Housing Stabiliizing

The National Association of Realtors reported a 2.4% increase in the level of existing home sales — the best bellwether of U.S. home sales as existing home sales outnumber new home sales by more than a 10-to-1 ratio. During May, home resales totaled 4.77 million units — up from 4.66 million in April and a notable increase form the current trough of 4.49 million units in January. The total monthly supply fell to 9.6 months from 10.1 months in April. Meanwhile, new home sales slipped 0.6% to 342,000 units in May and the associated level of inventories fell to 10.2 months. We view the May home sales data as positive and indicative of an industry that is finally stabilizing. We caution that there are still some hurdles to overcome, including rising mortgage rates, the expiration of the $8,000 first-time home-buying credit and rising unemployment. Also, sales generally pick-up during the summer since families attempt to avoid school disruptions.

Source: Argus Research - Market Outlook June 30, 2009

Soaring US Debt

U.S. debt is soaring, given the Federal Reserve’s quantitative stimulus program as well as the Obama Administration’s fiscal stimulus program. The weakened U.S. balance sheet has caused the dollar to decline, and interest rates have recently risen as global investors have demanded extra return to shoulder the increased risk. Many other nations are in a similar situation. International Monetary Fund economists do not believe that these debt-fueled government spending trends can continue indefinitely. The IMF argues that a 60% gross debt ratio (government debt/GDP) is sustainable. Given current spending patterns, this will take years to achieve. For example, to reach the 60% level in 2014, the proposed budget surplus would have to be increased by 3.5% of GDP. That’s almost $400 billion of extra revenue (higher taxes?) or reduced spending. In the meantime, expect investors to continue to demand a premium for buying government bonds.

Source: Argus Research, Market Watch 6-25-2009

Q2 Earnings Outlook

Many companies are in a quiet period, as the second quarter draws to a close and the EPS reporting season draws near. Assuming another EPS decline for the period, earnings will have declined for eight consecutive quarters. Currently, Wall Street is expecting a 16% decline in profits, according to Standard & Poor’s; we are a bit more conservative, with an estimated 25% drop for the period. But the outlook is starting to improve. In Q3, the consensus is expecting only a 5%-6% decline and then a strong rebound to profitability in Q4 (when comparisons will be easier as the market cycles the worst of the bank write-offs). Investors may get an early sense of 2Q EPS this week as Consumer Staples companies such as Kroger and Walgreen will likely report modest growth, while Tech companies such as Oracle and Jabil Circuit may report more substantial profit declines.However, investors will be closely attuned to comments from the Tech companies on the outlook for the IT business, which has been improving.

Source Argus Research - Market Watch, June 22, 2009

Headline Financial News

Fed unlikely to substantially boost bond purchases:
When officials at the Federal Reserve meet later this month, they are not expected to significantly increase purchases of mortgage-backed securities and U.S. Treasuries. However, other adjustments are possible as bond yields rise and the economy appears to be improving. While some Fed officials are more confident that the economy is stabilizing, divisions are emerging over the next step. The Wall Street Journal (12 Jun.)

Mountain of public debt could force overdue actions:
Policymakers will have to follow a tricky and difficult path to cope with government debt accumulated from stimulus spending. That is not necessarily a bad thing. They might be forced to make decisions that have been delayed far too long, such as raising the retirement age or reforming the health care system in the U.S. The Economist (11 Jun.)

U.S. sees 19 weeks of record unemployment claims:
The number of U.S. workers continuing to claim unemployment benefits set another record for the 19th consecutive week, at more than 6.8 million, according to the Labor Department. Last month, joblessness rose to 9.4%, the highest in 25 years. The New York Times/The Associated Press (11 Jun.)

FBI: Recession reveals record number of Ponzi schemes:
Hit by the same financial nightmares as legitimate businesses, Ponzi schemes are being forced into the open by the recession in record numbers, investigators said. "We have more open Ponzi scheme cases than at any time in FBI history," said Special Agent David G. Nanz, chief of the FBI's economic-crimes unit. The Washington Post (12 Jun.)

VIX - Update

After a rocky ride during which the VIX Volatility Index shot up toward 80 and has averaged 45 over the past 10 months, the popular measure of market volatility has moved back below 30 (barely) for the first time since the bankruptcy of Lehman Brothers. The markets have reacted positively to the monetary and fiscal stimulus plans enacted across the globe. The trend is pointing toward a quiet summer in terms of volatility, but investors would be wise to monitor their portfolios closely. One of the side effects of the numerous stimulus plans is likely to be an increase in pricing pressure over the next two-three years. We think hardasset based sectors such as Energy and Materials may be poised to benefit, as well as the Tech sector, which works to keep productivity high and costs low. We expect to see the VIX volatility index move within a range of 25-35 over the next several months as the market works to conclude that the recent rally is a secular move, not a cyclical swing in a long-term bear market.

I'm not sure I agree with the last sentence. I think this is more of a cyclical (short-term) rally in a secular (long-term) bear. I am very concerned that the US Bank are moving the way of the Japanese Banks in the 90's, which create "Zombie" Banks. For the US to have growth capital MOST be invested, currently the bank are not investing.

Source Argus Research, Market Watch, 6-8-2009

Bernanke Prolonged Deficit Will Choke Economic Growth

A large budget deficit will result in a sustained economic crisis, Federal Reserve Chairman Ben Bernanke said in congressional testimony. While acknowledging that Congress and the Obama administration were using the deficit to address short-term problems, Bernanke warned that "unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth." The deficit is expected to double to more than 82% of the U.S. economy by the end of the next decade. The Washington Post (04 Jun.)