Home > Uncategorized > 2011/10/05: QuickPost: The Fed, Jobs, Housing and Europe

2011/10/05: QuickPost: The Fed, Jobs, Housing and Europe

Much remains the same as yesterday in terms of the negative influences. And in our view those emanating from the US will count for even more of the future weakness in the intermediate term than the obvious headline focus on Europe.

Which is a bit of a radical view in light of the increasing social unrest response to draconian austerity measures in Greece. There are also the problems at the banks that have been highlighted by the problems at Dexia, leading to an admission by the European powers-that-be that just possibly banks which hold a significant amount of underwater sovereign debt are indeed going to need recapitalization; which is to say further significant support from the state.

Even in light of that admission being welcomed by the markets in the form of yesterday’s US equities late session sharp recovery from new lows, so far this is just so much talk. That said, getting back to sharply higher on the day from much lower did establish important technical bottoms for US equities (more on that below.)

However, all that still leaves the question that we have asked many times before: does crisis mitigation necessarily amount to a restoration of global growth that will be truly positive for economies and equity markets? And commensurately burdensome for government bond markets and the US dollar?

On current form, our answer is “not so much.” And there are several factors to consider that relate to the Federal Reserve, US employment and housing, and the latest round of market boosting missives from Europe. In the first instance, Mr. Bernanke’s testimony and Q&A session yesterday were very interesting. If we were inclined to be charitable, we could cast that in constructive terms. However, the bottom line seems to be that the Fed is down to begging the political class to change direction to enhance future potential economic growth in the US.

The Fed may also have scored some points against itself with the Operation Twist program purchase of long-dated government debt driving down the yields of that end of the curve. The banks have been under pressure again. And on top of all of the regulatory and legal burdens that it been heaped upon them, they have now seen one of their last surefire earning sources diminished as the long yields have come down relative to their borrowing costs.

That does not diminish the Fed’s infinite capacity to assist banks both here and throughout the world with the additional liquidity if such measures should become necessary. And, as opposed to some other market observers, we fully support their role in that regard. There is literally no degree of balance sheet expansion which is as troubling as letting the banking system fail for sheer lack of liquidity.

However, as has seemed clear to us from all of the FOMC statements and communication from Mr. Bernanke and other key Federal Reserve officials, he has finally seen the light and told the political class in the US, “I’ve got nothin’; the weak economy is your problem, you fix it.”

And in the current confrontational context, that’s going to be quite an interesting development. Taxulationism (combined negative impact of excessive tax and regulation along with the recently ascendant tendencies toward protectionism) rules.

And that is showing up in the weaker topline turnover fomenting more job cuts once again. The monthly Challenger Job Cuts Survey was a truly abysmal jump to over 115,000. That included major layoffs of government workers and financial services employees. John Challenger noted on CNBC that this seems to be the implementation of many companies “run leaner” contingency plans; that will accelerate unless final demand picks up soon.

What are the chances of that with job insecurity and weak housing prices affecting US consumer sentiment and activity? And the news is not good on that front either, as the weekly Mortgage Bankers Association mortgage applications survey showed a drop of 4.3%, which was substantially based on a lack of further refinancing activity. Needless to say, with requirements for down payments and credit scores already suppressing purchase activity, it isn’t good at all if refinancings are beginning to wane. And that is occurring with a 30-year mortgage rate of 4.18%, at or near the record low. As quite a few realtors noted when Operation Twist was first announced, lower mortgage rates were not going to drive stronger house purchases. Looks like they were sadly correct.

Of course, there is some good news out there, as US ISM Services came in above expectations at 53.0 today. Unfortunately a lot of the commensurate figures from Europe were weaker (especially Germany slipping below 50.0, and the pan-European number remaining below 50.0.) Which brings us full circle to the situation in Europe, and how that relates to the current disconnect in the US political culture.

What is becoming glaringly apparent is that federal government spending cuts do not necessarily address the important issue of fiscal rebalancing. Greece has been a great learning lab for major cuts leading to a weaker economy, which then does not generate the tax revenues necessary to achieve the desired projected rebalancing. Even allowing that Greece has a much bigger problem than the US or the rest of Europe with tax fraud, if everybody is cutting at once, the government layoffs and cuts in support to states and regional bodies suppress economic activity.

In that regard Mr. Bernanke (who is very smart, even if we don’t always agree with his view) has been pointedly right that an intermediate term fix is what’s necessary, and sharp spending cuts in the near term are not going to solve any problems. Smarter spending on things like industrial re-education would make a lot more sense, especially in an environment where highly skilled labor is in short supply even as the general unemployment levels remain unacceptably high. However, the chances of that sort of intelligent, middle-of-the-road discussion taking place in the US in the current political environment (which is already in full tilt campaign mode over a year ahead of the next general election) are likely slim and none

And in the classic observation, “Slim just left.”

General Market Observations

Significantly the same as in Monday’s post, other than the further evolution of the US equities trend reviewed above and below.


Equities: Much of the near term activity in equities as well as other asset classes will rest with whether the December S&P 500 future holds back above the 1,100-1,090 support, or drops back below it to a degree that knocks out yesterday’s 1,086 area UP Closing Price Reversal (CPR.) That will signal whether it is bottoming in the near term for at least a more substantial retest of upper-1,100 or even the low-1,200 area. If not, then follow-on weakness could readily carry down to the heavy congestion and extended Fibonacci support in the 1,040-1,000 range.

Long Dated Government Bonds: Not a huge surprise the somewhat unexpected and sharp recovery of US equities late yesterday derailed the near-term rally in the govvies. However, in each case those were from anticipated higher resistances that the markets were already not effectively escaping even while the equities were under pressure; sort of an anticipatory cautionary trade reinforcing the govvies oft-cited ability to see what might be coming next in equities. No surprise therefore that the December T-note future did not want to remain well out above 130-20 by yesterday’s Close, and is back modestly below it this morning. That said, this does nothing to change a bullish trend that would allow for further setbacks into the mid-low 129-00 area.

All other asset classes remain significantly the same as in Monday’s post.

Thanks for your interest.

  1. No comments yet.
  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: