Tuesday, February 17, 2009

Promise $2 trillion, only implement $100 billion


Over the last few months, the Federal Government, FDIC, the Treasury, and the Federal Reserve have announced plans to stimulate the economy. One estimate of the amount proposed to be spent on programs to help the economy is around 2 Trillion dollars. While this is a huge number, the real questions are ; how much can the government get out of Washington and how much can they really implement?

Let’s use last year’s economic stimulus checks for about $100 billion as an example as to how quickly things can get done in the Washington quagmire. It took a great many people in DC working long hours six months to get out $100 billion and even then they didn’t get it right,how long will it take to get out 2 trillion dollars? Yes, I understand that the entire $2 trillion isn’t going to be spent in one year, but an amount much greater than what was sent out last year needs to go out this year.

Perhaps the markets were telling us this morning that the promises made to send out all of this money can’t be fulfilled. The rhetoric makes us feel good for a day or so, but then the reality of the problem comes back and smacks us in the face with a reality check.

Let me use an example of a government plan that was a good idea, but has yet to be fully implemented. In November, the Treasury announced a program to buy back $400 billion in home mortgage loans. As of this writing they have purchased $40 billion, just about 10% of what they intend to buy.

The market reacted favorably to the announcement and mortgage interest rates fell, but because of inaction on the part of the government to do what it promised to do mortgage interest rates are up again. The good idea lost momentum because the government could not execute. If the government comes up with a good idea that could help housing, but can’t deliver, it probably does more harm than good.

I understand that the new administration has made a great many promises that it would like to fulfill to the American people. The reality of being inside and in control of the process is showing the administration that it doesn’t have as much control as it thought it could exert when it was on the outside hoping to get in.

The capital markets seem to have no patience and don’t want to wait for things to develop. The “Obama Bottom” of 805 on the S&P 500 was violated this morning. In addition, the previous low in the Dow Jones of 7,552 was tested. If this is a true retest of the low then the S&P 500 could fall another 32 points to test the most recent low. At this point in time the President owns what is going on in the markets and the economy. It is no longer “W” problems that he inherited.

When a new incoming president comes into office he has a honeymoon of about 100 days of free rein to do what he wants to do. We are less than 30 days in the new administration and 100 days seems like a long time to go. I wonder if people will give the president the full 100 days before they start to criticize him and what he has or has not done?

The chart at the top of the page shows just how bad things are in my neck of the woods. If you look at it carefully you will see that things, while still negative, are moving in a positive direction. This above chart shows a leveling off, but no sign of things really turning around to the positive.

Have you ever seen the picture of the kitten hanging on the clothesline by its paws? This wonderful picture illustrates the real question we are concerned about today. You look at that picture and wonder how long it can hold on before someone comes to its rescue. Our economy is much like that kitten, how long can we hold on till help comes? Can the government get to us the aid (money) we need in time to get us off the clothesline?

Dan Perkins

Wednesday, February 4, 2009

The Obama Bottom

There is an old Wall Street axiom that says, “So goes the month of January, so goes the year.” Then there is another forecasting methodology that says, “If the winner of the Super Bowl is a National Conference team or was an original National Conference team then the market will be up for the year.” The last forecasting model is that each full week of January represents each of the quarters of the coming year and the total return that can be expected for each quarter.

The month of January saw just under an 11% decline in the S&P 500. We started off the year with a great deal of hope and the extension of the rally that started in December 2008. As we got closer to the new administration being sworn in the market continued to decline. In fact the day of the inauguration the market set a new low for the year of 805 on the S&P 500. The “Obama Low” of 805 seems to be holding after several tests so far this year.

I have noticed that each time we sell off, the bottom is a higher bottom than the previous bottom. The process of higher lows is another sign of a possible market bottom or at least additional base building. There is no question that “Bear” markets can and do have powerful rallies. I do believe, as I have indicated before, that I’m expecting a blow off bear market rally in the first quarter.

On a historical basis the stock market leads the recovery in the economy. This big rally that I believe is coming, could be devastating to investors who get sucked in and buy on the rally and then watch the markets fall back to at least 805 or retest the previous low on the S&P 500 around 7500. I will use the rally if it happens to raise additional cash for redeployment later. Unless I can find better income producing investments I will not sell income producing assets.

The bond market spread between 90-Day T-Bills and 30-year Treasury bonds have widened substantially. When the correction comes after the rally, I would expect to see longer-term Treasuries fall in yield and increase in price as demand for them comes based on fear of falling stock prices. The problem is that even at these levels yields on Treasuries don’t look that attractive to purchase.

"How big could the rally be?" you ask. I think we could see a 15% to 20% move up from the 805 level in the S&P 500. If I'm correct this upward move would take us to the 950 to 975 level. There is even the outside chance of 1,000 on the S&P 500. The new Secretary of the Treasury has an announcement next week about the administration's approach to the financial crisis. His announcement could be the catalyst to move the markets.

Dan Perkins