Daily Insight

U.S. stocks ended mixed on Friday -- as the Dow and NASDAQ managed to close on the plus side, while the S&P 500 closed fractionally lower – but it was a very good week as the broad market gained nearly 7%. This followed four weeks of decline and unfortunately that’s what it takes for rallied these days. We’re closing in on the post-Election Day level again of 952 on the S&P 500 and about a half of a percentage point from 946, which has proven to be a mark we haven’t been able to eclipse for several months.

A good (all things considered) housing-market report helped to buoy stocks on Friday. Even though earnings reports are beating expectations, it looked like the market was going to fall apart in early trading as profit reports out of GE and Bank of America mirrored what JP Morgan’s earnings report clearly stated: the consumer is in trouble and delinquency rates continue to climb and commercial real estate issues are still in early innings. While more residential home building will not be helpful for supply, the market did like seeing a much better-than-expected housing starts figure and that helped to combat early-session weakness.

Tech, telecom, basic material and energy shares were the best performers. Financials and industrials were the laggards. Financials were hurt by rising consumer-segment default rates. Industrials probably had a little profit taking weighing on these shares after six-straight sessions in which the group jumped 10.2%.

Market Activity for July 17, 2009

Housing Starts

The Commerce Department reported that housing starts rose 3.6% in June after the large 17.3% jump in May as the figure came off of a the all-time low hit in April. But unlike last month’s increase, in which the very volatile multi-family segment drove the reading higher, single-family construction drove the June reading. (Multi-family starts fell 25.8% in June after a massive 65.9% jump in May; single-family units were up just 5.9%. In this latest reading singles were up a strong 14.4%). For a bit of perspective, housing starts are down 46% from June 2008.


While this reading will be good for GDP – residential construction accounts for about 3% of GDP – we don’t really need more supply. Sales need to rise in order to absorb this supply and that is going to be tough with the labor market in the shape it is in. The sales data will be helped as mortgage rates have come lower again, hovering just above 5% on the 30-year fixed rate. Foreclosures continue to rise though (up 33% in June from a year-ago) and that also adds supply.

What we have here are probably offsetting developments. The low rates will help but I’m not sure how long they’ll stay down, that short-term scare we got via higher rates about a month ago underscore this issue. Too, I’m just not sure the rate environment is enough, outside of one-two month pops, to offset the labor market and foreclosure conditions.

Public Health Care

The national health-care bill made it through committee on Thursday night and the way they plan on paying for it is by burdening the successful. You burden the only people with the means to pull this economy out of its doldrums and the results aren’t going to be pretty. Whether it’s adding surtaxes to top income tax rates that will already rise alone (and how weak is that, if you’re a politician that believes in higher tax rates then say it instead of some mealy-mouthed “surtax” locution) or boosting the tax burden on small businesses that have payrolls over $400,000 the middle class is hurt far more than the wealthy people that politicians have bulls-eyed. The top tax bracket will see their federal rate move to 39.6% at the end of 2010, then they’ll have this 5.4% “surcharge” added on if the legislation passes (and even in this Congress it’s hard to believe it will). On small business, those firms that have payrolls of $400K and do not offer health-care plans will be hit with an additional eight percentage point payroll tax – that brings the rate to roughly 23% from 15%; this is on top of income taxes. Individuals who do not buy health insurance will be smacked with an additional 2-5% tax.

These people aren’t this stupid are they? What do you think small businesses will do? They’ll make damn sure their payrolls remain below $400,000 and that doesn’t exactly bode well for job creation.

Outside of the burden related to paying for this insanity, there are even larger implications to national health care. You like freedom? Then you don’t like government-run medical insurance. I think people will be amazed how quickly national health care will meld into the government’s right to tell you how to live your life in order to access this health care.

A well-known remark from Thoreau: “If I knew for certain that a man was coming to my house with the conscious design of doing me good, I should run for my life.” What one views as “good” for you, may be quite different from what you yourself consider as good. Too many people these days are more than willing to allow government the power to state what is good for them. If this trend continues to roll, individual freedom will evaporate at blinding speed.

When President Clinton engaged in his shot at national health-care it ran into a brick wall as his party didn’t have a huge majority, his poll-driven tendencies caused him to pullback and the nation still had more of it individual ruggedness/self-reliant principles intact. Currently, I’m not sure those principles are fully intact, President Obama is rushing to get this thing done as he races to outrun his declining poll numbers and the proponents of this catastrophic bill have a huge majority.

If this thing fails to pass, I think it’s a sign to marginally become longer-term bullish. On the other hand, if it passes, I’m sorry, but I don’t see how one can expect past growth rates to continue.

Futures

Stock-index futures are higher this morning on news that CIT found some private-sector financing to stave off bankruptcy for now. While the situation at CIT illustrates the fragile nature of things (their inability to get normal financing in order to fund operations), the fact that we’ve got private-sector vultures willing to step up to offer the firm a lifeline I think is pretty optimistic – even if the terms of the financing is austere – 10.5% for 2.5 years).

CIT remains in a precarious situation as 2.5-year funding is not exactly the same thing as capital, and the uncertainty within the entire system is heightened in fact as banks still rely on FDIC backstopping to issue debt – at least at terms that are not strict. CIT was not awarded FDIC backstopping (the TGLP program), hence their problems.


Have a great day!


Brent Vondera