However, the stock futures have soared on the news, reason being that analysts were expecting a complete collapse. So, the bad news is really not that bad, which means its’ good. Did everyone understand that? Currently, the S and P is trading at around 1100 in the pre market. This may be a key level, as a strong move through it could signal a great third quarter. However, the trend this year has been choppy, so anything is possible going forward.

Happy Labor Day to all!

On the other hand, we have Meredith Whitney. Whitney achieved her primary claim to fame in October of 2007, where she wrote a very negative report on Citigroup while she was employed at Oppenheimer. She then went on to be a very prominent bear on the financials as they collapsed. Whitney went on to found her own firm last year. Currently, she is very bearish on the financials and housing as well. She believes that European Banks have enormous exposure due to the overvaluing of sovereign (read: country) debt, while US banks continue to suffer from housing loans. She believes that a great deal of housing losses have not been factored into the banks’ earnings. As such, she stated “Avoid financials at all costs”.

I stand more in the middle. I can’t argue with Whitney’s loan analysis. On the other hand, bank profits are soaring. For the second quarter, the roughly 7000 banks under FDIC had profits of $21.6BB, as compared to a $4.6BB loss for the sector a year ago. In addition, as long as the Federal Reserve continues its’ Zero Interest Rate Policy (also known as “ZIRP”), banks can borrow money at virtually nothing. Therefore, unless they continue to make crappy loans, they should continue to have a very high spread between their cost of funds and their return on loans. However, I continue to believe that the leverage factor (which I have discussed numerous times) is still a potentially dangerous scenario. I believe that this leverage should be gradually reduced over time. Any time you allow banks to leverage their equity at up 35-40 times you give them rope to hang themselves. Unfortunately, as we have seen, their problems can become everyone’s problem.

Maybe, but I doubt it. I’m still of the opinion that the market is going to churn around, much like it has for most of the year. Despite the rally, the Dow is still down about two and a half per cent for the year. In addition, I still don’t see many positive signs of economic growth. For example, Intel (The worlds’ biggest chip maker) warned Friday that demand was slackening, and that third quarter revenues were going to be below expectations. The Feds’ next move will hinge on this weeks’ key economic data, especially Fridays’ unemployment number. Even President Obama has conceded that the economy was not growing as fast as was needed, and that he had no “magic bullet” to change things. Sobering words indeed.
Meanwhile, the yield on the S and P is currently 2.6%. That doesn’t sound like much, but that’s actually greater than the yield on ten year treasuries. I would have thought that this would make stocks appear cheap vis a vis bonds. However, as long the economy continues to slump, investor sentiments continue to favor the safety of US treasuries. Personally, I don’t see the great benefit of lending my money to the United States for ten years at 2.5%. It will be interesting to see what happens going forward.

Numbers released this week indicate that home sales are declining at a rapid rate. July home re-sales were expected to show a decline of 13.4%. Instead, the actual number was a staggering decrease of 27.2%. Over the past year, housing sales have plunged over 25%. This has occurred despite the fact that mortgage rates are at their lowest level in decades. Why the steep decline? After all, don’t home owners recognize a bargain when they see one?
There are two issues. The first is, after an unprecedented period of spending, consumers are now turning cautious. Most people I know are cutting back on their lifestyles. After all, with a stock market crash in 2008 and an uncertain job market, do people really need a 50 inch plasma TV, or expensive season tickets to your local sports team? The second reason is the incredible glut of inventory. With foreclosures are extremely high levels, banks are sitting are huge inventories of houses. In addition, many banks are not foreclosing on homes under water (meaning that the mortgage due is worth more than the home itself) because

They have already had a huge inventory of homes they can’t sell.
They feel they would do better if they allowed the borrower more time by restructuring their loans. Of course, this has not worked out the way the banks planned: http://www.jodyeisenman.com/2010/08/the-mortgage-refinance-relief-mess/

Overall, the stock market has performed poorly. Since August 9, the Dow has declined from 10,700 to about 10,000 now. I would expect the Dow to have some sort of a bounce up here, (as has been the pattern all year), but continued poor economic numbers could really hurt growth going forward.

As I have stated for some time, I do not see the market making a major move in either direction for awhile. For the year, the Dow and the S and P are down slightly for the year. My own technical analysis shows that we are somewhat oversold here, so I think the next move is probably higher. However, as Summer volume remains light and should continue this way until Labor Day, anything can happen. I, for one, wouldn’t bet my bottom dollar on a crash.

This, obviously, is not good news. The DJIA, which had been down almost 150 points prior to the announcement, actually rallied to almost even before closing down 54 points. However, the futures this morning are down dramatically. European markets are down about 1.5-2%, which is the equivalent of roughly 200 Dow points.

Critics of the current administration (who seem to be growing in number every day) site the fact although the government has spent incredible sums in stimulus and bail outs, it has not had a major effect on Main Street America. Many industries are in deep trouble. The housing market continues to struggle under a combination of oversupply and a huge inventory of homes in foreclosure. According to Zillow.com, about 22% of all homeowners are under water, meaning that their homes are worth less than their mortgage. To add fuel to this fire, a Deutsche Bank report last week, this number could hit an incredible 48% before this recession ends. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=adBYDzUMt68k

I wouldn’t even hazard a guess as to what mass defaults would do to the housing and financial markets. Stay tuned.

The markets reacted negatively to Fridays’ job report. US private employers (that is, excluding the government) added fewer workers in July, and June’s numbers were revised downwards as well. The stock market tanked on the news, falling over 100 points, but rallied late in the day to close down just twenty odd points. Still, it would seem to many economists (as well as yours truly) that the economy is not recovering anywhere nearly as quickly as was hoped for. In todays’ Bergen Record, there was a very revealing article about the casino industry in New Jersey. When casino gaming was first legalized in New Jersey, gamblers flocked to the tables in record numbers. It was common for people to stand 2 and 3 deep at the blackjack tables! People did not want to use the rest rooms for fear of losing their seat. As gambling revenues skyrocketed, the tax revenue for New Jersey soared. Today, gaming makes up by far the largest portion of taxable revenue to the state. Unfortunately, the politicians never planned on a recession hurting their business. As such, they never invested much money in Atlantic City. Therefore, unlike Las Vegas, where people can walk the Strip at all hours of the night safely, Atlantic City is very different. A walk along the boardwalk or even a couple of blocks from the casinos will lead you into areas of slums, pawn shops and crime. No the recession has hit, combined with legalized gambling in almost every state, the whole industry is hurting and all of New Jersey is feeling the pain.

Meanwhile, consumer credit continues to shrink, while people are reluctant to spend, let alone take on additional debt. In the meantime, the dollar dropped against the Euro, and fell to a 15 year low against the Yen. However, yields continue to drop, with the 2 year treasury going to another record low. One wonders how long foreign investors will continue to invest in such low yielding treasuries in the face of a weakening dollar.

Meanwhile, the equity markets had a good July. The S and P 500 ended up at 1101,or a rise of 7.23% for the month. Many market technicians believed that 1100 on the S and P was a key resistance level. Thus, they believed that a break on the upside would send the stock market much higher. Although we did break through, there wasn’t a great follow through. It would seem to me that although the market certainly looks healthier than it did a month ago, we need a strong rally to sustain the breakout. Next week’s jobs report might be crucial to the future direction of the market.

The administration is in a tough spot. Interest rates as measured by Fed Funds are almost zero, yet the recovery is stagnating. Unemployment hovers around 10%. In addition, the debt situation is getting worse and worse.

As a president, it’s one thing to know you have a big fiscal problem. It’s quite another when a panel you appointed tells you the policies you have in mind will only make things worse.

That’s what happened Sunday, when leaders of President Obama’s deficit commission offered up the darkest of outlooks for our financial future — calling current trends in U.S. budgets a “cancer” that will “destroy the country from within” unless halted soon. Not exactly encouraging news.
Meanwhile, after a 200 point reversal in stocks yesterday after a weak opening, the market dropped on Bernanke’ remarks. After sitting slightly up for most of the morning, the markets dropped immediately during Bernanke’ testimony to eventually close down over 100 points. As I continue to expect, the equity markets continue to churn in a relatively narrow range. Year to date, the Dow has traded as low as 9686, and as high as 11, 204. However, for most of the year, the range has been less then 1000 points, or around 10%. Just to put this in perspective, in 2008, the Dow traded in a range of over 4000 points. In 2009, the range was over 3500 points.