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High & Low Finance: Don’t Be Alarmed, It’s Just the Economy About to Speed Up

May 30, 2013 by Leave a Comment

The American markets are getting worried again. But this time the fear is refreshingly different.

The worry is that economic growth may be about to accelerate.

After five years of a disappointing economy, such a concern sounds too good to be true, and perhaps it is. But imagine what will happen if it is not. We’ve been complaining for years about how slow the recovery is. It would be great if it sped up appreciably.

But you might not know that if you listened to some of the commentary these days. Those who see a black cloud behind every silver lining can point to plenty of negatives in a good economy. Bond investors will lose money as the value of long-term bonds declines. That will mean that a lot of people are poorer. Banks own a lot of Treasuries, and some of them could suffer as the value of those bonds decline.

Perhaps rising interest rates will prompt a sell-off in the stock market. Perhaps they will choke off the recovery in housing.

The federal government will suffer a hit from having to pay higher interest rates as it borrows money. The Federal Reserve, which has bought a lot of long-term government bonds and mortgage securities, will lose money — perhaps a lot of it — as it sells those securities at lower prices than it paid. It might lose so much money that it stops funneling profits to the Treasury, further damaging the government’s fiscal position.

Added to those specifics is the feeling that we are about to enter uncharted territory. Just as the Fed never before engaged in quantitative easing, it has never before unwound the positions. Who knows if it can handle the challenge?

“The Federal Reserve will need to carefully navigate through the completion of quantitative easing,” the Organization for Economic Cooperation and Development said this week in its generally gloomy semiannual global economic forecast. “A premature exit could jeopardize the fragile recovery, but waiting too long could result in a disorderly exit from the program with sizable financial losses.”

Of course, we’ve all known that — someday — the Fed would have to start reducing its positions. But on Wall Street, someday can seem a very long way off. “This was supposed to be next year’s trade,” a hedge fund manager told me this week.

What made it seem like this year’s trade was the sudden backup in the bond market that began early in May and accelerated late in the month after the Fed’s chairman, Ben S. Bernanke, mused that the Fed might be able to start to backing off the easing program later this year. The yield on 10-year Treasuries, below 1.7 percent early this month, rose above 2.1 percent on Tuesday.

That may not sound like a lot, but to owners of such bonds, it is a problem. If they bought at the latest auction of 10-year Treasuries, on May 8, the value of their securities fell enough in three weeks to offset more than a year of income.

That latest drop came on the heels of some surprisingly good economic news, as well an upbeat forecast. Last week, the Federal Reserve Bank of New York said it expected the unemployment rate, now 7.5 percent, to fall to 6.5 percent by late next year. That is earlier than the Fed had expected when it said 6.5 percent was the level at which it might choose to back away from quantitative easing,

Then this week the Standard Poor’s Case-Shiller home price index was reported to have leapt 10.9 percent over the year through March. That was the largest gain since 2006, when the housing bubble was in full expansion. And on the same day that was reported, the Conference Board said consumer confidence was at a five-year high.

There are reasons to restrain enthusiasm about both figures, though. Home prices hit their lows for the cycle in March 2012, so this is a bounce off the bottom. And while consumer confidence is up, it is still well below the levels that seemed acceptable before the financial crisis. During the decade before the economy began to crater in 2008, there were only two months — in 2003 — when the index was as low as it is now. And not all statistics are surprising on the upside; first-quarter gross domestic product was revised a bit lower in the latest estimate, released Thursday.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://www.nytimes.com/2013/05/31/business/economy/dont-be-alarmed-its-just-the-economy-about-to-speed-up.html?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

Despite Strong Earnings, Google Is Still Stymied by Mobile

January 23, 2013 by Leave a Comment

Investors were comforted on Tuesday when Google announced strong fourth-quarter earnings, and the stock rebounded from a dip over the last week, climbing 5 percent in after-hours trading.

But a closer look at the results shows that while Google continues to be a moneymaking machine, its most lucrative business, search on desktop computers, is slowing, while Google has not yet figured out how to make equivalent profits on mobile devices.

“You would expect Google to be a key player benefiting from mobile, but that hasn’t played out in the last year,” said Jordan Rohan, a Stifel Nicolaus analyst.

The price advertisers pay Google each time someone clicks on an ad, known as cost per click or C.P.C., decreased 6 percent from the fourth quarter a year ago, falling for the fifth consecutive quarter on a yearly basis, though not as much as some analysts had feared.

The cost per click has been declining largely because advertisers pay less for mobile ads, and more people are using Google on their mobile devices and fewer on their desktop computers.

Still, Google has been trying to improve its mobile products — from developing new kinds of mobile ad campaigns to building devices like the Nexus 4 smartphone — and its executives say it is a matter of time before the numbers improve. Already, in the fourth quarter, the cost per click rose 2 percent from the previous quarter.

“We’re in some uncharted territory because of the rapid rate of change in these things, but I’m very optimistic about it,” said Larry Page, Google’s chief executive, on a conference call with analysts after the earnings were announced. “I think the C.P.C.’s will improve as the devices improve, as well.”

Mr. Page, who has had health problems related to his voice, sounded unusually weak and breathy.

Google reported revenue that was lower than analysts had expected. Google warned last week that analysts’ expectations were off target because Google sold Motorola’s set-top box division during the quarter and so did not include it in the quarterly results. Still, even including that division of Motorola, Google’s revenue would have missed expectations.

The company reported fourth-quarter revenue of $14.42 billion, an increase of 36 percent over the year-ago quarter. Net revenue, which excludes payments to the company’s advertising partners, was $11.34 billion, up from $8.13 billion. Net income rose 7 percent to $2.89 billion, or $8.62 a share.

The fourth quarter is generally Google’s brightest because it makes much of its money on retail ads that run during the holiday shopping season. This holiday season was the first that Google charged e-commerce companies to be included in its comparison shopping engine, and these so-called product listing ads contributed to its bottom line.

“Despite talk about retail having a weak season, Google’s product listing ad program has taken off quite successfully,” said Sid Shah, director of business analytics at Adobe, which handles $2 billion in annual advertising spending.

Home Depot increased mobile commerce sales by four times after using Google mobile ads, said Patrick Pichette, Google’s chief financial officer. He also cited YouTube ad revenue, saying the “Gangnam Style” video, the most-watched on record, has earned $8 million in online advertising deals. Election ad spending on Google increased five times over the 2008 election, he said.

Nonetheless, Google’s mobile challenge overhung even its usual holiday shopping sparkle. Consumers are increasingly shopping on phones and tablets, yet Google and other companies have not yet figured out how best to profit from mobile users.

One problem is that advertisers pay about half as much for an ad on a mobile device, in part because they are not yet sure how effective mobile ads can be. Another challenge is that consumers increasingly use apps, like Yelp or Kayak, to search on mobile devices instead of using Google.

And even when consumers use Google for mobile searches, they are often doing so on Apple devices like iPhones, for which Google has to pay Apple a fee. Those types of fees are large — equivalent to 25 percent of Google’s revenue in the quarter.

The shift to mobile is happening as Google’s biggest, most lucrative business — desktop search — is slowing. The share of clicks on Google results that happen on desktop computers has fallen to 73 percent from 77 percent in the last six months, while the share of clicks on tablets and smartphones has increased to 27 percent from 23 percent, according to data from Adobe.

The problem is that clicks on retail ads on tablets, for instance, cost about 16 percent less than they do on the desktop, according to Adobe. The price of clicks on retail ads on tablets rose 16 percent over the last year, but on smartphones they fell 11 percent.

As the desktop search sector slows, Google has a new search competitor to contend with: Facebook, which last week introduced a new form of personalized social search on the site.

Google has also recently become a maker of mobile devices, both by acquiring money-losing Motorola and by producing the line of Nexus devices with manufacturer partners.

In the fourth quarter, Google sold about 1.5 million Nexus phones and tablets, not including those sold by other retailers, according to estimates from JPMorgan, and has had trouble keeping supply up with demand.

Eventually, Google hopes, these various businesses will help it solve the mobile revenue riddle, but analysts say they do not expect it to happen in the near term. “You have your Motorola Android phone, get offered a local deal, go into the merchant, use Google Checkout to pay and get rewards,” said Colin Gillis, an analyst at BGC Partners. “That’s the grand vision and it’s a nice vision, but it’s not happening in March.”

Article source: http://www.nytimes.com/2013/01/23/technology/google-profit-exceeds-expectations.html?partner=rss&emc=rss

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A Bold Dissenter at the Fed, Hoping His Doubts Are Wrong

January 9, 2013 by Leave a Comment

But for the last several years, Mr. Lacker, president of the Federal Reserve Bank of Richmond, has warned repeatedly that the central bank’s extraordinary efforts to stimulate growth are ineffective and inappropriate and, worst of all, that the Fed is undermining its hard-won ability to control inflation.

Last year, Mr. Lacker cast the sole dissenting vote at each of the eight meetings of the Fed’s policy-making committee, only the third time in history a Fed official dissented so regularly.

“We’re at the limits of our understanding of how monetary policy affects the economy,” Mr. Lacker said in a recent interview in his office atop the bank’s skyscraper here. “Sometimes when you test the limits you find out where the limits are by breaking through and going too far.”

As the Fed enters the sixth year of its campaign to revitalize the economy, the debate between the Fed’s majority and Mr. Lacker — whose views are shared by others inside the central bank, as well as some outside observers — highlights the extent to which the Fed is operating in uncharted territory, making choices that have few precedents, unclear benefits and uncertain consequences.

The economy continues to muddle along, shadowed by the threat of another government breakdown, and the crisis of high unemployment is only slowly receding. But in trying to address those problems by suppressing interest rates, the Fed risks the unleashing of speculation and inflation.

It is basically a matter of disposition: is it better to risk doing too much, or not enough?

Mr. Lacker, 57, often uses the word “humility” in describing his views. He means that the Fed should recognize that its power to stimulate the economy is limited, both for technical reasons and because it should not encroach on the domain of elected officials by picking winners and losers.

As he sees it, the Fed’s current effort to reduce unemployment by purchasing mortgage-backed securities crossed both lines. He sees little evidence that it will help to create jobs. And he says that buying mortgage bonds is a form of fiscal policy, because it lowers interest rates for a particular kind of borrower.

But Mr. Lacker is at pains to emphasize that his disagreement with the other 11 members of the Federal Open Market Committee, who supported the purchases, is not about the need for help.

“It’s very unfair to think of me as not caring about the unemployed,” he said. “It just seems to me that there are real impediments, that just throwing money at the economy is unlikely to solve the problems that are keeping a 55-year-old furniture worker from finding a good competitive job.”

That sense of caution is deeply frustrating to proponents of the Fed’s recent efforts. The economists Christina D. Romer and David H. Romer wrote in a paper published last month that such pessimism about the power of monetary policy is “the most dangerous idea in Federal Reserve history.”

“The view that hubris can cause central bankers to do great harm clearly has an important element of truth,” wrote the Romers, both professors at the University of California, Berkeley. “But the hundred years of Federal Reserve history show that humility can also cause large harms.”

It also makes an interesting contrast with Mr. Lacker’s personality. His favorite escape is driving a Porsche Boxster racecar; a model sits on a shelf at his office. He jokes that the track is the only place that people don’t ask him about interest rates — although, he adds, they do care about fuel prices.

And at the Fed, an institution that likes consensus, dissenting also requires a certain amount of boldness. Mr. Lacker has now said no at 13 of the 24 regular policy meetings he has attended as a voting member, one-third of all dissents since Ben S. Bernanke became the Fed’s chairman in 2006. He voted in 2006, 2009 and 2012 as part of the regular rotation of reserve bank presidents.

Even some who sympathize with his concerns doubt the efficacy of such public stands.

Article source: http://www.nytimes.com/2013/01/09/business/a-bold-dissenter-at-the-fed-hoping-his-doubts-are-wrong.html?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,