U.S. stocks ran into a little trouble on Tuesday on renewed concerns over European debt issues – haven’t heard that one for a couple months, but the problem wasn’t going suddenly disappear just because of some propagandized stress tests.  The pullback ended the most recent winning streak at four sessions.

Friday’s laggards were Tuesday’s relative winners as safe-haven sectors were back in vogue.  Consumer staples, telecoms and utilities were the best-performing groups (all off less than half that of the broad market) even as all 10 major sectors did fall on the session.  Financials (down 2.02%), consumer discretionary (off by 1.42%) and energy (down 1.38%) shares were the hardest hit. 

We’ve talked many times over the past several months about how concerns over European bank and sovereign debt situation will continue to ebb and flow.  Well, we may be witnessing another flow as the WSJ ran an article yesterday suggesting that the EU stress tests back in July were pretty much a farce.  You mean those stress test were all about convincing people there wasn’t a capital ratios problem within the EU banking system?  I’m stunned!

A larger-than-expected deceleration in German manufacturing data also pressured markets yesterday, although one doesn’t want to make too much of a sub 1% decline in stock prices.  Everyone got all excited when Germany printed that big Q2 GDP reading 8.8% at an annual rate), but I guess they either forgot, or are simply unaware, that over recent years European growth has generally lagged activity here in the U.S. by two-three quarters -- two reporting quarters back, U.S. GDP hit 5.0%.  Of course a euro that got crushed in the second quarter also helped to boost their exports, which was the main driver within that report.  Now, people see signs of weakness and get all surprised; it’s like amateur hour.

Market Activity for September 7, 2010

Great Policy Step, but Watered Down by Additional Keynesian Nonsense

We didn’t have a major data release yesterday, so let’s remain on the topic of this next round of “stimulus” the administration is planning.  For the most part it is just more Keynesian absurdity ($50 billion on roads, railroads and runways), an approach that may boost activity in 2011 but leave us out in the wilderness as it just adds to debt and fails to increase the longer-term employment situation (we desperately need a larger tax base to fire government revenues higher and that means many more jobs). This also keeps businesses uneasy as they know it will be tough to achieve real tax reform due to this degree of deficit spending.  (Although, in my opinion we will get serious tax reform, but things will have to get worse first in order to provoke it.)

We see government officials dropping like flies, leaving the administration as they disagree with the approach.  A rotation of cabinet members is hardly unusual two years into a term, but we’re seeing it’s more than just the typical, “I’m returning to the private sector” claim.  The latest is from former Office of Management and Budget Director Peter Orzag as he delivered a slap down to the Obama Administration on Monday by stating the current income tax rates for all brackets should be extended.

The administration campaigned, and continues to argue, that the lower top-bracket income tax rates caused the economic malaise.  And Orzag was a proponent of raising those rates in the past, but it appears he’s a bit open-minded enough now after yet another Keynesian experiment has failed. 

I applaud the administration for proposing an allowance for firms to expense 100% of plant and equipment outlays in the year of purchase (normally these purchases must be expensed over several years).  However, such a strategy should be accompanied by lower tax rates and more certainty with regard to future policy to be fully effective – instead the plan will also include higher corporate tax rates on overseas income and uncertainty regarding other issues results in businesses holding off.  (If you’re a small business owner with close to 50 employees, are you going above the 50 mark when it means you’ll be subject to the health-care law?) 

Also, hoping that the administration, as many people appear to be doing, extends the current income tax rates on the top bracket (those who provide the economy with most of its capital and are the major job creators) is quite a stretch.  Notwithstanding how the administration has vilified the current rates, if you caught President Obama’s speech on Labor Day, you undoubtedly understand the unlikelihood of such a move. 

This Week’s Data

We get back to the data front today with the Mortgage Bankers Association’s applications index, but it’s a quiet week – things will get more interesting next week as retail sales, the NFIB’s small business report, industrial production (all for August) and the first regional factory report for September are released. 

On mortgage apps, we need to see a substantial boost to purchase applications, but that’s unlikely before meaningful and consistent job growth ensues.  (Looks like it won’t be long before the tax credit makes another comeback.)  Heck, even refinancing activity remains subdued relative to the low nature of interest rates – the rate on the 30-year fixed mortgage continues to make new lows.

We’ll also get the latest Fed Beige Book, or the most recent economic activity reports from each of the 12 Fed districts. 

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900