Market Commentary

As widely noted the economy expanded for the first time in four quarters growing
October 30, 2009

As widely noted the economy expanded for the first time in four quarters growing by 3.5%, the quickest pace since the 3.6% rate register during 3Q07. Growth was led by housing—its first positive contribution in four years—and autos.  Consensus was expecting a 3.2% rate.

 The economy shrank 3.8% in the 12 months to June the worst performance in seven decades and the longest consecutive streak of negative growth since records began in 1947.  The $64,000 question is this growth sustainable?

Consensus however believes growth was “robbed” from the future via cash for clunkers and the housing rebate and a downturn in activity has already begun.

For a prolonged period of time I have advocated a muddle through economy that is economic growth between 1% and 2% as the excesses of the last five or six years is absorbed.  At this juncture I have not abandoned this view but I think the odds are rising growth might instead be in the range of 2%-3%. 

There are three simplistic reasons for this potential change.  First, growth is emerging from such low levels.  Second inventories are extremely low so any increase in demand will spur production. Third and perhaps most importantly job creation could occur considerably earlier than expected perhaps as soon as December or January partially the result of inventory restocking.

Wow!  What a radical thought.  As written several times we fired about 5.6 million people since September 2008 as companies panicked to ensure their survivability.  Again referencing the economic consulting firm of Reid Thunberg during the two previous “killer recessions” of 1973 and 1981 which both lasted 16 months a total of 1.4 million and 2.8 million jobs were lost respectively.

While the economy and the work force are considerably greater today by over 25% (Bureau of Labor and Statistics) than the above periods, one cannot deny the incredible shock that has occurred to the work force/economy.

Because of this shock all are at a heightened sensitivity similar to the level experienced after a major heart attack.  Any twinge which was formerly dismissed as indigestion is now irrationally believed to be the onset of another major cardiac arrest.  These irrational feelings will subside over time as confidence re emerges.

I believe the major risks now facing the economy is faulty monetary policy and reckless government spending.  Fortunately I believe the odds of the latter are declining because of the drop in approval ratings of the Administration, a decline primarily the result of deficit spending fears.

Speaking of monetary policy, the Federal Reserve meets next week.  While no change in monetary policy is expected, many are concerned the Central Bank will radically alter its statement.  I think this is the major reason for the drubbing that treasuries have received.  Demand at this week’s record $123 billion was or near record.

Stocks rallied sharply yesterday on the GDP data led by the former market leaders—energy, manufacturers and financials.  Equities were also encouraged by the extension of the $8,000 tax credit for first time home buyers which included a provision of a $6,500 credit for second time home buyers who have been in their houses for at least five years.  This credit expires on April 30, 2010.

As stated above treasuries were crushed.

What will occur today?

Last night the foreign markets were mixed. London was up 0.12%, Paris down 0.36% and Frankfurt down 0.53%.  Japan was up 1.45% and Hang Sang up 2.29%.

The Dow should open nominally lower on fears that an upcoming report may show consumer spending—personal spending and income due out at 8:30--dropped for the first time in five months.  The 10-year is up 8/32 to yield 3.47%.