Market Talk

- US GDP growth at 2% is unsustainable; economy either has to break higher or fade lower sooner than later, Stu Hoffman, chief economist at PNC Bank, tells Big Picture blogger Barry Ritholtz. “Just as a 747 cannot maintain altitude at 200 mph, neither can the economy sustain a 2% GDP,” Hoffman says. “So the captain of the plane must increase thrust and fly faster, or lose altitude and land. The economy…behaves the same way.”

- There were warning signs about former H-P (HPQ) CEO Mark Hurd that investors and the media largely ignored, writes Eric Jackson, founder and president of Ironfire Capital. He cites the “piggish behavior [Hurd] and his executive team were exhibiting at the expense of H-P shareholders,” in the form of excessive compensation and lavish perks in last few years. “In my book, if you’re piggish about the small stuff like expense reimbursements, you’re going to be piggish about the big stuff.”

- Disappointing jobs report last week as well as unfavorable monthly revisions don’t bode well for stock market and economic recovery. “Pending a change in policy mix which is anchored by meaningful structural policies, the equity market is unlikely to sustainably regain its composure and yield levels will continue to surprise on the downside,” says PIMCO CEO Mohamed El-Erian.

- S&P 500′s short-term uptrend remains intact. “Looking at the 15-day intraday chart, the index held the bottom of its uptrend channel nicely,” Bespoke Investment Group writes, noting technicals look pretty good this week. “It looks like traders are going to try and at least test the highs made last week.”

- “If you’re on Wall Street, and you’ve seen the stock markets recover and the banks go from virtual insolvency two years ago back to record profit numbers now,” then you may think the recession’s over, Rolling Stone’s Matt Taibbi says. But if you’re looking for a job “somewhere outside the Beltway and/or lower Manhattan, and you’re noticing that the only easy job openings this year were temp gig taking census surveys (and even those have dried up), then your view of things is going to be no way the recession has ended.”

- Investors should embrace the uncertainty and turmoil plaguing the economy rather than whine about it, Justin Fox writes at Harvard’s Business Review blog. “Think about the feelings of relative economic certainty and confidence that prevailed in 2006, or in 1999,” says Fox. “Investing right now may seem scary and dangerous, but chances are that it’s a lot less dangerous than investing three or four years ago.”

- Macroeconomic Advisers changes its stance on when it sees the Fed boosting rates, shifting to late 2011 from mid-2011. “Given our expectation that any downward revision to the forecast will not be ‘appreciable’ and that the recovery is not ‘faltering,’ we do not anticipate either easing steps or changes to the policy guidance,” Macroadvisers blog notes.

- About that whole “cash on the sidelines” argument, John Hussman says it’s nonsense. “Analysts are pointing to an apparent pile of corporate ‘cash on the sidelines’ as if these holdings of debt securities somehow make new corporate spending more likely.”

- AOL’s Daily Finance blogger Peter Cohan wonders how effective former H-P CEO Mark Hurd really was, especially since H-P’s cash and short-term investments have slipped from $13.9B to $13.3B and it’s long-term debt has jumped from $3.4B to $14B.

- Speculation swirling that the Fed this week could announce additional measures to boost the economic recovery. But University of Oregon economics professor Tim Duy isn’t so sure. “My baseline expectation is that the FOMC statement acknowledges the weakness in recent data, but leaves the current policy stance intact.”

Hewlett-Packard shares plunged in the first full trading session after an ethics scandal prompted the surprise departure of CEO Mark Hurd. But amid Monday’s steep decline, the mood surrounding the stock remains mixed. Dow Jones options guru Brendan Conway reports (subscription required):

Overall, Hewlett-Packard options trading leaned toward bullish call options, with traders picking up nearly 165,000, compared to 142,000 puts, according to Track Data. Trading was brisk as far out as November contracts, suggesting some investors expect H-P’s executive reshuffling to have a far-reaching impact.

There was plenty of bearish or protective trading as well. Most of the activity crossed the tape in small blocks typical of retail investors.

“The day’s trading reflected the uncertainty of who’s going to take over,” Oppenheimer & Co. Chief Options Strategist Michael Schwartz said.

H-P shares closed down $3.70, or 8%, to $42.60, a new 2010 closing low. Today’s decline marked the largest one-day dollar drop since September 2001 and largest one-day percentage decline since August 2004. HPQ has now fallen for five straight trading days and eight of the last nine. And the Dow, which finished up 45 points to 10699, would’ve gained 73 points if H-P had merely finished flat.

Analysts remain positive on H-P, but somewhat cautious on the stock.

“While we continue to like HP’s worldwide reach, leadership position in multiple technology sectors, these events (and sudden nature of the announcement) will cast a shadow over the story and the stock until a new CEO is chosen,” Janney Capital says.

Susquehanna says Hurd’s ouster “substantially” increases “operational risk” at HPQ. Firm shaves 12-month target to $50 from $58. Stifel Nicolaus also keeps HPQ at buy, but cuts target to $53 from $62 and says shares “likely to trade sideways until a CEO successor is named.”

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It’s pretty remarkable that the stock market was able to just ball up that jobs report Friday, toss it away, and say, eh, the Fed’ll take care of everything.

Stocks rise today ahead of tomorrow’s FOMC meeting, on the assumption the Fed will “do something” that’ll make it all better. Or at least keep the monetary spigots wide open. After all, the Fed’s already unloaded the revolver, the automatic, the Tommy Gun, the bazooka and the Howitzer. How much more ordinance do they have left?

Regardless, DJIA rises 45 (0.4%) to 10699, S&P 500 gains 6 (0.6%) to 1128, Nasdaq Comp rises 17 (0.8%) to 2306. NYSE volume at 3.1 billion shares is nearly comatose. Over in Treasurys, 10-year yield still around 2.82%, and two-year at 0.53%.

With the S&P right around key technical levels between 1125-1130, tomorrow could be a set-up for some memorable pyrotechnics, depending upon what the central bank does.

It’s remarkable that as aggressive as the Fed has been, Gluskin Sheff’s David Rosenberg says, there’s a perception that it hasn’t done enough. “To…find out that more needs to be done, especially considering the massive degree of fiscal stimulus and the vast array of programs aimed at stabilizing home prices and easing mortgage debt servicing burdens, just about says it all,” he writes. “There’s no sense being in denial. It is indeed Japan all over again, let’s just hope the deflationary malaise doesn’t last as long as 20 years.”

Elsewhere in the marketplace, Hewlett-Packard loses 8% in aftermath of CEO’s ouster. Freddie Mac loses $4.7B, hits up Uncle Sam for another $1.8B.

Fear not the double dip, citizens, as strong second-quarter corporate profits should allay those concerns. That’s the spiel from at least a couple of the Street’s strategists today.

I’m not so sure.

Oppenheimer’s Brian Belski says strong earnings are “debunking” double-dip fears, and he notes that if one looks at EPS expectations by sector, “you find that the economically sensitive cyclical areas are the ones that are expected to grow the most” this year and next. He continues:

In other words, analysts covering these companies day to day expect them to grow at a faster pace. So while many economists  and investors worry that our economy is headed for another downturn, those closest to corporate management of S&P 500  companies seem convinced this recovery is for real.

I see a different message in second-quarter profits. Rather than signaling a sustainable economic recovery, the results tell me that American companies did a tremendous job of reducing their costs and size of their operations in order to meet sharply reduced demand. And the results look terrific when stacked up against weak year-ago comparisons.

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If we only had some customers.

Edmund Phelps makes the argument in a NY Times op-ed over the weekend that the economy is faltering in many aspects, but a lack of demand isn’t an issue to worry about.

The steps being taken by government officials to help the economy are based on a faulty premise. The diagnosis is that the economy is “constrained” by a deficiency of aggregate demand, the total demand for American goods and services. The officials’ prescription is to stimulate that demand, for as long as it takes, to facilitate the recovery of an otherwise undamaged economy — as if the task were to help an uninjured skater get up after a bad fall.

The prescription will fail because the diagnosis is wrong. There are no symptoms of deficient demand, like deflation, and no signs of anything like a huge liquidity shortage that could cause a deficiency. Rather, our economy is damaged by deep structural faults that no stimulus package will address — our skater has broken some bones and needs real attention.

Phelps argues that structural deficiencies are plaguing the economy. Short-term pessimism is running rampant, which is hindering companies from increasing capex spending. He also notes business investment relies on innovation, which isn’t happening right now, especially with unemployment remaining at a stubbornly high rate. From Phelps:

Sustained business investment, in turn, rests on innovation. Business cannot wait for discoveries in science or the rare successes in state-run labs. Without cutting-edge products and business methods, rates of return on a great many investments will sag. Furthermore, innovation creates jobs across the economy, for entrepreneurs, marketers and buyers. State-led technology projects do not.

All are decent points. But Phelps’ final line reads like a dagger that ruins his entire argument. “Rather than continuing to argue over solutions to a problem we do not have — low demand — the country needs to focus on fixing the structural problems that, unresolved, will stymie the economy over the long haul.”

It seems like wondering which is the true culprit of the economy’s problems — sustained business investment or low demand — is like arguing which came first, the chicken or the egg? Completely disregarding low demand as one of the key issues plaguing the economy is short-sighted, at best.

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More and more, I’m becoming convinced that the real harbinger of any recovery and future economic strength will be not only employment growth, but wage growth as well. Now that the great credit-mania has ended, it’s become clear that wage growth in the United States has been lagging for quite some time, and that people who rely mainly on their incomes are struggling.

Rising wages are a sign of strong, sustainable corporate profits, they are a sign of a healthy and growing working class, they are a measure of buying power for those same workers. Unfortunately, we don’t have those signs right now, as Phil Izzo reports over at the Real Time Economics blog:

Even though prices declined last year — down 0.2% from a year earlier as measured by the national price index for personal consumption expenditures — incomes fell even more. On average, personal income dropped 1.8% in 2009, following a 2.7% increase in 2007. Income declined in 223 metro areas last year, increased in 134 and was unchanged in nine regions.

In areas that saw gains, most of the increases came from the government in one way or another. In 77 of the 134 regions that saw incomes increase, the growth came from transfer receipts such as unemployment benefits or Social Security payments. In most of the remaining 57 metro areas, the gains were concentrated in the government sector, the Commerce Department said, including strong growth in military earnings.

You can have job growth that comes with falling wages, as in the case of the concessions the UAW made to the Big Three. Sure, there are employed auto workers, but their standard of living is a sharp downgrade from what previous employees experienced.

It’s not just wage growth, either. It’s got to be wage growth that outruns inflation, otherwise we’re just spinning our wheels or losing ground.

This ain't the Hall of Justice, kid.

You didn’t miss much between Friday’s afternoon buying spree and this morning. In times of trouble, the market looks to the Federal Reserve to come to the rescue, to fix all the problems, to exercise its infamous put.

It’s like they’re the Super Friends or something.

The jobs report was so bad that the stock market’s convinced the Fed’s going to do something at tomorrow’s FOMC meeting. It is now obvious to just about everybody that the recovery phase of the recovery is over, and there was less recovery than lingering problems. Uncle Sam didn’t fix enough things for all the money he blew through, and now it’s time for, well, something.

The stock market is pricing in action; that’s what Friday’s late rally was about, and that’s what today’s gains are about, here and abroad. The market does this from time to time; by piling so many bets on one number on that roulette table, the markets are trying to force the Fed into doing their bidding, by setting up a very ugly sell-off should the central bank assets its independence.

If the Fed doesn’t do anything, if they issue one of their famous one-the-one-hand, on-the-other-hand statements but don’t implement some new program, I think the stock market will take that very badly. If, on the other hand, they do start some new asset-buying program, “QE Light,” I’ve heard it called, you may get a rally tomorrow.

The problem, of course, is how long it can last, because when the Fed’s actions can reasonably be described as a Hail Mary pass, well, that’s a pretty bad sign right there.

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The stock market is telling you that the Fed is going to make everything better, but the bond market is telling you everything’s actually worse than you think. We look at that and the “year of the chicken” on today’s Markets Hub.