Last Monday of Summer

August 29, 2011

After initially falling sharply last Friday during Mr. Bernanke’s comments on the economy, the markets reversed mid-comment and have continued with a bid this morning. While expectations of an announcement of QE3 were dashed early in the speech, the market was emboldened by the Fed’s plans to extend their September meeting to two days instead of the planned one day. Mr. Bernanke emphasized that while he still had “tools” available to help the economy, the short term monetary fixes were becoming incrementally less effective and that long term fiscal changes are needed to sustain any type of recovery.

Personal income was in line this morning, rising 0.3%, while personal spending rose 0.8% vs. an anticipated 0.5% increase. Personal spending had dropped in June for the first time in a year. The July increase is the strongest since February, which could indicate better consumer confidence. One measure that has been ignored in the news lately but may be helping the consumer has been the recent decline in gasoline prices, which are down to $3.62 nationwide. Last Friday Q2 GDP was revised down from 1.3% to 1.0%, which translates to an increase of 0.7% for the first half of the year. Per capita GDP actually declined in the first half of the year. Pending home sales rose by 10.1% year over year vs. an expected increase of 13.6%.

A recent investigation by ProPublica and NPR concluded that large US banks manufactured daisy chains of mortgage purchases to create fake demand for CDOs. The report cited that between 2006 and 2007 CDOs bought $107 billion in assets from each other to pump bank profits and fool investors into thinking that demand for the mortgage-backed securities was higher.

The Mexican government has announced plans to work with major Japanese banks in an effort to reduce their dependence on US sovereign-debt buyers.

Markets in Europe are up this morning after most Asian markets were up last night.

Showing no signs of admitting that Keynesian economics doesn't work, the President announced that Alan Krueger, a labor economist and Princeton University professor, has been nominated to lead the White House Council of Economic Advisors. Some of Mr. Krueger’s recent comments have supported a hiring tax credit, increased infrastructure spending, and a value added tax. He previously served as the Chief Economist to the Treasury Department where he worked on the first stimulus package. Mr. Krueger would become the third CEA chairman in three years.

Although there was significant flooding, power outages, 18 deaths, and damage in many parts of the east coast, Hurricane Irene’s force dissipated significantly as it approached the coast. Originally identified as a category 3 hurricane, by the time it hit shore it was a tropical storm. The early cost estimates are $3 billion, well short of the $10-15 billion being discussed at one point last week. Insurers are up this morning after Morgan Stanley commented that they would be able to raise premiums on storm fears but will benefit from the lower than expected losses.

Have a great day

Ned