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Seeking Alpha

Friday, February 08, 2008

Today's Coffee: Fiscal Stimulus on the Way


(Stocks in this article: AMEX: SPY, AMEX: DIA, Nasdaq: QQQQ, AMEX: DOG, AMEX: QID, AMEX: SDS, Nasdaq: YHOO, NYSE: ALU, NYSE: MCD, NYSE: TIF, NYSE: RMD, NYSE: WY, NYSE: MBI)

The market is drifting lower today as the reality of the current economic situation outweighs the progress of the fiscal stimulus package.

Fiscal Stimulus Fast Track

Congress finally passed legislation to send fiscal aid and business incentive to America. We expect the President will get that signed and sealed in a hurry, and Treasury Secretary Paulson is rumored to hope to have it delivered by sometime in May. If so, thanks for the birthday present Gipper.

The Senate held the package up for a couple weeks while they improved upon it (some would say complicated matters), but some of the hopes to extend unemployment insurance and other add-ons didn't quite survive. Apparently, the fact that fiscal spending has to be met by cost reduction was solemnly reinforced by the release of the President's budget, or semblance of one. The important takeaway here folks is that help is finally on the way, and actually in quick fashion on a relative basis for legislation.

Economic Data & Analysis

RBC Cash Index (Confidence Measure)

That rebate will not come soon enough, if recent sentiment readings are to be believed. The RBC Cash Index, which was reported this morning, offered up the lowest reading since its inception in 2002. Let me remind you that 2002 also offered little happiness. For you detail oriented folk out there, the actual reading was 48.5, compared to 56.3 in January.

We look at it this way at the philosophical Greek - when everyone realizes recession is upon us, it will likely be time to buy stocks. As sentiment continues to soften, it may yet be early. However, Main Street followed the early prognosticators like The Greek by a full year in the realization that times were getting tougher. The consensus of Street forecasters is still filing on board, but visionary economists were thinking about recession around mid-year 2007. The Fed is yet to get onboard, but Janet Yellen added yet another voice to the doomsayers today.

If The Greek is going to prove reliable as an early forecaster, maybe we can discount that fact in, and figure out when the market will actually turn with conviction. Based on our own positive sentiment now, and how bad things might get in the months to come, we're looking at one to six months before stocks start to rise in earnest. While fiscal stimulus will surely enthuse investors again in the short short-term (1-30 days), economic data is likely to continue to raise concern as it reaches the news wires. This in turn brings the market back to earth.

At the same time, Europe softens under a central bank that continues more concerned about inflation than recession. In other words, things should get tougher globally, and bear market rallies should continue to only precede the retesting of market lows. That said, we saw yet another presentation regarding the decoupling of global economies from U.S. growth yesterday at the Emerald Research Groundhog Day Conference in Philadelphia. We want to point out that while this decoupling phenomenon may hold promise for China, it offers no hope to stave off recession in the states. Finally, most of these measures compare the U.S. impact alone to Chinese GDP growth, and ignore the likely coinciding decline of Europe, and that impact on Chinese produced goods that would probably occur.

Also, while economists in America may understand decoupling, we doubt the unsophisticated investing public in the Shanghai marketplace does. So, an economic insignificance could still prove a significant driver of share decline in emerging markets, and it wouldn't be the first time.

Wholesale Trade

The monthly wholesale trade report for December showed sales lower and inventory higher on the wholesale level when compared to November of 2007. Also, the inventory-to-sales ratio looks to have spiked a small amount during the month. The long-term chart of this ratio, however, illustrates the increasing penetration of just-in-time inventory management thanks to technological benefits and management comprehension of its importance. This is a great thing, as better inventory management allows manufacturers to rebound from recession at a faster pace in current times then they might have in the past. Now, this data does not measure inventory on the manufacturing level, but it implies that its improvement has been realized across the sales chain.

We view the data supportive of the general negative forecast offered by the majority of economic data flow. It is supportive of the view that consumers are spending less on nondiscretionary items. We've yet to see a dramatic enough deterioration to start the headless chickens off and running, but there is no positive takeaway from the news either, in our opinion. That is, no positive excluding the long-term improvement of inventory management illustrated in the chart below.




Employment remains solid, though softening. As long as people are employed, there remains a floor, however unstable, to support the economy. That said, retail spending decline portends more store closures and layoffs like we saw at Macy's this past week. This in turn holds implication for the commercial real estate market. This is why The Greek argues that the government's fiscal stimulus package is a worthwhile endeavor.



Market-Moving News:


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posted by The Greek | 2:00 PM

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