Economic & Market Update: May 18, 2009
“Lackluster News Drags On the Markets”
The Fortigent Investment Research Team
http://www.Fortigent.com
Last Week’s Highlights:
Trade Balance: -27.6B – oil provides boost, but trade is generally weak
Retail Sales: -0.4% – understandably, consumers appear apathetic
PPI: 0.3% – no concern about inflation or deflation for now
CPI: 0.0% – reinforces lack of inflation or deflation concerns
Consumer Sentiment: 67.9 – sentiment steadily improving off the bottom
Stocks: 883 – profit takers outshine rally monkeys
Bonds: 3.1% – lack of issuance on the week drives yields down
Oil: $57 – expectation of weak demand weighs on oil
Dollar/Euro: $1.35 – no major catalyst to drive currencies on the week
Economics This Week:
Date Item Est. Comment
5/19 Building Permits: 530K Signs of further bottoming evident
5/19 Housing Starts: 527K Excess supply slows new construction
5/21 Leading Indicators 0.6% Trends point in the right direction
Investors Take Profits
Profit taking was the theme of the week, with the S&P falling by 5%. As we mentioned last week, the focus is moving away from earnings and back toward the “green shoots” that everyone is so fond of. Unfortunately, it looks like someone watered them with too much optimism and they are taking on a distinctively brown color.
Retail sales data was relatively disappointing and it’s increasingly apparent that the modest rebound in January and February was merely an aberration following an exceedingly weak holiday season. Surging unemployment will weigh heavily on consumers ability to increase discretionary spending through the remainder of this year and into 2010.
Source: Bloomberg
In addition to disappointing retail sales figures, initial unemployment claims bounced higher than expected following the Chrysler bankruptcy. This will be a trend in coming weeks as Chrysler and General Motors (GM) dealerships are forced to close their doors. The problem will be further exacerbated if GM opts for bankruptcy proceedings.
Inspiration No Longer Comes Standard
For anyone who is still under the impression that the Chrysler and potential GM bankruptcies are going to be a quick and painless process with few repercussions, we present the following. The map below provides a visual look at the number of dealerships Chrysler expects to eliminate – 789 of a possible 3,200. In addition, GM announced on Friday that they will shut the doors on 1,100 dealerships. The broad nature of the closures will create headaches for many individuals and municipalities.
Source: Zero Hedge Blog
Outside the immediate effect of lost jobs, city officials are left to cope with an unusual set of problems – what to do with all these empty car lots during a disastrous commercial real estate environment and how to replace the lost revenue from auto sales?
As an example, California – which is under the thumb of Proposition 13, a bill that limits increases in property taxes – is one of many states that depend on sales taxes as an important source of revenue. Other states like Texas, Florida, and Arizona derive more than 30% of their revenue from sales tax receipts. The real estate bust, coupled with declining sales tax revenue is creating a toxic brew for these states.
Source: Investors Insight
On the positive side, municipalities are in a much more favorable position than corporations in terms of balancing their budgets. The ubiquitous ability to raise taxes as seen fit allows state and local government’s greater flexibility to avoid potential defaults. But, without question, challenging times lie ahead for government entities large and small.
Unemployment Picture
The employment market declined rapidly at the end of 2008. In an effort to show just how quickly the picture reversed course, Slate.com created an interactive graphic depicting the remarkable deterioration. During the course of 2006 the US economy added a total of 2.6 million jobs to the economy.
Source: Slate
As the financial crisis kicked into high gear from March 2008 to March 2009, more than 5 million jobs disappeared from the economy. Barring a sudden turnaround, the unemployment picture will continue to weaken in the coming months before peaking at the end of this year. Either way, we expect that the number of people without jobs will create an inevitable drag on the economy as we emerge from this recession.
Source: Slate
The Week Ahead
It looks to be a generally quiet week in advance of the long Memorial Day weekend. Treasury Secretary Geithner will testify before the Senate Banking Committee on Wednesday. His testimony will provide a status update of the Troubled Asset Relief Program. The minutes of the April FOMC meeting will also be released on Wednesday.
Treasury bond yields will be under pressure throughout the week as the Fed is set to resume purchases on Monday, Wednesday and Thursday.
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