Thursday, February 25, 2010

Benny Always 'Silences' Bad Economic News

The equity market reacted to the housing market data as if we were back in late 2005. Disappointing new home sales of 309K (annualized), significantly below the 354K consensus, was disappointing enough to send the S&P 500 up nearly one percent! Of course, we cannot forget the fact that Mr. Bernanke testified today and said exactly what he knows his ex-colleagues at Goldman Sachs and the equity markets love, "low for an extended period." Add to all of this, last week's very disappointing jobless claims and the very high new homes inventory of 9.1 months (highest since last May) and one would not expect the market to shoot up 1%.

We concede that this type of movement would be understandable if it was believed that we were at the 'bottom' with no where to go but up. However, we ask - weren't we at the bottom in March '09? And given the 63%+ increase in S&P 500 since, combined with the not so greatly improved economy, is a continuing rise in the equity market really justifiable?

Well, it may be, as it is clear that the government, which can justify virtually anything, has been the driver behind such movement. Here is another example - the passing of today's jobs bill in the Senate. This is something that can cost over $13 billion during the next ten years. Tax exemptions are for social security payroll taxes. Given the indirect, but potentially very significant, impact of this on social security benefits, we are just amazed. Add to that a $1,000 income tax credit to businesses for every new employee that they retain for more than a year, and you have nothing but the government influencing the participating businesses' strategies.

The tax exemption will be in effect only until the end of Congress' 2010 calendar year, which is Sept. With no indication of strong improvement in consumer or business demands within this economy, why would businesses, any businesses, risk increasing their headcounts for no return? We actually forgot, that return is provided by the government, which means that as soon as it is shut off, so are the working hours of the newly hired employees of participating businesses. Even with low rates, businesses are not willing to borrow to expand. Will incentives such the ones mentioned above help this situation significantly enough to start a long-term job and economic recovery? No.

Of course, the government's actions and policies all come with good intentions, as it hopes that one day the real economy, the consumers and small businesses will jump on the 'bandwagon' (in addition to all lawmakers getting re-elected). When such phrase is used in sports regarding specific teams, we know we should not be placing much money on those teams when in Las Vegas.

Regarding some other economic data released today, the Case-Schiller Housing price index came in very slightly (1bp) better than expected. But let's be realistic, those figures were for the month of December, nearly three months ago. With indications of higher inventories and foreclosures, we envision continuous lower housing prices.

Given our consistent 'whining' and complaining about the current state of the economy and about certain steps taken by the government, what do we propose? Nothing. We propose that the Fed and the government do nothing. We propose that the Fed allow the market to determine the interest rate. We propose that with higher rates, individuals increase their savings. We propose for the government and the Fed to allow banks to patiently wait until higher savings increase their capital. After which, not only would consumers have some money to spend (creating demand), but banks would also be loaning money, their clients' money (not the government freebies, the supply of which appears endless, which in the long-term will make them useless).

Regarding tomorrow's jobless claims figures, we expect something slightly lower than the current 460K consensus, which the government and the market will likely take as good news. We expect lower numbers as we think staying home during the bad weather motivated more people to file for initial claims 1.5 weeks ago, rather than last week. However, we believe tomorrow's figure will remain above 430K and close to 450K, which is not positive no matter how one may look at it. We do expect continuing claims to be up for the 2nd week in a row.

January durable goods orders will also likely be better than expected, due to some New Year optimism demonstrated by some businesses in early January. With these in mind, it wouldn't surprise us if the market hit another "high" tomorrow. Such movements are mere but yet very important, short-term highs. If S&P 500 does not hover around 1100 long enough, the risk of another and more significant pullback increases, each day as it moves further above 1100, in our opinion.

For Friday, we expect a slightly lower second estimate of last year's Q4 GDP growth, which we do not believe will impact the market too much. In addition, existing home sales for January may not be disappointing as both some sellers and some buyers may have too quickly hit the market fearing that buying homes this cheap is a chance of a lifetime. However, Friday's likely disappointing Chicago PMI and University of Michigan's consumer sentiment, combined with the market moving up on Wednesday (and possibly on Thursday), will likely push the market down a bit, giving us a taste of what may happen next week with possibly three very important indicators (ISM, ISM Services and unemployment) being disappointing .

Lastly, we thought to mention something regarding the US’ ever expanding debt, to which any new jobs bill will add. There may come a time when, unfortunately, the government will no longer be able to help everyone due to high debt. At that point, many may begin protesting and demanding support from the cashless and/or dollar-valueless government, similar to what the Greeks are doing these days. We hope that at that time, we, along with many others, will be vacationing on one of those beautiful Greek islands.

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