2.26.10

2.26.10

          This week it was reported that new home sales unexpectedly plunged 11.2% in January, to the lowest level since at least 1963, and existing home sales declined 7.2%, the second straight unexpected monthly decline. Economists had expected both numbers to show increases, since the government program of sizable rebates to home-buyers is still in effect. Adding to the concerns, apparently both inside and outside of the Federal Reserve, is what will happen to the housing industry, so important to the economic recovery, when the refunds to home-buyers program ends in April, along with the announced end of the Fed’s year-long massive purchases of $1.2 trillion of mortgage-backed securities, which has been very successful in lowering mortgage rates from 6% to 5%.

        After four straight quarterly declines, GDP grew 2.2% in the third quarter. Last month it was reported that GDP surged up 5.7% in the fourth quarter, the fastest quarterly growth in six years. And on Friday, fourth quarter GDP was revised even higher, to 5.9% growth.

        But with its weakness beginning in January just as those positive GDP numbers were released, and so far this year, is the stock market providing another warning about the economy, that this is as good as it’s going to get, or is it just a normal ‘buy the dips’ pullback? Global stock markets have certainly been losing their upside momentum, some for several months. The Vanguard European etf, which tracks with European markets, is down 15%. Stock markets in the strongest global economies, China and India, are down 12% and 8% respectively. Japan, the 3^rd largest economy in the world, sees its stock market down 8%. Mutual funds tracking emerging markets are down 10%.

        The nervousness in global markets is understandable. After all, there was the surprise report from Europe several weeks ago that GDP growth in the 16 Eurozone countries slowed to being up only 0.1% in the fourth quarter, as close to zero as you can get. That raises concerns that Europe may already be slipping back into recession. That worry was not lessened any by subsequent reports that the German Business Confidence Index fell in January for the first time since last April, and the well publicized reports of serious debt problems in Greece, Italy, Spain, Portugal, and Ireland.

        No less worrisome have been the several announcements by China that it is making fiscal and regulatory moves to deliberately cool off its overheated economy, on which many countries have been pinning their hopes for continued export sales.

        After all, two weeks ago the bi-partisan Congressional Oversight Panel released a report saying that 2,988 U.S. banks, almost 40% of the 8,000 banks in the U.S., are about to “get hit by a tidal wave of commercial-real estate loan failures.” There was also this week’s report that the Consumer Confidence Index unexpectedly fell off a cliff, falling from 56.5 in January to just 46 in February. Consumer spending accounts for 70% of the spending that drives the economy.

        From where we sit, it is starting to look like a market that may be on the edge of going down, not up. We are still 100% in CASH and will stay on the sidelines a while longer.

Till next time

The MTA Staff