Economic & Market Update: July 13, 2009

“As Earnings Kick Off, Investors Remain Cautious”

The Fortigent Investment Research Team

http://www.Fortigent.com

Last Week’s Highlights:

Consumer Credit:      -$3.2B – less than expected but notable, nonetheless

Wholesale Inven         -0.8% – no signs of inventory rebuild in the near term

Trade Balan             -$26.0B – data provides positive support to Q2 GDP

Michigan Sentiment:      64.6 – individuals take a more pessimistic view of the future

Stocks:                              879 – risk aversion is once again the name of the game

10-year T Bonds:        3.30% – Treasuries rise for 5th week in face of heavy issuance

Oil:                                      $60 – surprisingly weak summer demand weakens prices

Dollar/Euro:                   $1.39 – questions about global recovery provide support to $

Economics This Week:

Date      Item                         Est.                     Comment

7/14      PPI:                          0.8%                    Producers have no room pass on costs

7/14      Retail Sales:         0.5%                    No clear consensus on June retail sales

7/15      CPI:                          0.6%                    Retail gas prices remain key driver

7/15      Capacity Utilization:  67.9%       Utilization stuck at all-time lows

7/15      Industrial Production-0.6%       Likely to be eighth consecutive decline

7/16      FOMC Minutes:                                Fed taking a more optimistic outlook?

7/17      Housing Starts:   530K                   Expected bounce from abysmal levels

Global Markets Undergoing Correction

An air of uncertainty permeated the markets last week as investors struggled to gain clarity around corporate earnings and more broadly, the economy.  Last week’s market action led to the fourth consecutive weekly decline for the S&P 500 index and dropped crude oil below $60/barrel for the first time since mid-May. 

Whether investors are choosing to take profits from the recent rally or electing to move into a defensive posture in advance of earnings season is still unclear.  What is clear is that the main beneficiary for the recent pullback has been Treasury securities.  Even in the face of extremely heavy new issuance last week, there was exceptionally strong demand that drove yields on the 10-year note from as high as 3.9% in early June to 3.3% at the close on Friday. 

Market technicians are also waiting with baited breath as the S&P 500 index is facing consistent pressure around its 50- and 200-day simple moving averages.  This is not entirely abnormal, but it may send the signal to the markets that the index is headed for a downward trajectory.

Source: Dshort.com

Government Motors

Almost as an aside to the rest of the week, taxpayers officially learned that they can now add General Motors to their growing portfolio of company keepsakes, as GM emerged from Chapter 11 in a breathtaking 40 days.  The ‘new and improved’ company is 60.8% owned by the US government, to the tune of a $60 billion investment.   An additional 11.7% is owned by the Canadian/Ontario government, 17.5% by the United Auto Workers and the remaining 10% is headed to GM’s bondholders.  As Representative Jeb Hensarling, who oversees the Troubled Asset Relief Program, said, “It’s amazing how fast a company can emerge from Chapter 11 when you inject $40 billion of involuntary taxpayer capital into the process and trample over the rights of creditors in an unprecedented fashion.” 

What Does the Future Hold?

The International Monetary Fund (IMF) released an update to its World Economic Outlook (WEO) last Wednesday.  Not terribly divergent from what other economists are predicting, the IMF believes that financial conditions have improved since the last WEO release in April and went as far as revising growth estimates upwards by 0.6% for 2010. 

Source: IMF

The IMF is quick to point out that worldwide policy support is working to stabilize the global economy, but the end of the recession is not yet here and any recovery is likely to be ‘sluggish’.  According to the report, the advanced economies will shrink by 3.8% this year before rebounding at a 0.6% growth rate in 2010.  Emerging economies are also feeling the effects of the slowdown, with growth expected at a mere 1.5% in 2009 and 4.7% in 2010.

Leaders from the Group of Eight were meeting at the same time in Italy to discuss the next steps in the fight against the global recession.  There was some dissension about what to do next but the leaders issued a joint statement saying that the recovery remains fragile. 

The root of the dissension was a call from President Obama to consider enacting a second stimulus package.  German Chancellor Angela Merkel is vehemently opposed, believing that a sound exit plan from current stimulus measures is more prudent.  She also argued that exploding budget deficits pose a greater long-term threat to the world economy.   

Either way, it’s not surprising to see a lack of agreement from world leaders as they struggle to combat the most severe recession in the post-WW II era.  The next steps are going to be critical in returning normalcy to the global economy, and world leaders are no doubt feeling the weight of the world on their shoulders.  

The Week Ahead

Brace for what has the potential to be a volatile week.  In addition to a full slate of second quarter earnings reports, economic releases both here and abroad will be plentiful. 

Starting abroad, our friends in China report 2nd quarter GDP, as well as retail sales, industrial production and the consumer price index. 

Closer to home, the minutes from the June FOMC meeting will be released on Wednesday.  Of interest will be comments pertaining to deflationary concerns and updated growth forecasts through the remainder of 2009.   Timothy Geithner, US Treasury Secretary, will also be heading to Europe and the Middle East to discuss the economic crisis with his counterparts in those countries.

Quotable:         “Our analysis leads us to believe that recovery is sound only if it does come of itself.  For any revival which is merely due to artificial stimulus leaves part of the work of depressions undone and adds, to an undigested remnant of maladjustments, new maladjustments of its own which has to be liquidated in turn, thus threatening business with another crisis ahead.” Joseph A. Schumpeter in ‘Depressions: Can We Learn From Past Experience.’

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