Economic & Market Update: November 11, 2008

“Stimulus (for everyone) on the Way”

Chip Norton, Managing Director of Fixed Income & Economic Analysis

Last Week:

Employment:                  Weaker than expected- 6.5% unemployment, -240k jobs

Dow:                                    8943 – Election volatility

S&P 500:                            930 – Ready for upswing Monday

VIX:                                     56 – Volatility still in command

10-Yr Bond:                      3.78%, Rates down on weak economy

3-mo TBill:                        0.30%, down again

AAA 10-yr Municipal:   4.35%, strong bid continues

Dollar/Euro:                     1.29 – Holding steady

Dollar/Yen:                       99.16 – Rebound steady

Oil:                                        $64.50 – Lower on weakening demand, gas prices close in on $2

Economics This Week:

Date      Item                    Est.                     Comment

11/14    Retail Sales        -1.5%                   Weak sales following higher unemployment

Over the week-end, China announced a massive stimulus package to help fight the economic slow down that is well underway in this Asian giant. The depth and breadth of this $586 billion package is staggering. Much of the money is said to be going toward infrastructure projects such as roads, railways, airports, and power plants. The package also includes a shift toward easing monetary policy. The government has cut interest rates three times since mid-September as economic GDP growth slowed from over 10% to near 9%. It’s estimated that China's stimulus package amounts to nearly 15% of GDP over a two year period. In comparison,

China responded to the Asian financial crisis in 1998 with a package totaling just 1.2% of gross domestic product (Forbes).

The US to Follow

While China implements its package, there is already talk in Washington of yet another stimulus package that’s being fast-tracked under Speaker Pelosi and president-elect Obama. Last week, Obama said, “I want to see a stimulus package sooner rather than later. If it does not get done in a lame-duck session, it will be the first thing I do as president of the United States.” House Speaker Nancy Pelosi has already called for a two-part economic stimulus package that would consist of at least a $100 billion package passed by a lame-duck session, followed by a permanent tax cut after Obama’s inauguration. The first stimulus installment is said to include a government-funded public-works (sound familiar?) effort as well as an extension of unemployment benefits. Concurrent with the plan is this week’s push to bail out the car industry. Both Speaker Pelosi and Senate Majority Leader Harry Reid are now pushing to have the TARP program extended to the auto industry (an argument hard to counter following the 2nd round of capital infusion into AIG – can you say “slippery slope”?). The amounts suggested for Ford, GM, and Chrysler are said to be in excess of $15 billion. But- hey, when you’re spending $700 billion, why not a few billion for the car guys if the banking folks are getting $250 billion slugs of cash? 

So where does this all lead? Nationalized banking, nationalized auto industry, government healthcare? Do the current round of bailouts and stimulus packages essentially mean that the US government is now in the business of backstopping every major business industry if it has problems? I still think that, ultimately, businesses that are not well run and are obsolete need to restructure themselves on their own dime rather than the taxpayers – or fail. And speaking of taxes and stimulus packages, where do you think all that money will come from? Better buckle your seat belts because taxes will certainly take a turn for the worse for some in the coming years. I’m still not quite sure how the new Administration figures 95% of Americans will get tax cuts with the US rescue ring being thrown in almost every direction. I suspect Americans need to reintroduce themselves to the concept of moral hazard, but may only do so the hard way.

Retail Sales Takes the Stage

Last week’s poor employment data, combined with low consumer confidence, doesn’t bode well for retail sales this season. Even the very early Christmas shopping season push (started in October) may not be enough to help retail efforts in the coming month. The consensus for sales in October is down 1.2%, which would equal September’s data and be four months of running negative data. As expected, the biggest hit is expected to again be in the auto sector, where sales were down 3.8% last month. With consumer spending being 2/3rds of GDP, the road to recovery looks to be a long one this time around, even with a stimulus package in the works.

Rubber-Stamp Returns – A Good Thing…

Here’s some good news for the week from my old pal Sam Stovall at S&P. If there is anything positive that can be said about a unified government, it’s that historically the S&P 500 has posted superior returns during periods in which the executive and legislative branches have been from the same party. Since 1945 there have been 26 years of pure political harmony, 20 of which featured a Democratic President and Congress. In each of these 26 years, the S&P 500 rose an average 10.4% (excluding dividends) and posted an annual advance 77% of the time. Only four times did the S&P decline by double-digit percentages: 1946 (-11.9%), 1962 (-11.8%), 1966 (-13.1%) and 1977 (-11.5%) – all of which occurred under a Democratic watch. Double-digit percentage gains were the norm, however, as the “500” rose from 10.3% to 45.0% on 14 separate occasions. Even though past performance is no guarantee of future results, one possible reason for this strong market showing is that a lack of disagreement likely led to swift approvals of proposed spending programs, which stimulated the economy, boosted economic growth, accelerated earnings growth, and propelled stock prices.

About Fortigent:

Fortigent, LLC delivers a fully integrated and customizable business-to-business outsourced wealth management solution to banks, trust companies, and independent advisory firms. Services include an "open architecture" investment platform with particular expertise in alternative investments, a flexible unified managed account program, and consolidated wealth reporting. Fortigent's web-based portal interface allows access to proposal and rebalancing tools, client portfolio reporting and accounting, as well as industry articles, research papers, and other practice management and business development resources.

The information provided is general in nature and is not intended to be, and should not be construed as, investment, legal or tax advice. Fortigent makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, the information. The information is subject to change and, although based upon information that Fortigent considers reliable, is not guaranteed as to accuracy or completeness.

Not FDIC Insured No Bank Guarantee May Lose Value

(c) Fortigent, LLC

www.fortigent.com