Stocks Advance with Little Data to Digest

Economic & Market Update: September 14, 2009

“Stocks Advance with Little Data to Digest”

The Fortigent Investment Research Team

http://www.Fortigent.com

Last Week’s Highlights:

Economics This Week:

Stocks Continue the March Higher

Market activity did little to reflect the numerous subplots that developed over the course of the past week.  The S&P 500 index finished up 2.6%, gold crossed above the psychologically important $1,000 threshold, the Obama administration announced protectionist trade measures and the Federal Deposit Insurance Corporation closed another three banks.  All in all, it became obvious that summer was over. 

One year after the Lehman bankruptcy, Dutch banks are set to become the first to impose pay caps on bonuses paid to senior executives.  The new code limits bonuses to one year’s worth of salary.  Next week’s G20 meeting in Pittsburgh will offer more discussion along these lines with the possibility of a global pay cap being implemented. 

China grabbed the spotlight last week following two key developments.  First, the Chinese government announced that it would issue $879 million of government debt to investors outside the mainland on September 28.  This is a relative baby step considering the overall size of the government bond market, but it represents a move by officials in Beijing to gradually establish a stronger worldwide presence for the Yuan. 

By Friday, the Obama administration fired the first shot in what is likely to become a tenuous trade battle.  The decision was made to impose stiff tariffs on Chinese tires that arrive in the US, signaling that the president is ready to stand behind the unions that helped to elect him.  China responded quickly by launching investigations into dumping of US chicken and automotive products.  With China and the US increasingly dependent on each other, this battle may negatively affect both countries. 

Recently compiled research of IRS data through 2007 showed that the income gap in this country increased to historic levels.  The percentage of income going towards the top 1% of households hit 23.5% in 2007, the highest level since 1928.  These trends began in the early 1980’s, and accelerated as the tech boom hit its crescendo in the latter half of the ‘90s.  Unfortunately, as interesting as this data is, the picture is likely to be very different now, given the freefall in real estate and equity prices. 

As much as talking heads enjoy railing against the top 1%, the fact of the matter is that they accounted for 36% of all income tax paid this year, a contribution that is sure to drop, creating further strain on the federal budget. 

Source: Center on Budget and Policy Priorities

Beige Book Turns Green

The Federal Reserve’s Beige Book is looking a bit greener these days after the Fed reported that economic activity is stabilizing and the outlook is “cautiously optimistic.”  Of the 12 districts overseen by the Fed, 6 reported improving growth trends, while one area (St. Louis) acknowledged that the rate of decline is stabilizing. 

Consumer spending was the main area of weakness, as individuals chose to limit spending to essential goods and services.  Tight credit conditions coupled with higher unemployment limited consumer spending habits in the period, but certain pockets of the country are showing a slight pickup in hiring.  Whether this trend is sustainable is not clear at this point. 

After suffering a precipitous decline, the housing market looks to be in the bottoming process.  Home sales picked up in the historically strong summer season; however, home prices are still facing pricing pressures, especially in the higher end of the market.  The $8,000 credit from the government is providing support to the lower end of the housing market, but the impending expiration of this credit could reverse recent gains in that segment of the market.

Overall, the report represents an improvement from the July Beige Book but it also sends the message that the economy is stuck in the uncomfortable position of trying to balance weaker trends in employment with the prospects of a recovery. 

The Week Ahead

The first full work week of the fall season should provide plenty of headlines for investors to digest.  Releases on PPI and CPI will reignite the inflation/deflation debate.  Retail sales data on Tuesday will offer a glimpse into consumer’s mentality ahead of the holiday shopping season.  But, the data is subject to distortion given the overwhelming popularity of the cash for clunkers program in the month of August. 

On the legislative front, Obama is heading to Wall Street to discuss the state of finance, one year after the crisis began in earnest.  Financial reform remains on the mind of legislators but the health care debate is stealing the political spotlight for the time being. 

Lighter Side:

Source: Tom Toles

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