Sunday, August 15, 2010

Interesting quote and some other thoughts ...

Before mentioning the quote, we'd just like to point to the fact that the economy is moving in the wrong direction, and that's become clearer since the start of 2H '10 (as we've been discussing since Q3 last year). Recovery will take a while, although the equity market may remain over-valued (in our opinion) due to the government making risky assets more attractive (we must say that S&P500 is down more than 3% YTD). Its amazing that consumers are at a stage where they not only have to pay down their debt (which can be helped by actually saving more) but they are also being enticed or 'pushed' to allocate their limited and possibly declining disposable income (due to uncertainty of employment) towards riskier assets! There will come a time, when the Fed, Congress, the President and the market will realize that this economy cannot be turned around merely by enticing consumers to buy or borrow more.

In addition, as much as we hate to say it, as we consider ourselves 'supply-siders', the supply-side strategy will not work. This is due to lack of credit available for consumers. And we certainly are not blaming the banks. Again, consumers no longer have credit because they borrowed and borrowed and borrowed, which has been the driver behind US economic growth since mid-80's. That's no longer possible, unless the government decides to 'force' banks to lend, and promises consumers that they won't have to pay it back. Yes, it sounds unrealistic, but it actually is becoming more realistic everyday. Let's put it this way, in California, some long-time recipients of jobless benefits have begun to use those government checks at casinos, while at the same time not paying their mortgages waiting for government to provide more protection from the ‘ruthless’ banks, which the government bailed out. It all just goes round and round.

We've mentioned this before, for this economy to stabilize and maintain it for the long-term, it must transition back to more manufacturing/production. Consumption can no longer be the growth driver. We look for consumption growth to continue in Asia (incl. China and India) as it remains untapped compared with the US, which will likely be followed by demands for higher wages in those countries (as we're already seeing in China). This could once again make labor more attractive here in the US, which could drive the transition towards more manufacturing and in time, a more balanced production and consumption driven economy.


Now, after such a lengthy argument/explanation, here's a quote from someone whom CNN was interviewing - "All the people that helped perpetuate the bad loans are now perpetuating the rescue scams". Sounds like banks and their little 'made-to-look-local-and-consumer-friendly' side businesses; whether you're talking about mortgage loans or credit card debt.  We note that we are NOT marketing CNN or any other of the too-many cable news networks.

Week of 8/16 – 8/20

Some potentially market-moving indicators will be released next week.

We think last week’s jobless claims will be inline with the current 475K consensus as many of the now-jobless government temp workers will likely take a bit longer to file. Continuing claims will likely show increase given the latest uptick in the 4-week moving-average (MA) of initial claims, combined with minimal job growth in the private sector. Last week’s disappointing July employment figures (as we’d expected) support our belief.

July housing starts will likely be in-line with the 555K consensus (an increase of 6K from June) given June’s surprising higher than expected housing permits. However, we believe July’s housing permits figure will be disappointing (which is positive in our opinion) as we are getting closer to the end of the summer construction season. Although the equity market reacts positively to strong housing permit figures, we believe that more permits could once again push inventories higher in 3 – 6 months, putting more pressure on home values and the overall housing market.

We don’t expect July’s capacity utilization to surprise on the upside mostly because exports were likely disappointing in July as they were in June (reported last week).

Lastly, the Leading Indicators will likely come in better than expected. We note that the better figure is driven mainly by the stock market’s performance in July; S&P500 went up nearly 7%. Although we must paradoxically say that we believe the Leading Indicators is actually a lagging one; it weighs too heavily the stock market’s performance.

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