FMX | Connect – www.fmxconnect.com - (Reported 7/21/2010)
Excerpt from MARKET MUSINGS & DATA DECIPHERING
MEAT GRINDER
That’s the best way to describe this market. One week the bears have the upper hand, and then, the bulls have it the subsequent week. And, the up-days are on low volume and the gains centered late in the day — program trading taking over, you think? There was a huge 27-point swing in the S&P 500 yesterday, for crying out loud.
The earnings season has, for the most part, been a dud. Not universally, to be sure, but guidance has been iffy and revenues continue to lag (Yahoo! a recent case in point) and it is hard to believe at this stage that we will get to the consensus $96 on EPS next year on margin expansion alone. The economy is clearly slowing — from 5.6% GDP growth in Q4, to 3.7% in Q1, to around 2% in Q2 and it seems like less than 2% this quarter (there is almost no growth at all being built into Q3).
With yesterday’s horrible housing starts report, we now have each of the past 17 pieces of economic data providing disappointments. Yet the market has found what appears to be a very tentative bottom. It’s as if denial has set in — even the bears (most) are not willing to call for a double-dip recession. We don’t think there can be a double dip because we probably never fully exited the last recession — probably why the National Bureau of Economic Research’s (NBER) business cycle dating committee has been so silent. We have often compared this year to the 2002 growth relapse but it also has a distinct 2008 feel to it. Back then, everyone seemed to think we were in a soft landing and up until the Fannie-Freddie slide (the recession was eight months old by then), it was widely viewed that we were experiencing a plain-vanilla 20% correction to be bought rather than being in the jaws of the bear. This market is more fragile than is commonly believed.
Yesterday’s rally was widely considered to have been a reaction to talk that the Fed is going to find new innovative ways to bolster the economy — like cut interest rates on bank reserves. Please, the pundits say this will induce the banks to extend credit, which totally misses the point. The household sector is deleveraging and is not interested in taking on more debt, which is still sitting at a historically high 126% relative to disposable income. All the Fed surveys show that demand for residential mortgages and personal loans is contracting, and the business sector is sitting on a ton of cash and capex plans now seem to be softening up. So, the Fed goes and cuts the rate it pays the banks for deposits, the excess reserves at the margin will end up being redeployed in debt among entities that need to borrow. Such as Treasuries. So in fact, this would be great news for the bond market. As for the banks, you don’t have to worry about strategic defaults with the government (at least, not yet).
MUST READS OF THE DAY
Housing Market Stumbles on the front page of the WSJ (and Building Supplies Drag Retail Sales on page A4). Year-over-year comps are now starting to look distinctly brown-shooty with unsold housing inventories in various California municipalities up anywhere from 15% (L.A.), to +33% (San Diego) last month. Mortgage applications for home purchases have collapsed more than 40% in the past two months despite record-low mortgage rates — lenders are demanding 20% downpayments (the nerve!) in response to the grim reality that over 7 million households are now at least 30 days past due or already in the foreclosure process. Fannie and Freddie are starting to push more repossessed properties onto the market, which means another down-leg in real estate prices is coming our way (we reckon at least 10% from here).
Meanwhile, following in the footsteps of most of the fiscal measures the Administration has chosen to pursue (oh, it’s all good — we stopped the unemployment rate from piercing 15%), the foreclosure-prevention program has fallen flat on its face. More than 91,000 homeowners cancelled their loan modifications last month while only 38,728 signed onto the program.
Chinese Firms Snap Up Mining Assets on page A11 of the WSJ. Canada shows up prominently on the map — one reasons we remain fundamentally bullish on the loonie.
Japanese Investors Snap Up U.S. Bonds (page 20 of the FT). For all that talk about a foreign buyers’ strike... fuggetaboutit!! In the nine weeks to July 8, Japanese investors have bought a net $88.3 billion in foreign bonds, mostly U.S. bonds. This is a great article (if you’re a bond bull in particular). The article quotes one portfolio manager saying, “no one in Japan is afraid of low rates ... The reasons to buy bonds — economic risks, regulation, deleveraging, risk of policy mistakes — all these themes are very common ones for Japanese bank portfolio and asset liability managers.”
No Need For a Panicked Fiscal Surge (Ken Rogoff’s column on page 9 of the FT). He restates the case that governments should be careful about tinkering with human nature too much — “output growth is likely to remain tepid compared with normal post-recession recovery ... anaemic growth with sustained high unemployment is par for the course in post-financial-crisis recoveries.” And, he warns at the end, “a panicked government fiscal surge is far more likely to de-stabilise the nascent recovery than to nurture it.” Well put.
Lender Warns Hungary Poses Contagion Risk on page A13 of the WSJ. Don’t take your eye off of Eastern Europe.
David A. Rosenberg
Chief Economist & Strategist Economic Commentary
drosenberg@gluskinsheff.com
+ 1 416 681 8919
Source: Market Musings & Data Deciphering
http://www.fmxconnect.com/
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