The Battle Is On – Tighten or Re-Stimulate!
Friday, July 23, 2010. 9:15 a.m.
So much for the planned global synchronization of exit plans from the massive stimulus efforts that rescued global economies from the worst recession since the 1930’s.
Last winter, global central banks were in agreement, assuring markets that stimulative policies would remain in place until a durable global recovery is secured, that “pre-mature withdrawal of stimulus would be avoided, and when the time arrived the withdrawal would be in a globally co-operative and co-ordinated way.”
Sounded easy. But it’s turning out to be difficult, if not impossible.
The president of the European Central Bank said in an interview yesterday that government spending needs to be cut now, and tax increases imposed immediately, in global industrial nations. He warns that central banks that want to prolong the stimulus efforts are wrong.
Economic reports this week gave some support to that view, showing that manufacturing output in Europe in July picked up, and consumer confidence rose in Europe in July. Possibly also affecting the demands are worries over the government debt crisis in Europe.
However, in the U.S, the country’s central bank, the Federal Reserve, faces different circumstances and has a different opinion regarding stimulus efforts.
The U.S. housing market has been collapsing again since April. Manufacturing, consumer confidence, and retail sales were unexpectedly down in June and July. Having been projecting slower U.S. economic growth in the second half of the year anyway, economists, and even the Fed itself, are cutting estimates of 2nd half U.S. economic growth even further.
No wonder then that the U.S. Federal Reserve has views and planned tactics that are completely opposite to those of the Euro-zone central bank.
Fed chairman Bernanke said in testimony before Congressinal banking committees this week that the U.S. economy faces “unusual uncertainties” and needs fiscal support and stimulus to remain in place. Going further he said the Fed will be willing to take measures to expand liquidity further if the U.S. recovery stumbles more than expected.
I guess we can forget about co-ordinated global economic cooperation.
No More Too Big To Fail – Sure.
Remember how the U.S. auto-makers had to be bailed out along with the major banks? It wasn’t just that their cars weren’t selling. It was that they were also heavily involved in the financial system, through their finance divisions. General Motor’s GMAC Finance division had $billions in loans out, not just auto loans, but real estate loans, including sub-prime mortgages.
GM sold controlling interest in GMAC to private-equity group Cerberus Capital Management to raise cash in 2006. In 2008 the Federal Reserve accepted GMAC’s application to become a bank holding company so it could have access to billions of dollars of government aid. The U.S. Treasury then invested $5 billion in GMAC from its TARP bank rescue program. GMAC renamed itself Ally Financial in 2009. And in 2009 the U.S. Treasury announced it would invest another $7.5 billion in GMAC, which gave the U.S. government the controlling stake.
It had to be done. You know. GMAC, and by default GM, were in the financial system and were too big to fail.
But it won’t happen again.
Two interesting developments though. In a last minute compromise, auto-dealers’ activities in making loans to car-buyers were exempted from the new consumer protection sections of the financial reform bill.
And yesterday it was announced that General Motors has agreed to buy Americredit, a vehicle finance company, for $3.5 billion. Too big to fail coming back so soon?
Subscribers to Street Smart Report: There is a mid-week ‘Market Signals and Recommendations’ report on the website for you from Wednesday, a hotline from Wednesday evening, and a ‘Gold, Dollar, Bonds’ update from yesterday.
Yesterday in the U.S. Market.
No intraday reversal this time. The market was up right out of the gate, moved sideways at the high level for the rest of the day, and sold off only a bit in the final half hour.
Volume was light for such a big move, only 1.2 billion shares traded on the NYSE. Market breadth was very positive with 2,678 stocks up and only 407 down on the NYSE, and 2,234 up and only 446 down on the Nasdaq.
Yesterday’s intraday chart:
The Dow closed up 201 points, or 2.0%. The S&P 500 closed up 2.2%. The NYSE Composite closed up 2.5%. The Nasdaq closed up 2.7%. The Russell 2000 closed up 3.7% The DJ Transportation Avg. up 3.8%.
Yesterday in European Markets.
European markets also closed up strongly. The London FTSE closed up 1.9%. The German DAX closed up 2.5%, and the France CAC closed up 3.1%.
Asian Markets Were Up Last Night.
The DJ Asia-Pacific Index closed up 1.5%.
Among individual markets:
Australia closed up 1.8%. China closed up 0.4%. Hong Kong closed up 1.1%. India closed up 0.1%. Indonesia closed up 1.1%. New Zealand closed up 0.4%. Singapore closed up 0.6%. South Korea closed up 1.3%. Taiwan closed up 1.2%.
Markets This Morning.
European markets are mixed this morning. London is down 0.3%. Germany is down 0.4%, and France is up 0.3%.
Oil is down $.37 a barrel at 78.93.
Gold is up $2 an ounce at $1,197.
Markets In the U.S.
This week had a fairly heavy schedule of potential market-moving economic reports including those related to the important housing industry; the Housing Market Index, Housing Starts, Mortgage Purchase Applications, and Existing Home Sales. To see the full schedule of the week’s reports click here, and look at the left side of the page it takes you to.
Monday it was that the Housing Market Index, measuring home-builder confidence, plunged in July to its lowest level in a year. Tuesday it was that new housing starts fell 5% in June, worse than consensus estimate of a 3% decline. Wednesday it was Ben Bernanke making remarks in his testimony to Congress that there is “considerable uncertainty” in the economy. Yesterday, it was that Unemployment Claims unexpectedly jumped by 37,000 last week, and that existing home sales fell 5.1% in June, after May’s huge plunge, while inventories of unsold homes rose 2.5%, and the Leading Economic Indicators fell 0.2% in June.
But the market is now apparently not macro-focused on the economy going forward, but micro-focused on 2nd quarter earnings and how impressively they are exceeding Wall Street’s estimates.
The results of the European bank stress tests will be released at noon-time and may also be a market mover. European regulators are deliberately releasing the report after European banks are closed for the day, but U.S. market will be open.
Pre-Open Indicators.
Our pre-open indicators are pointing to the Dow being up 25 points or so in the early going, not meaningful for market direction.
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