The Transportation Average, as we talked about yesterday is an important indicator to watch right here, slid for a second-straight session and has appeared exhausted over the past week. This is a reliable gauge for the entire market and may be suggesting the nine-week long rally is nearing an end. We may see a bit more upside as investors who have been on the sidelines and missed out on this surge from the wicked depths of 666 on the S&P 500 look for any pullback as a chance to get back in. Beyond that we’re probably very close to some degree of retracement after the 39.6% rally from the March 9 low, as of Friday. Whether this will be a 10%-15% pullback to be followed by another surge forward or a move back the middle of this trading range…we’ll just have to wait to find out.
Market Activity for May 12, 2009
A Tough Road for the Greenback
The dollar has had a rough run after hitting a multi-year high in early March. If the safety trade continues to recede the greenback will no longer benefit from the rush to own Treasury securities, but will be left to fundamentals -- and those fundamentals are ugly with a very easy Fed and massive levels of debt issuance coming down the pike. (There are only two ways to build a healthy and stable dollar value in a post gold standard world: there must be low tax rates on capital and monetary policy must be sound; the latter is not in play right now and the former will soon change for the worse)
As the greenie declines in value commodity prices will rise. As a result, the road to harmful levels of inflation may be shorter than most believe. Keeping an eye on the value of the dollar is essential and will prove to be one of the most accurate indicators of future inflation levels.
Trade Figures
The U.S. trade deficit widened a bit in March, but not because imports bounced back to positive territory (which would illustrate U.S. consumer and business spending have markedly improved); rather imports into the U.S. declined at a slower pace than U.S. exports declined during the month.
For the month, the deficit rose 5.5% but remains at a very low level, especially when one looks at the real (inflation-adjusted) figure excluding petroleum. (Funny how the same people who rail about trade deficits are many of the same who say we must continue to place restrictions on domestic energy production. If we didn’t need to import 70% of our petroleum-related energy needs, trade deficits would have been much narrower a few years back when the price of crude hit $145 – I’ve got a feeling we’ll have a date with déjà vu a year, 18 months outs; when economic activity bounces, the price of crude will push to $80, then $100)
U.S. exports fell 2.4% in March, following a 1.5% increase in February, and imports fell 1.0%, after a 5.1% decline in Feb.
While imports fell in March, the degree of decline was a huge improvement from the mid-to-high single digits of the previous five months. Nevertheless, a decline in imports, as mentioned above, means that consumers and businesses remained reluctant to spend in March – but no surprise there. The capital goods component of this data (business spending) fell another sharp 5.2% in March.
In terms of U.S. exports to regions and countries:
Export to Europe fell 17.8%, to Mexico down 14.5%, to Brazil down 18.4% and to the Pacific Rim down 25.4% -- China down 12.3%, Japan down 20.5% and Asia NICs (newly industrialized countries) down 34.5%. All of these numbers show trade activity remains very depressed, not the implosion of the previous several months but still extremely weak.
I put the China figure is bold because the rate of decline showed the largest improvement, coming off of 25% declines (again in terms of U.S. exports to the country) of the previous three months. China’s stimulus, virtually completely infrastructure-based in nature, will push commodity and overall U.S. exports to China higher over the next several months.
Budget Statement
The Treasury Department reported the first monthly budget deficit for April in 26 years, stating the shortfall came in at $20.9 billion, compared to a $159.3 billion surplus for the same month a year earlier – April, obviously, is usually a month in which the government books a surplus due to the jump in tax payments.
Fiscal-year-to-date (FYTD) the budget deficit sits at $802.3 billion, expected to hit $1.8 trillion, or 13% of GDP, when the fiscal year comes to a close in September – that will be more than double the previous post-WWII highs hit in 1983 and 1992. (The all-time high budget deficit-to-GDP ratio is 33.5%, which occurred in 1942 as we were financing the war)
Federal spending jumped 17.5% in April based on the year-ago period, while revenue (tax receipts) fell 34.1%. Corporate tax receipts, totaled $70.8 billion, a 58.6% decline from a year ago. Individual receipts came in at $566.4 billion, a decline of 24.2% from the April 2008.
I’m generally not a deficit hawk, simply because the budget shortfalls of the past 30-40 years have been completely manageable, averaging 2.4% of GDP – one only needs to look at average long-term interest rates during the last 40 years for evidence that our deficit spending has not been harmful. But when you get into the 10% deficit-to-GDP ratio range, harm will be done. These levels are not sustainable; they certainly are not conducive to a healthy dollar value.
And I don’t buy the argument that these deficits are short-term in nature, too much of the current stimulus spending will work its way into the budget baseline. In addition, there is an attempt to add a $1 trillion per year national health-care program – forget about the drug rationing and decision making by the government with regard to who gets care and when, we’re watching the Social Security and Medicare systems crumble right in front of our eyes, and still Washington wants to progress further along this entitlement road?
Eventually reality is going to confront Washington’s fantasy view of how the world works, particularly with regard to the affect massive increases in government spending has on the dollar, interest rates and economic growth. If we pass the next exit on this “Road to Serfdom,” it’s not going to be pretty.
Today’s Data
This morning we get mortgage applications for the week ended May 8, import prices and Retail Sales (both for April).
Retail sales will get the most attention as the market is intensely focused on consumer activity. The figure is expected to come in flat after a 1.2% decline in March. Watch for the number to beat estimates as Easter fell in April this year.
Have a great day!
Brent Vondera, Senior Analyst
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