U.S. stock indices ended mixed on Monday as the Dow and S&P 500 closed technically lower (essentially flat), while shares of Cisco Systems helped drive the NASDAQ Composite into positive territory. 

Stocks really need some sort of catalyst at current levels, the broad market has basically recouped the 8% slide that occurred during the three weeks ended February, and we were without an economic release to provide that boost.  There were additional comments out of Europe over the weekend that offered the clearest evidence Germany and France would be at the ready to help Greece refinance their debts if needed, but this was already baked into last week’s trading. 

(I did found it interesting to read that the Greek Prime Minister excoriated “unprincipled speculators” yesterday for threatening to bring a new global financial crisis.  He’s referring to the CDS market – in short, CDS is just insurance against default.  This market can be a bit screwy, particularly the naked sort – not to be confused with the naked-Rahm that’s allegedly found loitering in Congressional showers.  Naked CDS is when someone is using this derivative to bet for or against default, but has no direct exposure to the underlying debt.  But look, speculators wouldn’t be betting against Greece in the first place if the government hadn’t promised benefits they can’t possibly afford.  Get your finances in order and you wouldn’t be dealing with this problem, which should be a lesson to all governments.)

Telecom, consumer discretionary, tech and financials were the sectors up on the session.  Tech and telecoms were boosted by news that Cisco Systems will unveil new tools to help build systems to increase download speeds.  The index that tracks financial shares was most likely helped by news that AIG was able to sell another of its premier units.  This must have offset talk that banks are going to have to take much more losses on mortgage loans, which to this point have been valued on the prayer that housing is going to make a sustained comeback sometime in the near future. 

Industrial and health-care shares led the six major sectors that declined on the session.   

So we’re at the one-year mark of the nefarious intraday low of 666 on S&P 500 and the closing 13-year low of 676 by day’s end on March 9, 2009.  The broad market has jumped 68% from that low, which means it’s recouped 52% of the value lost from the October 9, 2007 all-time high.  The chart below takes us back to that October 2007 all-time high.

Market Activity for March 8, 2010

Dollar Strength on Weakness… and Policy

As we’ve talked about many times, the U.S. dollar is not behaving as it would during normal times.  I guess this isn’t surprising since this is not a normal environment – if there ever is such a thing, but those that rave over greenback rallies from all-time lows (or near all-time lows) don’t have much of an argument if you ask me.   The “but it’s worse elsewhere” view is not strength whether we’re talking currency or economic growth.

Typically, the dollar gains ground when prospects for economic growth, tax policy (after-tax return expectations) and monetary policy are viewed as strong and sound.  These days that is not the case since all three of these subjects are either not sound or expected to become detrimental as is the case with tax policy.  In the current environment, the dollar only finds support when investors begin to run for safety – whether this run for safety involves concerns over U.S. growth, sovereign debt worries or full-blown financial crisis matters very little.  So, as these concerns ebb and flow the value of the dollar follows. 

Currently, the dollar is holding onto most of its gains from when the Eurozone’s sovereign debt concerns were heightened, but as those concerns are in another stage of ebbing the dollar’s value is losing a little steam again.  Thus, commodity prices have found some life – particularly crude.  The price of oil is handily above $80/barrel again and this time the wholesale gasoline price is following crude’s direction in a more acute manner.  So, concerns about global growth and sovereign debt have decreased for now, but the price of fuel (which will result in $3 pump prices if the wholesale price holds) may create yet another headwind for the consumer and vital end demand. 

The overall reason I bring this up is to explain that massive levels of government spending and Fed intervention cannot simply whisk away the troubles we currently face – in fact these actions are creating additional problems.  It would be nice if jacked up government spending and the Fed’s ZIRP would make everything right in the world, but economics doesn’t work that way.  Of course, if the government and Fed began to reign in their current level of accommodation then the economy would endure another round of nasty conditions – the fact that the Fed still doesn’t feel comfortable even raising fed funds to 1% is telling.  However, if they keep fiscal and monetary policy floored, then other troubles result – such as higher commodity prices that whip the consumer, or government debt issues that bring financial crises to the following stage.

Frankly, I would prefer the former action because it will force a quick expunging of the debt excesses that are at the center of our economic troubles and allow for a more expeditious resumption to normal business cycle conditions – Washington’s policymakers can ease the economic hurt by slashing tax rates across-the-board, but this is viewed as anathema right now so forget about that dream.  By engaging in the latter, while it eases the economic hurt, it drags out the process…and we’ll still have to deal with the great unwind of fiscal and monetary policy accommodation at some point in the future. 

Get to it now, or get to it later.  We’re getting to it later; we’ll just have to wait and see how it turns out.

This Week’s Data

We didn’t have an economic release yesterday but this morning we ease into things with the National Federation of Independent Business’s (NFIB) small business optimism survey.  We’re watching for this reading to move above 90, which is still a depressed level but we’ve been stuck below it for the longest stretch in the survey’s 34-year history, so I view it as an accomplishment when it occurs.  The internals of this survey are important to watch as small businesses have accounted for 60% of job growth over the past two decades. 

On Wednesday, we get mortgage applications (week of March 5), wholesale inventories (January) and the budget deficit (February).  On mortgage apps, we’ll see if we can record two weeks of increase after a bad four-week stretch.  On inventories, the previous reading showed stockpiles fell after two months of building, and so another decline will increase doubts over the strength of the inventory dynamic.  On the budget deficit, we’ll see a blow out number, something like a deficit of $200 billion for the month – the year-ago period recorded a deficit of just $42.6 billion.

On Thursday, we’ll get the latest readings on initial jobless claims.  The market expects this reading to fall to 460K from 469K in the previous week.  We need to see this reading get back to 400K and stick there – this is the level that always accompanies some monthly job growth.

On Friday, the Commerce Department releases its advance look at retail sales for February.  Activity is expected to have declined 0.2% after a 0.5% increase in January and an overall good bounce since October.  Most of the decline is expected result from a decline in car sales, excluding autos the figure is expected to come in flat. 

A consistent increase in consumer spending will be dependent on job growth more than any time over the past three decades.  Generally coming out of recession, consumers can use credit to help offset stagnant wages due to a weak labor market.  This time we don’t have that luxury as debt levels have been expanding over the past three economic cycles and spiked after 2002 as the Fed kept the cost of money very very low.  Consumers haven’t been paying down debt, credit card lines have been cut or paid down but auto loans have begun to pick up again.  We’ll need strong job growth to manage these debt levels or it will be sometime still before households get balance sheets right again. 

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900