Late Breaking News:
The Chinese decided to raise the tax on stock market trading profits. As you might gather, this did not provide a strong backdrop to trading in China overnight. Their market opened down hard but recovered quite a bit in the early going (sound familar?) but now a few hours into the trading day the index is down over 6% and the rest of the Asian market is having some trouble, too. Our stock futures are trading down ever so slightly this evening but that could change by morning if China's market drops much further.
From earlier this evening:
After a long holiday weekend, the bulls were particularly anxious to start buying on Tuesday, especially the NASDAQ type stocks (and the RUT, Russell 2000). In fact, the buying actually spilled over to the blue chips and the Dow was sporting a 60 point pop about a half hour into the session. From those highs the market drifted lower the rest of the morning with the Dow sinking 35 points into negative territory. From there, the buyers came in to run the prices back up into the closing bell. The NASDAQ Comp ended with about a 0.5% move while the blue chips were only up slightly.
Still, the market did rally on Tuesday. The move doesn’t really say much because the prices stayed below last week’s highs. Those highs are not very far away so we keep a close eye on them for signs that the market will try to move back to them. We would think there is significant resistance at least in the NASDAQ. The Dow may try for another high which would not surprise anyone, but we would again like to see the other indexes fall short of relative highs to provide more evidence against a further rally.
This is the end of the month period when stocks are generally stronger. The jobs’ report is looming large on Friday as the start of June brings a weaker seasonal period, remember the “sell in May and go away” mantra.
The fourth largest homebuilder announced that it had not laid off enough workers over the past year and had painfully decided to lay off another 16% of its workforce, taking a $40 to $50 million charge. This news follows the 25% reduction that has happened already. The CEO said that “The homebuilding environment remains difficult and our current overhead levels are structured for a business that is larger than the market presently allows.” That doesn’t make it sound like a bottom is going to be in place any time soon.
Deflation Part Four:
To recap from last week, the current credit expansion has provided for the great asset inflation era with the price of homes and stocks moving up. Since this type of inflation does not warrant the Fed’s attention, it also goes unpunished. We think that asset inflation is the most difficult because it normally has the ability to drive the price of everything up. This includes the asset inflation itself because liquidity naturally flows to an asset because it’s going up.
Credit expansion has occurred simply because it has been easy to come by. You read about the mortgage loans that were being issued over the past year or so, with little or no documentation. In order for the residential real estate market to boom the way it did, there had to be a catalyst for it and the 1% Fed funds rate provided for low mortgage rates.
A credit expansion can only sustain itself with more and more credit and at some point it just can’t be done. This is the point at which we now find ourselves in, with the mortgage money getting tighter by the day. We know there is still plenty of money floating around to buy houses but the subprime and so called Alt-A money is slowly fading.
As you know, there is another driver of credit expansion and that is the government. The budget deficit has created a large amount of money that has been subsidized by many foreign governments. With the US trade deficit being what it is, very large indeed, these foreign governments have a lot of dollars flowing into their countries. The natural thing to do has been to send those dollars back to the US in the form of buying US Treasury bonds or actual US assets.
We believe this flow of funds may start having a different effect as our economy fades a little and the trade deficit begins to shrink. You are thinking that the Americans will continue to buy no matter what. Well, we think the contraction in the real estate market will hinder them in trying to purchase anything they want.
The other issue is if foreign central banks, or OPEC for that matter, decided that they may not want to deal in dollars. This is starting to occur already even without a reduction in the trade deficit but if the trade deficit started to shrink, there would be even less reason for these parties to continue to pursue dollar or dollar based assets.
The complacency on this issue is not a comforting thought but we do want to situate ourselves properly as we watch the US stock market drift along. The discussion is all about global warming, something that might be a problem in 50 years. Where is the discussion about the financial problems facing the US and its markets?
Dow Industrials: 13,521.34 +14.06
QQQRS: 0.18 bid
QQQRT: 0.36 bid