Market Talk

Capital Economics out today with a thorough, frank and reasoned report on the US economic outlook, taking a look at a host of areas like consumption, investment, external demand, labor market, prices and monetary & fiscal policy. The upshot? Recovery is “likely to remain muted for years to come.”

Let that sink in for a minute. For years to come. Doesn’t seem as if investors have really wrapped their heads around that concept, but the firm builds a pretty compelling case, in straight-forward terms. For example, this simple point:

The fundamental obstacle preventing a return to stronger economic growth is the damage done to the balance sheets of households and financial institutions by the housing bust and
the related financial crisis.

Household deleveraging is “still in its infancy,” the firm says, noting that since the start of 2008, household debt has fallen $470 billion, but half that decline has come because of defaults, not from folks paying off their debt. “Overall, the downward pressures on real incomes and the structural problems caused by high debt and lower asset prices mean that households will not be able to spend freely for at least the next two years.” Continue reading…

Main Street and Wall Street aren't exactly BFF these days.

Came across a line in a research report today that I wanted to share, because it gets right to the point I was trying to make yesterday in that economic-growth post. Lena Komileva, an analyst at Tuellet Prebon, wrote the following:

With economic confidence flagging in the US factory, housing and consumer sectors where will the growth impetus come from? Two decades on, the BoJ is still trying to answer that question.

So, hey, look, it’s not just me wondering that. It is not an academic question, either. It is also not a very easily answered question.

“I see nothing stimulative on the horizon as far as employment goes,” Invictus writes at The Big Picture. He notes that the durable-goods report is very closely correlated to the nonfarm payrolls report, and tends to lead it by about four months. So if durables are rolling over, and they’ve been down the past two months, well, you can see where that gets you.

Komileva says yesterday’s durable-goods report confirmed that the best growth figures are behind the economy, although at the moment investors seem focused on “short-term liquidity conditions” rather than the longer-term fundamental picture — as in, the Fed and ECB are clearly on hold for the foreseeable future as far as interest rates go, so the easy money’s going to continue to flow.

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Nobody's doin' nuthin'. What's so uncertain about that?

“The economic outlook remains unusually uncertain,” Fed chairman Ben Bernanke said yesterday in his semi-annual address to Congress. Um, what exactly does that mean? The future, by its very nature, is uncertain. So to say you’re uncertain is merely to admit reality; nobody knows what will happen tomorrow.

But to be “unusually uncertain,” well, that’s something else now isn’t it? That’s like saying, I have absolutely no idea what’s going to happen tomorrow. Europe could implode. An asteroid could strike the Earth. Lindsey Lohan could find religion in the joint. Dennis Kneale could discover what it means to be a journalist. I just really, really just have no idea.

That’s not exactly the kind of thing you want to hear from the head of the central bank. But he’s just jumping on today’s hot buzzword: uncertain. Take a look:

- “Gasoline demand has been fairly weak for the traditionally busy summer driving season, as Americans hold on to their cash in the uncertain economy,” the AP wrote on Tuesday.

- “Quest for yield continues despite uncertain economy,” was the headline on a Dow Jones story from last week.

- “The allowance for loan losses as a percentage of total loans increased to 2.81% as of June 30, 2010, up 1 basis point since March 31, 2010, due to continued economic uncertainty,” SunTrust wrote (rather stiltedly) in a press release this morning reporting its earnings.

You ask me, “uncertain” is the new euphemism for “lousy.”

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- Despite China’s placating yuan flexibility, tensions with the U.S. over the currency may still flare up, Yves Smith writes at naked capitalism. “The real determinant will be economic performance. If the growth falters and unemployment rises, which we deem likely, then the pressure on the president and Congress to Do Something will also rise. And the next window for certifying China as a currency manipulator is mid-October, temptingly close to mid-term elections.”

- As the relief thing goes these days, relief that the end of the ECB’s big financing program won’t cause havoc may be short-lived. “Now that we know we’re looking at a two-tiered existence for eurozone banks – those that can fund themselves in the interbank market and those that still have to rely on the ECB – we can guess that a rapid rise in rates could be difficult for some to take. In which case, we could still see rates like Eonia and Libor rise on fears of bank counterparty risk. It’s a tough job, this weaning-off-liquidity thing.”

- Google (GOOG) says it’s “going the extra mile” to treat employees fairly by paying for additional taxes that gay employees must pay when their partners receive domestic partner health benefits. In a blog post on Thursday, the company says it will start “grossing-up” imputed taxes on health insurance benefits for all same-sex domestic partners in the US, retroactive to Jan. 1. The progressive moves could have a ripple effect among Silicon Valley companies competing for the same talent.

- Oh, sure, blame the media. “The combined efforts of the bearish blogging network, the televised media (“What are the chances of a double dip, Mr. X?”), and the technical community (If we close a couple of points below 1040, the next stop is 20% lower), have scared the daylights out of the average investor,” writes Jeff Miller, CEO of NewArc Investments, at A Dash of Insight. “My guess is that Friday’s employment report will make matters even worse.”

- June was another difficult month for risky assets, with REITs and US stocks suffering the worst of the declines, each dropping more than 5%, while bonds performed fairly well. “But don’t let June mask the broader trend,” James Picerno notes at The Capital Spectator. “Stepping back and considering the first half of 2010, there are more losses, and deeper ones among the major asset classes.”

- “All we can say with any degree of confidence is that we see growth slowing, and await more data prior to making a recession call,” Barry Ritholtz says at The Big Picture.

- “Euroland is right to place deficit reduction at the top of its priority list,” former Dallas Fed President Bob McTeer says. “We should place it close to the top. We should be careful, however.”

- Michael Shedlock doesn’t offer a rosy interpretation to today’s jobless claims, pending home sales and manufacturing reports. “This data should be enough for anyone of sound mind to question the recovery.”

- WSJ’s Matt Phillips notes Doug Kass calls another bottom. Nevermind the fact that he missed the top, the hedge fund manager is still confident in his call.

- Only my Mets could pull off something as ridiculous as this. Thanks to a deferred buyout, the Mets still owe Bobby Bonilla 25 annual payments of $1.19 million. Yes, that Bobby Bonilla. No one ever said it was easy being a Mets fan.

The ferocious stock-market rally that saw indexes gain more than 30% in a three-month stretched has cooled in recent weeks. With the second quarter officially coming to an end tomorrow, the market is looking for actual growth to fuel a sustained recovery.

Unfortunately, that growth isn’t likely to come from the upcoming earnings season. From WSJ’s Ahead of the Tape column:

The current bull market has been fueled largely by wishful thinking. To go much further, some wishes need to start coming true.

Corporate earnings, for example, should recover one of these days. That day was likely not the second quarter, which ends on Tuesday. The season for reporting second-quarter profits starts next week , but companies might start preannouncing results soon. Wall Street analysts, on average, think earnings fell 34.9% year-over-year in the quarter, according to Thomson Financial.

First-quarter earnings beat expectations, but were still far down from a year earlier. Analysts don’t expect earnings to rebound until the fourth quarter. But stocks have risen in advance, which is not unusual.

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