Market Update: 2 23 09 _ Consumers aren't confident

Is there any good news?

A friend of mine called this morning and wanted some good news. I didn’t have any handy so I told him I’d have to get back to him. As I drove to work I thought about the issue the whole way…I really gave it some thought and it was difficult to find anything in the realm of business that I could spin as good news. As our economy shifts from a capitalistic structure where men and women used to accept risk in pursuit of reward to one where people get rewarded no matter how the risk pans out we’ve got some real problems. The government is now subsidizing bad behavior and punishing good behavior on a grand scale. Have no fear if you spent more than you earned…we’ll just tax those that saved more than they spent and it’ll all work out OK on average. From a monetary standpoint we’ll make everyone equal...they won’t all be happy but they’ll be equal. If I went home tonight and gave my daughter her allowance money even though she had messed up her room and forgot to set the table, and I took the money out of my sons piggy bank to do it, my wife would think I had started smoking crack. It makes no sense but it appears that many politicians are determined to do just this. So where is the good news that my friend was looking for?

Wisdom from the mouths of babes

My 9 year old son has been begging me to buy him a iPod Touch. For those that are unfamiliar with this gear it is essentially an iPhone without the phone feature. It gives you all of the multi-media functions…pictures, movies, music, web surfing etc. It costs in the neighborhood of $250. I imagine that all of the toys I owned when I was 9 years old wouldn’t add up to $250 combined so there’s not a lot of hope for the kid that I’m just going to drop that kind of coin on a toy. I dismissed the idea on the spot and I moved on…he didn’t.

Last night my little capitalist goes to his momma with a plan. He has a written proposal where he has outlined jobs that he can do to earn money, things he can quit doing to save money, and he has a timeline for making the purchase on his own with his current savings plus the capital he thinks he can raise under his plan. I couldn’t be any prouder of the kid. At NO TIME did he suggest that we tax Jim and Fay our next door neighbors to raise the money necessary to buy him an iPod. If a second grader can get this concept I don’t understand how so many people in America can miss it. The concept is simple…he can’t get what he wants by doing nothing so he comes up with a plan to WORK for it. He’s going to invest his time, his effort, and his emotions in this project…putting those items at risk in the pursuit of the reward that he wants. So that’s the good news…American kids still “get it”. The American Dream isn’t dead, it’s just that many of those that are supposed to be protecting it aren’t doing their jobs.

So with the good news out of the way…let’s look at the rest of the news from today.

Testify

First let’s look at some of Bernanke’s testimony from this morning. Those of you that have been getting my market updates for the last year will get very few surprises from today’s testimony. Last year I began writing that the government is fighting to avoid a Depression and I wrote a fair amount on Bernankes views on the subject. In Bernanke’s view, confidence in the financial system and maintaining access to credit for consumers and small businesses are paramount to recovery. Bernanke’s writings on the great depression state that the lack of these two factors caused what would have been the recession of 1933 to become the Great Depression. He is adamant that those two factors must be addressed and we are seeing strong action by the government to those ends. Large financial institutions are being given all of the help that they need to stay solvent. The government will not tolerate a crisis of confidence in these institutions. Despite the near hysteria in the media regarding nationalization of the banking system there is no talk from the current administration or from the Fed that this is in their plans. Nor is there any reason to believe that if they DID nationalize a bank that they would allow that bank to default on a bond. Allowing a bank to default on a debt obligation would cause a tidal wave of problems that run counter to everything that the government is trying to accomplish. As recently as this week Alan Greenspan was saying that even if some banks were nationalized that the government would have to protect the senior debt holders.

Based on everything that the government has said and done to date it is difficult to envision a scenario where a bond holder of one of these big financials in the TARP program takes a hit.

How Confident are you?

Consumer Confidence posted an all time low reading this morning. This data series began in 1967. It has seen all of the highs and lows that this country has been through since that date and today’s report shows that consumers are the least confident they have been since this series started in the late 60’s. I highlighted a few of the low points from this series since 1967 and I pulled a few random facts from the headlines of each period to give you a feel for what accompanied each low point.

The Richmond Fed index was released today. This is the latest in a long string of abysmal manufacturing data. Like the Empire manufacturing report and the Philly Fed index that were released earlier this month, this is a diffusion index which means any positive number indicates expansion in manufacturing activity and a negative number indicates contraction. The survey expected a bad number…a really bad number…and the Richmond Fed index delivered. The expectation was for a -49 and the actual release was a -51. You can see that this release was easily the worst since Bloomberg began reporting it.

The Case Schiller Home price index continues to decline on a Year-over-Year basis. There really isn’t much to say here…housing was a bubble and it’s correcting. Where she stops nobody knows.

There is still a lot of big news to come this week. Tomorrow we see Home Sales, followed on Thursday by Initial and Continuing Jobless Claims as well as Durable Goods. If you have any questions on this material please let me know.