Monday, April 29, 2013 - A Busy Week Heading in the Same Direction

A Busy Week Heading in the Same Direction

by Sinclair Noe

DOW + 106 = 14,818
SPX + 11 = 1593
NAS + 27 = 3307
10 YR YLD + .01 = 1.67%
OIL + .58 = 93.58
GOLD + 13.60 = 1477.50
SILV + .55 = 24.69

 The S&P 500 index ended at an all-time high. We have a celebration when the Dow Industrial Average closes at an all time high; no party for the S&P 500. I wish I could give you a valid reason for this but it defies logic. There is no law that says you can't enjoy milk and cookies anyway.

This week offers a packed economic calendar,with ISM manufacturing data Wednesday, and PMI manufacturing reports for the euro zone and China on Thursday. The week ends with Friday's U.S. employment report, expected to show 150,000 new nonfarm payrolls in April; and the backdrop to all the information is last Friday's initial report on first quarter GDP, which came in at 2.5%, short of the consensus forecast of 3%. 

Also, we'll compare and contrast this week's news with last week's reports out of Europe showing economic weakness in Germany as well really bad weakness in the peripheral countires where unemployment is rising from one awful record to another. In Spain, for example, the rate increased to 27.2%, with an even more stunning 57.2% rate among the young. In Greece, the unemployment rate tops 27% and the government is cutting thousands more jobs to qualify for more ECB bailout money.

The European Central Bank will face increasing pressure to cut its interest rate, currently at 0.75%, and to loosen monetary conditions, and to cut back on draconian austerity requirements. Italian Prime Minister Enrico Letta urged a focus on growth policies and away from austerity measures in his inaugural speech. Money market traders are evenly split on whether the ECB will cut rates at its meeting.

The ECB may well disappoint next week, since several influential decision makers oppose a rate cut. Even if the ECB does act, a quarter-point cut will do nothing for growth. And most importantly, such a tiny rate cut, if it happens, will simply underline the ECB’s refusal to follow the Federal Reserve, the Bank of Japan, the Bank of England and the Swiss National Bank in expanding the money supply or taking other “unconventional” measures that could potentially have a much greater financial impact than any marginal fiddling with interest rates. 

The Bank of Japan has already pulled out the big bazookas to loosen monetary policy and to jump into the bond markets. The result has been a roaring bull market in Japan.

In the US, corporate earnings show companies are still able to counter a worrisome revenue situation by cutting costs. Just 38 percent of the 271 S&P 500 companies that had reported through Friday topped revenue estimates, with the aggregate figure actually showing a sales decline of 1.45 percent. Weak corporate top-line growth is likely to spell an equally troubled bottom line for the 11.7 million unemployed. 

 And even as we continue to hit record highs in the stock markets; unfortunately, the broader economy hasn't joined in the party. The vast majority of US households face declining incomes and lower savings rates. This morning, the Commerce Department reported household purchases rose just 0.2%. Ultimately, it is households that provide demand for what companies make and sell. Cost cutting benefits are finite.

Last week, a Pew Research study showed that the top 7% of the population got richer during the past 5 years, while the remaining 93% lost. An Allstate/National Journal Heartland Monitor poll released Thursday found that while most Americans (56 percent) hold out hope that they‘ll be in a higher class at some point, even more Americans (59 percent) are worried about falling out of their current class over the next few years. In fact, more than eight in 10 Americans believe that more people have fallen out of the middle class than moved into it in the past few years.

Even more arresting was the extent to which things that used to be the unquestioned trappings of middle-class life have come to be seen as upper-class luxuries. Nearly half – 46 percent – of the respondents who described themselves as middle class said that being able to pay for children’s college education was possible only for the upper class. Forty-three percent thought that only the upper class had enough savings to deal with a job loss, and 40 percent believed only the upper class could save enough to retire comfortably.

For the land of opportunity, this is a seismic shift. America was created as a country where the middle class could prosper - Thomas Jefferson crowed that America had no paupers and few who were rich enough to live without labor.

This was supposed to be the place where, as Bill Clinton liked to put it, if you worked hard and played by the rules, you could get ahead. And Americans gloried in the fact that the world’s huddled masses regularly demonstrated their belief in the American dream by voting with their feet.

The respondents to the Heartland poll know the world has changed. Nearly two-thirds of those who described themselves as middle class said their generation had less job and financial security than their parents. More than half said they had less opportunity to advance.

The middle class is dying. Chart after chart, story after story, poll after poll, all show that the claim that we are a middle class nation are hollow fiction. People know things are bad, they know they are screwed, and they are coming to the realization that the problem is the giant corporations and their rapacious executives. A majority of people polled, 54%, believe that the actions of corporate CEOs have made things worse for the middle class. 

And so, that is the backdrop as the Federal Reserve FOMC starts two days of meetings tomorrow. Expect the FOMC to signal that the central bank is ready to step up to the plate – no backing down from accommodative monetary policy. In recent meetings the FOMC has indicated that it would like to taper off its $85 billion in monthly purchases of market securities, or at least they would like to know where the exit is located. Of course, the more the Fed looks for exits, the more the market players start eying exits. 

So, the Fed needs to come out and say QE will stick around for a while. This week, look for the Fed to offer reassurances of ongoing support, in large part because Congress is so dysfunctional that the Fed is the only way to support economic activity. And also because inflation is not a problem; the recent measures of inflation were running about 1.2% in the first quarter, well below target and even further from the limits. And last month's jobs report was sluggish at best.

Unfortunately, aggressive monetary policy is probably not enough to lift the economy; not enough for sustainable strong growth; and it can't last forever. At some point, high market valuations will either be validated by improving fundamentals or, if the fundamentals don't improve, they will eventually drag down the high valuations. Right now, valuations are high because the Fed is artificially pumping up the markets; it can't last forever but there is no reason for the Fed to stop the party right now. We hit a record high close on the S&P 500 today. A trend in place is more likely to remain in place than it is to reverse, until it reverses. Downside potential remains real; it could just be a tweet away.

It took only about five minutes for the market to tank and rebound after a group hacked the Associated Press’ Twitter feed to put out bogus information — and now the feds are taking a longer look to find out who got rich during the chaos.

The Securities and Exchange Commission and the Commodity Futures Trading Commission have each opened investigations into the hack that falsely reported “explosions in the White House and Barack Obama is injured” and briefly wiped away $136 billion in market value. Sources in and out of government say investigators will sort through the big financial winners and not just conduct a standard review of a market swing.

In addition to the SEC and the CFTC, the FBI is investigating the attack. Security and financial experts predicted the National Security Agency and the State Department, along with the Department of Homeland Security, would open their own inquiries.

The secretive NSA didn’t confirm any role, saying that Homeland Security “has the lead to secure civilian information and communications systems for the executive branch.”

A group called the Syrian Electronic Army immediately took credit for the attack last week, although terror experts note the Syrians don’t have the most sophisticated cyber-warriors.

One line of particular interest for investigators is that of lightning-fast “cheetah” traders who conduct deals with high-speed computers and who were trading in the market when the attack occurred.

Just a tweet away.