Last week the thought was, maybe better say the hope was, that the stock market had some upside after it held above the lows of 1045 set by the Standard & Poor’s 500 stock index intraday on February 5.
I don’t think that anybody was looking for an extended rally but after the S&P held at 1072 on May 21 and then at 1067 on May 26 and then again at 1071 on June 1 the consensus was definitely looking for more than a bounce. Lots of technical analysts were calling stocks oversold and looking for a rally that took the index back to its April 19 high of 1217 or so.
That wouldn’t have been a big enough move to guarantee a continued rally but 150 points is 150 points, especially when it amounts to a gain of 13%.
And then came June 4 when the index fell 3.4% to 1065 on news that private employers hired just 41,000 workers in May and that all hiring, government and private, added up to just 431,000 jobs, a far cry from the 500,000 that economists were expecting.
So now investors go back to watching not the top of the market’s potential range at 1220, but the bottom to see if 1045, the February low, will hold.
If it does, then the month long move downward from the April high near 1220 is still just a correction. A full blown 12% correction but just a correction none the less.
If it doesn’t, then the odds are that we’re looking for another leg downward—maybe as little as 5% below 1045, maybe as much as 10%. But something worse than investors have experienced so far.
Let me say that the overnight market action from Asia isn’t especially encouraging as of 11 p.m. ET Sunday night. The MSCI Asia Pacific Index was down 3.2% at 11:13 a.m. in Tokyo and futures on the Standard & Poor’s 500 were down 1.3%. The euro was also lower, down 0.7% against the dollar.
There’s nothing much on the U.S. economic calendar likely to move the stock market until the release of the weekly figure on initial claims for unemployment on Thursday, June 10.
The big uncertainty remains the international news flow with the pessimist in me believing that we’ll see some more bad news from Europe.
Maybe not though.
Over the weekend the Hungarian government, which had warned of default on Friday, said, in essence, “Never mind. Things aren’t nearly as bad as we told you a day ago.”
To say that nobody believes any number coming out of Hungary now and isn’t likely to for a long, long time is an understatement.
Ed, that answer is too facile. In generic terms, everyone wants the government to spend less. But then the budget gets looked at in detail, and lo and behold, there’s not a lot of fat to cut. The right wing always wants to cut “social spending” — that undefined theoretical pot of gold that hasn’t existed in years. The left wing wants to cut defense spending- stop the wars. Until the WTC gets bombed, and then, we’re all war-mongers wanting revenge.
And around and round we go.
Wasn’t it DeTocqueville that said democtratic capitalism only works until the government realizes it can bribe the populace using the populace’s money? I think the government figured that out circa 1980 and it’s been rape ever since.
jdecar
Yeah- well I was just saying. I think if JJ knew something dire, he’d let us know, and I consider almost everything Cramer Sez to be a stretch…
Over the years I have learned that one of the best- and most profitable- investment tools there is [for my brand of foolishness] is…patience. So- if Banco STDr is still standing when the dust settles, I’ll buy some, maybe. If not, I won’t.
There were some posts last week indicating that the Banco does hold a fair bit of E-debt, but they werren’t referenced, so I have no idea.
southof8,
Don’t get me wrong. I am NOT an advocate for deficit spending. I don’t think government should spend half of what it spends now.
I believe in honest accounting too. If “We the people” decide something is worth buying, then “We the people” should pay for it, not just somebody else (whether it’s the rich or any other sub-group of Americans). Government should NOT be an exercise in getting something for nothing. You want it, you pay for it.
cjxland
STD was one of the few large banks that did not get any govt funding in 2009. Spain problems will have effect but from there to ‘how to save STD’ is a stretch unless they hold billions € govt debt &/or spanish housing – have not heard this to be the case and Jim would probably have seen before recommending. Was wondering if there was something we missed.
sigli,
You and I aren’t that far apart in our views of the problems today. I personally think a consumption tax would be the way to go, since the wealthy do tend to spend more. Dump the billions of other taxes the federal government levies on us, including the income tax.
robert1234,
Your friend may be right. We could see a “melt up” for the first few weeks of June. But I am not putting any money into it, since I can’t really see where it would end, and it could end VERY badly.
Ed, the “only difference” between paying taxes or funding government by buying bonds is not that the in the former the government “gets a free ride,” but not in the latter. In the latter scenario, the next generation picks up the tab. There is no “free ride.” The quicker those always pushing for tax cuts regardless of the government’s, society’s or economy’s health, the better those of us in the next generation will be.
BSDGV simply advocates for honest accounting. If something costs a dollar and the body politic (READ= Government; we do, after all, live in a democracy) thinks its worth buying but without a tax increase the dollar’s not available, raise taxes.
Don’t borrow it from the next generation.
My friend says we should be watching for a follow thru day here. The market should pound this lever of support for a few days, then we should watch for a strong up day on big buying volume.
If we see that, it may signal a rally.
And where do you stand on combating the rise of feudalism, the proclaimed “new gilded age”, Ed? This is what I find lacking in arguments from
staunch pro-market, always cut taxes crowd. I’m not saying it necessarily is a problem, but I think we should address the idea at minimum. The founding of this nation was extremely anti-feudalist, but the founders tried the best they could to protect private property as well. It’s a balancing act.
My opinion is to drop corporate tax rates to zero, have low common dividend rates, and raise the higher tax brackets to offset. The “rich” still get theirs through dividends and don’t pay any more in taxes, their interests are aligned with shareholders (pay fat dividends) which bails out pension and retirement funds (bails out states without spending a penny), and America is much more competitive. Next would be getting rid of the GSE model guarantee. Who cares if “the rich” stuff their money in a mattress? It’ll get spent sooner or later. It’s only bad when they get enriched through bailouts.
bsdgv,
You do realize the flaw in your response to my comment on mason jars? You say we need to tax the rich more, then you complain about the rich buying short term treasuries? You do realize the net effect is the same: the government gets the money, and then proceeds to spend it. The only difference is the government gets a free ride on the tax revenue.
Look, you and I have both agreed that the wealthy (both private and corporate) have far too much say in how our country is being run. But taxing them more is no answer until we change the campaign finance laws, because the politicians will just raise their base tax rate, then add a bunch of tax deductions that only the wealthy can afford to gain from.
In addition, punitive taxation is simply wrong. It is no better than theft, but since it is “state sanctioned”, it is somehow ok? Feel free to explain what the difference is between putting punitive taxes on the wealthy, and taxing non-Muslims more under Sharia law? The truth is that both are an abuse of authority by government. And both are good examples of the tyranny of the majority.
bsdgv,
Respectfully, your arguement has so many holes both in practice and philosophy there isn’t enough space to give a economics lesson from a businessman’s perspective…one who has met payroll, paid taxes (federal, state & local), created innovative products, successfully competed in marketing, selling and providing customer service, making a profit in a capitalistic society and providing jobs for many of those you claim taken advantage of by “greedy corporations”. It’s a fact: Any enterprise the government touches always fails (loses money) such as the Postal service, Medicare, Medicade, Amtrack, GM, AIG…The list is endless as the imagination! IF you had a choice between investing in a thriving business or the Federal government (through taxes) which would you choose based on its success rate? I thought so!
Thank God for the wealthy! Those evil, greedy SOB’s pay the majority of the tax burden of this country…thought you might want to know that next time you decide to bash them.
“Indeed, double dip recessions are actually rather rare.”
So are extremely deep recessions like the one we’re currently in. You’ve heard that this isn’t a garden variety recession over and over, so why compare it to what isn’t rare?
I’ve more of a libertarian bent, and usually disagree with everything blood-sucker, do-gooderish, but I think BSDGV is making valid points here (although I see your ’50’s and ’60’s effects as more than a little far fetched–something to do with in spite of rather than because of…).
I think free-marketers can see BSDBV’s point if put in a mingling context–The Rich, whoever that is, have been pouring their money into GSE and Fed linked debt instruments. Debt investing without production increases is a pipe dream (Social Security, anyone?). The Rich have been socking their money away in mason jars known as MBS’s, CDO’s, etc., rather than making what I would consider true investment in the economy. They’ve (we’ve) built and built and built pretend savings as we chased “risk-free” investments in debt securities. We didn’t want to take chances (investments). We accumulated pretend wealth with no true productive backing.
Also, deflation is sure to follow when the people can’t afford to consume what they produce. I think we’re quite possibly in this situation right now–although I’m not crying on anyone’s shoulder about America’s terrible standard of living when I see iPods and cell phones on elementary ed. playgrounds. So, if I’m right, then we have policy choices to make. The recession would have wiped out the huge rich-poor imbalances, but we decided to make bondholders good, thus upholding the status quo (NLY is a perfect example of protection for the rich). We can cut off the spigot, take the pain, clear out the rich, and restructure the debt as is absolutely necessary, OR, we can keep trying to prime the pump by digging the hole deeper and deeper while praying it takes hold (which it may).
grindy,
We must differentiate between rich individuals and big corporations.
Taxing the rich individuals should have a positive effect on the economy because they will not want to realize their profits in the form of capital gains and dividends for fear of being taxed. They will keep them in long-term investments.
Taxing the corporations is necessary for forcing them to reinvest their profits. In emerging economies, they tax the corporations first and then give the tax back as credit ONLY IF they make investments. That’s what we should do in America too.
bsdgv,
You do make some really good points about taxing and working on infrastructure. It would be nice if our taxes DID THIS!
I think we are running into problems with short sightedness here. If we invest in our infrastructure we will see these returns in 5=10 years. No politician is going to be around for that long…… So why try?
Tax dollars to increased regulation doesn’t help, we need to put it in the right place. I’d say top 2 are education and infrastructure. Our health care system is awful right now and is eating business alive (leaving less for investment). We were much to small on our stimulus package.
It’s funny because IMO the easiest way to tell a good company apart from a great company is what type of capital plan they have…….. The US doesn’t pass the test here.
Ed,
The capitalism you imagine can and does only exist in economics text books. Your kind of capitalism is utopian; a capitalism where everyone has more or less equal power and can only harm the ones around himself. Nothing systemic because the system itself always works(!), according to you…
> BTW, it doesn’t matter whether you are taxing the rich or the poor. Either way, you are taking money out of the economy.
You sound like the government takes the money out of the economy and throws it in the ocean. You can only claim the government is not as efficient in its investments as the private sector but this is not true either. We have all seen how destructive, let alone inefficient, the private sector can turn out to be. Besides, I see govt programs like Medicare much more effective than private insurance when it comes to per dollar spent.
> Just an FYI, but the wealthy aren’t known for burying their money in mason jars.
Yes the wealthy do burry their money in mason jars. They do not lend money to small business so the economy takes off. They are so afraid of losing their money they only buy short term treasuries at negative interest rates. Corporations have a lot of cash in their coffers but they do not invest in capex anymore. They increase dividends or buy back shares. I’d rather tax’m all and invest in America’s crumbling energy and transportation infrastructure, healthcare and education… That’s what FDR did and that’s what we benefitted from during the 50’s and 60’s.
bsdgv,
I don’t think it is possible to grow an economy by raising taxes on the upper end. Rich invest their money back into the market, but when the upside is limited (heavy taxes) they invest less. This creates less jobs in the economy, and then further reduces GDP/Debt because of less jobs.
I think you are seeing a great cycle of this right now with the banks. Label the banks as “the rich”. When they don’t invest (IE small business loans, etc) the economy is bound to really slow down because their isn’t the capital in the system. In the end more people are hurt because we kill innovation and small jobs….. This is what we are having now and I think a huge reason why the recovery hasn’t taken off.
jdecar
re: Cramer and banks- I usually do not pay any attention to him, sometimes am diametrically opposed, but I have to admit that Cramer saved me a lot of money on WaMu; he actually predicted its collapse [just when I was going to bail IN for the low, low price and the huge div]. His predictions sounded just like what he is saying now about STD. You don’t suppose he could get it right twice??
That and “you know how banks love to cut their divs in hard times” [even USB did it] is giving me some second thots about STD. If one absolutely must, there are other banks with good dividends that are NOT sitting in the eye of the hurricane.
bsdgv,
I’ll admit it was a perfect storm of bad things to do in 1937.
BTW, it doesn’t matter whether you are taxing the rich or the poor. Either way, you are taking money out of the economy. Just an FYI, but the wealthy aren’t known for burying their money in mason jars. They typically invest it, which brings it back into the economy. So taxing them more does NOT help the economy, regardless of what you’ve been told.
bobisgreen,
I have yet to see “good news” that I couldn’t pop a hole in, especially since most of our so-called prosperity has come on the government’s dime.
The only truly good news I’ve heard recently was the German industrial numbers today. Unfortunately, when I pulled up some of the German industrial companies, they all looked overpriced. C’est la vie…
Guys off topic but I have a friend who works in Brazil for ABV , and he was telling me that they are working 24/7 to keep up with the demand for beer with the upcoming WORLD CUP . Do you think now is a good time to add to this stock? All South America is on fire when comes to soccer , as am I ! FORZA ITALIA!!!
> when FDR raised taxes to try and balance the budget
Not tax increases across the board. Tax raises only on the rich can only help in a depression. It undercuts cash hoarding and provides better use of national capital.
Also, cutting the spending and raising the interest rates were bigger factors in the 1937 double-dip.
bsdgv,
Please note the last paragraph from your link:
“Ironically, it is the new breed of Deficit Hawks are the ones pushing for a double dip recession. After decades of profligacy, they now seem to want fiscal austerity in the United States — just when the economy is most vulnerable. They apparently have failed to learn the lessons of 1929-33 and 1937-38. The time for balanced budgets and fiscal prudence is during the expansion phases of the economy — and not the post recession period where after an initial spurt, growth is beginning to slow.”
One of the lessons they mention there is the one from 1937, when FDR raised taxes to try and balance the budget. Unfortunately, that just sent the economy back into depression.
What do we have on tap for next year? Tax increases. ‘Nuff said.
Ed,
You know…all that good news that was ignored when Greece et al were the market’s darling (actually they still are…something like a red-headed step-sister…let Hungary or anyone else offer fresh bad news and voila!…milk spoiled! News like earning numbers, housing numbers…real estate up, durable goods up, M&As,…all ignored in the last month or so.
It says to me, economy improving…slowly, but improving. Come on you old bear; take a walk in a field of daisies! We’ll put on a CD of Julie Andrews and “The sound of Music” and “bull” our way into prosperity!
I’m definitely holding my own bottom..it’s all I have left after the last 10-years.
Barry Ritholtz has this as “good news”. (I’d rather call it “absence of bad news.”):
This is, historically speaking, normal. ECRI’s Lakshman Achuthan told Newsweek: “You always have a spurt in growth out of recession and then you throttle back. But we’d need to see a pronounced, pervasive, and persistent decline in the level of the leading indicators to start talking about recession risk.”
That “pronounced, pervasive, and persistent decline” is simply not present. Indeed, double dip recessions are actually rather rare. As Yale Professor Robert Shiller pointed out in a recent Sunday NYT article, “When inflation-adjusted G.D.P. has come out of a decline and posted three or four quarters of gains, it has never immediately begun to fall again — at least not since quarterly numbers began to be issued in 1947.”
And that is what we have had — a year of improving GDP. Following the initial surge in data off of the lows, we have entered a slowing phase of the recovery.
The key factor regarding all of this slowing data is that it is suggestive of an economy that will continue to expand, albeit at a slower pace. None of this data is highly aberrational, and none of it is consistent with past double dip recessions.
Indeed, even Capex and employment plans for the upcoming year show a potential upswing. ISI reports that their mid-year survey of CFOs shows the percentage of companies planning to boost their capex & hiring in 2010 has increased markedly. This would be heading in the opposite direction if we were on the verge of a double dip recession.
http://www.ritholtz.com/blog/2010/06/double-dip-or-just-a-soft-patch/
bobisgreen,
Was there good news at home? I must have missed that news report…
Jim,
Off topic, but do you plan on an update for Transocean? Obviously, in the short run, it’s getting killed. Should we cut our losses and sell? Anything promising to keep it?
Ed,
Not only that, but the market hasn’t been concerned with any good news at home…only with news out of Europe. If you figure this investor sentiment and psycology thing out let me know! Next thing you know the markets will jitter at some “imaginary” country or place like OZ (couldn’t resist).
See Cramer on STD article
http://seekingalpha.com/article/208432-cramer-s-mad-money-5-ways-to-save-banco-santander-6-3-10
Comments anybody?
I thought the whole Hungary issue was blown WAY out of proportion by the Media.