The S&P500 slid about 0.75% last week in a string of seesaw trading sessions. Volume, in this down week, was greater than in the preceding two up weeks. And volatility inched back up, although it is still near 52 week lows, suggesting that complacency is beginning to set in.
The economic data were mixed to weak. Housing permits and starts came in much weaker than expected–both fell when they were both expected to rise. Producer prices were lower than projected, suggesting that there is little inflation in the goods and services pipeline. Jobless claims jumped up to 531,000 when they were expected to drop to 519,000. Leading indicators were slightly stronger than expected. Existing home sales, boosted by the federal tax credit for first time home buyers, rose 9.4% m.o.m. on a seasonally adjusted basis; on a raw, unadjusted basis they actually fell 5% m.o.m. Unfortunately, median prices continued to fall (dropping 8.5% on a year-over-year basis) implying that any stabilization in UNIT volume sales does not translate into a PRICE stabilization. The bottom in home prices has NOT been reached.
Technically, the S&P is turning bearish on a daily basis. Numerous price indicators are suggesting that the rally is running out of steam, and up volume has been consistently lower than down volume. From a weekly perspective, the S&P is still maintaining its uptrend, but here too, the strength of the up moves is diminishing.
The Economist, this week, featured a good news, bad news piece on America’s upcoming debt crisis. It began by quoting Harvard economics professor Ken Rogoff who warned that “There is every reason to worry that the baking crisis has simply morphed into a long-term government-debt crisis”.
The Economist focused its analysis on the reasons why such a “crisis” need not be acute, or catastrophic. Instead, the author of the piece argued that this crisis ought to be chronic, as though our nation will be suffering from a type of debilitating obesity over many years, rather than from an acute, or fatal heart attack.
The problem with the piece is that the author ends his analysis by outlining–inadvertently–the many reasons why our particular type of obesity could be especially dangerous: 40% of our national debt matures in less than one year (subject to rollover risk); our likely deficit trends imply that we will get much fatter over the next ten years than we already are today (government debt to GDP will balloon past 100%); our government debt will crowd out private investment (dragging down GDP growth that would otherwise help pay down debt) and steal away a growing portion of the federal budget to pay interest (diverting funds from social services); our devaluing dollar won’t necessarily boost GDP by pushing up exports (our trading partners are sick themselves and exports don’t make up as much of our GDP as they do in other economies); half of our debt is owed to foreigners (unlike Japan’s debt which is mostly owed to more tolerant domestic citizens).
Still, the author concludes that–despite all the reasons above–America’s battle with debt-obesity will be merely protracted and uncomfortable.
Unfortunately, that’s akin to claiming that a morbidly obese person will have more a “burden” than one who’s simply obese.
Instead, critical observers would rightfully counter that a morbidly obese person should be less concerned about losing a couple of pounds over the next few years, but more about dropping dead from a heart attack tomorrow.
No, although we hope that we can slowly work off our excessive weight, the markets may not be so tolerant. Confidence can disappear very quickly, as we’ve learned over the last 12 months. If our nation keeps packing on the pounds, we increase the odds of suffering from fatal coronary–and much sooner than than later.