U.S. stocks bounced in fairly dramatic fashion yesterday, as traders respond to anything that policymakers propose to magically wash away all of our debt woes, as the market failed to hold onto a mid-day surge that brought stocks off the intraday nadir to close lower.  Just below is a picture of the swoon:

The areas of safety generally reigned as health care and consumer staples were the only groups to close higher.  But not all of the safety trade was working as utilities led the market lower, followed by energy and financials.

So what caused the market’s sudden spike around 11:00 STL time?  It was news that the IMF has approved credit lines to member nations (think euro-zone countries) worth between 500% and 1,000% above their current quotas.  IMF member countries have had strict guidelines as to how much they can borrow, it’s based on the size of their annual contributions to the fund.  Well, as policymakers try everything and anything to make this debt problem go away, they have thrown those restrictions to the curb.  And what does it even mean that a country can borrow more than 10 times their erstwhile quota?  It means the U.S. is on the hook for much more of the IMF’s funding, as we are the largest contributor.  It’s a way of getting around the fact that the ECB has thus far refused to outright print money.  Conversely, Mr. Bernanke has no problem printing money, and this may be how that monetization makes its way to Europe, or at least as it’s drawn up.

However, the gains could not be held, maybe because it didn’t take long to figure out that this plan is not a solution or even a patch; the numbers still aren’t enough to fund either Italy’s or Spain’s refinancing requirements through 2012 and that’s probably generous.  And now we’ve got the first failed German auction on our hands.  This morning the 10-year German bund auction failed to capture the demand required to borrow all the money they intended to.  It’s being called the worst German auction ever – I suppose by “ever” they mean in the postwar era.  This makes the IMF’s plan even more of a joke.

Nice try though.  Maybe one of these days we’ll actually come to grips that yes, a debt problem can only be solved the hard way – via time, growth and some level of fiscal prudence.  We can implement growth-enhancing strategies that ease the economic pain in the meantime and pave the way for the levels of future growth that augment payroll gains, but the path is not an easy one as paying down debt never is.

Market Activity for November 22, 2011

Sector Activity for November 22, 2011

GDP

The first revision to Q3 GDP came in at 2.0%, down from the 2.5% that was initially estimated and missing the 2.3% consensus estimate.   The figure was dragged lower by larger than previously believed decline in inventories, softer business spending and personal consumption that was a bit lighter than previously estimated.  The lower inventory figure was supposed to be offset by a stronger than previously estimated trade figure.  Indeed, the trade deficit narrowed (stronger trade in GDP terms), but not enough to fully offset.

A couple of quick comments:

First, the lower inventory numbers aren’t necessarily a bad thing.  If economic activity picks up, firms will need to rebuild very low inventory levels and that will help boost GDP in future quarters.  The problem is there is no real indication the economy is picking up steam – quite the opposite in fact with Europe’s coming recession.  Also, there is a reason firms are choosing to keep stockpiles so lean, it’s a lack of confidence.

Second, while the business spending results for Q3 came in a bit softer, the figure has looked good for several quarters now.  But one must understand that there has been a 100% depreciation allowance on business equipment for 2011.  That allowance will fall to 50% in 2012, so even as business spending growth has been good, it should be stronger as firms pull their spending decisions into 2011 (likely sucking outlays from 2012 unless the economy accelerates) to take advantage of the tax shift.

Overall, with this latest GDP print, the U.S. economy has grown at a 1.5% rate over the past year.  There has been only one occasion in the postwar era in which the economy has escaped recession two-three quarters following a full year of such low growth – that was 2003, but the broad tax-rate reductions of that year saved us from that event, and remember the Fed’s interest rate mechanism still worked back then as debt had not reached its point of satiation.

In the current cycle, we not only have the Fed’s interest rate floored to the zero bound but they’ve engaged in massive bond buying and still the economy has ground to this very slow level of activity.  It’s an extremely precarious situation and even the slightest shock can shift an economy that is already saddled with very high unemployment to contraction mode.  The level at which joblessness would rise if this event occurs is anyone’s guess.  One can surmise what the Fed’s guess is as their 2012 stress tests will involve a scenario in which the jobless rate hits 13%.

Richmond Fed

The Richmond Federal Reserve Bank’s gauge of factory activity within the fifth Federal Reserve district came in at a reading of zero for November, up from the -6 for October and better than the -2 expected.

So as a reading of zero would suggest, the internals of the report were pretty weak.  New order volume and backlog of orders improved but remained in contraction mode, capacity utilization fell further into contraction and the employment figures printed readings of zero – although up from contraction mode.

Overall for November, this is the third regional manufacturing survey we’ve received.  All have improved from posting readings of contraction for multiple months, but just barely as NY and Richmond are at zero for the month and Philly just higher at a 3.6 print.

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Happy Thanksgiving!

Brent Vondera, Senior Analyst

Phone: 636-449-4900