Up and Down Wall Street
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SATURDAY, SEPTEMBER 29, 2012
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A Whiff of the Cliff
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By ALAN ABELSON
Stocks have rallied so far this year, but the fiscal cliff is a mere three months away, and miracles can only last so long.
Even in this age of rage, miracles can happen and did last Thursday: After a fairly miserable slump, the stock market showed it can go up! We kid you not. In seeking a cause for this phenomenal about-face many of the Street's most keen-eyed observers fingered Spain's vow to be a good corporate citizen and mend its profligate ways, which they seized upon as a favorable omen not only for Spain, but for the future of the staggering European Monetary Union as well. Others gave the nod as a bolstering influence to expectations that China would get its act together long enough to try to pump some life into its faltering economy.
Our own view is a mite different and, we trust, nowhere near as shopworn. We suggest that investors got a shot in the arm from the news that the NFL settled its lockout of the refs by kicking in some more dough and firing the fill-ins whose attention often seemed elsewhere, especially in keeping track of who did what on close plays. It dawned on Wall Street that it's just the kind of thing that got the masses all riled up and if, heaven forbid, rigid accountability for bad calls spread to the investment arena, it would lead to wholesale sacking of strategists and analysts. Thousands of poor souls would find themselves adrift without notable skills to perform even the most humble of tasks.
Normally, if something as awful as that happened, we would take due note and urge the swelling ranks of on-the-dole investment pros not to lose heart. For opportunities for employment are still extant, provided you know where to look for them. By way of example, we would cite a very recent case in which a prisoner sued because he was forced to share his cell with cockroaches and mice.
While the court's ruling was to dismiss his suit on technical legal grounds, it envisioned the possibility that such conditions might be a violation of the Eighth Amendment to the Constitution. In which case, the infested cells would have to be cleaned up and necessitate the hiring of workers. The only catch, it occurs to us, is whether laid-off Street people are sufficiently adept in the use of a broom or a shovel to qualify for the job.
But, alas, miracles come with a time limit these days and it took only one session for stocks to resume their lackluster ways and Friday ended on a down note, although a spectacular September put a gloss on the quarter as a whole. The good old Dow was up almost 3% last month and added more than 500 points in the July-September stretch. The S&P 500 was up 2.42% in September and rose nearly 80 points in the quarter; the comparable numbers were 1.6% and 181 points for Nasdaq, and 3.1% and 39 points for the Russell 2000.
In recent months (and not for the first time since equities began their astonishing climb from the ignominious lows set in the frigid depths of March 2009), a gap, often huge, opened between the buoyant mood of the markets and the glum state of the economy. On the latter score, although the most recent week's tally of new claims for unemployment insurance fell by an impressive 26,000, hiring is anything but robust. Durable-goods orders turned in a miserable performance, dropping an awesome 13% in August, reflecting a precipitous decline in aircraft orders, while the critical nondefense capital equipment, which includes stuff like computers and telecommunications, managed the feeblest rise.
Consumer spending was a tad higher in August, with the bulk of the gain accounted for by rising prices for food and at the pump. For the first time in almost a year, disposable income, adjusted for inflation, was lower, and to make ends meet households were chipping away at their nest eggs, as evident in the decline in the savings rate to 3.7% from 4.1%.
.
Second-quarter GDP, alas, was revised downward to 1.3%, from the previous gauge of 1.7%. All of which at the least should temper expectations (that weren't very juiced-up in any case) of what September's jobs report, due for release on Friday, will show.
Little wonder, really, that investors have gone from joyous to jittery as the spate of dour news has flushed out a new wave of negativism among the Street's professional kibitzers. And little wonder, too, that the Fed felt the need to do something to puff up a rapidly deflating recovery. What gives us pause before joining the funereal chorus prating on about the sins that are destined to issue from the third round of quantitative easing is the fact that no one has a good word for it. Even to a congenital skeptic like ourselves, the blamed thing deserves more than a week to prove its worth or worthlessness. Contrary opinion is great; lopsided opinion, chances are, is anything but.
.
IF YOU'RE DESPERATE FOR SOMETHING to worry about -- or even if you're not -- keep your eye on the fiscal cliff, a mere three months off and drawing irrevocably closer each and every day. We've been babbling on about it for quite a spell now, and we can't say the passage of time has witnessed any significant progress on the part of the powers-that-be to make its prospective arrival any less daunting.
.
Despite their pronounced tendency to fall prey to mundane or more immediate distractions like buttering up possible clients or striving to find the next big momentum winner, portfolio managers have cobbled together some contingency plans against the day the game changes with the arrival of the cliff. And corporate types have been especially sensitive to the economic drag its advent likely would bring, which explains in no small way their affection for piling up cash rather than, say, piling into capital investment.
Consider the foregoing a prologue to a brief recounting of a recent report by Bank of America Merrill Lynch on–by gosh you've guessed it -- the fiscal cliff and, more specifically, its potential impact on the global economy. We won't keep you in suspense, the impact will be ponderable. Or, as the report puts it succinctly, it is shaping up as the biggest "known unknown" (pace Donald Rumsfeld). U.S. businesses, the firm's global economic team says, are pulling back, which could mean a softer fourth quarter than the consensus is forecasting.
From the standpoint of international, cross-border contagion, the report warns, jumping off the cliff would administer "a major shock" to economies around the globe. From where we sit, that could prove to be a major understatement. The report notes that U.S. growth is largely driven by domestic demand and so is apt to have "larger spillover effects on the rest of the world." And, it cites researchers at the IMF as finding the potential size of cross-border spillovers has measurably increased in recent years.
It also dubs the fiscal cliff "a wholly U.S. -- made crisis." Which means that U.S. fiscal contraction would hit "the global economy as a brand-new shock." And while the firm posits that Washington may be able to temper some of the fallout from the cliff, in light of the parlous condition of the global economy, a 2% of GDP fiscal pullback would still inflict serious pain to outsiders.
If U. S. growth suddenly weakened, the report asserts, global activity would be affected through a trifecta of channels consisting of confidence, finance, and trade. In terms of trade, the most exposed economies are those of Canada and Mexico. But trade takes a back seat in importance to confidence and finance. European exposure is particularly acute. The euro area is caught in a deepening recession, slowing growth elsewhere, and further slippage in the global economy would obviously hurt all the more.
According to the report's reckoning, European growth weakens quickly following U.S. fiscal contractions, but typically, the eventual impact is moderate. One has to wonder, though, given the current bedraggled state of so many of the Old World's economies, if this reaction would sedulously follow that script. Forgive us our doubts.
In any case, the report attests to the close relationship between U.S. and global conditions. And it cautions that "a tense run-up to the cliff could spark a broad market reaction similar to the correction seen at the 11th hour of last year's debt-ceiling agreement." Which, in case you've forgotten, laid the groundwork for the infamous fiscal cliff.
WE'RE NOT TELLING YOU ANYTHING you don't know when we point out that housing has been one of the brighter sectors lighting up the investment landscape. Our own suspicion is that shares of home builders have outrun the recovery, but why quibble? What we find noteworthy is that Robert Shiller -- yes, that Shiller of Yale University and the Case-Shiller index of home prices -- is more than a trifle tentative in hailing the housing rebound.
We have to own up to being on the tardy side in catching up to this interesting tidbit and we're indebted to the Daily Beast for providing it in a posting on Sept. 18. What's newsworthy is that Bob Shiller is in no rush to celebrate the return to the land of the living just yet. If it's any consolation, he allows as housing may have hit bottom, but it looked that way also 2009, 2010, and 2011.
And even if it finally has achieved something like a sustainable recovery, he needs more evidence that it's the real thing and that housing prices will enjoy anything approaching a true rebound worthy of the name. He warns that housing prices have to do more than merely keep even with inflation to enhance the true value of homes.
Our own view is a mite different and, we trust, nowhere near as shopworn. We suggest that investors got a shot in the arm from the news that the NFL settled its lockout of the refs by kicking in some more dough and firing the fill-ins whose attention often seemed elsewhere, especially in keeping track of who did what on close plays. It dawned on Wall Street that it's just the kind of thing that got the masses all riled up and if, heaven forbid, rigid accountability for bad calls spread to the investment arena, it would lead to wholesale sacking of strategists and analysts. Thousands of poor souls would find themselves adrift without notable skills to perform even the most humble of tasks.
Normally, if something as awful as that happened, we would take due note and urge the swelling ranks of on-the-dole investment pros not to lose heart. For opportunities for employment are still extant, provided you know where to look for them. By way of example, we would cite a very recent case in which a prisoner sued because he was forced to share his cell with cockroaches and mice.
While the court's ruling was to dismiss his suit on technical legal grounds, it envisioned the possibility that such conditions might be a violation of the Eighth Amendment to the Constitution. In which case, the infested cells would have to be cleaned up and necessitate the hiring of workers. The only catch, it occurs to us, is whether laid-off Street people are sufficiently adept in the use of a broom or a shovel to qualify for the job.
But, alas, miracles come with a time limit these days and it took only one session for stocks to resume their lackluster ways and Friday ended on a down note, although a spectacular September put a gloss on the quarter as a whole. The good old Dow was up almost 3% last month and added more than 500 points in the July-September stretch. The S&P 500 was up 2.42% in September and rose nearly 80 points in the quarter; the comparable numbers were 1.6% and 181 points for Nasdaq, and 3.1% and 39 points for the Russell 2000.
In recent months (and not for the first time since equities began their astonishing climb from the ignominious lows set in the frigid depths of March 2009), a gap, often huge, opened between the buoyant mood of the markets and the glum state of the economy. On the latter score, although the most recent week's tally of new claims for unemployment insurance fell by an impressive 26,000, hiring is anything but robust. Durable-goods orders turned in a miserable performance, dropping an awesome 13% in August, reflecting a precipitous decline in aircraft orders, while the critical nondefense capital equipment, which includes stuff like computers and telecommunications, managed the feeblest rise.
Consumer spending was a tad higher in August, with the bulk of the gain accounted for by rising prices for food and at the pump. For the first time in almost a year, disposable income, adjusted for inflation, was lower, and to make ends meet households were chipping away at their nest eggs, as evident in the decline in the savings rate to 3.7% from 4.1%.
.
Second-quarter GDP, alas, was revised downward to 1.3%, from the previous gauge of 1.7%. All of which at the least should temper expectations (that weren't very juiced-up in any case) of what September's jobs report, due for release on Friday, will show.
Little wonder, really, that investors have gone from joyous to jittery as the spate of dour news has flushed out a new wave of negativism among the Street's professional kibitzers. And little wonder, too, that the Fed felt the need to do something to puff up a rapidly deflating recovery. What gives us pause before joining the funereal chorus prating on about the sins that are destined to issue from the third round of quantitative easing is the fact that no one has a good word for it. Even to a congenital skeptic like ourselves, the blamed thing deserves more than a week to prove its worth or worthlessness. Contrary opinion is great; lopsided opinion, chances are, is anything but.
.
IF YOU'RE DESPERATE FOR SOMETHING to worry about -- or even if you're not -- keep your eye on the fiscal cliff, a mere three months off and drawing irrevocably closer each and every day. We've been babbling on about it for quite a spell now, and we can't say the passage of time has witnessed any significant progress on the part of the powers-that-be to make its prospective arrival any less daunting.
.
Despite their pronounced tendency to fall prey to mundane or more immediate distractions like buttering up possible clients or striving to find the next big momentum winner, portfolio managers have cobbled together some contingency plans against the day the game changes with the arrival of the cliff. And corporate types have been especially sensitive to the economic drag its advent likely would bring, which explains in no small way their affection for piling up cash rather than, say, piling into capital investment.
Consider the foregoing a prologue to a brief recounting of a recent report by Bank of America Merrill Lynch on–by gosh you've guessed it -- the fiscal cliff and, more specifically, its potential impact on the global economy. We won't keep you in suspense, the impact will be ponderable. Or, as the report puts it succinctly, it is shaping up as the biggest "known unknown" (pace Donald Rumsfeld). U.S. businesses, the firm's global economic team says, are pulling back, which could mean a softer fourth quarter than the consensus is forecasting.
From the standpoint of international, cross-border contagion, the report warns, jumping off the cliff would administer "a major shock" to economies around the globe. From where we sit, that could prove to be a major understatement. The report notes that U.S. growth is largely driven by domestic demand and so is apt to have "larger spillover effects on the rest of the world." And, it cites researchers at the IMF as finding the potential size of cross-border spillovers has measurably increased in recent years.
It also dubs the fiscal cliff "a wholly U.S. -- made crisis." Which means that U.S. fiscal contraction would hit "the global economy as a brand-new shock." And while the firm posits that Washington may be able to temper some of the fallout from the cliff, in light of the parlous condition of the global economy, a 2% of GDP fiscal pullback would still inflict serious pain to outsiders.
If U. S. growth suddenly weakened, the report asserts, global activity would be affected through a trifecta of channels consisting of confidence, finance, and trade. In terms of trade, the most exposed economies are those of Canada and Mexico. But trade takes a back seat in importance to confidence and finance. European exposure is particularly acute. The euro area is caught in a deepening recession, slowing growth elsewhere, and further slippage in the global economy would obviously hurt all the more.
According to the report's reckoning, European growth weakens quickly following U.S. fiscal contractions, but typically, the eventual impact is moderate. One has to wonder, though, given the current bedraggled state of so many of the Old World's economies, if this reaction would sedulously follow that script. Forgive us our doubts.
In any case, the report attests to the close relationship between U.S. and global conditions. And it cautions that "a tense run-up to the cliff could spark a broad market reaction similar to the correction seen at the 11th hour of last year's debt-ceiling agreement." Which, in case you've forgotten, laid the groundwork for the infamous fiscal cliff.
WE'RE NOT TELLING YOU ANYTHING you don't know when we point out that housing has been one of the brighter sectors lighting up the investment landscape. Our own suspicion is that shares of home builders have outrun the recovery, but why quibble? What we find noteworthy is that Robert Shiller -- yes, that Shiller of Yale University and the Case-Shiller index of home prices -- is more than a trifle tentative in hailing the housing rebound.
We have to own up to being on the tardy side in catching up to this interesting tidbit and we're indebted to the Daily Beast for providing it in a posting on Sept. 18. What's newsworthy is that Bob Shiller is in no rush to celebrate the return to the land of the living just yet. If it's any consolation, he allows as housing may have hit bottom, but it looked that way also 2009, 2010, and 2011.
And even if it finally has achieved something like a sustainable recovery, he needs more evidence that it's the real thing and that housing prices will enjoy anything approaching a true rebound worthy of the name. He warns that housing prices have to do more than merely keep even with inflation to enhance the true value of homes.
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