It Looks Like It is All Unraveling

Morris Segall      Barack Obama, elections, foreign policy, Jimmy Carter

Today looks like one of those watershed events which could mark a defining moment in the Presidency of Barack Obama. First, the President is forced to fire his hand picked general leading the war in Afghanistan for at the least conduct unbecoming and at the worst insubordination. Second, the Federal Reserve Board at its monthly meeting described the economic recovery as “proceeding”, i.e. stalled and weakening. Today’s Fed statement confirms for us the change in our economic and capital market outlooks we have been expressing in our prior blog articles beginning last month. We have believed the situation in Europe is serious and will get worse and it is having a depressing effect on the capital markets and in turn our economy.

In our website article, “The Election”, November 17, 2008, we commented that Barack Obama and the Democrats in Congress had a “short window to pacify a desperate electorate” and risked enacting programs that had “short term palliatives at the risk of eroding longer term U.S. financial strength and flexibility”. It would appear that window of opportunity to turn the economy around and fulfill the mandate of 2008 is about closed. The angry electorate of 2008 is absolutely livid in 2010. Voters are angry with the “bailouts” of Wall St. and corporate America while “Main Street” still struggles with unemployment, stagnant income and surging health care costs. The lack of success in the wars in Iraq and Afghanistan add to voter discontent. The object of voter ire is President Obama and his party that look disconnected and ineffectual. The President’s style of eloquent speeches but lack of decisive follow through is wearing thin on the American electorate.

Nowhere does the President look more ineffectual than in the arena of foreign policy. We commented in our website article on “The Obama Foreign Policy…”, January 7, 2010, the President was in danger of committing serious mistakes in Afghanistan by forcing a short timetable for military victory on the U.S. military. The President’s Afghanistan policy was clearly not supported by military leadership in the field who felt they were given an impossible task predestined for failure. No military officer accepts that. The shock in General McChrystal’s dismissal is the fact that he and his aides were so publicly contemptuous of the President and his administration. You have to go back to Vietnam for this kind of military “mutiny” to the President’s war policies. On the heels of foreign policy setbacks in the Middle East, soured relations with Turkey and Brazil and now a disconnect on economic policy with Europe, the Obama foreign policy is notably devoid of success and apparently now losing respect.

The loss of confidence in the President and his party to successfully deliver results domestically and overseas is in our opinion,  making the Obama presidency resemble that of Jimmy Carter and we believe will have similar electoral results in this year’s congressional elections and the presidential election of 2012.

Morris R. Segall

May Retail Sales: Unexpected weakness

Morris Segall      consumer spending, disinflation, wealth destruction

May retail sales reported this past Friday showed a surprising decline of 1.2% from upwardly revised April levels. We usually would would look at the May decline as a normal respite to strong gains in the previous month. So while retail sales, excluding food and gasoline sales, did increase significantly (.7%) in April, the comparable decline in May sales amounted to 1.2% and the declines encompassed many areas of discretionary consumer spending including building materials, clothing and autos. In addition, the level of retail sales in May, again excluding grocery and gasoline station sales, was also approximately .5% lower than comparable retail sales reported in March. After surging through the first four months of this year, consumer spending may be stalling, at least temporarily, as a result of the dramatic and severe decline in the stock market last month. We commented in our last blog posting, June 6, 2010, that “ the pace of the U.S. economic recovery could be retarded by the current stock market decline”.  Combined with the expiration of the home buyer tax credit and impending expiration of extended federal unemployment benefits, consumer spending could be at least taking a hiatus if not a more serious retrenchment. We expect consumer spending will rebound from May levels over the summer as Americans take vacations this year and increase domestic travel  due to lower gasoline prices and overseas travel due to the strong value of the U.S. dollar.

 The question is will it and if so by how much. Consumer incomes will have to grow consistent with the .3%-.4% rates of the March-April periods to provide the resources necessary for consumers to step up their spending. The psychology of consumers facing new wealth destruction from the stock market, suppressed equity in their homes and new fears regarding economic and job growth could cause consumers to become cautious again. A cautious consumer will not fill the void being created by abating Federal stimulus and aid programs.

At this time we are sufficiently concerned about the recent confluence of negative events in Europe, the worldwide capital markets and the suppressing effects on U.S. economic growth to revise downward our projections of  U.S. and overseas economic growth for this year and next. In our April 4th blog posting, “Happy Days Are Here Again…”, we projected U.S. economic growth in the second quarter would be in the range of 4%-6% largely based on the surge in consumer spending we were detecting coming out of the severe winter. Indeed, consumer spending in the first quarter accounted for 2.4% of the 3% growth in the first quarter, the highest level since the onslaught of the recession. We now believe second quarter GDP growth in the U.S. will range between 3%-4% due to lower expectations of consumer spending from our previous forecast. We continue to project total U.S. GDP growth for 2010 of 3% but within a range of 2.5%-3% rather than the 3%-3.5% previously projected. For 2011, we are using a projected range of 1%-3% for U.S. GDP growth next year, down from our previous expectations of 2%-3% growth and we are telling clients and audiences that this revised outlook is subject to further change as developments here and in Europe become clearer. Commensurate with our lower expectations of  U.S. and worldwide economic growth this year and next, we now project disinflation in the U.S. over the remainder of this year and into next as the upward pressure from rising commodity prices seen in the first half of this year reverses from the recent fall in energy and industrial commodity prices.  

We will publish a more detailed discussion of our current economic and capital markets analyses and forecasts on our website, www.spgtrend.com.

Morris R. Segall, CFA, CIC

May Unemployment Disappoints; So does Europe

Morris Segall      capital markets strategies, Economic Growth, European sovereign debt, May unemployment, stock market

Friday’s unemployment report for May was just what the stock market didn’t need- a disappointing jobs creation picture. Total nonfarm payrolls grew by a little over 400,000 in the month of May, but virtually all of that increase was due to temporary hires for the U.S. Census. Most of those workers will be terminated by the end of the summer. Only 41,000 jobs were created in the private sector in May according to the business establishment survey, well below the 150,000+ jobs expected. We have been commenting in previous blog postings about the increasing inaccuracy of the monthly business establishment survey in reporting job creation. Most of our criticism has been focused on the erroneous seasonal adjustments and the errors in reporting job creation in the small business sector. Most of the monthly reporting errors result in overstating job creation that are then reversed when the Labor Dept. makes its semiannual revisions in the winter and summer of each year. However, this time we believe the May jobs report is actually understating job creation. Empirical data and other employment measures point to a larger job creation in May than the 41,000 reported on Friday. We believe the May number will be revised upward in subsequent monthly reports over the summer. But that is where the good news on jobs ends. First time unemployment claims are “stuck”  around 450,000, far too high to indicate strong  job creation. In addition, other measures in the May jobs report continue to point to high levels of discouraged and underemployed workers and most discomforting,  a continued high level, nearly 50%,  of workers unemployed are jobless for 27 weeks and longer. We estimate that we are building a “hard core” unemployment rate of over 6% as a result of the recession and the historically weak economic recovery.

Also on Friday was news from Hungary that their fiscal situation was becoming dire to the point of possible debt default. The announcement was a surprise since it was assumed the IMF bailout of Hungary last year was sufficient to avoid default. The prospect of another European country sliding toward debt default was sufficient to break the euro below critical levels of $1.20 on Friday and raise the threat levels again of more widespread financial crisis in Europe. The Hungarian announcement created new strains on the financial system in Europe with lending spreads and costs of credit default insurance rising again. The situation in Europe is becoming more alarming as default risks spread from Southern Europe to Central Europe and likely to Eastern Europe next. The austerity programs being enacted by the governments in Southern and Western Europe and the U.K. will exacerbate the problems in Central and Eastern Europe that depend on exports to the Eurozone for much of their GDP growth. The financial system is now on heightened alert again to see where this latest emergency in Europe will lead. The outlook for containing the European sovereign debt problems is becoming more bleak.

The combination of a weak employment report and the dire news from Hungary, reversed a stock market rally that began before Memorial Day and carried strongly through last Thursday. The market decline on Friday eroded market technicals and has cast doubt on the view that the market decline in May was a correction and not more serious. We have stated in our most recent blog entries that we believe the market action in May signals a “Sea Change” in the international capital markets cycle. The market action on Friday confirms that view for us. We now believe we are moving towards a short-intermediate term trading range on the Dow 30 Industrials of between 9,000-11,000. We reiterate our belief that the market highs recorded at the end of April-early May, are the highs for this market cycle. While the U.S. economic news has been improving since last summer, going forward, the economic news becomes more problematic as Federal stimulus recedes and the stock market itself becomes the main story in the economy. It is estimated a trillion dollars of market value was lost in the month of May and June is extending that. The market decline is replacing risk assumption with risk aversion and when investors see their portfolio values at the end of May, there is the fear consumer spending will retrench just when the economy needs more robust consumer spending. We believe it is possible the pace of the U.S. economic recovery could be retarded by the current stock market decline. We  continue to stress defensiveness in our capital market strategies and emphasize U.S. dollar denominated assets.

Morris R. Segall, CFA, CIC