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Bet on Airlines to Take off Again MoneyNews
(Headlines - scroll down for full stories) 1. Dollar Rally Crashing: Top Securities Firm The U.S. dollar rally may end in 2006, once the Fed ceases raising interest rates and more focus is put on the U.S. current-deficit account, according to Stephen Jen, head of global currency research at Morgan Stanley. Bloomberg quotes Jen as saying, "The dollar will remain supported as long as the Fed is tightening. When the Fed stops tightening, the rates story starts to fade and the deficit story will return." The dollar is set for its first gain in four years, as the Fed boosts rates and other countries' central banks maintain borrowing costs.
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Says Bloomberg: "Morgan Stanley, the world's second-largest securities firm by market value, predicts the dollar will weaken to $1.24 per euro at the end of next year from $1.1694 at 11:05 a.m. in New York. Jen estimates the dollar will strengthen to $1.16 by the end of next month." Jen, a former IMF economist, predicts dollar vulnerability during the six months after the Fed stops its tightening and the deficit stays high. He has recently become more of a dollar bull. Bloomberg reports that: "Morgan Stanley began 2005 predicting the dollar would drop to a record $1.38 per euro by the end of the first quarter. The dollar is up almost 16% against the euro this year." Interest-rate hikes in the U.S. have improved potential yields on dollar-denominated assets this year, making them much more attractive than similar treasury purchases of other countries. Experts argue that once rates become less of a factor, investors will decide against holding dollars. Says one analyst: "The major outstanding issue that hasn't been addressed is the current account deficit, so this will return to weigh on the dollar." Editor's Note:
2. Media Hardly Fair, Balanced Noel Sheppard isn't pulling any punches these days. Sheppard has become an increasingly popular economic guru, and he could well be the political right's answer to noted liberal pundit Paul Krugman of The New York Times. Sheppard is widely accessible in cyberspace, and he continues to land haymakers, delivering crushing blows to mainstream media arguments that the American economy is in peril. This past weekend, Sheppard took the mainstream media to task for their questionable evaluation of economic news as "good" or "bad". Granted, no Republican with a realistic view of the political spectrum would say that the past three months have been kind to George W. Bush. Justified or not, the American public has a lot of problems with President Bush - and the White House will have to counter that criticism if it has any chance to win out in the 2006 elections. But economically speaking, the Bush White House is on a record-breaking roll, with eight straight quarters of positive economic growth, as measured by quarterly Gross Domestic Product (GDP) figures (the last coming in at 3.8%). This boost flies in the face of historic terrorist attacks on New York City and Washington, a serious recession fueled by the Dot-Com hangover, the looming presence of China as the next global economic superpower, an unpopular war in Iraq that seems to be finally kicking into higher gear and a mainstream media that seems to take endless shots at the president and his tax-cutting cadre of free-market conservatives. As Andrew Wilkinson has pointed out in his weekly columns on NewsMax.com, Bush's status as a true free-marketer is up for debate. Bush has been left vulnerable to criticism from both the political left and the deficit hawks on the right. That's because of his propensity to overspend, aversion to vetoing, reluctance to confront the Chinese over the widening trade deficit, and his move to protect the American steel industry via tariff reform during his first administration. But a little straight shooting from the media would help the public decide for itself, right? Wrong. As Sheppard points out in a weekend column, as the frequency of pessimistic reports increases, their accuracy seems to decline. "Since the stock market's collapse between March 2000 and October 2002, the media have continually been making gloomy and bearish economic forecasts, from predictions of a housing bubble implosion to gasoline prices heading to $5 per gallon and even an economic downturn due to Hurricane Katrina ... none of these have panned out," writes Sheppard. Sheppard points out many instances in which the media has been tripped up on economic projections - including predictions about a falling dollar in 2004. "Tom Fenton of CBS News went so far as to link the decline to the start of the Bush presidency - that since the end of the Clinton administration (or to put it another way, since the beginning of the Bush administration) the dollar has been heading south at an alarming rate," he writes. Fenton, in his sanctimonious ignorance, wasn't alone. Sheppard notes some additional naysayers:
Despite the dour outlook of the national media, which presumably includes journalists with both economic degrees and the absence of a political agenda, the dollar is surging. "It's been almost a year since the media began in earnest to warn Americans about the falling dollar, and, as is typical of press predictions, they were wrong," says Sheppard. "As measured against a basket of currencies referred to as the "Dollar Index," which trades futures on the New York Board of Trade, the American currency has risen by 15% - instead of falling precipitously as forecast last December by many media. Against the euro, it is up 20% to a two-year high." But Sheppard doesn't stop there. He insists that Big Media's attempts to deride President Bush's economic policies have also fallen completely flat: "They also missed the mark on their forecasts of an economic downturn. In fact, not only did the dollar's value fail to '[put] the brakes on the country's economic recovery,' but, instead, the gross domestic product grew by 3.8% in the first quarter, 3.3% in the second quarter and 3.8% in the third quarter," writes Sheppard. The media blew it on oil, as well, incorrectly suggesting a negative corollary between rising oil prices and a declining dollar. "Curiously, even after the dollar had clearly bottomed, the media continued to focus on its 'weakness,' as well as espouse new reasons why its value had ominous portent for the nation," writes Sheppard. "Mellody Hobson of ABC News said this on 'Good Morning America' on Feb. 23 of this year: 'Well, it affects them [Americans] in a couple of ways. One, we saw oil go up yesterday. It's now over $51 a barrel, almost $2 at the pump around the country. More in certain areas. So that's a very specific effect that comes right out of your pocket because oil trades in dollars. So when the dollar gets weak, the oil producers raise the price to make up for the difference." Sheppard calls out Hobson on her comments. "It was fairly common of the media earlier in the year to blame rising oil prices on a declining dollar," he says. "However, as the dollar has increased by roughly 15% this year, while oil has increased by about 40%, it was obviously specious to suggest such an inverse relationship existed between the two." So the question is: Can you really trust the national media to get the economic news right? That would be a "no". But at least savvy investors might be able to glean a buying opportunity from these flawed reports. "Americans could learn a key lesson from the media's poor prediction skills that many professional investors have known for decades," says Sheppard. "When the mainstream press begin to recognize a trend in anything and focus a tremendous amount of attention on it, that trend is probably very close to being over. Editor's Note:
3. Bet on Airlines to Take Off Again The airline industry has taken a beating in the financial markets over the last few years. But is a comeback in the wings? The Economist says so. In that magazine's Nov. 10 issue, reporters say that after losing $43 billion in five years, airlines are at the beginning of a massive boom. In typically florid fashion, The Economist sets the table: "Mention the airline industry in polite company and a few truisms invariably come trundling out: airlines are loss-making, inefficient, prone to extreme cycles and vulnerable to fickle consumers. Why, most of America's industry is currently bankrupt, flying on only thanks to that country's Chapter 11 cushion. Only an idiot would buy shares in British Airways (BA), which currently owes almost half its £3.5 billion ($6.1 billion) market value to its pension fund." But as The Economist maintains, only an idiot would turn his or her back on the airline sector right now. Huge volume, new technology and the kind of economic order that historically comes from an industry shakedown (which separates the weak from the strong) makes the airline industry an opportunity, and not an obstacle, for investors in 2006.
"The airline industry is poised for an almost unprecedented boom, as a new generation of planes is combining with better business models and huge volume growth in new markets," says The Economist. "Traffic volumes are growing. International traffic has risen by 8.3% so far this year, compared with 2004." The big aircraft makers are also buoying the boom. The Economist points to Airbus and Boeing as two industry titans that are entering a boom period of growth. "Airbus is scouring Europe and farther afield for 1,000 engineers to push ahead with its new long-haul A350 250-to-300-seat plane and bring its super-jumbo A380 into service," says the magazine. "Boeing is booming even more, with about 650 orders under its belt already this year, compared with just over 400 for Airbus at the end of September. Some observers think Boeing could finish this year with almost 1,000 orders, while Airbus will net nearly 900. In a good year the two manufacturers usually share 800 orders between them." As The Economist points out, the price of oil is a problem, especially as jet fuel prices rose to $90 a barrel in 2005. That's caused airlines to tighten their belts in an attempt to lower costs. And low-cost, no-frills airlines are giving the big boys fits. But as The Economist says, "competition is good for the industry and good for consumers." It could be good for investors, too. Editor's Note:
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