Daily Insight

U.S. stocks ended mixed on Friday as the Dow and S&P 500 gained some ground, while the NASDAQ Composite slipped a bit. The gain in the S&P 500 helped the broad market advance for a fourth-straight week, although we’ve been in a very tight range for the past six weeks (929-946 on the S&P 500).

Utility shares led the market higher for the third session now as a bill out of the House to curtail austere emissions standards helped the group’s profit outlook and the concern over higher interest rates has eased over the past couple of sessions – these interest-rate sensitive shares normally have a tough time advancing when the market expects higher rates because it makes these high dividend-paying shares less attractive.

Basic material, energy and technology were the worst performing sectors as some doubts over the degree of an impending economic rebound increased on Friday.

Volume remained very weak, which has been the trend over the past couple of weeks. A computer glitch caused very low NYSE volume on Friday as just 850 billion shares traded – 40% below the three-month average. Beyond that, activity has been weaker for while here.


Market Activity for June 12, 2009


Its Crystal Clear, Policy if for Large and Long-lasting Government Programs

National Economic Council Director Larry Summers gave a speech on Friday to the Council on Foreign Relations and at the end offered what most would see as a really appealing analogy. While talking about the financial crisis and signaling the direction the Obama Administration would take, he stated that his daughters learned American history in their final years in high school (surely throughout all four years one hopes). He said they didn’t learn about the 1974 recession, the 1981-82 recession, the stock market crash of 1987, or the financial crises of the late 1980s and mid 1990s but did learn about the Great Depression. He went on to state that his goal is that kids in 2040 do not learn about the financial crisis of 2008-2009.

What he was getting at was a defense of the New Deal (as he explicitly stated within the speech). According to Summers, if not for the government intervention of the 1930s then all recessions and crises hence would have been much more severe. Well, you can’t prove a counterfactual, so simply from that perspective I have a real issue with the comments. What’s more, it is pretty clear, except for the most rabid of Keynesians, that most of those programs actually prolonged the depression. One of the best examples is the National Industrial Recovery Act (NIRA) that had the government setting prices, which led to massive market distortions. Beyond that, if not for failed monetary policy, combined with higher tax rates and applying trade-killing tariffs, the recession of the early 1930s would have been just that. Those mistakes made it a depression. I found it rich that he neglected to touch on these realities of the era

It’s concerning that the current leadership thinks this way, particularly since some of the major programs of the 1930s are with us to this day and are among the most financially crushing and unsustainable aspects of the budget. They ignore the faults of government intervention and seem ebulliently eager to repeat them.

I’m sorry to say, our sons and daughters, and grandsons and granddaughters, will learn of this era. Thankfully, new policies will eventually arrive to ameliorate the damage to be done by Washington’s current direction.

Never in Doubt

Incumbent President Mahmoud Ahmadinejad won a second term this weekend. It’s amazing the number of people who had believed a true election was taking place -- that the Iranian people’s vote would actually have been counted. Instead, while there is voting, it’s completely within the circle of the mullahs. And with Ahmadinejad’s approach working (for now) there was no way the opposition candidate (Mousavi, who has yet to be heard from) had a chance.

I saw an oil analyst on Friday – a big name in this field – surmise that if Mousavi won, oil prices would come much lower. Even Intrade (a pay-to-play prediction market) had the chances of Ahmadinejad winning at only 21% at one point on Friday.

What were people thinking? The disturbing aspect of this thought process is that maybe it signals the market in general is ignoring geopolitics. Let’s hope not; it better have this stuff priced in, which had been the assumption, but now I’m not sure.

Futures

Stock-index futures are under pressure this morning on the aforementioned news and the G8 meeting this weekend. Actually, the press is blaming lower futures solely on the G8 meeting, in which the main topic involved discussions on how and when to remove the stimulus that major economies are in the process of injecting into the global system.

In reality, governments will not be removing fiscal stimulus plans any time soon – although I wish they would in exchange for policies that incentive private-sector production but it’s not going to happen.

Here in the U.S. less than 10% of our stimulus program has been funded to this point, and roughly half of the $787 billion will find its way structurally into the budget – the entitlement spending isn’t going away until there’s a democratic shift in Washington, and even then it will be very difficult. China is pumping massive amounts of stimulus (in terms of their GDP) and isn’t about to hold back anytime soon. No one should believe governments are anywhere near pulling this spending back, and we’ll watch as the bulk of it comes as the economy has already bounced back without it.

If anything (and determining what drives the market on a daily basis is all but impossible to begin with) the market is lower this morning because the administration has shown their goal of large government is charging full-steam ahead and, unfortunately, the market has been ignoring the hard fact that we’re not going to see a change in direction out of Iran. These are big issues that will have long-lasting implications if not properly addressed.

Today’s Data

This morning we get New York-area manufacturing (June) along with foreign investment flows into U.S. securities (April). The New York factory gauge will get most of the attention. The foreign inflow number is important to watch but it’s just too outdated to have much impact on trading. If the Empire reading can move above zero, it may be able to offset these other issues tugging on investor sentiment this morning. If not, its looks like we’ll give some gains back.


Have a great day!


Brent Vondera