Climbing the Wall of Worry

Both the market and President Obama are experiencing rebounds in their numbers despite poor fundamentals.  The market has held up with five consecutive weeks of gains despite the potential for a synchronized global recession with Europe, Japan, and the BRIC countries experiencing weakness.  Earnings season just ended, and while it was the weakest since 2009 in terms of the percentage of companies beating either sales or earnings estimates, earnings are still approaching the all time highs achieved just before the debt bubble blew. Why is the market holding up?  How about exceptionally low rates, a reasonable valuation, no real signs of inflation outside of food and fuel (remember, we don't really count those), and the probability of both the Fed and ECB stepping in to support the market, er, I mean save the economy.  It's a Goldilocks scenario for sure. 

The President's rebound is no less astounding.  His lead vs. Mr. Romney and new running mate Paul Ryan has widened.  The President is taking pages from LBJ and Harry Truman's playbooks.  From LBJ he has learned to utlizie friendlies with a big microphone, in this case Senate Majority Leader Harry Reid, to engage in knowingly making false statements.  Governor Romney has been on the defensive about his tax-compliance (does anyone else remember Tim Geithner, among other cabinet members, never paying taxes?).  After a supporter started rumors about his opponent "engaging in intercourse with farm animals", LBJ responded that "of course its not true, but let him prove it."  The page from Mr. Truman's book is of course run against a "do-nothing" Congress.  Mr. Obama has been successful with both strategies, taking the microscope off his failed policies which have added $5 trillion to the US debt burden and added more people to the disability rolls than to the employment roll.

The President stated last week that the auto bailouts were such a success (you remember, when they violated the rule of law and forced a cramdown on bondholders while giving equity to labor unions?) that they hope to do it in more industries going forward.  I view this as either encroaching socialism or bad policy from the people who gave us Solyndra.  Watch your pocketbook and remember, you didn't build your business, the government did. 

Just when it looked as though we would experience a summer with moderate gasoline prices, a fire in a California refinery combined with other outrages have conspired to push prices well north of $4 per gallon for regular.  The jump in prices far exceeds the moderate increase we have experienced in oil prices over the past two months.  The picture below is from filling my wife's SUV this past week, and yes, that is the price of regular.  

Speaking of California, the first phase of Governor Brown's unfunded $100 billion high speed rail project is expected to run through the Central Valley.  The general idea is to build an overpriced rail that would provide riders with a breakeven point between rail and driving from LA to San Francisco.  Evidently they have succeeded, assuming gasoline prices jump from $4 to $44 per gallon.  I'll be interested to see if they can actually get the thing built.  Besides the obviousl impossible funding hurdles, how are the environmentalists going to respond when the proposed route travels through the protected habitat of the endangered red-spotted jumping flea?  This would be fun if it wasn't so disgusting coming from a state that is already struggling with a debt problem so large that, according to Governor Brown (aka Engineer Fred) we must slash school spending in order to pay the overly generous pensions of state employees. 

The Olympics concluded, and even though the opening ceremonies were horrifically boring, the games overall were great.  I regularly found myself up at 1 AM watching the NBC coverage.  I thought the competition was superb across the board.  The only disappointment beyond the opening ceremony was the Women's Gymnastics team.  After winning the team overall and the individual overall, these young ladies engaged in a series of bloopers that caused NBC to pull their "Fab 5" advertisements and replace them with other medal winners.  I thought the women's track team was amazing as was the volleyball combo of Misty/Keri, woman's soccer, men's swimming, and a slew of great individual stories.  

After bottoming at under 1.4%, ten year treasury yields have backed up to 1.66%.  Junk bonds have been the surprise this year, returning 9.8% for the year.  Yields have dropped below the magical 7% hurdle which has signfied sell-offs in the past.  Interestingly, in spite of the weak economy, the default rate is 3.3% versus an historical average closer to 5%.  On the flip side, the risk premium for high yield over treasuries is at almost 600bps vs. an historical average of 5%.  With lower risk bonds yielding peanuts, the demand for high yield debt should remain robust unless there is a deterioration in the default rate.

Well, it looks as though all those political appointees in the Obama Administration have finally paid off for Goldman Sachs (GS).  In spite of what would seem to be overwhelming evidence of wrong-doing, the US Justice Department has decided not to prosecute GS for its deeds in the sub-prime fiasco known as Abacus.  GS notifed the SEC this week that the investigation had been dropped.

I have been avoiding talking about Greece, however, the recent unemployment numbers deserve comment.  For May the unemployment rate in Greece was 23%, nearly three times higher than the 9% rate in 2009. Among people younger than 25, the jobless rate is 55%.  Ouch! 

The Economist is reporting that the US economy, which expanded at a 1.5% rate in the second quarter, is growing slower than any other recovery in US history.  Output has increased 6.7% and employment 2.1% since the recession ended in June 2009.  By contrast the economy in the early 1980's showed an 18.5% increase in real output and an 11.1% increase in employment over the first three years. 

We haven't had a chance to discuss the Knight Trading fiasco, which cost the firm $440 million after a software glich generated buy orders for $7 billion worth of stocks.  The firm will apparantly survive after receiving a cash injection from a group of investors, but the damage to its credibility and that of the entire market have been badly damaged.

Forget about all my musings about the soaring student loan debt levels and rapidly rising default rates.  Fed Chairman Bernanke, speaking to a teacher's group, assured them that the $1 trillion in debt wouldn't jeoparize the US financial system because its backed by the US government.  Whew!  Now I feel better.  Can we restate the official government debt number to $16 trillion now?

OK-it's darn near college football time.  I'm looking forward to a great season and can hardly wait for the first game.  My youngest son and I have been watching replays of games we have taped or those appearing on the myriad of ESPN channels.  We've watched last year's Oklahoma State-Stanford game a number of times, but we're ready for some new action.

Have a great day

Ned