U.S. stocks got a jolt from the longer-than-feared gradual timeline banks will have to meet higher capital requirements, increased industrial output in China and a higher euro-zone growth forecast from the European Commission (EC).

I love the optimism from the EC, even if the boost is from a very low previous estimation; just remember that they raised the full-year forecast when Q3 and Q4 growth rates are announced.  On China, the government there is making sure activity remains robust (command-and-control capitalism is what they call it), but China has a bit of a problem: they depend on consumers from developed nations as they are an export-driven economy.  This is an outrageous statement to all who believe China’s economy is unstoppable (What worry about Chinese growth?  Are you some kind of idiot or something?), but those who forget just how violently things can shift in emerging-market economies by taking on too much exposure to the class will pay for their amnesia. And on bank capital, the more stringent requirements won’t take meaningful effect until 2015 and full effect until 2019.

It is rather amusing/fascinating to watch how perfectly economic sentiment changes with the direction of stock prices.  Nothing in total has improved with regard to the three-month data trend, but every time stocks move to the top-end of the trading range (we’ve hit this level four times now in four months), analysts seem to ignore realities on the ground.  I can enjoy these upward moves in stock prices as much as the next guy, but remain highly skeptical that we’ll see a sustained move higher.

Financials led the broad market higher, along with tech shares – both doubled the performance of the overall market.  Consumer staples led the laggards, and was the only group to lose ground for the session.

Volumes was suppose to bounce back to more normal levels yesterday, then again that was expected to occur last week coming off the of the holiday.  Activity remained weak though, 25% below the six-month average.

Market Activity for September 13, 2010

That’s Right, I’m Negative

The above commentary is hardly cheerful, especially on such a happy day for stocks.  But it’s kind of justified when the economy has slowed to 1.5%-2.0% at best, housing can be termed in a state of depression, toxic assets within the banking system have yet to be resolved (more like extend and pretend) and debt problems are present in both private and public sectors.  And these realities are present even with monetary and fiscal policy all in (until they are even more “in” within a few months). 

Besides, even if we woke up tomorrow and everything was suddenly wonderful we still have a Fed that must unwind unprecedented levels of monetary easing (invoking the more typical Fed-induced recession) and the bond market would have to re-price in the most dramatic manner in a very long time.  How’s the economy going to react to that scenario?  And that’s the positive outlook. 

Look, I can see many opportunities presenting themselves over time, and entry points like the devilish 666 on the S&P 500 was certainly an opportunity – let’s hope that level has been left in the dust.  However, first we must get through many more challenging events because the government can’t only wave a magic wand and make a debt-driven recession and its aftermath disappear, their desperate attempt to make it go away is only extending the time to actually expansion – yes, the Great Delay.  (And I didn’t even mention that the risk of geopolitical shock remains historically high.) 

I hope this helps to explain my negative tone.  Trust me I don’t enjoy it, as long-time readers probably understand, but it’s kind of justified.

Monthly Budget Statement

The Treasury reported that the federal budget deficit came in at -$90.5 billion for August, which was better-than-expected by $4.5 billion and improved from August 2009’s shortfall of $103.6 billion.  Nevertheless, we’re on pace for another $1.3-$1.4 trillion deficit by the time the government’s fiscal year ends this month. 

The better-than-expected results were helped by a 14.9% climb in individual tax receipts relative to the year-ago period.  Corporate receipts were of little help as they came in at just $2.7 billion, roughly half of year-ago levels. 

Corporate profits have accounted for just 7% of total receipts fiscal-year-to-date (individual receipts make up 41% and FICA 39%), which is just another reason policymakers should advocate eliminating the corporate income tax.  (Oh boy, there’s another statement that will provoke the what’s-up-with-this-idiot comment.)  But elimination of the corporate tax rate won’t just help to ameliorate the trouble businesses are running into with regard to intense levels of uncertainty, it will incentivize global firms to set up shop here too.  So you receive zero direct revenue from corporate profits.  Big whoop!  The tax base would expand in an aggressive manner from all the new jobs created and you get a windfall of indirect revenue from profits.  Oh, and that will kind of help the housing market to boot. 

It’s been very frustrating to watch the government try so helplessly to bring housing out of its doldrums – they think so myopically it’s pathetic.  If they would target the areas of policy that actually have a shot at stimulating the job market, troubles like de-leveraging, housing, government fiscal mayhem and unresolved toxic assets would all evaporate much faster than is currently the case. 

Week’s Data

It’s a big week on the data front, as we get it started today with the NFIB’s small business gauge and retail sales for August. 

We so need to see NFIB’s figures rise above 90 and hold there, hopefully getting to something closer to the 95 level.  I’m not optimist this will occur though as small firms remain mired in a morass of policy uncertainties, higher employment costs that they know are coming via health-care legislation, and nonexistent-to-low revenue growth. 

The previous two prints (June and July) fell back below the 90 level after finally moving above in April and May –  that’s never occurred before in the gauge’s history (which goes back to 1976), a quick return to sub-90 that is.  And prior to that, it held below 90 for longer than any time in the data’s history (18 months).  Something in very wrong in small-business land and that means things are not right in the job market, but we already know this.

On retail sales, the data is expected to show a 0.3% increase for August, which follows July’s 0.4%.  This figure has been bouncy as May and June combined saw a large pullback in spending, which followed a large increase in February, March and April thanks to those homebuyers tax credits being spent. 

So we continue to see the consumer spending data post volatile results as government action results in activity to be pulled forward and, and at least in the short term, can keep spending levels higher than they otherwise would be.  To enjoy consistent spending activity though, we need to complete the needed household de-leveraging (paying debt down) and that takes durable and substantial job growth. 

For the rest of the week, the big releases will be Empire Manufacturing (the first regional factory data for September), Industrial Production (August) and the weekly event that is jobless claims.

Have a great day!

Brent Vondera, Senior Analyst