Economic & Market Update: June 15, 2009

“Global Leaders Provide Optimistic Outlook”

The Fortigent Investment Research Team

http://www.Fortigent.com

Last Week’s Highlights:

Trade Balance:                   -29.2B – imports and exports both decrease in the month

Retail Sales:                           0.5% – sales increase on back of rising gas prices

Business Inventories:         -1.1% – business inventory cycle continues to slow

Michigan Sentiment:            69.0 – sentiment weak but improving

Stocks:                                     946 – few catalysts led to modest gains

Bonds:                                    3.8% – successful 30-year auction helps yields

Oil:                                            $72 – commodity investors continue to expect recovery

Dollar/Euro:                          $1.40 – weak reports from Europe support the dollar

Economics This Week:

Date      Item                              Est.                     Comment

6/16      Housing Starts:     483K                   Bounce from April’s all-time low

6/16      PPI:                            0.6%                    Pricing at producer level stays strong

6/17      CPI:                            0.3%                    Inflation/deflation not a concern

6/18      Leading Indicators: 0.9%               Equities likely to provide bulk of gain

Investors Take Pause for the Moment

An expectedly quiet week led to reserved gains in global equity markets, with the S&P 500 closing up 0.4% on the week.  Economic catalysts were few and far between as most investors preferred to either watch from the sidelines or take profits from the recent rally. 

The biggest news of the week was the announcement that 10 of the 19 financial institutions that received money from the Treasury would be allowed to repay the money.  The combined $68 billion that will be repaid represents a potential turning point in the global financial crisis and provides further support that the worst is, possibly, behind us.  But it also creates a clear demarcation line between healthy and potentially weaker banks.

On Thursday we learned that retail sales for May increased by 0.5%, the first monthly increase since February.  This was, more or less, in line with economists’ expectations as a spike in gas prices contributed 0.3% to the overall gain.  Sales in the retail sector are likely to remain ‘flattish’ in the coming months due to rising unemployment and a consumer focus on essential spending.

Source: Wachovia

Proverbial Light at the End of the Tunnel?

Global finance ministers met in Italy over the weekend to discuss the state of the global economy.  There was agreement from the group that the worst of the crisis appears to be over and discussions actually turned to the possibility of crafting an exit strategy from the numerous liquidity backstops that were implemented over the past 18 months.

An official communiqué from the G8 leaders read as follows: “There are signs of stabilization in our economies, including a recovery of stock markets, a decline in interest rate spreads, improved business and consumer confidence, but the situation remains uncertain and significant risks remain to economic and financial stability.”

The comments from the G8 finance ministers echo a similar sentiment from the OECD earlier in the week.  An OECD analysis of global leading indicators through March 2009 discovered that while the slowdown continues worldwide, the rate of slowing is abating.  Economies such as China seem to have turned the corner around the beginning of the calendar year but developed areas, such as the Euro zone and the United States, are showing tentative signs of bottoming out. 

Source: Organisation for Economic Co-operation and Development (OECD)

As the crisis reaches the supposed final stages, leaders need to be cognizant of an effective exit strategy that will prevent runaway inflation due to the excess liquidity that was released into the system. 

Flow of Funds

The Federal Reserve’s quarterly Flow of Funds report, which measures the movement of money within the economy, was released last Thursday.  The big picture shows that consumer debt decreased slightly. As a sign of continued deleveraging by families and consumers, The Wall Street Journal reported last month that Visa debit card volume (in which money is taken directly from savings or checking accounts) surpassed Visa credit card volume for the first time in history.

But the increase in debt at the federal level far outstrips the level of consumer debt contraction.  Household net worth fell by a 16% annualized rate in the first quarter, largely due to falling equity prices.

Source: Option Armageddon

More unsettling is the fact that the level of debt as a percentage of GDP increased from 368% at the end of the 4th quarter to 375% by the close of the first quarter.  The amount of borrowing required to save the US financial system from collapse is increasingly placing the federal balance sheet in a tenuous position, and will require years to repair.

Source: Option Armageddon

The Week Ahead

Economic news looks to be light once again, but government leaders will have a full calendar during the week.  President Obama will address the American Medical Association and provide greater details surrounding his healthcare plans.  Additionally, the Obama administration is expected to unveil an overhaul of financial regulatory powers that would allow the Federal Reserve greater oversight into the regulation of the countries biggest financial institutions. 

The International Labour Organization is scheduled to meet from the 15th to 17th to address the global jobs crisis.  Heads of state, as well as leaders from worldwide labor organization, will discuss ways to combat the global slowdown.

Finally, the World Economic Forum meets in Seoul, South Korea to discuss the impact of the global financial crisis on Asian economies.  Specifically, the conference will look at the role of Asia as we emerge from the crisis.

Quotable: “If the State takes the power of disposal from the owner piecemeal, by extending its influence over production; if its power to determine what direction production shall take and what kind of production there shall be, is increased, then the owner is left at last with nothing except the empty name of ownership, and property has passed into the hands of the State.” Ludwig von Mises in “Socialism: An Economic and Sociological Analysis”

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