Financials got clocked, as you can see below, on news the “bad bank” idea is running into snags. This is ridiculous. As policymakers focus on their brainiac fixes they are incapable of seeing the simple solution that’s slapping them in the face – end mark-to-market rules with regard to establishing capital adequacy ratios.
Additionally, comments from the White House that sounded like they came from a Russian oligarch rather than a U.S. president didn’t help matters. You want to demand that private-sector firms halt bonuses? Maybe we should understand how our market works first. While there are economic problems right now, we should not forget that top talent is performing well in many cases; if you punish this talent it will move on. And if they can’t move on under the current labor market conditions, these people won’t forget, and they’ll say sayonara the moment they get the chance.
Fire those that have made grave mistakes and reward those that continue to bring value – that’s how we’re set up to prosper. If the government believes it is justified in managing businesses because they have provided taxpayer funded capital, they need to be reminded that beyond the mistakes financial institutions have made the regulatory decision to implement mark-to-market accounting rules just 14 months ago is that which drives the industry, and the economy, into the dirt.
Market Activity for January 29, 2009
Yesterday’s Economic Data
First, the Labor Department reported initial jobless claims rose 3,000 to 588,000 for the week ending January 24. So, we held below the 600k mark that everyone expects the reading to eclipse, but that level will probably be breached within the next couple of weeks as layoff announcements continue to climb.
The four-week average rose for the first time in five weeks, up 24,250 to 542,500. This measure is now nearly back to its mid-December high and as the lower readings of mid-January drop out over the next three weeks you can bet it’s going higher.
Continuing claims rose to a record high of 4.776 million, increasing another 159,000. Although we’ll note that when one adjusts for the size of payroll employment, continuing claims would have to hit 7.5-8.0 million to match the highs of 1974 and 1982. So the current labor market issues are hardly as rough as those past periods.
That said, we better get our priorities straight on attacking the problem, or it will reach those levels.
We must attack the crisis in confidence by slashing tax rates on incomes, capital and corporate profits. The immediate boost to after-income and after-tax return expectations would be the greatest stimulus we can implement right now. Spending much of the stimulus plan on government transfer payments and allowing laid off workers entry into the Medicaid program will not do – this is what passed the House Wednesday night.
Even the infrastructure plans (and one can argue whether or not this is beneficial but at least it is some form of stimulus) make up only 12% of the total package, and even then 80% of which would not be implemented until 2010 and 2011. As former Fed Governor Larry Lindsey summed it up yesterday, we’ll look back a couple of years from now and all we’ll find is we’re two years older and saddled with much more debt by the looks of this current bill.
Back to the labor market, the insured unemployment rate (the jobless rate for those eligible for benefits) rose 0.2% to 3.6%. This reading generally corresponds with a directional move in the overall unemployment rate, so we’ll probably see the jobless rate hit 7.4% when the January data is released early next month.
Next, the Commerce Department reported that durable goods orders fell hard in December, down 2.5% on the headline reading and 3.6% excluding transportation. This report shows as clearly as anything that businesses are in capital preservation mode, unwilling to engage in business equipment plans until they see something that offers some sense of confidence over the foreseeable future.
Every aspect of the report was down, save electrical equipment and military aircraft. Primary metals were down 6.9% for the month, industrial machinery orders fell 5.0% and computers and electronics orders dropped 7.2%. Orders for these three components of the report are down 70%, 53.2% and 27.5%, respectively at an annual rate for the past three months.
And if these two reports weren’t bad enough, the Commerce Department also showed news home sales plunged 14.7% in December to 331,000 units at an annual rate – that’s the lowest level since records began in 1963.
The good news is at these levels it is tough to believe we haven’t bottomed out. Further, the drag this data has on the economy has eased as residential construction makes up just 3.0% of GDP, down from 6.0% three years ago.
In terms of region, sales were weak across the board. The Northeast endured the largest decline, down 28.2% -- although this is a bit deceiving as the prior two months saw strong sales growth. The West region saw sales fall 20.2%; the South was down 12.1% and Midwest new home sales fell 5.6%.
The median price of a new home fell 9.3% on a year-over-year basis. So we add this into the other three major housing indicators and home prices are down 12% on average over the past year.
Despite the decline in home prices, the inventory-to-sales ratio rose to a new high.
Yesterday was indeed a particularly harsh day on the economic data front. Today won’t be much better, although it is expected (so long as it’s not worse than -6.0%), as the preliminary fourth-quarter GDP report registers its weakest reading since 1982.
We’ll get through this, but it would be nice to see a strong, pro-growth agenda that attacks the problem. We don’t need the economy to turn on a dime, recessions are important events that eliminate the weak and provide a stronger base with which to grow when the business cycle begins to expand.
However, if we choose to support businesses that cannot compete on the global stage, and expand transfer payments to the point that government spending reaches 25%-30% of GDP, then one should not expect the economy to rebound with the vigor we’ve become accustomed to.
What we can do immediately is return a higher level of confidence to the market place, but that will take the correct policy response.
Have a great weekend!
Brent Vondera, Senior Analyst
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