Thursday, September 22, 2011

No Encouragement on the Horizon --- Stocks Get Hammered

On September 2nd I posted some thoughts about areas of concern for the US and global economies (see "Some Random Thoughts About Who We Can Trust and Other Stuff").  It's time to update some of those observations given what has transpired over the past three weeks, namely:  President Obama's address to the joint session of Congress on September 8th re: jobs creation ("the American Jobs Act"); the President's announcement several days later as to how to pay for the jobs legislation he proposed; the President's deficit-reduction proposal that he put on the table a couple of days ago; the Republicans' reactions to those proposals; the Federal Reserve's actions of yesterday ("Operation Twist"); the continuing drama with respect to the Eurozone debt crisis; and various economic numbers re: the US and global economies.

The American Jobs Act, Deficit Reduction and Republicans' Reactions - The cost of the proposed jobs legislation would be about $447 billion.  Perhaps 1/2 of this (maybe more) would not create new jobs --- rather, it would effectively provide cash flows to various groups that would maintain current spending levels and, thereby, not cause economic deterioration and further job losses.  (This is certainly important to assure that the economic softness that we are already experiencing is not exacerbated.)  The other half would be split between creating new jobs (e.g., infrastructure spending) and providing businesses with greater cash flow (e.g., lower payroll taxes).  The problem with this latter issue is whether businesses will spend the increased cash flow in creating new jobs or let it accumulate along with the trillions of cash that already resides on corporate balance sheets.  Overall, I'm not convinced that the American Jobs Act is a bold and imaginative enough program to stimulate the US economy to growth.  Moreover, I don't believe businesses will create new jobs before there is increased demand for their products --- and I don't think the American Jobs Act (even if enacted in its entirely) will stimulate very much increased product demand.

With respect to the President's deficit reduction proposal, the concepts are fine: entitlement reform, tax reform, reduced spending --- but the devil will be in the details and the whole proposal has been effectively kicked over to the Congressional Deficit-Reduction Super Committee.  I still lack confidence that the Super Commitee can reach bi-partisan compromise on the details of any deficit-reduction program.

And then we have the Republicans' (and some Democrats') reactions to the Jobs Act and Deficit-Reduction proposals.  The Rs don't want any tax revenue increases and the Ds don't want any significant entitlement reform.  This is an equation for continuing partisan gridlock, with no end in sight.

Finally, my overall reaction to the Obama job and deficit-reduction proposals and the Rs' responses is this --- it's all about campaign politics and not about advancing meaningful policy proposals designed to effect bi-partisan solutions in the next few months to enhance the lackluster US economic recovery.

Eurozone and China - The problems in the Eurozone continue and no resolution is on the horizon.  Further, recent economic data for the Eurozone economy have provided evidence of further slow-down or contraction.  Moreover, it appears China's economy is also slowing more than anticipated.  Bottom line --- the global recovery is in trouble.

The Federal Reserve – Yesterday's actions to implement Operation Twist suggest the Fed is limited in helping the economy by the tools remaining in its monetary toolbox.  Further, the Fed commented "there are significant downside risks to the economic outlook, including strains in global financial markets."  Not very encouraging.

Republicans in Congress - In my post of September 2nd I raised the question of whether we can trust the House and Senate to agree to anything that looks like it will give Obama new life for the 2012 election process.  How can we trust the Republican caucus to agree to meaningful fiscal stimulus to salvage the US recovery and lower unemployment levels before the election?  Based on recent rhetoric, the answer is "we can't" --- and the subtext is "and let the American people be damned" for another 13 months until the 2012 election.

And, in large measure, because of all these issues - Today US and global stocks get hammered. 

Friday, September 2, 2011

Some Random Thoughts About Who We Can Trust and Other Stuff

A week ago I got out of the market as I closed all my volatility/momentum trades when the S&P 500 was @ 1175 --- it’s now @ 1205 (but this morning’s futures are looking as though the index will head considerably lower today because of the terrible August payrolls/earnings/unemployment report).  I don’t mind losing those 30 points (probably less than that when the post-payrolls-report market opens this morning) because I didn’t have to worry about any potential damages from either the Bernanke Jackson Hole speech last Friday (even though it didn’t result in a downdraft for the market) or Hurricane Irene (even though the damage was less than most weather experts anticipated).  Sleeping better at night was worth the trade-off between a somewhat higher market and a potentially significantly lower trading level.

This leads me to consider where we now find ourselves and who can (and, more importantly, who will have the courage to) lead the US and global economies toward recovery and away from a double-dip recession.  To that end, the following are some random thoughts on various issues.

Eurozone and European Central Bank – New sovereign debt problems (or the same old problems) in Italy and Greece are again negatively impacting the Eurozone and the European markets.  Can we trust the Eurozone countries and the ECB to work together to bolster the sagging Eurozone economy?  In the short-run, austerity by the offending countries without some stimulative actions by the ECB doesn’t seem to be the immediate answer.

US Exports to the Eurozone – According to a Brookings Institution research report1, we export over $300 billion a year to Eurozone countries and virtually all of the rest of our exports go to nations that also export to the Eurozone.  If the European economy continues its sag, this would have a measurable effect on the US recovery.  We can’t afford inaction or ineffective action by the ECB and the Eurozone countries.
1 source:, Why Can’t Europe Get it Right the First Time… or the Second… or the Third?

The Federal Reserve – Chairman Bernanke’s speech in Jackson Hole last Friday didn’t lay out any new actions it might take with respect to stimulating economic growth.  Was that just a kick of the can down the road to motivate the Congress and the WH to engage in meaningful fiscal policy before the Fed committed to any additional actions --- or is the Fed limited by the remaining tools in its monetary toolbox --- or both?  In spite of the no-news Jackson Hole speech, the market moved higher.  I think prematurely.

President Obama – Can we trust Obama to have the imagination and courage to put a big jobs package on the table in his Joint Session of Congress Address next week and really fight for it?  And, more importantly, even if the answers are affirmative, does he have the political skill and capital to effect a bipartisan result?

Congress - Can we trust the House and Senate to agree to anything that looks like it will give Obama new life for the 2012 election process?  Speaker of the House Boehner won’t even agree to the date and time of a speech by Obama --- how can we trust him to get his Republican caucus to agree to meaningful fiscal stimulus to salvage the US recovery and lower unemployment levels before the election?

Congress’ Super Committee - Lots of questions and little optimism on my part at the moment.

Infrastructure Investment – This is something that needs to be put in place now to effect long-term economic growth.  Will the WH and Congress have the courage to do something big now when borrowing costs are so low?

Big U.S. Banks - These banks and smaller banks need to make loans available to small/mid-sized businesses (the real job creators).  Can we trust the banks to do this or will the big banks, subsidized by the Fed over the past three years with near-zero interest rates, just keep on arbitraging the effectively-free funds with low-risk investments (i.e., US Treasury securities and the like)?

Consumers – We had one decent consumer spending number this past Monday.  This gave some encouragement to the markets that the consumer isn’t totally sitting on the sidelines --- but we need consumers to keep spending.

Gold and Swiss Franc Investors – As global uncertainly has been the watchword of late, investors have sought the “safe-haven” of gold and strong currencies.  However, if we are to see the equity markets move to the upside, a prerequisite will be that these investors see less risk in the global economy and redeploy funds into other than these “safe-haven” investments.

Corporations – Can we trust them to hire without legislated fiscal incentives or without an increase in demand for their products?  In a word, no.  And, as a free-market capitalist, I wouldn't expect or advocate corporations to do anything that isn't in their own long-term self interest (to be read as including all their constituencies --- shareholders, employees, customers, communities, etc.).

Having said all that, there may be some hope that September will be better for the equity markets than was August.  (In August the S&P 500 opened the month @ 1292 and closed it @ 1219, a decline of 5.6%.)  Some of what normally happens in September happened in August, such as economic forecast revisions.  Also, some of the shocks from the Eurozone and the US debt ceiling debate/S&P credit downgrade were put behind us in some fashion or other.  However, can we trust that there won’t be new or renewed shocks in September to create more volatility in the equity markets?

As a final comment, I noted within the past couple of days (after we regained communication with the world following Hurricane Irene’s pass through our area) that earlier this week CNBC conducted an interview with Abbey Joseph Cohen of Goldman Sachs (an equity market guru who merits considerable respect).  It was reported on CNBC’s website that Cohen “reiterated her forecast for the Standard & Poor’s 500 reaching 1450.”  At first read, this really surprised me and with good reason.  This is terrible reporting --- and I have commented to that effect on the CNBC website.

Cohen’s 1450 forecast was made in June 2011 --- this when the S&P 500 was trading near the 1300 level.  Specifically, the Cohen/GS prediction, based upon all the information available in June, was that the S&P 500 would close out 2011 in the 1450 range.  However, if you view the tape of the recent interview2, what Cohen actually says is this, “the US portfolio strategy team believes that over the next 12 months we can see the S&P 500 reach about 1450.”  1450 by year-end 2011 vs. 1450 by the end of August 2012 are two entirely different animals.  This is clearly not a "reiteration" of Cohen's forecast.  Shame on CNBC.

To end on a positive note, the Yankees beat the Red Sox last night and are tied in the loss column for first place in the AL East.  The Yankees have one more three-game series with the Red Sox this year --- on September 23rd, 24th and 25th at Yankee Stadium.  If both teams take care of business between now and then, it will make for an exciting close to the regular season.