Andy Singh's  Instablog

With the stock market rallying, many investors want to participate in the gains but don't know which stocks to buy. For example, you’ve heard that the tech sector is sizzling and well known names like Google (GOOG) and Apple (APPL) are reporting stellar earnings - but still don’t know which one has the best long term potential (and what about other tech stocks). And is it worth investing in one or both of these stocks - which is not a cheap proposition either with the stocks priced over $150 and $400 respectively.

President Barack Obama said recently that a second [multi-billion] economic stimulus package isn’t needed yet, though he expects the U.S. economy and unemployment to worsen this year. He also acknowledged that due to worse than expected economic factors, initial forecasts from his administration missed the mark. The original $787 billion stimulus bill was rushed through Congress and signed in February 2009, with his chief economic advisers forecasting that it would help hold unemployment below 8 percent. It included tax cuts and spending on infrastructure projects that the president pledged would save or create 3.5 million jobs. Obama defended his initial stimulus projections, saying the economy worsened once the legislation was enacted only weeks into his presidency. “Nobody understood what the depths of this recession were going to look like,” Obama said. “It was only significantly later that we suddenly get a report that the economy had tanked.” However, the President did acknowledge that he was not satisfied with the progress made around distributing the stimulus funds and that the administration had to do more work with a program to modify existing mortgages, which hasn’t “been keeping pace with all the foreclosures that are taking place.”

While the current administration does not think a second economic stimulus package is needed in the near term, I do think they will be back next year or the year after if the economy does not improve as indicated by a few of the following triggers or key economic vital signs:

- Unemployment rate nears 15%. This may seem far away, given the current unemployment rate of 9.5%, but in California it is already approaching 12%, and America's most populous state is a good leading indicator of national trends. Further, many economists think that the real unemployment numbers are much higher given part time, seasonal and non-participating workers are not reported in the unemployment figures. Should the official unemployment rate hit the 15% mark, it is almost certain that the Obama administration will be back for more funds to stimulate the economy.

- Home prices continue falling, declining 50% since the July 2006 peak. Median home prices are already down more than 26% to date and while there are signs of stabilization, worsening unemployment and rising interest rates could prompt further declines. In states like Florida and California, real estate values in some of boom areas are already down much more than 50%. With short sales and foreclosures still rising in many areas (reaching a record 1.8 million in May), despite government stabilization programs, their looks to be much more pain ahead. Even the new home buyer tax credit that have prompted many new home buyers into the market, look to have only provided a temporary buffer in now that interest rates are rising again.

- Democratic controlled congress increases majority in mid-term elections. President Obama still has an overall approval rating of 65 percent and the support of a democrat controlled Congress. In the mid-term 2010-2011 congress elections there is a good chance congress could come further under democratic control - reaching a filibuster majority, thereby making the Republican party virtually helpless in stopping any additional stimulus legislation. A worsening economy and support from the improvised masses waiting for more government handouts, will allow a more Democrat friendly consumer-focused stimulus package to be passed.

- Stock Markets Free Fall (Dow falls to 6000) and a large financial institution collapses. The stock market has been on a nice run of late and many investors are returning to the market as a sense of optimism pervades. However, as we have seen countless times, the market can fall just as fast as it rises leaving many investors licking their financial wounds. Given the stock market is a leading indicator of the economy, a sharp fall in the stock market generally signals further economic gloom and doom ahead. This would be compounded by a collapse of one or more large financial institutions, a primary trigger for the stock market collapse late last year. If all this comes to pass, the government will be forced to enact fiscal policy, like another consumer or corporate stimulus, to stem the tide.

- Global Markets Turmoil: The key to a sustained economic recovery will be a revival in real growth amongst the BRIC economies. These are the Brazilian, Russian, Indian and Chinese economies, that accounted for most of the economic growth over the last decade. They have the largest populations, are relatively debt free and are the biggest buyers of all things American. These new economies and their consumption will be the key for American growth in the 21st century. If these economies collapse, either thorough political problems of spiking inflation then the US economy will feel the pain.


To me the key statistic is unemployment. If consumers do not have jobs or feel in danger of losing their current one, then they will cut back on discretionary spending, delay buying or upgrading homes which all results in falling corporate profits and a worsening economy. If unemployment is “well into the teens” and still rising, it would indicate broader problems in the economy and serve as a strong catalyst for more fiscal stimulus actions. So despite record deficits and government debt, the administration will be back for more and I think they will be asking upwards of $1 trillion dollars for the next economic stimulus package!