A Look at the Coming Week - June 22, 2009
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The financial markets may be tired. The past few months it looks like the "green shoots" may be turning into yellow weeds. Insiders are starting to sell. Insiders are those management types that run and rule large corporations. They have been net sellers for 14 weeks-a clear sign of waning confidence. The ratio of sellers to buyers was 1-to-1 at the beginning of March and is now 9-to-1, the highest level in two years.
Could we be starting another down leg? While it is hard to say, we need to be cautious in this environment. The markets have a nasty habit of getting folks all excited only to cut their legs out from under them. The past few months, while less bad than before, is certainly not enough to convince old codgers like me that the worst is over.
Real estate is still not rebounding very well. Interest rates are climbing which is stopping the mortgage market. Rumor has it that banks are holding inventory and that there is really more than just the 10+ months that is currently available. Now that state and local governments are struggling and trying to balance their budgets (many are due July 1), foreclosures may increase as more people are laid off. In fact, just today, the White House is expecting unemployment to climb to 10%.
If only it were 10%. That is the tip of the iceberg. Not included in those numbers are self employed, those who have had hours cut, those who have had wages cut, and the discouraged workers. My estimate is the true number of unemployed is about 18% and that those who are underemployed would boost the number by another 10% to 12%. That would imply a full 30% of our workers not able to spend as they did in the good old days.
The head of the National Association of State Budget Officers just reported that 46 states have until midnight June 30th to figure out how to close the $121 billion budget gap that is looming for the next fiscal year. For the first time since the Savings and Loan debacle in 1983, states are cutting spending. The chart below shows this ominous sign. Notice that even during the last big recession of 1990-1991 that spending still increased by around 5%.
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As you look at the chart, it appears that the projection for decreasing spending is about 2.5%. Here is the challenge: income tax revenues are down 6.6% and other tax revenues have decreased by over 15% so they may be very far off the mark. Let us hope not.
The World Bank today got the market off to a rough start by reporting that the global economy will shrink 2.9% this year. As recently as March, the estimate was a decline of 1.8%. Right now, we don't know if this is because things are weaker, new data is coming in or if they simply were too optimistic in earlier days.
Commodities are having a pullback. Oil prices are down as are gold, agriculture and base metals (copper, aluminum, nickel, etc) prices. It can drop as the dollar gets stronger but last year commodities were punished as the recession took hold. We think this may be reflecting a sudden drop in demand. One bit of evidence may be that three banks were closed this weekend. That makes 40 for this year at a cost to the FDIC of $11.5 billion.
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Thanks for reading the Vance Advance!
Working for your Wealth and Peace of Mind,
The Vance Capital Management Team |
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