U.S. stocks rallied, sending the S&P 500 to the highest level since mid May, as IBM announced a $1.7 billion takeover and the NBER finally promulgated that the recession ended June 2009.  I’m not sure why the statement would rally the market since we all know June/July 2009 is when the business cycle troughed and thus the recovery began.  Additionally, this announcement says nothing of what’s to come. 

The broad market is closing in on the May 5 close, just 2.2% off that mark – the May 6 flash crash rattled investor complacency, but complacency has returned.  We’re within 7% of the April 23 19-month high of 1217 on the S&P 500.

Volume was weak again yesterday, pathetic since July, coming in 22% below the six-month average.

Strangely, well in a normal environment I guess, Treasury securities also rallied – abnormal for a positive day in stocks, much less a pretty strong upswing.  The yield on the 10-year fell nearly 4 basis points to 2.70% -- bond prices and yield are inversely related. 

European sovereign debt challenges continue as Irish and Portuguese government bond spreads increased to their widest levels on record – the spread one talks about is the yield above German bunds, which are the benchmark.  The way these spreads have widened, it sure looks like the EU will be triggering the European Financial Stability Fund again in order to stave off any crisis that would otherwise present itself…until that is, another government rescue plan no longer suffices. 

The National Bureau of Economic Research’s (NBER) promulgation that the recession ended in June 2009 marks the recession as the longest in the postwar era at 18 months (December 2007 – June 2009).  The decision to officially call the recession was arrived at on Sunday via conference call, but the group warned that chance of another slump has increased – of course this comes as no great surprise, but for the NBER the caveat is quite timely. 

Market Activity for September 20, 2010

Reminded of the 2008 Fantasy

Yesterday morning the media centered on the attention-grabbing town hall meeting President Obama was going to engage later in the day.  I listened to two analysts offer predictions that the president would signal current tax rates will be extended.  One said the president would announce that even the top two income tax rates would not change, at least over the next year, during the “town hall.”  The other predicted that the announcement would come just prior to the election.

This sort of mindset reminds me of the 2008 election when I heard so many people saying that then Senator Obama would govern as a moderate – and they stated these opinions with such confidence.  I always found that conviction strange, if not completely misplaced, considering the soon-to-be president made very clear that the change he was talking about was a Europeanized system of higher tax rates and much more government spending/economic involvement. I often wondered at the time whether these people ever took the time to listen to just one full speech – that’s all it took as every speech was focused on the redistribution of income and the vilification of success.

The comments I heard yesterday morning from those analysts seem strikingly familiar to me, simply because the predictions are at odds with President Obama’s comments as recently as last week.  He made clear that extending the current tax rates for “millionaires and billionaires” (as if the income segment within the top two tax rates consists solely of these wealth levels) was not affordable.  His actual statement was close to, and I paraphrase since I’m going off of memory, “we can’t afford tax cuts that amount to $100,000 for billionaires because it will add $700 billion to the deficit.” 

The main reason for low tax rates on upper income earners (and they are hardly low now) is because this group provides the bulk of the capital and jobs to the economy – beyond the fact that it is totally American to reward success; it is after all the American Dream to aspire to upper ranks of the economic ladder.  To vilify this group and reduce their after-tax return on income and capital only hurts those on the lower rungs of the ladder.  But to the point of these misplaced predictions, the election refrain the president has signaled he’s going with offered zero evidence we would hear a message of extending all current tax rates via yesterday’s much ballyhooed town hall meeting – nothing more but hopium-addicted commentary from traditional sell-side Wall Street analysts. 

NAHB Market Index

The National Association of Home Builders (NAHB) index of housing market activity held at a reading of 13 in September (expected to tick up to 14) – the lowest level since the measure bottomed at 8-9 in late-2008/early-2009.  A reading below 50 means that more builders stated conditions as “poor” relative to those stating conditions are “good.”

The sub-indices that make up the overall index were steady-to-down.  Builder confidence regarding current single-family home sales held at the 16-month low of 13 (record low of 6 was hit Jan. 2009) and builders’ expectations of future sales activity held at 17-month low of 18 (record low of 15 hit in February 2009).  The survey on buyers traffic fell back to 9 from 10 in August (the record low of 7 was hit in November 2008).

Week’s Releases

The theme for the week will be housing as we get starts and existing-home sales for August.  Both should bounce off of very depressed levels – housing starts have remained at the lowest level since the worst of the housing crisis and existing-home sales plunged 16% below what many had believed to be the cycle floor.  What we will watch for within the existing home number is the median price component, which has held up despite big supply problems but must eventually move lower again.

The other key events will be today’s FOMC meeting, and the Committee’s statement that follows; initial jobless claims out on Thursday and durable goods orders (August) out on Friday.

Regarding the Fed meeting, people will read that statement for evidence of the coming next round of QE, but they won’t get it just yet – we should watch the Fed build expectations to this event as we progress to year end.  They’ll also cut their economic growth forecast, something we first mentioned would be occurring after they raised it a couple of quarters back. 

On jobless claims, they’ve been stuck above the 450K level when we need the data to slide through 400K.  We may see dips below 450K on occasion, but just like past moves to the 430K range, labor market realities appear to offer evidence we’ll live in a 450K world for a while still.

On durable goods, the data has shown considerable weakness over the past four months.  The important segment to watch is the business-spending proxy, which has turned down again.  The economy needs this segment to buoy GDP, as consumers are in de-leverage mode (most of which is involuntary as defaults accounted for 90% of the reduction in household debt last quarter, according to the Fed) and the inventory cycle is looking winded. 

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900