U.S. stocks ended a pretty good session on Friday, especially after a triple-digit decline in pre-market futures gave the impression things were going to be rough. A couple of good earnings reports out of the tech sector and what appeared to be an increased chance of a decent tax response making it into the stimulus bill helped the broad market rally about two hours into trading.
(Let’s hope Congress gets the message the market is sending, which looked to be the case on Friday. However, what we heard on the Sunday morning talk shows was not altogether helpful. President Obama’s chief economic advisor made pretty clear his disdain for current tax rates, and what they are calling tax cuts in the stimulus bill are mostly government transfer payments to those that escape federal taxes on income.)
At this point, I don’t see even the higher current-year allowances on business spending write-offs in the bill, but there are some good ideas the Senate may be able to force into the legislation. Tax cut proposals from the House were completely ignored last week, but the Senate works a little different and if the Obama Administration wants a bipartisan bill, they’ll have to compromise a bit. The market is showing investors do not like what they have seen thus far – the S&P 500 is down 7.8% for the month.
Most of the 10 major sectors within the S&P 500 managed to gain ground on Friday. Industrials took it on the chin, however, as shares of GE lost 10%.
Market Activity for January 23, 2009
Concentrate on Your Own Currency
We were without an economic release on Friday, so the big news of the day was statements from the soon-to-be Treasury Secretary Tim Geithner. In written comments to members of Congress, Geithner expressed the administration believes China is “manipulating” their currency. A red light goes off in my head when I see politicians and policymakers engaging in this talk.
Look, China is likely to devalue their currency for fear a substantial deterioration in domestic growth will trigger levels of unemployment that result in social unrest. The Chinese government, of course, does not want this to occur. They’ve learned their old ways of tamping uprisings don’t work real well, at least in an overt sense, as it damages economic ties with trading partners and have since used economic responses to quell these events.
What that means is they will devalue their currency to boost exports. The Treasury Secretary can engage in all of the currency rhetoric he wants; what he needs to concentrate on is policy that sends the world the message the U.S. is the place in which capital will remain the most welcome and best treated, to borrow the Walter Wriston adage. He can do this by recommending broad-based tax rate reductions on income, corporate profits and especially capital along with reminding the Fed that sound monetary policy is in our best long-run interest.
For now, he seems set on vilifying the Chinese. (We should recall our trade deficit with China grew so wide over the previous few years not because of Chinese currency manipulation but primarily because the Federal Reserve kept real interest rates negative a few years back that encouraged credit expansion – when the Fed effectively subsidizes debt, you’re going to get more debt and naturally higher levels of consumption.)
Furthermore, one cannot state that they believe in a strong dollar, but in the same breath say China must strengthen their currency. To achieve this China must reduce their foreign currency reserves, much of which is in U.S. dollars. Such action will not boost the value of the dollar, but weaken it. What’s more, when we’re about to engage in $1 trillion in Treasury debt offerings over the next year, picking this fight is that much worse.
In addition, we can call on the Chinese to boost the value of their currency (the Yuan) but even if China becomes less competitive in terms of a manufacturing base, it’s not going to bring certain types of factory jobs back to the U.S. They will simply move to Thailand or Vietnam, not Cleveland or Raleigh.
Don’t do it Geither; you’re playing with fire. A trade war, especially right now is in no ones interest, and that’s putting it mildly. Ignorant politicians have already jumped on Geithner’s comments by stating if we can’t work things out diplomatically we can do it legislatively. Read that as tariffs. Be very careful Mr. Treasury.
Earnings Season
This week marks the heart of fourth-quarter earnings season and will give us a very good sense of how profit results will shape up for what was a horrendously weak period. Forget overall S&P 500 earnings results right now, pro-cyclical accounting rules are in the process of putting the financial sector six feet under. What we should concentrate on are ex-financial results. If we can get past the season with a decline in ex-financial profits that doesn’t exceed 10%, I think the market can rally on the news, all else held constant. We’ll have a good idea by the end of this week.
Today we get back to economic data as the Leading Economic Indicators (LEI) index for December is out and existing home sales for last month too.
LEI is going to post another decline, weighed down by labor market indicators such as jobless claims and hours worked. The housing market will also continue to pressure the number as building permits are very weak.
Existing home sales for December will make another new low.
We need a confidence boost and nothing can accomplish this like immediate and “permanent” reductions in tax rates – investors and consumers need certainty! The Bush Administration failed to include this in their response to the economy’s woes and it doesn’t seem President Obama is too interested either as he’s focusing on public works programs and government transfer payments.
But maybe the market is successful in sending a clear message to policy makers. If this means another move lower, so be it; getting Washington’s attention will be very helpful to stock prices over the next year. To engage in stimulus without driving after-tax returns on incomes and capital higher just doesn’t seem very serious to me. It makes one believe there’s some other agenda in play.
Have a great day!
Brent Vondera, Senior Analyst
(Let’s hope Congress gets the message the market is sending, which looked to be the case on Friday. However, what we heard on the Sunday morning talk shows was not altogether helpful. President Obama’s chief economic advisor made pretty clear his disdain for current tax rates, and what they are calling tax cuts in the stimulus bill are mostly government transfer payments to those that escape federal taxes on income.)
At this point, I don’t see even the higher current-year allowances on business spending write-offs in the bill, but there are some good ideas the Senate may be able to force into the legislation. Tax cut proposals from the House were completely ignored last week, but the Senate works a little different and if the Obama Administration wants a bipartisan bill, they’ll have to compromise a bit. The market is showing investors do not like what they have seen thus far – the S&P 500 is down 7.8% for the month.
Most of the 10 major sectors within the S&P 500 managed to gain ground on Friday. Industrials took it on the chin, however, as shares of GE lost 10%.
Market Activity for January 23, 2009
Concentrate on Your Own Currency
We were without an economic release on Friday, so the big news of the day was statements from the soon-to-be Treasury Secretary Tim Geithner. In written comments to members of Congress, Geithner expressed the administration believes China is “manipulating” their currency. A red light goes off in my head when I see politicians and policymakers engaging in this talk.
Look, China is likely to devalue their currency for fear a substantial deterioration in domestic growth will trigger levels of unemployment that result in social unrest. The Chinese government, of course, does not want this to occur. They’ve learned their old ways of tamping uprisings don’t work real well, at least in an overt sense, as it damages economic ties with trading partners and have since used economic responses to quell these events.
What that means is they will devalue their currency to boost exports. The Treasury Secretary can engage in all of the currency rhetoric he wants; what he needs to concentrate on is policy that sends the world the message the U.S. is the place in which capital will remain the most welcome and best treated, to borrow the Walter Wriston adage. He can do this by recommending broad-based tax rate reductions on income, corporate profits and especially capital along with reminding the Fed that sound monetary policy is in our best long-run interest.
For now, he seems set on vilifying the Chinese. (We should recall our trade deficit with China grew so wide over the previous few years not because of Chinese currency manipulation but primarily because the Federal Reserve kept real interest rates negative a few years back that encouraged credit expansion – when the Fed effectively subsidizes debt, you’re going to get more debt and naturally higher levels of consumption.)
Furthermore, one cannot state that they believe in a strong dollar, but in the same breath say China must strengthen their currency. To achieve this China must reduce their foreign currency reserves, much of which is in U.S. dollars. Such action will not boost the value of the dollar, but weaken it. What’s more, when we’re about to engage in $1 trillion in Treasury debt offerings over the next year, picking this fight is that much worse.
In addition, we can call on the Chinese to boost the value of their currency (the Yuan) but even if China becomes less competitive in terms of a manufacturing base, it’s not going to bring certain types of factory jobs back to the U.S. They will simply move to Thailand or Vietnam, not Cleveland or Raleigh.
Don’t do it Geither; you’re playing with fire. A trade war, especially right now is in no ones interest, and that’s putting it mildly. Ignorant politicians have already jumped on Geithner’s comments by stating if we can’t work things out diplomatically we can do it legislatively. Read that as tariffs. Be very careful Mr. Treasury.
Earnings Season
This week marks the heart of fourth-quarter earnings season and will give us a very good sense of how profit results will shape up for what was a horrendously weak period. Forget overall S&P 500 earnings results right now, pro-cyclical accounting rules are in the process of putting the financial sector six feet under. What we should concentrate on are ex-financial results. If we can get past the season with a decline in ex-financial profits that doesn’t exceed 10%, I think the market can rally on the news, all else held constant. We’ll have a good idea by the end of this week.
Today we get back to economic data as the Leading Economic Indicators (LEI) index for December is out and existing home sales for last month too.
LEI is going to post another decline, weighed down by labor market indicators such as jobless claims and hours worked. The housing market will also continue to pressure the number as building permits are very weak.
Existing home sales for December will make another new low.
We need a confidence boost and nothing can accomplish this like immediate and “permanent” reductions in tax rates – investors and consumers need certainty! The Bush Administration failed to include this in their response to the economy’s woes and it doesn’t seem President Obama is too interested either as he’s focusing on public works programs and government transfer payments.
But maybe the market is successful in sending a clear message to policy makers. If this means another move lower, so be it; getting Washington’s attention will be very helpful to stock prices over the next year. To engage in stimulus without driving after-tax returns on incomes and capital higher just doesn’t seem very serious to me. It makes one believe there’s some other agenda in play.
Have a great day!
Brent Vondera, Senior Analyst
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