Alan Moore Commentary 3-1-2012 alanm@slavic.net
These are some of the emails I sent out to the list during the month---day by day, for those who want to relive them. The highlights were the improving US economic data, the surging stock market and the new bailout of Greece. My take is: despite German approval on Monday, the bailout will fail; our economy is moving sideways at 2% growth; and, the stock market faces the daunting threat that Iran will be bombed by Israel. I do not think US growth will accelerate because of $4/gal gas and Europe’s sinking GDP, not to mention that global political risks are enormous: with elections in France and Greece occurring in April and the Bush tax cuts expiring at the end of this year----- useful compromise seems impossible with the politicians we have, or will get. Obama is popular but ineffective; and any Republican candidate will be hamstrung by the party’s ideology, which is unpopular in the mainstream. So the November election will come down to who gives the best speeches and has the biggest campaign fund. It will not entail a real debate on real solutions to cutting the deficits through taxation and spending reduction, which is what we all want to see, but don’t see happening anytime soon.
Today: (MarketWatch, 2-28) —Case Shiller index said U.S. home prices in December fell to their lowest level since the housing crisis, as an uptick in activity isn’t yet being matched by rising values, according to a closely followed index released Tuesday. The S&P/Case-Shiller 20-city composite fell 1.1% in December, to wrap up 2011 with a 4% downturn.
Previously during the month, I reported:
2-21-12 The new Greek deal is much like the old Trojan horse deal-------- you can drag the nag into the EU fort, but there is a trap door called default, waiting to be opened. However, the markets have discounted a default and moved on to worrying about Israel bombing Iran. Oil is up on that threat, but the real deal is a rising US economy which is causing inflation to inch up. Interest rates couldn’t be far behind. All and all, stocks prefer inflation to deflation----- and so far so good. Investors must feel like the man who fell off a ten story building………. as he fell the people on the floors could hear him say: so far so good, so far so good.
2-16-12: WASHINGTON (MarketWatch 2-16) – “The United States won't reach the debt ceiling until "quite late" in 2012, Treasury Secretary Timothy Geithner said Thursday. "We do not expect to hit the debt limit until quite late in the year, significantly after the end of the fiscal year [Sept. 30] but before the end of the calendar year," Geithner told the Senate Budget Committee. There has been lingering concern in financial markets that the U.S. would hit the $16.4 trillion debt limit before the Nov. 6 presidential election.” The ceiling will have to be lifted by $2 trillion more after the election, which will put us over 18 trillion in debt. The ceiling debate will happen along side of the expiration of the Bush tax cuts and the 4.2% payroll tax reduction, which should “Greece” the glide of the economy in 2013.
2-16-12: I’m buying some investment properties and it has been an eye opener. The cost of borrowing money is so cheap that I can’t resist leveraging; but the tough underwriting by the banks makes it near impossible for the average borrower to qualify for a loan. Low appraisals usually tank 50% of impending sales at the end of the process, unless it is an all-cash offer. It used to be, before Fannie Mae was a player, that the banks kept the loans as part of their portfolio; but now they just sell them for a fee to a federal government agency, which requires forms a mile long. No bank in their right mind would tie-up depositor money in a 30-yr mortgage only getting a 4% return; just six years ago, banks were paying depositors 5% on savings accounts. Without Fannie Mae buying up all the new mortgages, there would be no housing market until mortgage rates rose over 6%. In the 1983, lousy, housing market, mortgage rates were 13% while inflation was 10%. I guess it all comes down to inflation doesn’t it, or the lack of it, and a lot can happen to home prices between 4% and 13% mortgages--------- which happens to represent opposite ends of a bell curve. In both instances home prices are at their lows in the cycle; the peak occurs at around 7%. This indicates that rising rates could mean a better housing market; but they aren’t rising.
2-14-12: So let’s just assume Greece defaults; so what? Greece will certainly have big problems, but it is small in GDP compared to the $15 Trillion of the Euro block----less than 3%. The real effect will be the contagion that spreads to Spain. See the following:
MarketWatch 2-14-12 “The pressures on the Spanish economy, which is close to entering a renewed recession, will be further increased by the need for even stronger action to achieve a deficit reduction,” said Moody’s. The country’s unemployment rate stands at nearly 23%, the highest in the 27-nation European Union. Spain aims to cut its budget deficit to 4.4% of gross domestic product this year, down sharply from 8% in 2011.””
Spain can no more impose additional austerity on its people than Greece. All this is happening with the stock market going up; the cover of Barron’s this week says: “Dow 15,000”. Go figure. I remember when the Dow hit 14,000 in 2007 the Barron’s cover said “Dow 36,000”. Then the cover got knocked off the ball by the housing crash and the resulting financial crisis.
2-9-2012: Greek leaders, with long names I can’t pronounce, will agree to austerity soon in order to get the next draw on March 20th. Then in April they will probably be voted out of office in the coming election and the deal will fall through again. The Greek people aren’t going to go through with it; unemployment is already pushing 20%.
This was announced today: the people that know their stock are selling their stock.
CHAPEL HILL, N.C. (MarketWatch 2-9-12) — “Corporate insiders are now selling their companies’ stock at a rate not seen since late last July. That’s a scary parallel indeed, since that late-July spike in selling came just days before one of the more painful two-week periods in the stock market in years.”
A few days ago, I gave you the good news on credit growth and consumer spending which has been happening since October. Last week the employment number was surprisingly good. This is the real world evidence of cause and effect and it is saying: first, consumers start spending, and subsequently hiring takes place; finally, businesses start to build new plants and open stores. This evidence kind of blows “supply-side” economic theory out of the water doesn’t it? Corporations are not going to start using the 2 trillion dollars on their balance sheet to invest until well after they see new demand, perhaps with a year or two lag. After seeing new demand, the first thing they are going to do is hire people and use up the plant capacity that is sitting idle now. However, there is a weak link in this cycle---insiders are selling, meaning they don’t see the demand continuing. Somebody is wrong: either consumers are too optimistic over the job market, or corporate insiders are not reading their markets very well. No matter, the stock market is up because the group selling is but a small group.
2-8-2012: Beside the Greece thing, this was some good news yesterday:
Market Watch 2-7-2012. “U.S. consumers increased their debt in December by a seasonally adjusted $19.3 billion, the Federal Reserve reported Tuesday. The increase is just below November's $20.4 billion pace which was the biggest gain in a decade. Monthly debt rose by a 9.4% pace in December, after a 9.9% pace in the prior month”
To put this news in my perspective: Consumers continue to spend and the economy is recovering because of it. If this keeps up( and is not derailed by Europe), the new demand will spur hiring, followed by wage gains later this year. Structurally though, this recovery won’t be robust due to low interest rates, which hamper lenders taking on more risk by making loans to small businesses. Lenders aren’t paid enough to take risk, instead they choose to raise capital to satisfy the new Frank-Dodd regulations and to address continued exposure to the housing market. That is the catch-22 concerning low rates---they limited the depth of the recession, but now will limit the economic expansion. For every debtor that benefits from interest rate reduction, there is a creditor that loses income and must pull back from making new loans.
Not to bridle your optimism, I did purchase a stock two days ago, Exelon, a nuclear-power, utility company that pays a 5% dividend; just for a trade; I don’t plan to keep it very long and do not recommend that you do the same.
