Daily Insight

U.S. stocks ended yesterday’s session relatively flat (although activity was somewhat volatile throughout the day) as investors hold off and wait for the path Treasury Secretary Geithner will lay out in his press conference this morning.

The S&P 500 managed a small gain, while the Dow was dragged lower by consumer and energy-related shares. A nice day from shares of 3M and GE were not enough to pull the 30-stock index to the plus side

Financial and industry shares pushed the broad market into positive territory by the close as traders await the Geithner announcement and assume if the plan is effective these will be the areas that receive the most benefit – financials for the obvious reasons and industrials simply because of the economic boost that may result.


Decliners just barely beat advancers, 10 stocks fell for every eight that rose. Volume was subdued as 1.2 billion shares traded on the NYSE, 15% below the three-month average.

Market Activity for February 9, 2009

Some Early Signs of Reflation

Metals prices have rebounded from the lows they set following the credit market chaos that began in September. The market, assuming no additional carnage is upon us (no new financial-sector events I should say), seems to be turning its focus from deflation risk to inflation, even if it will take some time still for this to set in.

While the inflation rates that we think are possible due to trillions in liquidity the Fed has pumped in (the cash is being hoarded for now but when lending normalizes it will explode through the system) and another trillion dollars from the fiscal side will not be a pleasant event, it is good for stocks right now to expect the deflation event will not truly occur.



The Baltic Dry Index (a gauge measuring the price of moving raw materials by sea among 26 shipping routes) has also rebounded from it 22-year nadir back in November.


If these trends continue it will help to ease concerns over the state of economic activity and stock prices as a result.

The Burden

We have a number of challenges in front of us, and I’m just not talking purely from an economic perspective. We have entitlement programs that are out of control and demographics will intensive the situation. There are also geopolitical risks that must be dealt with and homeland security is a premium. On the economic front, we have a housing market that remains in a nasty correction, the credit markets are not normal, and joblessness is rising, fast.

However, this economy is spring-loaded because the things that matter most look good. Inventories are low – and thus we do not have the usual bloat that accompanies this point in the business cycle, businesses are streamlined and stuffed with cash, our labor force is highly productive -- thanks to a strong work ethic and capital improvements that drive productivity, and real (inflation-adjusted) wages have jumped over the past few months -- thanks to the plunge in energy prices. We should expect real incomes to remain positive over the long term thanks to the prior point – real wage growth is dependent upon the marginal productivity of labor.

But darn, the private sector continues to get bashed via political rhetoric. By stating lower tax rates (specifically on capital) and freer trade got us into this mess, while ignoring the true reasons – terrible monetary policy mistakes, government intrusion in the housing market (demanding low-income borrowers gain cheap access to credit) and an accounting rule that has exacerbated the whole thing -- is terribly destructive.

Look, investors want to seek out the next innovation and businesses want to invest in new equipment, but capital will remain on strike so long as policy makers, either explicitly or tacitly, continue to state tax rates are going higher and free trade pacts will be destroyed. The government cannot get in the way like it has over the past year, and the concern is it’s pretty obvious the shadow, or economic burden, will extend over the next few years.

If we just refrain from making major mistakes in the future, our economy is poised to bounce back. But if we fail to learn from the most destructive policies of the past – a printing press-minded Fed, higher tax rates (especially during periods of economic vulnerability) and protectionism -- we’re headed for a tough economic road ahead and that means the stock market (savings) will remain mired as well. We should be very careful here.
(Note on the Fed: They have had little choice of late in terms of their monetary and quantitative easing, but they have done what they can for now – the credit troubles have eased substantially. They should not seek to continue to print money in order to drive the cost of money down further – it won’t take long before this policy backfires and they find interest rates are much higher than is accommodative to economic recovery. The market sets prices for a reason and somewhat wider spreads is its way of erasing the credit excesses that resulted from easy money policies of the past. If the Fed looks to drive spreads to normal-economic-situation levels, when things are not normal, it will have consequences.)

Economic Reports for the Week

We were without an economic release yesterday, but get back to it this morning with December wholesale inventories. While this is old data, it will give us a hint to what business inventories will look like when that figure is reported on Thursday. Some will be watching for a larger-than-expected decline as this will affect the Q4 GDP revision to the downside (the inventory component of GDP is what kept the figure from posting a 5.0% real rate of decline).

Later in the week, the most important reports will be the January retail sales figure and initial jobless claims for the week ended February 7.

Of course today the market will be intensely tuned to the Treasury Secretary’s press conference, which will spell out their approach to dealing with the banking sector. The market expects a complete package, he’ll need to deliver.

Have a great day!


Brent Vondera, Senior Analyst