That call on Goldman came from Meredith Whitney, probably the biggest name among bank analysts behind only Dick Bove – nothing like an upgrade after a 90% upshot in the stock in a matter of four months. For Best Buy, I wouldn’t count on anything special. We saw the retailers results for the first quarter: total sales down 15% and same-store comps down 6.2% -- and that was with bankrupt Circuit City out of the game; I don’t see results reversing course anytime soon.
I’m not trying to be overly pessimistic here, just rational. For goodness sakes, sure banks will have a couple of big quarters with the Treasury yield curve positively sloped to a massive degree (the curve has narrowed from the record spread between 2s and 10s hit in June but remains very wide), but I think of Sisyphus when contemplating the banking sector – that rock will come rolling back down as commercial real estate and consumer loans and credit cards bedevil the industry for some time to come. On Goldman, everyone knows they’ll knock the cover off of the ball for another couple of quarters, my six year-old knows that. Heck, their profits tied to massive government issuance (specifically Buy America Bonds) and corporate debt issuance related to maturity rolls will fuel results. But this is kind of what the run from $70 to $150 is about.
Volume was weak as just 1.1 billion shares traded on the NYSE Composite, 26% below the three-month average.
Market Activity for July 13, 2009
The Dollar
We like to talk about the old greenback on occasion as one keeps a watchful eye on its value against other currencies. In a time of exploding debt issuance and lower after-tax return expectations you’ve got to think U.S. dollar will have to fight to remain above the recent lows we saw back in June.
For now, the safety trade has made a return – even yesterday on a strong positive session for stocks the long-end of the Treasury market rallied – and the greenback has found some support right around $80 on the Dollar Index. Let’s hope we engage in some policy changes to keep the currency from falling too much, but it is pretty unlikely as $3 trillion in government debt will occur this year and another $2 trillion at least next year. That’s a lot for the debt market to absorb and even though foreign government will not be able to sell the dollar en masse, it’s going to be a tough road for old green. An aggressive reduction in capital gains tax rates (boosting after-tax return expectations and thus dollar demand) could go a long way in mitigating pressure in my view, but that sort of thing is anathema to the current leadership.
Stimulus, the Economy and Patience
There has been a lot of talk recently about the stimulus plan not working. While I in no way agree with the track the administration and Congress have taken in their attempt to boost economic activity let’s be clear that less than 10% of the planned spending has occurred to this point. For all that was said about “shovel-ready” projects, that was just political speak. The appropriations process (as we talked about early this year) makes quick results impossible. Further, most of the money is not spent until 2010 and even the planned spending for 2011 is more than what will be injected during 2009 – that is by design too, we’ve got mid-term elections next year and of course the next presidential race in 2012.
There is little doubt the $787 billion (look let’s call it a trillion for now because that’s what it will end up being) will have an ameliorative effect on GDP. When you throw a trillion dollars into a $14 trillion economy you will have a positive short-term effect – even if muted. However, while this spending will calm such aspects of the economy such as job losses (you’ll have construction and manufacturing firms refrain from laying off workers as they land construction contracts) it only delays the inevitable. We may not see the unemployment rate peak until 2011. I know this sounds shocking but it’s a real possibility.
My expectation has been for the jobless rate to peak somewhere near 10.5% in early 2010, but I’m beginning to think this view needs to be reassessed as we may see the rate begin to flat line at the end of 2009 only to climb again by 2011. Government can’t keep this spending going for long and the massive deficits, higher tax rates (and have you seen the surcharge to income-tax rates many in Congress are pushing?) and the potential for higher interest rates in the not-too-distant future combine to whack economic activity. Anyone who believes that government can boost aggregate demand or that this level of spending (and the more austere tax-rate environment that ensues) doesn’t cause businesses to hold back due to caution is kidding themselves I’m afraid.
What’s more, we have another hike in the minimum wage coming later this month. This will have a disemployment effect on low-skilled labor, which will also shows up in joblessness over time – as the WSJ editorial board states, “those who never get a job in the first place get a minimum wage of zero.” Businesses that have a low-skilled component within their labor force will likely choose to get more work out of existing employees to counter this mandatory increase in wages.
I bring this all up to extend upon a theme of the past month – the investor needs to be careful, don’t let emotions drive you to improperly assess risk merely for the objective of attempting to make up for prior losses, or hunt for yield as the government holds interest rates lower than they otherwise may be.
Policymakers are in the process of prolonging the economic stagnation, but the spending will offer some short-term bounce first. It is then that expectations could begin to run ahead of the realities. Again, investors must pick their spots in this environment. Don’t get sucked into thinking you’re missing out when stock prices move to the high-end of this trading range, you’ve got to have discipline and patience and buy on the meaningful pullbacks – do not chase rallies! We could witness several moves to and from the high-end of this range for a couple of years – have that expectation and you’ll mitigate the damage emotions and performance chasing can do.
Monthly Budget Statement
The Treasury Department reported the fiscal deficit topped the $1 trillion mark for the first, as we’ve blown past the previous nominal-dollar record hit in the 2004 fiscal year. I recall that year vividly as the deficit was all the rage within the financial press – that shortfall was $459 billion. The shortfall for June broke a record for that month as well, coming in at -$94.3 billion (and that’s with $70 billion in TARP pay backs in June) – a month that almost always shows a surplus. We’re up to $1.1 trillion and counting so far this fiscal year, on course for a deficit-to-GDP ratio of 12% -- twice the post-WWII era record of 5.6% hit in 1983.
Corporate and individual tax receipts are off big time, down 57% and 22% fiscal-year-to-date (FYTD), respectively. One wonders how deep the deficit-to-GDP ratio will go in 2010 when the bulk of stimulus spending begins to roll.
Social security outlays led the way on the spending side, up 11% FYTD to $511 billion. Defense spending, one of the few aspects of the budget that was originally enumerated, rose 7.4% to $491 billion. Income security (yes, this is in addition to social security) jumped 17.5% to $403 billion. Medicare outlays increased 10.3% to $315 billion, just to name the big ones. Again, this is hardly sustainable and a certain degree of circumspection should be employed as the road to deal with the ramifications of this spending trajectory will likely be a rough one.
Have a great day!
Brent Vondera
No comments:
Post a Comment