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Today's Featured Article
Domestic Economic Conditions
It appears that the stimulative efforts undertaken by the Federal Reserve and the Treasury have caused the downturn in the economy to be of a shorter duration than it normally would have been. Currently there is some evidence that the economy may soon be turning around. The latest bullish surprise for the economy was the recently released February housing starts report. After a series of weaker than anticipated monthly housing reports the analysts substantially underestimated the recent housing activity. Starts were 583,000, when 450,000 were anticipated, and the more leading permits figure was 547,000, when 500,000 were guessed.
S&P500 Futures - Monthly
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In addition, we are finally starting to hear better news from some of the large U.S. banks. Citigroup said they are having their best quarter since 2007. JP Morgan Chase said the bank was profitable in the first two months of this year and Bank of America said that they were also profitable in the first two months of this year.
The February University of Michigan Sentiment Index, which is considered to be one of the better leading indicators, was a respectable 56.6, against a median guess of 55 and February retail sales were down only .1%, which compares to analyst's expectations of a .5% decline.
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Over the weekend Federal Reserve Board Chairman Bernanke on television said the U.S. recession will probably end this year and a recovery will start in 2010. He said that the biggest risk to an economic recovery is the potential lack of political will to tackle the problem. In addition, he said he believed that any plan to stabilize the financial industry must have patience and support, while maintaining that the risk of a depression has been averted.
Not all of the news is pessimistic, but a good portion of it still is. One area of worry, for example, is the concern over increasing credit card defaults. Since many consumers are using their credit cards as a "lender of last resort" source of funding, it is feared that major credit card companies will soon announce increases in defaults and delinquencies.
There is plenty of talk that consumer borrower defaults, due to an environment of rising unemployment, will be an added strain on the financial system. This fear is currently being addressed by banks and credit card companies through their efforts to limit lines of credit and cancel credit outright. Consumers continue to have a difficult time getting credit lines and loans and it appears unlikely that this condition will be remedied anytime soon in spite of the variety of government assistance plans. Consumer spending could deteriorate even more as the problems on Wall Street move through the economy. Underscoring this problem is a report from the Federal Reserve that said a majority of
U.S. banks have made it more difficult for consumers and businesses to get credit in the last three months even though financial institutions received large injections of taxpayer funds. A Federal Reserve study showed that approximately 70% of U.S. banks have tightened their lending standards for small businesses. Our analysis suggests that there will be additional banking industry related problems in the U.S to be revealed later this year.
Employment
In the week ended March 14th jobless claims were 646,000, which compares to the median guess of 655,000. February non-farm payrolls were down 651,000, which is very close to the estimate of a 650,000 decline. However, there was some disappointment with the unemployment rate of 8.1%, which compared to the guess of 7.9 %. It is true that many of the bearish factors that have exerted downward pressure on stock index futures this year have taken place during previous bear markets. A weakening employment picture always seems to be a common thread. As bad as the recent employment reports have been, keep in mind that employment statistics are considered to be a lagging indicator rather than a
leading indicator of future economic activity.
Corporate Earnings
Our research tells us that corporate earnings will remain weaker than analysts' estimates at least through the first half of this year. We are hearing reports that analysts are revising down their corporate earnings estimates for the first and second quarters of 2009 and there are an increasing number of analysts that are predicting that the U.S. economy will continue to shrink in the first half of 2009. This feeling was reinforced after the fourth quarter GDP was revised down to a 6.2% decline from the initial estimate of a 3.8% drop. This latest number was worse than the market forecast of a 5.4% decrease. The downward revision was primarily due a sharply lower estimate for exports
and inventories.
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Global Accommodative Policies
Most of the major central banks have eased credit conditions dramatically in an effort to stimulate the global economy. The Bank of England, which lowered their benchmark interest rate to a historic low of 50 basis points, is now employing an additional method to add liquidity to their banking system. They recently announced that they have established a program of quantitative easing. Quantitative easing takes place when a central bank buys debt directly from the government. In addition, the Bank of Japan announced a policy of "quantitative like" easing. Japan's central bank said they will increase their purchases of government bonds by purchasing $18.3 billion of government debt every
month. There are reports that the European Central Bank is searching for ways to employ quantitative easing even though this practice is prohibited by their charter.
The most recent support package for U.S. financial institutions was revealed on Monday, March 23rd. The Treasury Department released the details of a plan to establish what they called "public-private" investment funds that will purchase up to $1 trillion in troubled loans and securities. The initial reaction to the plan was positive.
While the additional accommodation from the Federal Reserve and other major central banks is well intended, it appears to be too little and too late. It is amazing that it was only a few short months ago that financial markets analysts were almost unanimously predicting tighter credit and immediate rampant inflation.
Federal Reserve Buying Treasuries
For some time it has become more apparent that additional stimulus other than a zero to 25 basis points fed funds target is needed to turn this economy around. Even though the Federal Open Market Committee lowered interest rates by 75 to 100 basis points at their December 16th meeting, it appears to have not been enough. As early as last December some analysts were saying that the Federal Reserve should start buying Treasury issues in an effort to keep longer term interest rates low. This feeling gained favor when the FOMC mentioned the possibility of buying Treasuries in their statement following their meeting on January 28th. Within their statement they said "The Federal Reserve
continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets." More recently we were hearing that at least three of the top Federal Reserve officials were in favor of buying Treasury issues. Well, it is obvious now that more than a few voting Fed officials were in favor of
implementing a quantitative easing program. At the conclusion of the March 18th FOMC meeting the U.S. central bank, in a surprise move, announced they will buy up to $300 billion worth of longer term government debt over the next six months and increase purchases of mortgage related debt.
Third Quarter Bottom
The big question remains: which stimulus plan will be the one that finally turns the market around? Our experience has shown that the stimulus plan or government intervention that finally reverses a market trend is the one that takes place when the market is ready to turn around on its own. History has shown that it takes six to nine months at the minimum for a policy change to have an impact on the economy. Our analysis suggests that whatever stimulus package or intervention that we have in the third quarter will be the one that finally "works." Our longer term outlook, which is becoming more optimistic in light of the new quantitative easing program, is telling us that we can expect
massive buying opportunities to develop in stock index futures in the third quarter of 2009.
If you would like more information on this article, please contact Alan Bush at 1.800.243.2649 or email him at alan.bush@archerfinancials.com.
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright © ADM
Investor Services, Inc.
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About the Author
Alan Bush has been a commodity analyst since 1976 focusing on the fundamental and technical aspects of stock index, interest rate and foreign currency markets. He has authored several articles for Stocks Futures and Options magazine and produced the "Futures Tech Focus" program, which is a technically based market outlook.
Alan served on the faculty of Oakton College as instructor of a course entitled, "Principles of Technical Analysis." He has been interviewed on many national television programs, appearing on the Nightly Business Report, CNBC, CNN Moneyline, Reuters Television and Web FN. In addition, he has been frequently quoted in The Wall Street Journal, USA Today, The Bond Buyer and the Chicago Tribune and has been regularly interviewed on Chicago's WMAQ radio business reports.
Alan can be reached at (312) 242-7911, or via email at
alan.bush@archerfinancials.com. | |
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