Fed Throws a Wet Blanket on Equities Markets

The markets all did well yesterday, but they were doing better before the Fed minutes came out. It is almost as if investors were being almost insanely giddy. Then the Fed slapped them in the face to bring them back to reality. Of course, that didn’t last long.

One example of what I am talking about was the retail sales data which came out on Tuesday. All anyone could talk about was the headline figure had come in at +0.6%, which was 0.1% better than expected. No one mentioned that auto sales being up was likely the result of steep discounts by dealerships being discontinued by the parent company (mostly GM and Chrysler). No one mentioned that those closing dealerships would provide 0 sales in the very near future. This would virtually ensure a future drop in auto sales (and overall retail sales). No one mentioned that a lot of the increase in retail sales was due to the increased sale price of gas. This is the same mostly imported crude oil/gasoline that is bankrupting the US via the trade deficit.

Energy costs went up +6.6%. If you excluded auto sales data, the retail sales number came in at +.3%, which was lower than the expectation. If you also excluded gasoline sales, retail sales were an anemic -.2%. In reality retail sales shrank in the week ending July 11. Yet everyone acted as if they were great. It must be a good thing that the US is accruing more debt by paying more for imported crude oil/gasoline.The markets needed the slap in the face from the Fed.

Also yesterday, COF reported that its credit card charge off rate had risen from 9.41% in May to 9.73% in June. This was smaller than the expected 9.9%. It must be great news!!! Maybe it is, but it is not that great. The charge off rate still rose significantly. With the unemployment rate still rising, the charge off rates of credit card issuers will likely continue to rise for some time. Most if not all of the credit card issuers will be losing money for some time to come (likely through 2010). That is not good. That is not a reason for the markets to go up. Admittedly the rate of COF accounts 30 days or more delinquent dipped modestly to 4.77% from 4.9%. However, this may not be sustainable over the longer term. It is not a reason for the markets to take off in unabashed glee. When the job losses from the automakers’ cutbacks really start to be accounted, the situation will look demonstrably worse. The wet blanket was needed.

The Fed minutes show increased risk of inflation for 2009, 2010, and 2011. The Fed revised the unemployment rate estimate to 10.1% from 9.8% for 2009. They did raise the GDP estimates though. The new estimates are for -1.0% GDP growth in 2009 (formerly -1.5% growth). For 2010 the new GDP growth estimate is 3.3% (from 2.1%). The Fed said they continue to be concerned about the labor markets. In other words this might be a jobless recovery. If that’s not a wet blanket, nothing is. Then they got around to the banks that everyone has been touting lately. The Fed said, “Banks could see substantial losses in loan portfolios.” This was a definite wet blanket to this weeks’ market thinking. The Fed foresaw an end to the recession “before long”. However, it called the situation “fragile”. In other words the recession will end at some as yet undetermined time this year or next. If we are unlucky, even those weak thoughts could be in jeopardy. If that’s not a wet blanket, nothing is.

Still the market has not crashed. It seems to want to go on after already being up 200+ points on the DJIA. Still just one piece of negative economic news after the Fed comments could send the entire market scrambling for the doors. I would not call the Fed’s words encouraging (or overly discouraging either). However, they certainly do not support the rampant enthusiasm of the markets over the last few days. They especially do not support the enthusiasm over the banks stocks. The markets may figure that out eventually. I will be watching.

Is it my imagination or is CIT, an important part of the banking infrastucture for small to medium businesses, essentially bankrupt? Didn't a similar occurrence with Lehman cause a credit market crisis? Didn't S&P recently downgrade a lot of CMBS's from AAA to BBB-? Isn't the single family home mortgage market still a trouble spot? Isn't that supposed to go on for some time?

Comments

[OldLimey:]

Facts are just so 'yesterday'. Until they become 'now' again - which will be when GS is loaded-up on shorts and ready to go. As for 3.3% GDP growth in 2010 - just remember what Bernanke was predicting about sub-prime and its wider ramifications back in 2007: $50B and nil respectively. There are very few central banks left which can be trusted, and the Fed most surely isn't one of them.

Jul 16 10:00 AM

[ain't no fo...:]

The high profile banks (and other co's like INTC) have, with the complicity of the sell-side "analysts," set the bar so ridiculously low for their earnings estimates that they can't help but "blow out the estimates!!!!!!!!".

Then the banks bid each other up on the great news, and the MSM immediately starts in with "the unexpectedly strong earnings reports from GS and INTC signal that the economy is showing signs of recovery and we may be out of the recession already."

Its a rigged game in a closed circle - you scratch my back, I'll scratch yours. The banks have big "profits" because the government is allowing them to totally ignore the mark to market accounting rules that got thrown out the window this Spring, and because until recently they have been able to trade the markets aggressively with lots of TARP cash, and that newly found funny money is now circulating through the markets.

Has anyone bothered to ask what the implication of +10% unemployment rates THIS YEAR and perhaps close to 11% in 2010 (and that's U-3, not -6 or Shadow Stats) will have on the most adverse scenarios for these still technically insolvent baks? No?

Here's a swell chart- let's see how this plays out over the next few years.

static.seekingalpha.co...

Things are BAD, really bad. And that brings out the sugar plum fairies in droves to protect their interest and talk their books.

(ain't no fortunate son, formerly wpdragon)

Jul 16 12:44 PM