Is the Obama Plan Creating Unfounded Market Optimism? 12 comments
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Some Washington lawmakers are now talking of a $1 trillion government spending package to kick-start the US economy; last week the figure was closer to $500 billion. But before any stimulus plan can save or create the first job, certain formative developments are likely to reduce the programme to build bridges, roads, schools and green projects to little more than a belated (and diminished) attempt to reshape rapidly deteriorating American family balance sheets.
It is quite obvious that a good proportion of institutional and retail investors purchasing shares at current levels are being driven by President-elect Barack Obama’s commitment to implement what will rate as the largest public works effort since the 1950s. In reality, when the facts are placed along a rational timeline, it is not too difficult to conclude that long S&P 500 trades even 10% below Friday’s close (876) are going to result in heavy losses by mid-2009.
Most analysts concur that Friday’s job report was grim. But the very nature of the methodology governing job statistics ensured that the picture painted barely reflected the grimmer reality. While US non-farm payrolls plunged by 533,000 in November, the number of people outside the workforce (people not looking for work) jumped by 637,000 and the number of part-time workers (counted as fully employed) rose by 621,000 to 7.3 million. So, before you enter or retain any bullish positions (SPY, QQQQ), bear in mind that a total of 1.9 million Americans lost their jobs over an 11-month period, that the Obama stimulus plan is targeting to save or create 2.5 million jobs, and, most importantly, that by the time the stimulus plan becomes a reality on the ground, at least 3.2 million Americans will be without jobs and roughly 10 million Americans will be desperately in need of better, full-time jobs.
Under those circumstances, it is inconceivable for the S&P 500 to be settling anywhere above 700 during the second half of 2009, as an increasing number of investors realize that the $1 trillion budget is having a minimal impact on the engines of the US economy.
In the final analysis, the Obama stimulus plan needs to actually improve the quality of family incomes (thus boosting consumer demand and home values) which continue to be threatened by a range of factors: health care and education costs, the cost of food and living essentials and, of course, the possibility that failing business models (e.g. Detroit) will throw more Americans out of work over the next few months.
Further pressuring President-elect Obama’s vision of America in 2010 (and beyond) is the uncertain fate of the emerging markets, and the volatility in oil prices given the prospects of a series of knee-jerk reactions by the OPEC cartel in forthcoming weeks.
As things stand, the $8 trillion (and growing) worth of government rescue schemes are sustaining asset, corporate and shareholder valuations within the framework of a highly leveraged environment. And a number of pro-Obama economists are rightly claiming that, to a significant extent, leverage will be countered by enhanced disposable incomes. But will the new $1 trillion stimulus package create the required seismic shift in the overall quantum of family balance sheets?
This writer is of the opinion that the sheer scope of today’s crisis is well beyond resolution (or containment) by the stimulus packages for three reasons. Firstly, Washington has totally ignored the pressing needs of the huge non-investment-grade segment of the American corporate spectrum. Secondly, and quite surprisingly, lawmakers and regulators have failed to examine the rapidly changing fundamentals of the domestic and international agricultural environment, fundamentals which are directly affecting American exports on one hand and the cost of imports on the other. Thirdly, nobody in authority appears to be particularly concerned with deficits, with the future value of the dollar and with the impending compromises in the “full faith and credit” of the US government.
Disclosure: Author holds short position in SPY, QQQQ
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Rakesh is the ONLY commentator on this site that has published something that shows he or she gets it.
BRILLIANT post !!!
- the debt under Prez GW Bush went from $5.7 trill to $10.0 trillion. What happens if interest rates start going back up? How are we going to afford the interest on $10 trill? Let alone the trillions more than Obama and the Democrats want to tack on? Just look at countries that run up continual deificits, e.g., the Argentine Peso or Turkish Lira. Their currencies suffer for it. In summary, more debt on top of our $10.0 trillion debut may feel good in the short run; however, it’s going to be terribly painful in the long run.
Rakesh's balanced article makes clear there are a number of moving parts to be coordinated not just do this and damn everything else. There is still great uncertainty out there, not a time to rush in and just buy stocks. There may be unintended consequences. You stimulate usd1 trillion, then another usd 1 trillion etc how do you pay back the interest and principal ?
Translated: inflation.
And...what happens in several years (8? 10? 15) time when those highways and bridges are done being built? Where do those construction workers and civil engineers go for jobs? Back to the auto industry? Heh. Right. Again, just postponing facing the problem. Not that we don't need some infra repairs...but...that is something that needs to happen on a smaller but continual basis in order to be sustainable and not its own bubble!
fairtax.org
1. Mortgage rates are on a down trend. Refinance will help the balance sheet.
2. Housing prices have come down significantly but there is hope that it is bottoming (except may be in some specific neighborhoods).
3. Credit crunch seems to be easing (small businesses can look up).
4. Inflation has come down.
5. Many world economies are implementing big spending plans
6. Season retail sales looking up
7. Finance sector stocks are starting to look up. It is a proxy for the stock market.
8. Don't hear of any more major bank/finance company failures - at least for the time being.
9. The current payroll statistics might be the result of response to stock market downward spiral. The labor market statistics are a lagging indicator.
10. Layoffs increase need for more productivity tools (computers and other automation stuff).
11. Many big and essential companies and banks are now awash with cash
12. Country is saving a bunch due to fallen oil prices
13. The stimulus plan money is only needed in phases over a two year period
14. Will be interesting to see how the labor market behaves if the S&P goes up another 10 -15% from here.
The two areas that bother me still are health care (especially for those who are laid-off) and acquiring new skills for a new job. Hopefully the stimulus plan will address these in some form.
Above all, most in the country (except for you shorts and ideologists ) want the country and the stock market to look up!
"True the country's debt situation is dire but that could change very quickly if the employment and stock market improves."
Since that will not happen any time soon, the rest of your response is largely irrelevant. Rational thought is needed, not hope as an investment strategy...
On Dec 08 09:21 PM Manifestor wrote:
> The family balance sheet will look up when the stock market goes
> up and the house price stabilizes. True the country's debt situation
> is dire but that could change very quickly if the employment and
> stock market improves. Even the various bailout dollars lent out
> will return with interest! One should also consider the following:
>
> 1. Mortgage rates are on a down trend. Refinance will help the balance
> sheet.
> 2. Housing prices have come down significantly but there is hope
> that it is bottoming (except may be in some specific neighborhoods).
>
> 3. Credit crunch seems to be easing (small businesses can look up).
>
> 4. Inflation has come down.
> 5. Many world economies are implementing big spending plans
> 6. Season retail sales looking up
> 7. Finance sector stocks are starting to look up. It is a proxy for
> the stock market.
> 8. Don't hear of any more major bank/finance company failures - at
> least for the time being.
> 9. The current payroll statistics might be the result of response
> to stock market downward spiral. The labor market statistics are
> a lagging indicator.
> 10. Layoffs increase need for more productivity tools (computers
> and other automation stuff).
> 11. Many big and essential companies and banks are now awash with
> cash
> 12. Country is saving a bunch due to fallen oil prices
> 13. The stimulus plan money is only needed in phases over a two year
> period
> 14. Will be interesting to see how the labor market behaves if the
> S&P goes up another 10 -15% from here.
>
> The two areas that bother me still are health care (especially for
> those who are laid-off) and acquiring new skills for a new job. Hopefully
> the stimulus plan will address these in some form.
>
> Above all, most in the country (except for you shorts and ideologists
> ) want the country and the stock market to look up!
>
>
Depends on what's your time frame for a 'soon'? Note, employment is a lagging indicator and may take more time, but the stock market, IMO, could settle at a 10-15% higher level from here (ie. S&P > 1000) in the next three months.
Aside from the Federal Reserve, government has little control over short term economic outcomes (exceptions: wars, instability, tax policy). Most of what the government can do for the economy has a long-term focus: educating the next generation of workers, building infrastructure, preventing corruption, controlling crime.
There are a dozen more important factors to 2009 stock performance than what the politicians are arguing about.
I definitely agree, 2009 has plenty of more important factors that the politicians don't even mention! I don't understand why so many people think government can save them from economics...
On Dec 09 04:02 PM Chris B wrote:
> I doubt that the vauge phrases of a president-elect are what is driving
> the market. Changes in expected earnings, perhaps, but not political
> slogans.
>
> Aside from the Federal Reserve, government has little control over
> short term economic outcomes (exceptions: wars, instability, tax
> policy). Most of what the government can do for the economy has
> a long-term focus: educating the next generation of workers, building
> infrastructure, preventing corruption, controlling crime.
>
> There are a dozen more important factors to 2009 stock performance
> than what the politicians are arguing about.