Waiting for Ben

Big Ben, Gentle Ben, Uncle Ben, Helicopter Ben, the Bernanke Put.  Ben Bernanke has many nicknames, but after this week's Senate grilling, the chairman might be forever remembered as Benevolent Ben.  After Senators criticized him for not doing more to help the economy in spite of expanding the Fed's balance sheet to a record $2.7 trillion, the Chairman decided to take one for the team, exhorting the Senate to "do your job".  Ben is right-he has exhausted the Fed's ability to prop up anything, much less the economy, while the politicians have dithered away the time by arguing about trivial matters.  Meanwhile, Rome burns as the Fiscal Cliff looms large heading into 2013.  As I've written in the past the impact of the Obamacare tax increases, the expiration of the Bush tax cuts, the expiration of the payroll tax cut, and the spending cuts created by last summer's budget battle all hit while we are celebrating the entrance of 2013.  I've seen estimates of up to 2.5% of GDP, although most estimate the impact closer to 1.7%, still enough to cause a recession. 

What to expect as we head towards a recession?  How about a third quarter market rally?  Makes sense, right?  The market peaked in late 2007 right in front of the biggest recession of us remember.  Why not another spike up?  I'd say its almost a given that the Fed will make one more injection before the election in an effort to stimulate a wealth effect.  There will be howls of partisanship if  he does so, and watch out for his chances of getting renominated should he make a pre-election injection and Mr. Romney still wins the election. 

Speaking of the election, the national polls have it at a dead heat, with Mr. Obama carrying a slight, but statistically insignificant lead.  The President, who once adamantly admonished those who dared to engage in name smearing tactics, is now setting a record for spending on such messages.  Why the reversal?  The President really has nothing else to run on.  His economic record is horrible, and even worse his prescriptions for fixing the economy border on insanity (fortunately many of those have been blocked by Congress).  Just last week he showed his true nature by saying that if you started a successful business, you really weren't responsible for doing so, that government truly deserves the credit.  This is one scary individual, and while I'm not a huge Romney fan, my fear of another four years under Obama would allow me to vote for a sea slug if he were opposing the incumbent. 

I don't think it's a secret that the economy is ebbing and flowing-right now it's weak.  Retail sales, which if you recall were strong in the early part of the year due to better than expected weather, fell by 0.5% in June, the third straight month of declines.  Unemployment claims have also begun rising again, an ominous sign as we head into 2013. 

Yahoo (YHOO) announced their sixth CEO in the past five years as they lured Marissa Mayer from Google (GOOG).  YHOO reported a 4% drop in earnings the day after Ms. Mayer's hiring.  She definitely has her work cut out for her as YHOO continues to struggle monetizing their traffic. 

The country's largest pension fund, CALPERS, announced that their return for the fiscal year ended June 30 was a paltry 1%, a far cry from their stated goal of 7.5%.  Pension liabilities are at the crux of the latest slew of bankruptcies among California cities.  An independent analysis pegs the national pension crisis at a $4.7 trillion underfunding.  Ouch! 

Drought conditions continue in the Midwest during what some are calling the driest year in the US on record.  Corn and soybean prices are both hitting new highs as crops continue to wilt.  This should be a good year for the Global Warming crowd. 

Bond yields in Spain continue to rise as the economy, once thought to hold a 2% growth rate for 2013, is now expected to decline by 0.5%.  The country is now seeking assistance in making debt payments.  Should Spain fall, the fallout will be dramatic and much worse than the impact of Greece, whose economy is a fraction of the size of Spain's. 

Sorry for all the bad news.  Remember, if the Fed steps in this fall, ride the market for a bit and then get really defensive.  Without any government action to address the fiscal cliff, expect a truly poor market in 2013, with few places to hide. 

Have a great week

Ned