Market Commentary

What is the underlying strength of the economy?
December 15, 2009

What is the underlying strength of the economy?  Is the recovery the result of stimulus spending or by the natural forces of the economy and capitalism?  Third quarter the economy expanded by 2.8%.  Fourth quarter estimates range between 3% and 5%.  Of the $787 billion stimulus, only $242 billion has been spent as of December 4.

The Commerce Department’s November retail sales reports supports the Labor Department employment report indicating that the recovery began to coalesce back in September. The rise in retail sales especially among discretionary items during the last four months gives further evidence of sustainability   As noted several weeks ago there was an unexpectedly small decline in November’s nonfarm payrolls and a sizeable upward revision in both September and October’s reports.

Today and tomorrow the FOMC meets.  No change in monetary policy is virtually assured.  FRB Chairman Bernanke strongly implied such in his speech last week.  Moreover I don’t think the Committee will even hint of a possible policy change given the importance of the final three weeks of the year for retail sales.

Will the FOMC address my two introductory questions?  Probably but only in euphemistic terms.  I reiterate my long held view the economy is recovering at a pace faster than most had expected, a recovery primarily the result of natural capitalistic forces.  The stimulus has helped however not by the magnitude one would have anticipated.

How sustainable is this rebound?  As widely noted the average money market account is yielding 0.1%.  Balances are still around record levels.  I ask how much longer investors will weight to decide before investing some of these funds into more productive assets, be it purchasing businesses, plant and equipment or equities?  As also noted a gazillion times, excess bank reserves are over $1 trillion versus the historical norm of $1-$2 billion.  When will back lending return?

Is the proverbial spring coiling perhaps waiting to find out the direction or success of the Administration’s agenda?  In my view one must return back seventy years to find an administration whose goals were this progressive.  All do not know the outcome therefore is hesitant to embrace risk.

What will happen in this heavy data ridden day?  The PPI, Empire Manufacturing, Industrial Production/Capacity Utilization, and NAHB Housing Index are released.

Last night the foreign markets were down.  London was down 0.77%, Paris down 0.29%  and Frankfurt down 0.54%.  Japan was down 0.22% and Hang Sang down 1.23%.

The Dow should open nominally lower over concerns on Greek and Austrian banks.  There are also concerns that the FOMC might suggest it is on the verge of withdrawing some monetary stimulus.  The 10-year is off 9/32 to yield 3.58%.