02.19.10
Home Market Timing Weekly Updates Weekly Update Archives|
Last summer, economic fears were fading away. Home sales were rising month after month. Monthly job losses were slowing dramatically. The third quarter had arrived, with indications that the recession was over. Positive GDP numbers for the third quarter were expected to confirm that. And sure enough, after four straight quarters of decline, it was reported that GDP grew 2.2% in the 3rd quarter. The recession was over.
In January the news got even better, when it was re-ported that GDP grew 5.7% in the fourth quarter, the fastest quarterly growth in 6 years. Meanwhile, fourth quarter corporate earnings came in much better even than rosy forecasts. But instead of driving the market higher, selling took over as uncertainties came crowding back in, concerns that it might be as good as it’s going to get for awhile.
In the U.S.
Most economists are projecting the economy will slow over coming quarters anyway, but especially if the government begins to reverse the aggressive easy money policies that created the recovery.
That slowing scenario looked even more likely when economic reports showed home sales fell in November and December, even though the rebates to home-buyers had been extended to April 30.
Other negatives piled on, including that 85,000 more jobs were lost in December, much worse than forecasts, and bankruptcies grew at a quickening pace.
Then this month came the report that 22,000 more jobs had been lost in January versus forecasts that 25,000 new jobs would be added. And worse, the previous report of 85,000 jobs lost in December was revised to a loss of 150,000 jobs.
Last Thursday the bi-partisan Congressional Over-sight Panel issued a report warning that almost 3,000 small banks are about to “get hit by a tidal wave of commercial real estate loan failures.” That’s 38% of the 8,000 banks in the U.S. The panel used information provided by the Federal Reserve, the Comptroller of the Currency, and the Federal Deposit Insurance Corp (FDIC). The head of the panel said that unlike the 17 major banks that were bailed out, “These banks were never stress-tested. Their ability to withstand the coming storm was never examined”.
From the rest of the world.
Economic news from around the globe is no better.
Last week, for the second time in four weeks, Chinese regulators raised the level of cash or equivalents that Chinese banks must hold in their reserves, taking money out of circulation, as they continue their unexpected efforts to slow China’s economic growth, to prevent “potential bubbles in speculative investments and real estate”.
It was a similar unexpected move by China four weeks ago that caused the sharp three-day plunge in global markets that began the market correction.
Also in the headlines were reports of potential debt emergencies in several European countries, most notably Greece, but including Iceland, Portugal, and Spain. Meanwhile, indications arrived that several global central banks, including the U.S. Federal Reserve, have begun to reverse their stimulus efforts and easy money monetary policies, apparently making sure they don’t repeat previous mistakes of waiting too long to act and risk creating asset bubbles.
For instance, in the U.S., the Federal Reserve announced it is winding down its $1.2 trillion program of buying mortgage-related assets, and its purchases of U.S. Treasury bonds. And the rebates to home buyers is scheduled to end on April 30.
Meanwhile, from Europe came the report last week that the economic recovery in Europe stalled in the fourth quarter, with GDP in the 16 Eurozone countries rising only 0.1%. That disappointing report has European economists worried that Europe may be slipping back into recession, pointing out that Europe’s recovery in the previous quarter had only been due to the temporary influences of government stimulus spending and temporary inventory re-building by businesses. Europe’s surprise report that its 4th quarter GDP growth slowed to only 0.1% should be of concern in the U.S., given that the same factors that caused it are in place in the U.S. More than half of the exceptional GDP growth of 5.7% in the U.S. in the fourth quarter was also due to inventory re-building, after companies had allowed their inventories to fall to record lows in the recession. And much of the rest of the growth was due to government stimulus spending, including re-bates to home buyers, and the Federal Reserve’s purchases of mortgage-related assets, programs that are due to expire in March and April.
So, we have indications that economic recoveries may already be stalling even with the stimulus efforts still in place. At the same time it looks like central banks, including at least those of the U.S. and China, are beginning to reverse their massive stimulus efforts.
Meanwhile, on the political side, and directly connected to the stock market, Congress and the Administration seem determined to rein in the major banks, including banning much of their trading activity. Yet, right or wrong, their trading activity has been one of the main sources of their profits, and one of the main driving forces of the bull market, as their strength allowed the financial sector to lead the rally and new bull market. Yet the market sees no problems. And as the old saying goes, the market may not seem rational but usually gets the future right. The market, which was in a correction, has had no trouble beginning to rally again even as the new negatives continued to pile in. However, the rally so far was probably only technical, expected due to the short-term oversold condition beneath the 21-day moving averages. So we remain skeptical that it will continue. But it would take very little more positive momentum to convince us.
We remain neutral as we wait out the next couple of days. For the coming week we are 100% in cash. Stay tuned.
Till next time
The MTA Staff |
