Tuesday, February 05, 2013

Stocks Peak Through a Cloudy Climate

Wall Street on Friday reached highs not seen since 2007. The Dow broke through 14,000 to 14,010, and the S&P, now above 1,500, reached a new post-2007 high of 1,513. Both indexes were not far from their all-time highs, also reached in 2007 (NASDAQ peaked in May 2000 at over 5,000 before the dot-com bust dropped it below half its value; on Friday, it too at 3,179 hit near its post-dot-com-bust high of 3,197).

Our FOX Index (see chart), which tracks the distance from 15,800, the “healthy” market minimum total of a Dow of 12,000, an S&P 500 of 1,300, and a NASDAQ of 2,500, reached its all-time high of +2,902 (the Index is 5+ years old). Is the market telling us recovery is on the way? Well on Monday, the FOX Index gave up 295 points, as stocks suffered their worst single-day decline in 2013.


The U.S. economy shrank in the fourth quarter for the first time since the Great Recession ended in June 2009, with GDP (Gross Domestic Product) contracting by a 0.1% annual rate, down from 3.1% growth in the third quarter; well below the consensus forecast of 1.0% growth. But the fourth-quarter retreat mostly stemmed from lower inventories and a plunge in military spending.

Consumer Confidence 

“MarketWatch” reported University of Michigan-Thomson Reuters sentiment gauge of consumer sentiment rose in January more than expected, but remains relatively low with respondents concerned over higher payroll taxes. January’s gain made back only a portion of the sentiment drop during December, when consumers worried about the “fiscal cliff.”

Consumer confidence data from the Conference Board was less encouraging, with moods falling to their lowest level in more than a year as Americans became more pessimistic about the general economic outlook and their specific financial prospects in the wake of rising taxes. Consumers' views on the labor market were also weaker, with the "jobs hard to get" gauge rising for the first time since September.

Federal Reserve Chairman Ben Bernanke

FOX Business financial analyst Charles Gasparino, writing in the New York Post, believes:
It’s been Bernanke’s unprecedented money-printing and super-low interest rates that keep inflating stock prices while keeping banks’ borrowing costs so low that it’s nearly impossible for them not to make money. . . The price of Bernanke’s medicine, of course, is a debased currency, plus a high risk of serious inflation if the economy ever picks up steam. But that’s a big “if,” since nothing [the Obama administration] did in . . . four years on the job gives anyone confidence that the slowest economic recovery in modern history will speed up anytime soon.

Nin-Hai Tseng, in Fortune, agrees with Gasperino that Bernanke is artificially boosting stock prices. Tseng writes it all comes down to housing:
as the Federal Reserve moved to buy up billions of dollars worth of bonds to stimulate the economy, Chairman Ben Bernanke said that higher stock prices boost consumer wealth. And in turn, the extra spending helps the economy grow. While that might be true, as it turns out, home prices trump any run-up on Wall Street. . . U.S. housing market authorities Karl Case and Robert Shiller. . . found that households spend more when home prices go up[, and] they spend less when prices fall. . . the findings might explain why the stock market's rally hasn't really helped the economy grow that much faster.
The most recent S&P/Case Shiller composite index of 20 metropolitan areas, in fact, rose 5.5% over the previous 12-month period, making for the strongest yearly home price increase in more than six years. But Tseng reminds us that while the increase has helped thousands of borrowers reclaim what they originally paid for their homes, prices would have to increase much higher to save the millions more borrowers who owe more on their mortgages than their properties are worth.

No Jobs

The chart below is a sobering look at the Obama administration’s four-year job creation record. The unemployment rate increased. The number unemployed rose more than 250,000.

While the separately-measured establishment survey showed a gain of 1.2 million jobs, that was less than the labor force increase of 1.4 million--and a gain of just 25,000 jobs a month over the full four years.  Employment only made it back to its January 2009 level in July 2012, and has averaged 177,000 new jobs a month since.

And look at the declining labor force participation rate during Obama’s first term.  At 63.6%, it's at its lowest rate in over 30 years.  If jobs had merely expanded with population growth, 6.5 million more Americans would be working.

In short, Wall Street and the Obama administration just aren’t creating jobs.

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