Tuesday, September 6, 2011


Can the U.S. stock market benefit from being a relatively safe haven?

While there might be good fundamental reasons to be very negative today, if we were ever at or near a sentiment extreme, it is likely now.

It has been said that the E.U. is considering a suspension of financial institutions' mark-to-market, as was done in the U.S. over two years ago.

The August Non-Manufacturing ISM was higher than expected at 53.3 vs. a 51.0 estimate, 52.7 in July and the long-term average of 53.8.

In terms of the components to the release, orders and backlogs were higher, business activity was slightly lower, and employment dropped (but still remained above its long-term average and consistent with 100,000-125,000/month private jobs increases).

If we combine the non-manufacturing report (this morning) with the previously reported manufacturing release, we are at 53.0, which is consistent with real GDP growth of close to 2%.

By contrast, according to many strategists the market is pricing in at least a two thirds chance of recession.

The problems over there since Friday (on top of the weak domestic jobs report over here) were multiple:

* Greece is racing toward default. (As a reflection, the yield on one-year paper exceeds 80%.) Italian and Spanish yields widened measurably.
* Eurozone growth has slowed.
* Numerous roadblocks have popped up in the attempts to address the sovereign debt crisis in Europe (legal, lack of coordination, political, a fragile European banking system, etc.)

The hard truth about easy money is that it has, for many reasons, lost its effectiveness over time -- more and more cowbell is needed to produce less and less of an economic impact.

Hawkish Richmond Fed President Jeffrey Lacker similarly related this view recently:

My sense is that more monetary stimulus at this point would likely show up almost entirely in higher inflation with very little constructive influence on growth.

My consistent theme is to err on the side of conservatism. While I still am of the view that the U.S. stock market made its yearly low in August, the negative feedback loop threatens domestic and European growth.

We must now closely monitor whether the emerging negative sentiment hits the hard economic data in September.