U.S. stocks, after spending most of the day in positive territory looked ready to take one of those afternoon headers, but bounced again in the final 90 minutes of trading to close well into plus side.
I’m not sure what sparked the late-session rally that erased what appeared to be a post-lunch fizzle, maybe it was comments about waiving appraisals for refinancing GSE mortgages, which we’ll touch on below. Financial shares ended the day lower, but the group pared its losses late in the day, which helped the indices advance – so maybe the comment to waive appraisals was what did it.
Energy and basic material shares led the advance as the two sectors jumped 4.71% and 2.67%, respectively.
Market Activity for December 10, 2008
The weekly energy report showed gasoline supplies rose 3.7 million in the week ended December 5 – supplies were expected to fall 400,000. Further, an industry report showed demand will fall the most since 1983. Nevertheless, energy stocks shook this data off to focus on what will surely be OPEC production cuts, the likelihood that the massive Federal Reserve liquidity injections will cause prices to soar again and the very low valuations at which oil-integrated, coal and drilling shares trade.
The Economy
The Commerce Department reported wholesale inventories fell well more than expected, declining 1.1% in October vs. the expectation for a 0.2% decline. The underlying sales data, which we watch acutely, slid 4.1% -- down 2.9% ex-petroleum. The ex-petroleum figure applies right not as energy prices have collapsed.
The degree to which inventories declined surely won’t help the fourth-quarter GDP reading, already expected to be lowest reading since the 1981-82 recession (the change in inventories is one segment of the GDP report). We’re probably looking at a negative 5.0% at an annual rate for the final three months of the year.
The sales data is disturbing, but this is for October so it’s not of great surprise as we knew that month, and November for that matter, were horrendous. Everything aspect of the report was down save machinery, drugs and paper products. Durable goods sales were down 4.2%, automotive down 4.5%, furniture sales down 4.0%, electrical goods down 1.9%.
Machinery sales were actually up 1.6% in October, which is a bit surprising.
As a result of sales falling more than stockpiles, the inventory figure rose in October marking the fourth monthly increase. Stockpiles, while rocketing off the all-time low hit in June, remain low but we’ll need to see some rebound in sales over the next few months or we may not be able to state this for much longer.
Budget Buster
In a separate report, the Treasury Department reported the 2009 fiscal-year budget picture continues to deteriorate.
The November deficit jumped for the second month of the new fiscal year as the government began to re-capitalize banks via the TARP. While these funds will collect a yield via preferred shares issued to the Treasury (this is more an investment than a traditional outlay), fact is the Commerce and Housing segment of the budget skyrocketed last month to $95 billion from $980 million a year ago.
These funds will flow back to Treasury, assuming the biggest banks don’t go down and become part of the government, which is not a likely scenario, thankfully. Why? Because the SEC will finally be forced to withdraw mark-to-market accounting rules and return us back to capital adequacy ratio standards that served us so well for a very long time if it came to this. Unfortunately we have trouble stating this with ultimate confidence during these times.
The deficit came in at $164 billion last month, compared to $98 billion in November 2007. The shortfall has widened to $401 billion fiscal year to-date, which is just $54 billion shy of the shortfall for the entire 2008 fiscal year. (The government’s fiscal year begins in October, so we’re just two months into it)
This is really sad considering we made so much progress coming out of the 2001 downturn – lowering the budget shortfall from 3.9% of GDP in early 2004 to the virtually non-existent level of 1.2% by the start of the 2008 fiscal year. .
Budget deficits always rise as we enter recession/downturn as corporate and individual tax receipts decline – of course, government spending never declines. This was certainly the case as we entered the 2001 downturn and it took until 2004 for revenues to pick up again; it’s no coincidence revenues jumped following the May 2003 tax cuts on income and capital – the three years that ran 2005-2007 experienced the largest inflation-adjusted increase in tax revenues ever, jumping $785 billion during that stretch.
The budget will skyrocket this year and next, hitting the highest levels in the post-WWII era. We may hit 10%, as a percentage of GDP, which would exceed the current high of 5.3% touched in 1992. During WWII the budget/GDP ratio hit 24% in 1942, which needless to say is the all-time record.
A tax-rate response is needed again to revive things. This will drive the deficit higher over the next 12-18 months, but this is already occurring. Two years out the revenues will come rolling in again – history has shown this is the result (we have the 1965, 1978, 1982, 1986 1997 and 2003 tax-rate reductions as evidence – 1978 and 1997 were solely cap gains tax cuts) as the stock market will rise and the lower tax on capital will encourage investors to actually realize gains and thus pay the lower tax. Individual receipts and corporate tax receipts will also rebound due to a higher corporate profits and the higher tax base that results from job creation.
Appraisal Industry Bailout Next?
Federal Housing and Finance Agency (FHFA) Director James Lockhart made comments yesterday (just comments to a reporters question, not an official announcement) explaining the agency is considering waiving the new appraisal requirement on refinanced loans (regarding Fannie and Freddie mortgages).
This could be big. While I think it is not the way we want to go, it certainly gets at the heart of the issue for now. Many have not been able to refi, because their home values have declined and thus would no longer have an appropriate loan-to-value ratio– this would remove the obstacle.
We know the government has proposed using Fannie and Freddie to issue 4.50% mortgage loans, so one would assume this rate to be in effect for refis too – just a guess at this point. Cha-Ching!
While we’re changing standards, maybe the authorities can eliminate mark-to-market accounting rules that have led to the financial-sector death spiral, which was a totally arbitrary rule pertaining to capital adequacy ratios put in place just a year ago. It sure makes a heck of a lot more sense than the plethora of Fed facilities and Treasury programs – some of which have shown little if any efficacy.
Have a great day!
Brent Vondera, Senior Analyst
I’m not sure what sparked the late-session rally that erased what appeared to be a post-lunch fizzle, maybe it was comments about waiving appraisals for refinancing GSE mortgages, which we’ll touch on below. Financial shares ended the day lower, but the group pared its losses late in the day, which helped the indices advance – so maybe the comment to waive appraisals was what did it.
Energy and basic material shares led the advance as the two sectors jumped 4.71% and 2.67%, respectively.
Market Activity for December 10, 2008
The weekly energy report showed gasoline supplies rose 3.7 million in the week ended December 5 – supplies were expected to fall 400,000. Further, an industry report showed demand will fall the most since 1983. Nevertheless, energy stocks shook this data off to focus on what will surely be OPEC production cuts, the likelihood that the massive Federal Reserve liquidity injections will cause prices to soar again and the very low valuations at which oil-integrated, coal and drilling shares trade.
The Economy
The Commerce Department reported wholesale inventories fell well more than expected, declining 1.1% in October vs. the expectation for a 0.2% decline. The underlying sales data, which we watch acutely, slid 4.1% -- down 2.9% ex-petroleum. The ex-petroleum figure applies right not as energy prices have collapsed.
The degree to which inventories declined surely won’t help the fourth-quarter GDP reading, already expected to be lowest reading since the 1981-82 recession (the change in inventories is one segment of the GDP report). We’re probably looking at a negative 5.0% at an annual rate for the final three months of the year.
The sales data is disturbing, but this is for October so it’s not of great surprise as we knew that month, and November for that matter, were horrendous. Everything aspect of the report was down save machinery, drugs and paper products. Durable goods sales were down 4.2%, automotive down 4.5%, furniture sales down 4.0%, electrical goods down 1.9%.
Machinery sales were actually up 1.6% in October, which is a bit surprising.
As a result of sales falling more than stockpiles, the inventory figure rose in October marking the fourth monthly increase. Stockpiles, while rocketing off the all-time low hit in June, remain low but we’ll need to see some rebound in sales over the next few months or we may not be able to state this for much longer.
Budget Buster
In a separate report, the Treasury Department reported the 2009 fiscal-year budget picture continues to deteriorate.
The November deficit jumped for the second month of the new fiscal year as the government began to re-capitalize banks via the TARP. While these funds will collect a yield via preferred shares issued to the Treasury (this is more an investment than a traditional outlay), fact is the Commerce and Housing segment of the budget skyrocketed last month to $95 billion from $980 million a year ago.
These funds will flow back to Treasury, assuming the biggest banks don’t go down and become part of the government, which is not a likely scenario, thankfully. Why? Because the SEC will finally be forced to withdraw mark-to-market accounting rules and return us back to capital adequacy ratio standards that served us so well for a very long time if it came to this. Unfortunately we have trouble stating this with ultimate confidence during these times.
The deficit came in at $164 billion last month, compared to $98 billion in November 2007. The shortfall has widened to $401 billion fiscal year to-date, which is just $54 billion shy of the shortfall for the entire 2008 fiscal year. (The government’s fiscal year begins in October, so we’re just two months into it)
This is really sad considering we made so much progress coming out of the 2001 downturn – lowering the budget shortfall from 3.9% of GDP in early 2004 to the virtually non-existent level of 1.2% by the start of the 2008 fiscal year. .
Budget deficits always rise as we enter recession/downturn as corporate and individual tax receipts decline – of course, government spending never declines. This was certainly the case as we entered the 2001 downturn and it took until 2004 for revenues to pick up again; it’s no coincidence revenues jumped following the May 2003 tax cuts on income and capital – the three years that ran 2005-2007 experienced the largest inflation-adjusted increase in tax revenues ever, jumping $785 billion during that stretch.
The budget will skyrocket this year and next, hitting the highest levels in the post-WWII era. We may hit 10%, as a percentage of GDP, which would exceed the current high of 5.3% touched in 1992. During WWII the budget/GDP ratio hit 24% in 1942, which needless to say is the all-time record.
A tax-rate response is needed again to revive things. This will drive the deficit higher over the next 12-18 months, but this is already occurring. Two years out the revenues will come rolling in again – history has shown this is the result (we have the 1965, 1978, 1982, 1986 1997 and 2003 tax-rate reductions as evidence – 1978 and 1997 were solely cap gains tax cuts) as the stock market will rise and the lower tax on capital will encourage investors to actually realize gains and thus pay the lower tax. Individual receipts and corporate tax receipts will also rebound due to a higher corporate profits and the higher tax base that results from job creation.
Appraisal Industry Bailout Next?
Federal Housing and Finance Agency (FHFA) Director James Lockhart made comments yesterday (just comments to a reporters question, not an official announcement) explaining the agency is considering waiving the new appraisal requirement on refinanced loans (regarding Fannie and Freddie mortgages).
This could be big. While I think it is not the way we want to go, it certainly gets at the heart of the issue for now. Many have not been able to refi, because their home values have declined and thus would no longer have an appropriate loan-to-value ratio– this would remove the obstacle.
We know the government has proposed using Fannie and Freddie to issue 4.50% mortgage loans, so one would assume this rate to be in effect for refis too – just a guess at this point. Cha-Ching!
While we’re changing standards, maybe the authorities can eliminate mark-to-market accounting rules that have led to the financial-sector death spiral, which was a totally arbitrary rule pertaining to capital adequacy ratios put in place just a year ago. It sure makes a heck of a lot more sense than the plethora of Fed facilities and Treasury programs – some of which have shown little if any efficacy.
Have a great day!
Brent Vondera, Senior Analyst
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