Daily Insight

U.S. stocks bounced below the cut line several times yesterday, hitting the day’s nadir about 45 minutes into the session, but pared nearly all of the session’s losses by the time of the close. Stocks moved to the day’s low point just after the latest consumer confidence and regional manufacturing activity readings were released – consumer confidence came in above expectations but remains very weak and the factory report out of the Richmond Fed missed the estimate by a wide margin.

But the Fed’s afternoon release of the minutes from the November 4 FOMC meeting seemed to foment a relative rally as they raised their growth estimates and lowered their jobless rate predictions. They also stated that the likelihood of excessive risk-taking from record-low interest rates is “relatively low.” That’s reassuring. Are we living in one big world of wishful thinking here or what?

Among the top 10 S&P 500 sectors, gains and declines were spilt in half. Five sectors lost ground on the session, led by financials, tech and basic material shares. Five sectors gained ground, led by telecoms (two days in a row), health-care and energy shares.

Yesterday’s $42 billion 5-yr auction, the final of $179 billion of issuance this week, was hugely successful. And why not, who wouldn’t love gobbling up 5-yrs at a yield of 2.15%. The bid-to-cover of 2.81 (a measure of demand) was the best since September and above the four-week average of 2.59. Indirect bidders (foreigners and global central banks) stepped up for some of this awesome yielding stuff too, accounting for 60.9%, above the average of 51.1%.

This demand is all a function of several factors: year-end balance sheet clean up, risk aversion, a view among some that we’re in a Japanese-style malaise, foreign central banks devaluing their currencies (by buying U.S. dollar assets) and you know that other thing – the Fed at zero, which means banks get money for nothing and their chics, I mean income, for free. A yield of 2.15% ain’t all bad when your cost of money is nothing.

The Treasury will issue all they can at these rock-bottom yields until…well, they can’t. Then they’ll be issuing massive amounts of debt at higher rates.

Market Activity for November 24, 2009

We’ve got a lot to talk about, I’ll try to make it as concise as possible without leaving the important stuff out.

Third-Quarter GDP Revision

The Commerce Department reported that third-quarter growth was revised down to 2.8% at a real annual rate, down from the initial estimate of 3.5%. Thus, the end to the “Great Recession” came in softer than previously thought.

Quickly, there are a lot of people believing in a powerful economic recovery simply because history shows the larger the collapse the greater the recovery. This time I don’t think past will be prologue. We’ll find out by way of the fourth quarter reading. It’s not unusual for the first positive GDP print coming out of a major contraction to be weak (weak defined as below normal – and normal is 3.4%). But just as was the case following the nasty 1958 recession, the rough 1974 recession and the harsh 1982 recession, the subsequent quarter following the end of those contractions (two quarters from the last negative GDP reading) posted a reading of at least 5.1%. In the year ended that first big GDP reading, growth averaged 7.8%. We won’t have to wait long to find out how this period compares to those in the past.

The areas that led to the downward revision to GDP were weaker-than estimated personal consumption due to lower than expected car sales, a smaller increase in gross private investment as non-residential structures declined more than previously estimated and residential construction rose less than estimated, a larger decline in inventories, and a widening in the trade deficit.

The first two reasons for the revision pretty much speak for themselves – less car sales occurred than was estimated during the first look at GDP and business-plant construction declined more than thought, while the bounce in home construction (the first in 15 quarters) was less than estimated.

The other two reasons need a little more explanation.

Inventories fell more than anticipated and thus the segment didn’t add as much to GDP as was the case when first reported. You may be asking yourself, if inventories fell, then how did they add to GDP? Logical question. The answer: inventories only need to fall at a reduced rate relative to the previous quarter to add to GDP. Since stockpiles were pared more than expected they added less to GDP – but they did fall at a reduced rate compared to the record level of slashing during the second quarter.

In terms of the trade figure, it is a function of net exports (exports minus imports). GDP = C + I + G + (X-M), or Consumption, Investment, Government, eXports –iMports. The September trade figures were not out when initial estimates to GDP were released, thus economists must guess on this reading. Well, despite the declining dollar (which had economists believing exports would get a boost), exports fell at a greater rate than did imports. Since the export number was less than expected, it subtracted more from GDP than previously thought.

Those are the main reasons for the downward revision. I’ll also note, the government consumption segment of GDP actually increased vs. what was reported via the initial estimate. Thus the private sector played even a lesser role in economic activity than previously thought.

The great crowding out has begun. Intense government involvement via deficit spending along with current actions, and future signals, of new banking regulations and higher tax rates will likely cause the business community to remain very cautious. As the government puts the clamps on risk-taking within the banking industry (while ironically telling banks to offer more loans to small business – fat chance of that happening under current guidelines) Washington is finding no problem accessing capital as banks lay low via risk-free Treasury security purchases (a topic we touched on when the latest Federal Reserve Flow of Funds report confirmed it). As a result, small business is essentially locked out. And when small business is largely locked out of the credit markets, you can forget about the most powerful engine of job creation humming anywhere near all cylinders. Thus, the jobless rate is likely to remain high for a considerable length of time and final demand will remain weak. Businesses see what is occurring and that’s precisely why they will remain cautious and keep business spending (another important economic engine) to a minimum.

S&P CaseShiller HPI

The S&P CaseShiller Home Price Index showed the year-over-year rate of decline continued to fall in September. Among the 20 major cities the index tracks, home prices fell 9.36% over the past 12 months (a bit more than the 9.10% expected but not big deal). That is down from an 11.30% y/o/y decline as of August. The monthly figure showed prices rose for a fourth-straight month, up 0.27% from August. That follows increases of 1.13%, 1.12% and 0.76% during the subsequent four months.

The numbers on the chart below are not median home prices, just index numbers.

I guess it is a bit undesirable that the monthly increase was substantially smaller than that of the previous three months. This may be a sign that the monthly increase in home prices is short-lived, even shorter than those skeptical about this housing recovery had thought.

Another sign of renewed erosion is the increase in cities that posted a monthly decline. In August only three of the 20 cities tracked posted price declines – they were Charlotte, Seattle, Las Vegas and Cleveland. In September nine of the 20 cities posted m/o/m price declines – NY, Boston, Charlotte, Seattle, Dallas, Portland, Tampa, Las Vegas and Cleveland.

Just three cities – LA, San Francisco and Chicago (which make up 30% of the overall CaseShiller index) – accounted for effectively all of the September monthly price increase.

Consumer Confidence

To no ones surprise, or at least it shouldn’t have been, the Conference Board’s gauge of consumer confidence remained depressed, coming in at 49.5 for November – up just slightly from October’s 48.7; that October print was revised up by one point. The consensus estimate had actually expected worse, a reading of 47.3 based upon the previous months initial reading of 47.7. So, on an expectations basis the number was better, up 0.8 from the previous month’s higher revision vs. an expected 0.4 point decline from the original previous month’s print of 47.7.

Nevertheless, it is difficult (actually inappropriate) to get excited about this reading simply because it beat the expectation as the reading remains at a level that’s commensurate with the low points hit during the worst recessions since 1967 – which is when the survey began.

The overall consumer confidence reading is a collection of respondents ‘ appraisals of current and expected (six months out) business conditions, current and expected employment conditions and expectations regarding household incomes six months out. Here are how a couple of these segments came in.

The present situation index made a new cycle low, posting 21.0 for November after October’s 21.1. For reference, during the market low back in March this figure fell to 21.9. The all-time low is 15.8, hit in December 1982.

The expectations reading (view of economic prospects six months out) improved to 68.5 from 67.0 in October. At least the reading seems to have left the cycle low of 27.3 hit in February (also the all-time low) in the dust.

The most important segment of this report is the jobs “plentiful” less jobs “hard to get” reading. This is the confidence index’s best indication of future consumer activity trends. The measure made a new cycle low of -46.6. The all-time low is -58.7, hit in December 1982.

The share of respondents stating jobs are “plentiful” fell to 3.2% from 3.5% in the previous month and those stating jobs are “hard to get” increased to 49.8% from 49.4%.

Policy makers who believe their efforts will stoke consumer activity, and confidence within the business community, are living a fantasy. Their response is actually causing additioanl longer-term damage. While it eases the difficulty in the short term, the aggressive increase in government involvement will prolong economic and labor-market weakness, as touched on above. It appears we’ll be waiting quite an extended period of time before the overall consumer confidence reading returns to its long-term average of 95.

As a side note, I found the survey’s question on home buying particularly interesting. Only 2% of respondents stated they planned on buying a home within six months, that’s the lowest level since October 1982. The two periods compare well in terms of joblessness as the early 1980s was the only other time in the post-WWII era in which the unemployment rate was north of 10%. However, the interest rate environment was quite different as the 30-yr fixed mortgage rate was also north of 10%; today it is south of 5%. You get my point.

FOMC Minutes

The Fed released their notes from the November 4 meeting. I won’t spend much time on this, just a couple of things. We already know they unanimously decided to keep rates at emergency levels for an extended period of time and yes, they talked about how they will remove all of this accommodation – no reason to touch on these specifics now as unwinding appears to be well off in the distance

The entertaining stuff was the growth and unemployment estimates they offered.

For 2010, the Fed Governors and Reserve Bank presidents raised their economic growth forecast for 2010 to a range of 2.5%-3.5% from 2.1%-3.3% and lowered their forecast of the unemployment rate to a range of 9.3%-9.7% from 9.5%-9.8%. For 2011 (that’s really stretching things), they predict GDP will range 3.4%-4.5% and the jobless rate to a range of 8.2%-8.6%. Oh, and their inflation projections were lowered too – which is probably appropriate over the next year at least with credit continuing to contract (I’m certainly reassessing my own views on this one). I’ve got to say though, expecting higher rates of growth and lower inflation does seem just a bit too convenient. We shall see how it turns out.

They also offered estimates for growth and unemployment for 2012. Ok, this is getting ridiculous – they’ll struggle to get their 2010 estimates even close. But I won’t leave you hanging: The economy will grow at 3.5%-4.8% in 2012 and the jobless rate will range 6.8%-7.5%, according to Bernanke & Co.

The top range of their central tendency estimate for inflation is 1.9% by 2012. Read between the lines and this says the FOMC believes rates can remain very low for two years still. Unless, unless they are forced to act to rescue the sinking dollar. Bernanke has actually spoken the word: dollar; and that is a big event for someone who normally seems to act as if he never contemplates the value of our currency. But he is paying attention now and with the greenback moving ever closer to the all-time low hit 19 months ago, the only way they’ll be able to keep rates ultra low for another two years is if the economy flat lines or even falls back into recession.


Have a great Thanksgiving!


Brent Vondera, Senior Analyst

All Hail Dividend Stocks!

Dividend stocks are all the rage in the Dow Jones newsroom, with Barron’s cover story (10 for the Money) and the Wall Street Journal (Shop for Dividends in This Aging Bull Market) both championing “safe” dividend paying stocks.

This should be no surprise. The Fed’s zero-interest-rate-policy (ZIRP) is forcing investors and savers out of money-market funds and CD as the yields of those cash equivalents are virtually zero. Meanwhile, longer-term bonds sport higher yields, but leave investors exposed to inflation.
The common thesis among news articles like the ones above is quite simple. Low-quality stocks have been driving the current rally, but high-quality stocks will drive the second phase of the rally. And if the rally fades, they offer downside protection through their income.

But before you start scouring the market for yield, remember that higher yield often involves higher risk.

Here are some of the tools Acropolis uses to evaluate a company’s dividend.

Dividend Yield (Dividends per Share/Share Price)
Low yield compared to industry peers is either:

1. A result of a high stock price that reflects the company’s impressive prospects and ability to make the dividend payment, or
2. The company cannot afford to pay a reasonable dividend because its business model is not a strong as its industry peers.
   

At the same time, however, a higher dividend yield can signal a sick company with a depressed share price.

Dividend Growth
A company that increases its dividend sends a powerful message about future prospects and performance. A history of steady or increasing dividend payments often signals financial well-being and shareholder value. Double-digit growth rates are preferred, but a growth rate that at least exceeds inflation is sufficient.

Of course, dividend growth shouldn’t come at all costs. We generally frown upon companies that rely on borrowings to finance dividend payments. Watch out for companies with a debt-to-equity ratio greater than 60% since debt levels can hamper a company’s ability to pay its dividend (see financial crisis of 2008).


Dividend Payout Ratio (Dividends/Net Income) or (Dividends per Share/EPS)
In general, a lower payout ratio signals a more secure the dividend because smaller dividends are easier to pay out. A high payout ratio often means there may not be enough cash to weather hard times or raise the dividend.

However, different industries have different payout trends. For example, retail stocks tend to have ratios less than 30% and telecom stocks tend to payout more than 70% of profits. As a result, a company’s payout ratio should be compared to that of its industry peers to determine if it is high or low.


Dividend Coverage Ratio (EPS/Dividends per Share )
Dividend coverage ratio gauges whether earnings are sufficient to cover dividend obligations. In general, a coverage ratio of 2 to 3 is considered safe.

In practice, the coverage ratio becomes a pressing indicator when coverage slips below about 1.5. If the ratio is under 1, then the company is using its retained earnings from last year to pay this year’s dividend.

If the coverage is too high, say above 5, then investors should question whether management is withholding excess earnings or not paying enough cash to shareholders.

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Peter J. Lazaroff, Investment Analyst

Daily Insight

U.S. stock got off to a good start Monday, feeding off of strong pre-market futures trading as U.S. central bankers continue to signal monetary policy will remain at emergency levels of accommodation for…well, as long as they get away with it. Stocks then built upon that momentum after the October existing home sales data blew by expectations.

This is the third-straight Monday in which stocks got off to a bang. Two weeks ago we rallied as the G-20 meeting concluded with all members pledging to keep stimulus plans going. Last Monday stocks celebrated APEC’s (Asia Pacific Economic Cooperation) members’ comments that they would do the same. Yesterday, stocks were juiced by a statement from the president of the St. Louis Fed that the central bank should continue to buy mortgage-backed securities – and the way that housing is becoming conditioned to these low rates the Fed will likely have to get the 30-year mortgage rate down to 4.50%, or below, to keep that market going.

All 10 major sectors gained ground on the session. One would have thought basic material stocks to have led the rally, with the easy-money trade alive and well, but it was telecoms that propelled the session. It’s no coincidence that it was just Friday in which bond maven Bill Gross, via his monthly letter, recommended buying these shares because economic growth will mirror utility growth rates as Washington seeks to regulate anything and everything. The attractive yields on stocks such as Verizon and AT&T (nearly double that of the 10-year Treasury) obviously have something to do with the rally in these shares as well, with the Fed at zero.

Volume on the NYSE Composite came in under 940 million shares, 23% below the six-month daily average.

Market Activity for November 23, 2009
Commodity Prices and the Greenback

The CRB index (an index that tracks a basket of commodities) is closing in again on the post-crisis high (touched a month ago) as Fed officials continue to express that the central bank will need to remain very loose for a long time. Last week’s speeches by various Fed officials didn’t offer specifics but their easy-money opinions were evident and some of the formerly hawkish (in terms of their inflation concerns) FOMC members have become dovish – that’s an important point to be aware of. Comments became more specific though on Sunday night as St. Louis Fed Bank President James Bullard stated the Fed many keep rates aggressively low to 2012 and the mortgage-backed security purchases program should be extended. This sent commodity price higher Monday, with metals leading the charge. Gold hit a new closing high of $1,165/oz., aluminum hit $2,035/metric ton (well below the 2008 spike but back to 2005 levels when economic activity was robust), and copper is up to $310/lb.(closing in on levels hit when home construction was going gangbusters). Oil remains near $80/barrel even as fundamentals suggest something closer to $40 is appropriate – of course crude likely has some Iranian-lunatic premium priced in.

This is all the loose Fed/dollar-down trade – none of these prices appear to be justified base on supply/demand fundamentals. The trade had chilled out a bit, pretty much moving sideways, over the past three weeks but looks set to roll again in the near term. (Looking out a few months the trade is likely to pull back as the economy shows its legs remain wobbly, before resuming its uptrend.)

The dollar hit the 74 handle on the Dollar Index again yesterday, a sustained move below 75 is viewed as a sign the greenback will test the all-time closing low of $71.33 hit in April 2008. If you dozed off over the previous two sessions you missed the dollar rally. Policy makers, and I’m talking about the Fed not Washington as politicians want the dollar to keep falling, will not become concerned until the Dollar Index settles in at 74. This morning it has bounced a bit back to 75.21.


Existing Home Sales – The Last Hoorah? (for a while at least)

The National Association of Realtors (NAR) reported that previously-owned home jumped 10.1% last month to 6.1 million at a seasonally-adjusted annual rate (SAAR) from September’s downwardly revised 5.54 million. This blew by the expectation for a 2.3% rise to 5.7 million units. Single-family sales rose 9.7% to 5.33 million – the highest level since February 2007; condo/Co-ops sales rallied 13.2% to 770,000 SAAR – the highest reading since March 2007.

The median price of a single-family existing home fell 1.6% to $173,100 – off by 6.8% over the past 12 months and down 25% from the cycle peak hit in July 2006.

The supply figures continue to move in the right direction as the homes available for sale reading dropped to 3.00 million from 3.10 million. At the current sales pace it would take this inventory (inventory/sales) 6.8 months to sell off – that’s down from 10.6 months hit in November 2008. Anything over 6.0 months worth is traditionally viewed as a buyers market, but this is a major move lower by this measure of supply.

We must, however, be cognizant of the inauspicious reality that banks are holding back the foreclosure process – the rate of foreclosure is not keeping pace with the increase in 90-day delinquency rates. Thus, there is a shadow supply, as some have termed it, that has yet to hit the market. Last week, NAR stated that that the total of mortgages either 90-days late or in foreclosure hit four million through September, so it is pretty-darn likely we’ll see the supply figures rise meaningfully again over the next several months.

Is this the last housing market hoorah for a while? October’s sales data were undoubtedly fueled by a rush to get in before the first-time homebuyers tax credit expired (must close by November 30 and contract closings are taking 6-8 weeks), We now know that the credit has been extended through April, but that wasn’t made official until November, thus those looking to take advantage had to get in. This existing homes figure is based upon contract closings, thus these are contracts that were signed in August and early September. Keeping this in mind, the November reading should receive a boost from late-September/early October purchases, but the back-half of October probably saw an immediate sales halt.

We may soon be watching quite a reversal take place as the efficacy of the tax credit is unlikely to have the same powerful effect as it did during the traditional home-buying season and most have already taken the $8K lure. From there, it seems pretty clear to me that when the credit eventually expires home sales will endure another round of significant weakness.

Fed-induced rock-bottom interest rates are certainly helping the housing market as well, but the market still has to contend with a jobless rate north of 10% (a reading north of 7.5% is highly unusual in the U.S.) and supply that is currently held from the market but must eventually hit. Since the market has become conditioned to these rates, ever a slight increase in mortgage rates will do massive damage to housing. The Fed will do everything in its power to hold down rates but for how long and at what price?

Eighteen months back we believed housing would begin to recover in the spring of 2009 – meaning durable sales activity and a sustained increase in prices. That estimate appears to be correct at the present. Unfortunately, I now believe it will prove to be quite inaccurate, which will become evident over the next 12 months.

The housing market has two very serious pressures to deal with over the next year. One, prime fixed-rate mortgage delinquencies make up 54% of the quarterly increase in loans 90 days past due but not yet in foreclosure – that’s according to the Mortgage Bankers Association. This is a lot of supply that will be thrust onto the market, and unless the labor market bounces back quickly, which is unlikely, the problem will persist. Two, we have Alt-A and option ARM resets to get through – and this is likely a major concern within the Fed, undoubtedly one of the main reasons they’re holding their benchmark rate at zero.

Have a great day!


Brent Vondera, Senior Analyst

Thanksgiving Week

S&P 500: +14.86 (+1.36%)

A few fun Thanksgiving week facts about the Dow Jones Industrial Average:

1. Over the past 59 years, the DJIA averaged a gain of 0.76% during Thanksgiving week.
2. The DJIA has ended the Thanksgiving week higher in 38 of the last 59 years – roughly 64% of the time.
   

I will attempt to keep with the Thanksgiving theme for the rest of the week (no promises though). Here goes nothing…


Market’s got off to a nice start this week as investors piled back into the risk trade following St. Louis Fed President James Bullard’s dovish remarks on interest rates. Stock investors are thankful (for now) for extended easy money policy. They were also thankful for today’s lower-than-average volume, which probably helped enhance gains.

Telecom led the market higher as AT&T (T) received several upgrades, including a positive write-up in Barron’s. AT&T is thankful there is an App for that. Meanwhile, Sprint Nextel is expected to close its acquisition of Virgin Mobile USA on tomorrow. Sprint is thankful they are surviving against much bigger rivals AT&T and Verizon.

Health-insurance stocks were particularly strong after a JPMorgan Chase analyst pointed out that managed care companies trade at a 40% discount to the S&P 500. These shares are also gaining amid growing doubts regarding a public health plan option. Managed care companies are thankful for centrist Democrats who disapprove of a proposed government-sponsored health plan option.

Treasury prices remained low after the $44 billion two-year note auction, the first leg of this week’s record $118 billion government note sales. The U.S. government is thankful for demand from foreign investors.


Quick Hits

• How Overrated is Sentiment in Economics?
• Fed’s Bullard: Asset Buying Efforts Should Remain Active
  

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Peter J. Lazaroff, Investment Analyst

Daily Insight

U.S. stocks closed lower for a third-straight session on Friday, but again pared about half of its early-session losses in the final two hours of trading. Stock got off to a poor start as overseas bourses closed their session lower. A huge earnings miss from Dell Inc.and a larger-than-expected loss from homebuilder D.R. Horton didn’t help matters.

Comments made by European Central Bank President Trichet on Thursday night, in which the central banker stated policy makers will gradually withdraw emergency cash, hurt stocks overseas and that again flowed into U.S. trading. The market is not even close to wanting to hear these types of comments. Nevertheless, it is exactly what central banks need to be doing. (Although, St. Louis Fed Bank President Bullard last night, stating he hopes the U.S. central banks will extend its mortgage-backed security purchase program has stock-index futures sharply higher this morning.)

The global economy is not in a position to stand on its own and resume anywhere near normal growth, but you’ve got to allow the market to continue to wash out excesses and the miscalculation of risk that occurred via the previous loose money campaign. The current prolonged period of aggressive monetary stimulus is beginning to create other problems and it’s just not the rock-bottom level of rates but also other liquidity measures to banks. Just like intense government involvement, it may make things appear better than they are in the short term but it prolongs the economic damage. We’re seeing evidence of monetary policy exacerbating credit contraction, greatly endangering credibility regarding currency stability and leading to early-stage asset bubbles particularly in Asia (specifically, investors borrowing cheap dollars, converting to other currencies and buying assets in those countries).

Energy, tech and financial shares led the market lower on Friday. The traditional areas of safety – health-care, utilities and consumer staples – were the only sectors out of the top 10 groups to close higher on the session.

For the week, the broad market ended essentially flat, down just 0.19%, as the final three sessions of the week erased Monday and Tuesday’s gains.

Market Activity for November 20, 2009
The Greenback

The dollar is getting hammered this morning, looking to move to that 74 handle on the Dollar Index again, due to the divergent statements between Trichet and Bullard. If the European Central Bank is really going to begin a mild tightening campaign (removing the emergency level of stimulus) and it’s just not talk, while our Fed is going to keep the pedal to the metal, possibly even expanding its quantitative easing campaign, the U.S.dollar will make a new low.

The greenback will find some support via Asian countries forced to buy dollars as the Chinese yuan continues to get de-valued against the currencies of its Asian neighbors (as it is pegged to the U.S. dollar). Thailand, South Korea, Vietnam et al., will seek to de-value their own currencies so not to lose too much export activity to the Chinese. This is all due to the Fed’s policy.direction. It’s a race to the bottom, and a trend of currency de-valuation is not a good sign for global growth. To the contrary, it is a recipe for turmoil. But this dollar support will prove temporary. The longer-term trend of the dollar is almost completely a function of monetary policy – it ultimately depends on how long they remain hooker loose.

Gold has made a new nominal dollar high this morning, up $20 to $1,166/oz (the inflation-adjusted high is roughly $2,200/oz., hit in 1980). The metal is up 59% since the S&P 500 hit its all-time high of 1565 on October 9, 2007.

The Fed and Independence

There’s a lot going on in Washington, which we’ve been talking about on a weekly basis – you can never separate economic developments from policy, and this is especially so today. The latest is this bill to make the Fed’s actions more transparent.

The House Financial Services Committee advanced a proposal to remove a 30-year ban on audits of monetary policy and engage in examinations of central bank actions.

There are many people in an uproar over this development as they believe the ideas in this bill will compromise the Fed’s independence from Congress. Well, welcome to the arena of concern; Fed independence, or lack thereof, appears to have been jeopardized for over a year now. I guess it takes intensely conspicuous acts to wake people up to the fact.

The reaction seems to be a bit carried away though as the process is in the earliest stages and the entire proposal is not all bad if it’s massaged a bit.

First, it is likely to be diluted as, if, it ends up flowing through the legislative process. It must first pass a vote in committee, then must be approved by both the House and the Senate, and then of course signed by the President.

Second, the Fed can inform Congress of its actions, such as emergency loans to specific banks and institutions, so long as there is a significant lag (say, 2-5 years). This is the case in terms of some other things the Fed does. We just cannot make the information immediately public as it may result in a run on specific banks, or develop into other situations that potentially cause widespread panic.

So that’s the part of the bill that isn’t all bad if a bit of common sense is incorporated. The very bad part of the bill is this idea that the GAO (Government Accountability Office, formerly known as the General Accounting Office) would be able to criticize or even have a role in determining monetary policy. This would paralyze the decision making process. (Some people may see action to paralyze the central bank as a good thing, frankly I’m not going to offer an opinion on this right now because things have not yet progresses to a point in which the opinion would seem anything other than outrageous – in time we’ll be able to discuss, I’m pretty confident of that.) Anyway, at this point in time, the Fed cannot be paralyzed and adding another set of players to the mix will probably do much more harm than good.

So we’ll see how it turns out. In general though, it sure doesn’t seem the Fed is nearly as independent from the political process as it should be. I’m frankly concerned that the Fed has been roped into monetizing the debt (keeping rates grounded and devaluing the dollar) as this makes it easier for the government to manage massive levels of deficit spending – the interest payments are lower than they otherwise would be and you’re paying debts back with dollars that are worth less. Of course, it leads to many problems down the road.

Week’s Data

We were without a data release on Friday but this week will be a big one even as it is cut short by Thanksgiving Day.

On Monday we’ll get existing home sales (October), the data is expected to show a 2.3% increase as first-time buyers rushed in during the first half of the month to get in before the tax credit deadline (that credit has been extended but as of October it was uncertain). If the number misses it will be a big market downer as it is abundantly clear the November reading is going to show decline.

On Tuesday we get the first revision to Q3 GDP and the CaseShiller Home Price Index (September). GDP is expected to be downwardly revised to show the economy expanded at a 2.9% real annual rate – originally estimated to have grown 3.5%. CaseShiller has a large lag to it (being September data) but is still heavily watched nonetheless. It should show prices rose for a fourth-straight month for the 20 cities the index tracks. The year-over-year reading should show prices declined at a reduced rate, which would extend upon the five-month trend. We’ll also get consumer confidence (November). The reading has been falling for three months and currently sits at a level that is the low point for every recession since 1967.

On Wednesday we get personal income and spending (October), durable goods (October) and initial jobless claims (pushed up to a Wednesday due to Thanksgiving). Personal income is expected to rise 0.2% after unchanged for September and spending is expected to rise 0.6%. Spending will be boosted by durables, which were driven by auto sales as they bounced off of September’s very weak car sales. Initial jobless claims are expected to fall 5K to 500K. If accurate, it will mark the first time the reading touches 500K since falling to 488K in early January. We’ll be watching for the increase in extended jobless claims as this will be the first week in which the latest French-style extension takes effect – up to 99 weeks of benefits now.



Have a great day!


Brent Vondera, Senior Analyst