U.S. stocks pulled back on Friday, trimming the week’s performance, as JP Morgan and Bank of America stated March was a tough month, a meaningful decline in oil prices dragged energy and material stocks lower and the latest personal income data didn’t help expectations regarding consumer activity.
The bank news was probably the most important of the day. You may recall financial stocks caught some fire because the largest banks stated they were profitable during the first two months of the year – hard not to be as they can borrow at virtually zero and lend out at 5%-6%. But the commercial real estate market is beginning to cause havoc and we’ve got rising credit-card delinquencies that have hardly run their course as the unemployment rate continues to climb.
Still, last week managed another strong performance as the broad market added 6.17% -- thanks to that huge 7.08% bounce on Monday. The S&P 500 has rallied for three-straight weeks now, up 21% since the nefarious low of 666 was hit on March 9.
Market Activity for March 27, 2009
The Economic Data
The Commerce Department released its personal income and spending data for February, along with the inflation gauge that is tied to personal expenditures (the PCE deflator we often talked about, one of the three main inflation gauges).
The report showed personal income fell 0.2% in February, following a downwardly revised 0.2% rise in January (formerly estimated at a 0.4% increase). The income decline would have been worse if not for a 10% jump in unemployment benefits that boosted the government transfer payments segment of the report.
Total compensation fell 0.3% (hasn’t posted a monthly increase since October); wage and salary income fell 0.4%; rental income slipped 0.2%; interest income dropped 1.2% and dividend income fell 1.5%. The only segments of income that rose were, as mentioned above, government transfer payments, which rose 0.8% in February, and federal workers’ wages.
Inflation-adjusted disposable (after-tax) income remains positive on a year-over-year basis. However, as inflation begins to creep higher, and with monthly income retrenching, we may see this figure move to negative territory a few months out.
(With consumers unwilling to take on more debt (a good thing longer term but bad for the short term), we feel this will keep consumer activity subdued for some time. This is yet another reason we’ve stated broad-based tax rate reductions are needed. This will boost the disposable income number as we wait for the business cycle to turn and the labor market to rebound. Broad-based tax cuts would also boost business spending, which is activity that is vital for job creation. Unfortunately, Washington is headed in the opposite direction, tax rates will rise.)
On the spending side, expenditures rose 0.2% and followed a nice 1.0% rise for January, which was revised higher from the 0.6% increase reported last month. This back-to-back rise in spending is good to see after falling in the prior six-straight months. However, we find no evidence that consumer activity will rebound in a sustained manner as the only area of increase on the income side is coming from government transfer payments – this suggests a personal spending rebound will be transitory.
This data also reports the cash savings rate, which slipped to 4.2% from 4.4% in January. Readers may recall we have been watching for a cash savings level of 5% as a signal consumer activity will rebound (due to the plunge in stock prices and the continued decline in home prices consumers will need this cash cushion in order to feel better about spending). That savings rate figure was reported to have hit 5% in January, but was revised down to the 4.4% in this latest data. We do believe the consumer will return to adding to cash savings, but I’m no longer sure about the 5% figure triggering a sustained rebound. We will need to see the private-sector side of income rebound in order to give us conviction consumer activity will increase in a sustained way.
On the inflation front, the PCE Deflator came in at 1.0% on a year-over-year basis, a slight acceleration from the 0.8% printed for January. (The abrupt deceleration in the year-over-year PCE Deflator is more a function of the collapse in energy prices following the Fed-induced -- and $200 oil hysteria -- spike last summer.)
Core PCE, which excludes food and energy, rose 0.2% last month after rising by the same level in January. On a year-over-year basis, the core PCE inflation rate rose 1.8%, up from 1.7% for January.
While inflation is very low right now, there is no evidence to the claim that deflation is emerging (deflation is not a reduction in the growth rate of prices, but rather an outright decline in which negative figures are posted – and let’s make it clear, the traditional definition involves meaningful declines, not occasional monthly blips below 0%). In fact the data shows inflation is picking up a bit, albeit at very low levels, for now.
Washington Motors
The government has moved in to oust GM CEO Rick Wagoner and will likely force the company to enter into some sort of bankruptcy, although it surely won’t look like conventional bankruptcy. The company failed to meet the benchmarks laid out a couple of months back. GM will continue to receive an undisclosed amount of government aid at it develops a new plan over the next 60 days and will receive greater “guidance” from the Treasury Department than previously was the case.
It is that term, more government “guidance” that has stock futures down big this morning, in my opinion. Fear runs through the market every time it appears the government will become more involved in making business decisions. It also creates greater uncertainties as investors simply don’t know what the government will do. The way this process should occur is through the markets, not via government propping up a company that has made an array of bad decisions for a very long time, which is an issue that goes back to the Bush Administration.
To GM’s credit, they were on the right path roughly a year ago. They made good progress moving much of their legacy costs over to the unions (in terms of the VEBA, moving more of the health-care costs to the unions), some progress regarding employee attrition and the product line was very much improved. They had failed to implement important things such as trimming at least half of their dealership system and eliminating plants, but implementing these plans was pretty much impossible outside of bankruptcy.
We should recall that GM was doing pretty well until the oil price spike that occurred last summer. That spike was caused by the Fed when they engaged in a massive easing campaign that slashed the fed funds rates to 2.00% by June 2008 from 5.25% just a year before. That move sent the dollar reeling, plunging from 84 on the Dollar Index to the low of $71; this dollar freefall pushed commodity prices higher (specifically oil) and as that occurred you had the typical performance-chase occur (and predictions that oil would hit $200 per barrel) that caused crude to soar from $65 in June 2007 to $145 by July 2008. This crushed GM’s SUV product line, where it made virtually all of its money, and that signaled the end.
Now the government is going to rescue the firm? Good luck with that, especially as they force higher fuel efficiency upon the industry in a way that is not realistic (27.3 MPG by 2011; technology will bring increased efficiency over time, but this a mandate that carries a burden GM simply can’t handle right now). Then again, considering the degree to which monetary and fiscal policy will stoke inflation, the public may just demand smaller more fuel-efficient cars – so there may be a master plan here; however, I’m not sure the rest of the market is going to enjoy the environment very much.
Have a great day!
Brent Vondera, Senior Analyst
The bank news was probably the most important of the day. You may recall financial stocks caught some fire because the largest banks stated they were profitable during the first two months of the year – hard not to be as they can borrow at virtually zero and lend out at 5%-6%. But the commercial real estate market is beginning to cause havoc and we’ve got rising credit-card delinquencies that have hardly run their course as the unemployment rate continues to climb.
Still, last week managed another strong performance as the broad market added 6.17% -- thanks to that huge 7.08% bounce on Monday. The S&P 500 has rallied for three-straight weeks now, up 21% since the nefarious low of 666 was hit on March 9.
Market Activity for March 27, 2009
The Economic Data
The Commerce Department released its personal income and spending data for February, along with the inflation gauge that is tied to personal expenditures (the PCE deflator we often talked about, one of the three main inflation gauges).
The report showed personal income fell 0.2% in February, following a downwardly revised 0.2% rise in January (formerly estimated at a 0.4% increase). The income decline would have been worse if not for a 10% jump in unemployment benefits that boosted the government transfer payments segment of the report.
Total compensation fell 0.3% (hasn’t posted a monthly increase since October); wage and salary income fell 0.4%; rental income slipped 0.2%; interest income dropped 1.2% and dividend income fell 1.5%. The only segments of income that rose were, as mentioned above, government transfer payments, which rose 0.8% in February, and federal workers’ wages.
Inflation-adjusted disposable (after-tax) income remains positive on a year-over-year basis. However, as inflation begins to creep higher, and with monthly income retrenching, we may see this figure move to negative territory a few months out.
(With consumers unwilling to take on more debt (a good thing longer term but bad for the short term), we feel this will keep consumer activity subdued for some time. This is yet another reason we’ve stated broad-based tax rate reductions are needed. This will boost the disposable income number as we wait for the business cycle to turn and the labor market to rebound. Broad-based tax cuts would also boost business spending, which is activity that is vital for job creation. Unfortunately, Washington is headed in the opposite direction, tax rates will rise.)
On the spending side, expenditures rose 0.2% and followed a nice 1.0% rise for January, which was revised higher from the 0.6% increase reported last month. This back-to-back rise in spending is good to see after falling in the prior six-straight months. However, we find no evidence that consumer activity will rebound in a sustained manner as the only area of increase on the income side is coming from government transfer payments – this suggests a personal spending rebound will be transitory.
This data also reports the cash savings rate, which slipped to 4.2% from 4.4% in January. Readers may recall we have been watching for a cash savings level of 5% as a signal consumer activity will rebound (due to the plunge in stock prices and the continued decline in home prices consumers will need this cash cushion in order to feel better about spending). That savings rate figure was reported to have hit 5% in January, but was revised down to the 4.4% in this latest data. We do believe the consumer will return to adding to cash savings, but I’m no longer sure about the 5% figure triggering a sustained rebound. We will need to see the private-sector side of income rebound in order to give us conviction consumer activity will increase in a sustained way.
On the inflation front, the PCE Deflator came in at 1.0% on a year-over-year basis, a slight acceleration from the 0.8% printed for January. (The abrupt deceleration in the year-over-year PCE Deflator is more a function of the collapse in energy prices following the Fed-induced -- and $200 oil hysteria -- spike last summer.)
Core PCE, which excludes food and energy, rose 0.2% last month after rising by the same level in January. On a year-over-year basis, the core PCE inflation rate rose 1.8%, up from 1.7% for January.
While inflation is very low right now, there is no evidence to the claim that deflation is emerging (deflation is not a reduction in the growth rate of prices, but rather an outright decline in which negative figures are posted – and let’s make it clear, the traditional definition involves meaningful declines, not occasional monthly blips below 0%). In fact the data shows inflation is picking up a bit, albeit at very low levels, for now.
Washington Motors
The government has moved in to oust GM CEO Rick Wagoner and will likely force the company to enter into some sort of bankruptcy, although it surely won’t look like conventional bankruptcy. The company failed to meet the benchmarks laid out a couple of months back. GM will continue to receive an undisclosed amount of government aid at it develops a new plan over the next 60 days and will receive greater “guidance” from the Treasury Department than previously was the case.
It is that term, more government “guidance” that has stock futures down big this morning, in my opinion. Fear runs through the market every time it appears the government will become more involved in making business decisions. It also creates greater uncertainties as investors simply don’t know what the government will do. The way this process should occur is through the markets, not via government propping up a company that has made an array of bad decisions for a very long time, which is an issue that goes back to the Bush Administration.
To GM’s credit, they were on the right path roughly a year ago. They made good progress moving much of their legacy costs over to the unions (in terms of the VEBA, moving more of the health-care costs to the unions), some progress regarding employee attrition and the product line was very much improved. They had failed to implement important things such as trimming at least half of their dealership system and eliminating plants, but implementing these plans was pretty much impossible outside of bankruptcy.
We should recall that GM was doing pretty well until the oil price spike that occurred last summer. That spike was caused by the Fed when they engaged in a massive easing campaign that slashed the fed funds rates to 2.00% by June 2008 from 5.25% just a year before. That move sent the dollar reeling, plunging from 84 on the Dollar Index to the low of $71; this dollar freefall pushed commodity prices higher (specifically oil) and as that occurred you had the typical performance-chase occur (and predictions that oil would hit $200 per barrel) that caused crude to soar from $65 in June 2007 to $145 by July 2008. This crushed GM’s SUV product line, where it made virtually all of its money, and that signaled the end.
Now the government is going to rescue the firm? Good luck with that, especially as they force higher fuel efficiency upon the industry in a way that is not realistic (27.3 MPG by 2011; technology will bring increased efficiency over time, but this a mandate that carries a burden GM simply can’t handle right now). Then again, considering the degree to which monetary and fiscal policy will stoke inflation, the public may just demand smaller more fuel-efficient cars – so there may be a master plan here; however, I’m not sure the rest of the market is going to enjoy the environment very much.
Have a great day!
Brent Vondera, Senior Analyst
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