5/11/09: Monday Morning Perspectives

I’m hearing lots of talk about the S&P; 500 ending this rally at about 950, so let’s call it 940-960. That range brings together a few points: it’s where recently popular DeMark signals say the rally should turn down, it’s the home of the 200-day moving average, and it’s the one-year downtrend line. That’s a lot of challenge.

Naked Capitalism doubts the rally’s staying power because it hasn’t “featured a new leadership group, as enduring bull markets normally do, nor has it reached the crushing valuation lows (PEs of 5-8 versus roughly 11 in early March).”

Michael Santoli at Barron’s, however, thinks “broad anticipation of a correction, combined with this reservoir of skepticism and desire to buy in at lower prices, imply that the first pullback wouldn’t be all that deep, absent some fresh rupture in the financial fabric.”

On last week’s employment report, The Kelly Letter suggested the 539,000 jobs lost was a big number even if smaller than feared. Worse, though, is that it wasn’t actually much smaller than feared because “the supposedly great -539k was manipulated. Government hired 72k in preparation for Census work, and the Bureau of Labor Statistics happened to adjust its Birth/Death figures to make the number of jobs lost shrink by 60k. Subtracting those, I get -671k for April.”

David Leonhardt at Economix isn’t as concerned. He found the jobs report to be “pretty encouraging” because, “It’s just not getting worse at an accelerating rate anymore, and that’s often a sign of better days ahead.”

That’s not how Frank Ahrens at The Ticker sees it, as the headline 8.9% unemployment rate “tells only half the story of this recession.” If we include the “unofficially unemployed” tracked by the Bureau of Labor Statistics, the “total number of Americans who are not working full-time but ought to be is actually about 22 million, or 15.8%.” That figure “is the highest since the bureau began keeping these figures in 1994. Excluding the current recession, the highest previous rate came in January 1994, when it hit 11.8%.”

Dan Burrows and Will Swarts at SmartMoney worry that better-than-feared news is not the same as good news and that “the recent market rally might be getting a bit long in the tooth” despite improved economic data.

Moira Herbst at BusinessWeek suggests that a true rebound will include rising business investment (currently falling at a rate of 30% over the last six months), rising consumer spending (still depressed), number of hours worked per week (still at a record low), and increased temp hiring (still falling).

In real estate, Dr. Housing Bubble sees no green shoots, certainly not in Southern California. He says the “fundamental factors that have depressed and caused the California real estate market to crash still remain” because “a tsunami of inventory is going to be flooding the market in late 2009 and early 2010″ as the market moves out of the subprime frying pan into the Alt-A and ARM fires. Among ten problems he finds are rising notice of defaults, rising unemployment, sluggish sales, and this stunning fact: “Nearly 30% of all mortgaged property in California has negative equity.” He concludes, “There is absolutely no rush to buy a home right now.”

Meanwhile, Washington is up to its usual good-for-nothing posturing as President Obama acted triumphant over finding $17 billion in savings, which amounts to less than 0.5% of his $3.4 trillion spending plan. David Broder at The Washington Post described the number as “theoretical savings almost invisible to the naked eye.” Senate Budget Committee ranking Republican Judd Gregg said, “This amounts to less than an asterisk when it comes to the amount of debt and deficit that we will be running up as a government.”

Shane Oliver at AMP Capital finds China’s green shoots of recovery to be “much stronger and more broad-based” than others around the globe. He notes China’s low public debt, lack of a bubble in its property market, and thinks “there is significant scope for strong growth in consumer spending to underwrite sustained Chinese growth of 9% to 10% per annum.”

Stephen King at The Independent sees more than just economic recovery on the line. He points out that it’s “Western banks which have been making the bad loans and it is, ironically, Western governments which are now following the Chinese model of state-directed lending.” Chinese banks skipped the dangers of leveraged securitization and “their loans have been funded much more through good old-fashioned deposits, reducing the risk of a domestic credit crunch.”

As the U.S. government demonstrates its inability to manage its economy, “for countries fearful of their excessive dependence on the U.S. economy, China offers an opportunity to reduce their vulnerability.” Because “the U.S. economy will be weighed down by private and public-sector debts over the medium term, other countries will increasingly look elsewhere to find supportive trading partners.”

Most ominously: “China is already extracting a price for this process, increasingly signing long-term trade deals in renminbi rather than dollars, with the effect of slowly turning the renminbi into an alternative to the dollar as a reserve currency. Although we are still many years away from a world economy dominated by China, we may already be witnessing the first signs of America’s dwindling status as the world’s hegemonic economic power.”

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