Rebel Traders - Stock Market and Economic Analysis

What a week we have been through. The situation with Greece seems to change by the hour with battles between the European Union, the IMF, and Chancellor Merkel of Germany. Greece is rumored to try and go to the market this coming week with a bond sale.

Greece will issue Eurobonds next week in order to test the rescue plan – Greece plans to borrow about €5B before end of March – Source: news wire

Q4 GDP

The final Q4 GDP came in and it was a bit lower than expected (5.6) with the downward revision mostly coming from lower consumer spending growth (1.6% vs 2.8% prior) as well as more weakness in the real estate markets.

A significant reason why the Q4 GDP was a high as it is, even after the downward revision, is the buildup of inventories. As stockpiles of goods were allowed to dwindle in 2009 to save cash this has led to a surge of inventory buildup as companies begin to add goods to their inventories for the expected return of consumers in droves. When purchasing agents all hit the manufacturers at once to build up some stockpiles it creates a surge in virtually all manufacturing sectors. This is what created a GDP to go from below zero to a suddenly positive number of 5.6%.

The reason, which I have opined previously, that the GDP witnessed in Q4 will not be repeatable is simple, the surge of inventory buildup is a one off event. At best, manufacturing will curtail again as the inventory buildup is completed. Now comes the consumers, if the inventory buildup exceeds the consumer demand then purchasing agents will once again be scaling down future orders. If consumers have reached a new “comfort level” of buying frugally, then it’s very clear that inventory stockpiles will only be maintained at a status quo level, not growing stockpiles which would mean a stagnant manufacturing sector.

With everything hanging on the consumer it becomes clear to me that irrespective of any pent up demand for goods, the longer term outlook remains weak. With unemployment still hanging near 10% (closer to 17% when counting those who are forced to work part time for lack of full time work), a housing market that is still in shambles, and foreclosures still rising which I don’t expect to see any major turn in the numbers until late 2011 or early 2012 at best, and consumer credit still in a contraction trend then how is it the consumers will be bouncing back to pre 2007 levels?

Housing Market – Government keeps blowing air into the balloon

Instead of letting the natural supply and demand system establishing market prices, the government keeps trying to blow air into the already deflating balloon. We learned just yesterday that the Obama administration is attempting to get banks to write down more mortgages to aid those who are underwater. Additionally, the administration is also considering payment assistance to those who are unemployed.

While all of this may be good in the short term for those who are underwater with their mortgages or unemployed, it continues to stall the natural process of price discovery in the markets. The governments attempts to salvage the housing market is keeping prices at artificial levels. In other words, the government is doing everything possible to keep the housing bubble from deflating any further – at taxpayer expense. And creating a false hope that prices will skyrocket upwards in the coming months and years.

The only way to correct the housing market problem for the long term is to allow the excess debt to be taken out of the equation. I understand this will be a painful process, but it is necessary to “reset” the entire market. All government efforts to keep the balloon from deflating any further only prolongs the pain. Those who believe the housing bubble of the past decade will return will be disappointed, and this will lead to further stresses in the housing market as speculation is once again rolling the dice that the bubble will come back.

Jobs

The weekly jobless claims data that was released on Thursday showed no let up in the number of people seeking unemployment insurance benefits. It is holding steady at approximately 450,000 each week. Next week the monthly unemployment report will be issued (on April 2nd). Expectations are that the report will show a positive job growth for the first time in nearly 2 years. But if it does show job growth, how much of it will be a direct result of the temporary hiring the government is doing now for the 2010 Census effort? Please consider my post on employment impact of the 2010 Census.

Health Care Reform

It passed, now we have to live with it. Already there are scattered reports of individual polices experiencing increasing premiums following the President’s signing the bill into law. Large and small companies have already reported that the changes to the health insurance laws will impact revenues for 2010 as they will be forced to spend more on health insurance for the employees. AT&T reported yesterday that it will cost upwards of $1 Billion in 2010 alone.

AT&T Corp Discloses forecasts $1B non cash charge in Q1 due to health care reform – filing

- Included among the major provisions of the law is a change in the tax treatment of the Medicare Part D subsidy. AT&T Inc. ("AT&T") intends to take a non-cash charge of approximately $1 billion in the first quarter of 2010 to reflect the impact of this change. As a result of this legislation, including the additional tax burden, AT&T will be evaluating prospective changes to the active and retiree health care benefits offered by the company.

Similar statements were issued by 3M, Caterpillar, and John Deere in the past two days. If large companies will be facing higher costs then it is likely to have an impact on employment levels and/or benefits for retirees. This could place even more stresses on the already broken Medicare system.

But it is not the large companies that I worry about, it is the small companies with at least 50 employees that will be facing a choice of providing health insurance at great costs or no insurance at all and simply pay the yearly penalty to the government, which for some companies will be cheaper than paying for health insurance.

While the debate on the merits and demerits of the new law continues, I see it as a disaster for the economy and the public at large. Because so much of the new law does not go into effect until months and years later it allows the health insurance companies to gouge their customers before they must adhere to the new regulations. Much like the credit card companies did over the past 8 months before that law went into effect.

The Market

The stock market remains jittery and on the edge. Following the health care reform bill becoming law two bond auctions were held, and both were bad. This sent yields higher as the bond market is having a hard time absorbing all of the notes being sold by the government and the increasing threat of the increasing deficit. Together these two factors gave the bond market a shock this week and should this continue we are likely to see interest rates rising significantly in the months to come.

But Ben Bernanke will either be forced to raise the Fed Funds rate or drain liquidity in order to control yields. Either situation would not be good for the equity market at this time.

The equity market continues to hover around resistance levels, remains extremely over bought, and sentiment indicators that show extremes are upon us. All of the ingredients for a significant turn in the markets.