“A 10,000 Dow is Psychology…not Economics” - October 16, 2009

Like on weekend afternoons in the fall, all eyes will be on the scoreboard today to see if the market can close the week above the magic 10,000 mark. It’s not likely as news overnight was broadly disappointing.

• At the company level, GE reported lower-than-expected revenue and a big drop in profits, and Bank of America also reported greater-than-expected losses – two bell-weather stocks lots of people watch.
• Mortgage foreclosures continue to rise. They were up 23% in the third quarter compared to a year earlier and 5% worse than in the second quarter.
• And the latest industrial production numbers just out, although strong for the third quarter, were disappointing as they continued to slow over the course of the quarter.

So the Champaign corks that popped 10 years ago when the market first passed 10,000 aren’t happening this time.

They won’t pop – and the market will not be sustainable – until some fundamental foundations are shored up: there are 3 key ones:

(1) The big one is job growth…that’s not happening yet
(2) The second is personal income growth that follows
(3) The third is confidence…or consumer moods

Until all three of these show signs of sustained improvement, any flirting with the 10,000 mark will be just that…It will be fleeting.

"Demise or Not…the Dollar is Vulnerable” - October 6, 2009

A report out of the UK means that the phrase “the new world order” is happening faster than anticipated. The Independent newspaper is reporting a “game changer” – many Arab states along with China, Russia, Japan, France, and Brazil are planning to phase out the dollar as a basis for oil trading over the next 9 years.

The plan would be to replace the dollar with a basket of at least 5 currencies: (1) the Japanese yen, (2) the Chinese yuan, (3) the euro, (4) gold, and (5) a new unified currency for the major Middle East Gulf States.

This would be a serious departure from the present architecture of the modern international financial system that was put together after World War II – the Bretton Woods accords.

This is happening for a couple of reasons:

(1) Changing economic power in the world, particularly China’s extraordinary new financial power; and

(2) Anger over the crisis the United States caused in world financial markets in the past couple of years.

Two near-term implications are obvious:

(1) Gold will become very attractive in the near term, and
(2) Inflation of imported goods…including oil…will continue to occur as the dollar continues to weaken.
What’s important to note about “game changers” like this in capitalism, is not so much to worry about the new rules, but to understand them so that you can play by them and not be held hostage by the hope that it ain’t so.

“Early Fall Foliage and Economic Data…Both Dull” - October 1, 2009

One month ago today, I mentioned on this segment that the market was sending out a clear signal: it’s not convinced a recovery is here…And the same message holds true today...because the latest economic data continues to be about as dull as this year’s early fall foliage.

· This morning’s personal income results for August were disappointing and the small increase in spending was due only to government gimmicks like “cash for clunkers” and first-time homebuyer tax credits.

· Consumer confidence in September was down, with most people feeling worse about job prospects and income growth. Buying plans for both cars and homes are also down.

· Consumer prices have fallen for six straight months, clearly indicating a lack of demand.

· Although the revised GDP number yesterday showed the economy slowing by only 0.7% in the second quarter, the best performance in more than a year, it was not due to new fundamental strength.

Fed Chairman Ben Bernanke will be testifying this morning before a House Committee about financial market regulation. This is a long overdue discussion, particularly about derivatives trading and the dangerous credit default swaps.

Depending on what he has to say, this could be the best news of the week. And while it won’t make for a sustainable recovery, it could turn over a new leaf in making Wall Street more transparent. The upshot of this week’s data is simple: the New England foliage will be far more vivid than the economy for quite a while.