Monday, January 08, 2007

Important Changes for Market Watchers

Several interesting things have developed in the last week, things that every investor should know about.

==== Congress restores 'pay as you go' rule ====

I remember around 1990 when voting for fiscal responsibility meant voting Republican. Back then the House put in place a rule where new spending and new revenues in any bill had to balance. In other words: the politicians couldn't spend money without figuring out where it would come from. That rule helped result in balanced budgets in the 1990s.

More recently with the Republicans in charge of everything in Washington the rule got scrapped and deficits skyrocketed. Okay, so it was important to pump up the economy to avoid recession but nonetheless it was a little disorienting friday to see the Democrats put back the 'pay as you go' rule.

This rule will make it harder for democrats to boost the programs they typically like to see grow and I give full credit for an impressive move of fiscal responsibility. (More at CNNMoney.com)

==== Oil & Gas ====

A government report Monday showed gas prices at the pump dropped to the lowest level in a while. The average national price over the last week was $2.31 per gallon, and last weeks dramatic oil price drop hasn't hit the pumps yet. Oil makes up about half the pump cost of gasoline so the 9% drop last week could take gas down another ten to eleven cents to around $2.20 per gallon.

If we plug some of these numbers together with monthly gasoline purchases we see that ten cents cheaper gas boosts the money in consumer wallets by about $770 million per month. That's almost $10 billion per year, totaling about 1/3rd of a percent of total consumer spending. Tiny, but magnified by the miracles of money velocity most economic models will tell you that could boost GDP growth by significantly more. Even half a percent of GDP at this particular moment could push the Fed into inflation concerns... so this is food for thought.

==== Minimum Wage Increases ====

This one is still unfolding. Congress is sure to be able to pass a wage increase, but the Senate and the President may require it to have some sort of tax relief for small businesses attached.

----

The change in minimum wages, oil and gas price changes, and changes to the federal budget rules comprise a shift in most of the major categories of economic modeling. It will take a while for people to come up with a solid idea of what to expect, and a while for the economy to pick a direction.

As unsatisfying as it is, I think my conclusion is that the market is going to wander for a while. Probably months, before choosing a direction.

There are still plenty of ways to make money off a wandering market. I will probably be selling covered calls on some of my market index baskets, for example. It also gives us time to build an understanding and a plan. Some people seem to think trading is a fast paced activity. In my experience the pace is quite slow and we rarely lack time to think and plan if we keep on top of things.

Invest well,

FW
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