The broad market closed up on Friday, but the Dow was held back by shares of American Express and Verizon; both companies reported better-than-expected earnings but the former cited concerns about weak loan demand and the latter slow wireless subscriptions.  The NASDAQ Composite was the best performing of the three major indices thanks to a bounce in tech shares.

Also on traders’ minds was the G-20 meeting over in South Korea as the currency fight is heating up.  Treasury Secretary Geithner went into the meeting trying to manage everyone’s trade activity and arguing against depressing currency values, which went over like a lead balloon especially since his own central bank has been beating the hell out of the dollar – do as I say, not as I do isn’t really the best plan of attack.  The meeting ended with nothing accomplished, which may be a good thing considering what Geithner has up his sleeve – at least they got superior quality accommodations, food and wine on everyone else’s dime. 

Energy, tech, consumer discretionary and staples all out-performed the broad market.  Basic material, utility and telecom shares were three of the major 10 industry groups to close down for the session. 

Volume has really backed up again over the past two days after spending six of seven sessions above the six-month average.  Trading was 35% below that six-month average on Friday.

For the week, the S&P 500 gained 0.59% -- up seven of the past eight weeks and within 3% of the April 23 intermediate-term high. 

Market Activity for October 22, 2010

Fanciful Little Mind

Ok, so we had another meeting of the G-20 this past weekend and Treasury Secretary Geithner went into the convocation with a goal of “rebalancing the global economy.”  This guy never ceases to amaze me, fanciful minds are full of lofty and quixotic ambitions – it wouldn’t be so bad alone, but it’s exactly these type of people, those who believe they’re smarter than they actually are, who have gotten us in so much trouble in the past.  

“Rebalancing the global economy” – what does this mean?   In Geithner’s mind it means setting exchange rates and current account balances for individual economies (ie, levels of trade surpluses/deficits).  He also mentioned earlier in the week that he believes the exchange rates between the dollar, euro and yen are in balance.  Beyond the fact that there is no such thing, such comments only anger the Japanese as the yen sits at a level that’s killing that export-dependent economy – a result of the Fed’s QE¥.

Geithner appears to want to engage in a modern form of Bretton Woods; that monetary and trade management system set up near the end of WWII.  What the U.S. was able to do then was make the dollar the world reserve currency, as it was “as good as gold.”  (Currency exchange rates were fixed to gold at that time – countries had to maintain their currency values to a fixed price in terms of gold.) 

Anyway, John Maynard Keynes came up with the goofy idea of the “bancor,” which would serve as the world reserve currency; global economies had to fix their currencies to the bancor so to eliminate wild fluctuations that lead to things like trade wars and currency devaluations – it appears some things never change as we once again find ourselves in an environment of wild currency fluctuations.  But the bancor was never established, and thus the U.S. dollar took over as the world reserve currency.   This was possible because the U.S. was essentially the creditor nation as we didn’t only save Europe militarily but also financed WWII and actually kept Britain from going bankrupt. 

So Geithner wants to set up a virtual Bretton Woods type of framework, one in which he and some other bureaucrats seemingly determine the “correct” degree of trade gap and currency value for each country – the arrogance is astounding. 

Mr. Geithner fails to realize a few things.  One, we are not in a creditor nation position right now.  Two, we’re not dealing with only a Europe, a continent we completely saved and thus gave us tremendous bargaining power, but China is a major player now.  (If this guy thinks the Chinese are interested in Bretton Woods-type frameworks he’s even more clueless than I previously thought.)   Three, this is exactly the wrong way to go about this whole thing.  As a result, the agenda was s flop.

So what’s the right way?  It’s certainly not some arrogant, centrally-planned system in which a few people in government attempt to determine where exchange rates should be and how much each economy should promote growth via “balances” between export activity and domestic consumption (Geithner and his ilk believe the U.S. imports too much and China exports too much – he wants the Chinese to engage in more domestic consumption but one can’t force these things; they must happen over time). 

Instead, what we need to do is implement sound monetary and fiscal policies that foster growth here at home and enhance the propensity of foreigners to direct large sums of capital to the U.S.  I could run down the gambit of specifics, but I’ve done that before so I’ll save space by generalizing:  Much lower income tax rates on income and capital, elimination of the corporate tax, reforming long-term entitlement programs and reducing the Fed’s mandates from two (currently tasked with stable prices and maximizing employment) to the single objective of stable prices – no more of this bailing the economy out from each and every economic contraction; it only causes serious problems down the road and leads to the very “imbalances” that Geithner seeks to mend. 

When this occurs we’ll see our growth rates improve, our currency will be strong and stable and there will be much less international turmoil that results.  The way the administration and Geithner are going about this is going to lead to trade wars and the continued race to the bottom among currencies -- a situation that has proven to be perilous in the past. 

ECRI WLI

Well, the Economic Cycle Research Institute reported that its Weekly Leading Indicators index improved in the previous release, but the revision showed it was unchanged at -7.00 for the week ended October 8 after previously being reported at -6.70.  In the latest reading, the measure did improve – assuming it’s not revised lower later this week – to -6.80.  This means the index fell at an annual rate of 6.80%. 

This Week’s Data

This morning we get back to some major economic releases with results on existing home sales for September.  It will be a big week as we also get consumer confidence, Chicago manufacturing and the first look at Q3 GDP.

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Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900