Tuesday, August 9, 2011

Some Positives at the Margin

Long time readers know I've been negative on the economic underpinnings (structural) from essentially day one on the blog.  [Dec 4, 2007: First Half Predictions for 2008] The U.S. refuses to acknowledge the problems it has, not to mention actually trying to address them and instead is reactionary trying to run around like a chicken with its head cut off to douse immediate fires with water.  Like many third world countries, we have a dysfunctional government which has become a curse on the economy, rather than neutral ... or heck, a positive.  The economy has been filled with never before seen levels of steroids and hence a 'recovery' has occurred over the past few years.  I'd contend almost all the recovery has come in the top end, college educated class and on corporate balance sheets - much of the rest of the country is standing still, or falling farther behind.

That said the stock market is not the economy and that has made for tricky trading at times as the economic underpinnings of the U.S. (which matter less and less to our multinationals) and corporate profits have diverged significantly. I had underestimated the power of laying off millions of U.S. workers in terms of creating very nice earnings as fixed expenses plummeted across corporate America.  To fill the hole of all those lost wages and benefits, in came the government.  That can work for a few years and/or for as long as you keep federal deficicits at a massive 10% of GDP.  But without those constant fingers in the dam, even corporate America will eventually feel some pain.  Indeed we've been seeing how dependent some of our blue-est of blue chips are on government spending the past few quarters (i.e. ask Cisco).

However with tumult in the markets comes some positives.  Oil has dropped significantly the past few weeks and now sits at the lowest level in 2011 at just above $80 per barrel on WTI.  If the refiners play along this should be a nice tax cut for 'average Joe'.  Of course Mr. Bernanke could destroy that tax cut with QE3 which would punish the dollar (again), and push speculators into all things that Bernanke cannot print on a whim.

On the housing front, 10 year yields are back to sub 2.40%.  (this would look like one heck of a double bottom if it were a stock chart)  For those looking to first time housing purchase, and/or refinance, it's a gold mine.  Of course, many Americans lack basic savings for first time purchases and just about anyone who could, should have refinanced by now during the ultra low rates of the past few years - but I'm trying to be positive this morning, at least on the margin.

As for the market, with so much technical damage all rips to the upside should be considered bounces to sell into, until proven otherwise.  At this exact moment, I would not be constructive on a market for anything other than an oversold bounce (potentially dramatic!) until we see the S&P 500 back over 1250.  That's quite a ways away.  With that said, there should be a vicious rally at some point here - and perhaps in anticipation of The Bernank coming to aid of speculators at Jackson Hole, Wyoming 2.0.

I do not believe the Fed will do anything dramatic today (in terms of a QE announcement) because they like to telegraph things ahead of time, and they usually float things in the Wall Street Journal or other news outlets before they act.  So if Ben wants his QE3 soon, we should start seeing a parade of rumors and Fed Presidents showing up on the major news outlets between tomorrow and end of August.  For now, the WSJ's John Hilsenrath (one of the chief talking outlets for the Fed) lists the most likely options before the bazooka.

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