inflation would roar back to life once the government started its massive deficit spending, prices have remained under control for the past couple of years. At the same time, housing prices have been dropping, or stagnant at best. That has caused some people to wonder if the low rates of inflation have been unduly influenced by the crash of the real estate market.

Some researchers at the Fed have looked into that very question, and they've found that housing is not distorting the overall inflation numbers to any great degree. They broke down consumer spending into 50 different categories, and found that inflation has slowed in most of them, including jewelry, transportation, and electronics. There were a few categories in which prices had risen, such as used cars, but those were a decided minority.

The researchers also recalculated their preferred inflation measure without housing costs included. With housing, the February inflation rate was a 1.3 percent increase over the previous year. Taking out the costs of renting or owning a home, the research indicates that rate would jump to 1.55 percent.

In other words, falling housing prices have kept the inflation rate lower than it would otherwise be. But even aside from housing, inflation is still pretty low.

The Global Growth in Manufacturing

The recovery that we're experiencing is going on around the globe. and one area in which the entire world is participating is in manufacturing. Manufacturing accounts for 20 percent of the economy, with consumer spending accounting for the other 80 percent. The other day, we saw that consumer spending has been strong; now it's manufacturing's turn.

Here in the United States, the Institute for Supply Management's Manufacturing Index, a leading indicator of factory output, rose sharply in March, exceeding analysts' estimates. According to Bloomberg News, the ISM's gauge of exports rose to its highest level in more than 20 years.

There are similar signs of manufacturing growth all around the world:

* JPMorgan's global manufacturing index grew at its fastest pace since May 2004.

* China continues to expand, with its manufacturing output growing now for well over a year. March marked the 13th straight month with growth in manufacturing in China.

* In Europe, manufacturing output grew at its strongest level in over three years, with the biggest jump since 2007.

The Employment Surge

Remember when the good news was that we had lost fewer jobs than we had the month before? March's jobless report blew that out of the water, with payrolls rising by 162,000 positions, the most in three years. It was the highest number of jobs created since a good six months before the recession officially started.

Even that understates the good news a bit. When the government released the March figures, it also revised the January and February numbers upward as well. All told, the new employment numbers added 224,000 jobs to the numbers we thought we had.

Here at home, the unemployment rate in Somerset County ticked upward, from 7.9 percent to 8.1 percent. Statewide, the number of New Jerseyans filing for unemployment dropped to its lowest level since July 2008, although the jobless rate is still above the national average at 10.3 percent.

The bad news? Of the 162,000 new jobs, 48,000 of them were filled by newly hired census workers. Those really belong in the category of full-time but temporary positions.

Shady Dealings in Bayonne

There had been some shady dealings going on at Pamrapo Savings Bank, based up in Bayonne, over the past couple of years. The bank pleaded guilty in court on Monday to violating the Bank Secrecy Act and agreed to pay a $5 million fine for activities that happened between 2005 and 2007.

Here's what happened: Ordinarily, a bank is required to report any transaction of more than $10,000 to the authorities, in order to ferret our drug dealers, money launderers, etc. In one instance, a Pamrapo customer sought to evade these limits by writing out a whole bunch of checks for just under that amount. In this case, there were a whopping 586 such checks, totalling $3.2 million - an average of more than $5,000 per check. They were all made out to cash and all cashed at Pamrapo branches.

And that wasn't the only violation; all told, there was approximately $35 million in suspicious transactions filed through Pamrapo. That $10,000 limit is fairly well known, but any sort of activity of that scope is supposed to at least trigger a suspicious activity report. It's not clear whether Pamrapo was in cahoots with these money launderers, or whether, as they claimed, they just felt that a good compliance program was too expensive to maintain. At any rate, it probably would have cost them less than that $5 million fine.

The Mutual Fund Fee War

The Supreme Court handed down a ruling this week on mutual fund fees that has left both sides cheering. The case involved a suit against the Oakmark family of mutual funds; a group of investors charged that the fund's advisor had charged individual investors twice what it was charging institutional investors to buy into the same funds.

The Court's decision affirmed the idea that exorbitant fees are illegal when "an investment adviser must charge a fee that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's length bargaining," wrote Justice Samuel Alito. That's been the standard since a 1982 lawsuit against Merrill Lynch, although a lower court had thrown it out, saying that as long as the adviser misled the fund's directors, the fees could be characterized as excessive. Now the Supreme Court is reiterating that the tougher standard is the law of the land.

So why are investors groups happy about the ruling? Simply because they left the door open for such suits against excessive fees. The simple fact that investors can still use pension fund fees as a comparison was considered a victory.

Of course, investors still have a very powerful tool to combat excessive mutual fund fees: Sell the fund and buy another one.