On the banking system, it is certainly more stabilized than it was back in the fourth quarter when it could only be described as chaotic – inter-bank lending rates were sky-high, illustrating the unwillingness of banks to lend to one another; this is not the case today. We shouldn’t confuse lower lending activity with instability; banks always tighten lending standards in a downturn and this was certainly needed coming out of the past few years when there really were no standards.
On the Geithner comments…well, let’s just say he bombed. More on that below.
Basic material, energy and technology shares gained ground yesterday. This is a good thing as we need the commodity players (materials and energy) to pick up as a sign things are reflating. I’ve got a feeling we won’t be worrying about basic material and energy stocks a year down the road as fiscal/monetary policy will spark an inflationary event that will cause its own issues. For now though the market will view signs of reflation as a good thing.
It was also nice to see technology shares gain ground on a day in which most sectors were down. This group has huge cash positions, low debt levels, and is poised to rock when the economy does turn. Now we need to see industrial shares rally, which is another industry we think will outperform over the next few years.
On the downside, utility shares led the declines as the administration seems dead set on cap and trade. I’m laughing as I type this, but I shouldn’t be. This is an inappropriate response to energy efficiency and it will cause home-energy costs to jump 40%-50% at least over the next couple of years if it is eventually passed.
Market Activity for March 3, 2009
So Bernanke and Geithner were on Capitol Hill again yesterday. They talked about several topics, but we found it strange neither touched on one of the biggest news items of the day, which is the latest Fed program – the lack of clarity, or willingness to expound on the various programs Treasury and the Fed are rolling out is one of the main problems right now.
TALF (yet another acronym)
The Fed will finally roll out the Term Asset-Backed Loan Facility (TALF) on March 25 – they’ve been working on this since November. It will be a $1 trillion (we’re seeing a lot of that number lately) program to prop up the market for consumer and business loans.
The TALF will start by offering $200 billion in loans to hedge funds and other investors aimed at jumpstarting lending for consumer-related and small business loans. The program will also help auto dealers finance inventory.
This will target the securitization market, a huge source of credit that is outside of the traditional banking system – a credit source that has basically shutdown following the Lehman shock. Personally, I’m not sure this is the best route as consumer credit simply needs to contract for a while still. And this program may have some difficulty as a result; the consumer has pulled back for a reason. If they are not willing to borrow, you can open up the pipeline all you want but it won’t have the intended efficacy.
Geithner Comments
And then we have the Treasury Secretary. In his testimony to Congress yesterday, explaining to the members of the Spend-Freely Club how the $1.5-$1.75 trillion deficit we’re going to run this year (as he vilifies other economies for being currency manipulators at the same time – governments we’ll need to buy this debt), that the financial-system rescue will cost more than $700 billion. Well, hell yeah it will. The way they’re laying waste to the market by crushing investor psychology, disparaging the holders of capital and scaring the tar out of the business community – the very people we’ll need to bring things back – no amount of government spending will do the trick.
Mr. Geithner also mentioned he would crack down on companies and individuals who try to avoid paying taxes -- now that’s a real peach of a comment coming from him; I’m sure you all remember the FICA tax fiasco. Besides, avoidance is not evasion – the former is legal – and maybe if we were to implement a tax structure that made sense, economic participants wouldn’t find it worthwhile to incur the costs of finding legal ways to avoid tax rates. But no, they will raise tax rates. Well, guess what pal, you’re going to be chasing a lot of people because I’ve got a feeling tax avoidance is going to make a big comeback.
And get this one, the Treasury Secretary also mentioned the administration plans to propose rules that would curb companies’ ability to delay paying U.S. corporate tax on foreign earnings. Um, the issue he is talking happens to be a current law, U.S. firms that have subsidiaries overseas are allowed to defer U.S. corporate tax until they bring the money home – and guess what? The money doesn’t come home, its stays put.
Why do you think this deferral is law right now? Anyone? It’s because no other OECD economy levies their home tax on business done overseas. You see, U.S. firms already pay the country’s corporate tax in which the sales are made, by forcing them to pay the U.S. tax as well means they become unable to compete. Now it seems they will eliminate this rule. That’s grand!
This letter has been calling for the abolition of the “repatriated tax” as the above deferral is often called. Instead though, they seek to make it overtly onerous. These people are like a financial hurricane, destroying anything in its path. One has to believe, for those giving this much thought as have I, that they are purposely attempting to drive the stock market and the economy into the dirt simply so they can control more of it via their highfalutin “fixes.” These people are not idiots, maybe incredibly naïve, but not completely stupid. What else is one supposed to take from the path they are on? It makes zero economic sense.
Pending Home Sales
Pending home sales fell 7.7% for January after the December increase was downwardly revised to show a 4.8% increase, it was initially estimated to have risen 6.3%. Three of the four regions dropped, led by a 13% drop in the Northeast. The South saw a drop of 12% and in the Midwest pending sales were down 9%. Pending sales rose 2.4% in the West.
Pending home sales are considered a leading indicator because they track contract signings. Although, lately an upswing in pendings hasn’t been a great barometer of existing home sales for the subsequent couple of months as there has been a trend of mortgage contracts being signed but then falling apart when it came to closing – existing home sales are not counted until the contract is closed.
It appears we’ve got a while before we find a bottom in housing. We’ve got to be close, but troubles within the labor market will delay the rebound.
Have a great day!
Brent Vondera, Senior Analyst
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