Wall Street Strategies'  Instablog

Market conditions have become choppier this week as disappointing economic data, tough talk from Fed Chairman Ben Bernanke, and mixed signals from Fed governors serve as anchors.  While most economic data that has fallen short of the consensus measuring stick has pointed to expansion in the U.S. economy after a sharp contraction, the pace of recovery is now increasingly in debate.  Mr. Market is shifting its sights to 2010, and by evidence of the trading action this week it does not like the lay of the land.  The ballyhooed “V”-shaped economic recovery may conclude with a lower case “v”; in other words a strong, short snapback in economic growth from 2Q to 3Q.  Following 3Q, the probability for a further extension in the recovery “V” is up in the air as global demand for durable goods, for example, remains sluggish.  China alone cannot dig the rest of the world from below trend growth, and the market may now be reassessing the risk equation of equities. 

 Good
* Case-Shiller Home Price Index (+ for both 10- city and 20-city composites)
* Personal Income (+0.2% in August, ahead of +0.1% consensus)
* 2Q GDP (-0.7% compared to previous -1.0% reported)
* Pending Home Sales (+ seven months in row as tax credit sparks buying)

Bad
* Conference Board reading on consumer confidence (all components weak, except for inflation but who cares about that right now)
* ADP Employment (for an economy on the mend, softness in construction and manufacturing is worrisome)
* Auto sales (“cash for clunkers” is no longer; the numbers across the board were soft)
* Personal Spending (is a savings rate of 3.0% actually good for a sustainable economic recovery?)
* Initial Jobless Claims (+17,000 from prior week; 21,000 above consensus forecast)
* Chicago PMI (46.1 as opposed to 52.0 consensus; manufacturing speed bump hit)
* Non-Farm Payrolls (September’s report suggests economists got too ambitious in their targets and a “jobless recovery” is surely probable)

Bernanke’s testimony to the Committee on Financial Services on October 1 did not aid matters.  In broad strokes, the Fed Chairman outlined five principles to reconstruct the financial regulatory framework, some of which are needed and some of which will indeed hinder growth in corporate America.  Naturally, putting restrictions on capital flows to the private sector will only temper the speed of economic recovery in the U.S. and create a precarious position for global risk assets following an appreciable rise from March.

Key Points of Bernanke’s Regulatory Plan

Legislative change to ensure supervision, whether or not financial firm owns a bank
* English: increased oversight, higher capital requirements, reduced capital flowing through the system
Oversight council created to oversee broad financial risks
* English: more regulators who could skirt blame if the system breaks down once again
Procedure to wind down too big to fail financial institutions
* English: this is needed, so we agree with Bernanke here

Brian Sozzi
Written by Brian Sozzi, a Research Analyst for Wall Street Strategies (www.wstreet.com) specializing in the apparel/hardline goods sectors of the retail industry.  For more information about Mr. Sozzi, refer to the company's website, wstreet.com.