Don’s Outlook 7/10/09
The corporate earnings season got underway on Wall Street this week when Alcoa’s (AA) earnings exceeded estimates, helping to kick off the 2nd quarter results on a positive note. The company’s CEO also noted that signs of strengthening could be seen in the aluminum market.
Rising commodity prices have been linked once again to Chinese demand. But the implications for the U.S. hinge on whether that demand is permanent. I believe that rising prices so far have been due to a combination of the depressed market and their massive loan growth. Chinese companies found themselves flush with cash as the banking sector became a tool for stimulus and they faced a world with severely depressed commodity prices. It is probable that the recent demand was not a resumption of previous growth levels, but future demand packed into a few short months. Nevertheless, the U.S. has its own stimulus dollars that may keep commodity demand elevated for some time.
Economic data was light this week. The ISM Services Index showed a better-than-expected improvement in the service sector, although it still illustrates a contracting economy. The initial unemployment claims data released Thursday was slightly better than expected, but with more than 500,000 people filing for unemployment claims, the number is still too high for comfort. Ongoing claims hit another new all-time high of nearly 6.9 million. Unemployment is hitting the retail sector, where sales are still falling at a 5 percent or greater clip.
The weak sales and rising unemployment have caused many politicians and pundits to panic, with growing calls for a third stimulus package. What few entertain is the idea that the stimulus spending itself may be the problem. Increases in government spending move workers and capital out of productive private production and into inefficient public projects.
Despite the bad retail and employment numbers, the stock market hasn’t performed terribly. The decline from the recent high is about 7 percent, which is still within a normal 10 percent correction. Considering the S&P 500 Index climbed 42 percent off its lows, a correction was inevitable and overdue. The index remains very close to the 200-day moving average and that average will slide in the coming weeks, preserving a bullish technical signal for the market. If there is a successful effort to pass a third stimulus, optimism will return and lift stock prices to new highs.
I would like to remind each of you about the Worker, Retiree, and Employer Recovery Act of 2008, which allows investors to suspend their 2009 Minimum Required Distributions (MRDs). If you wish to suspend your MRD for this year, you must initiate the change. Please call or email your Dion Money Management client representative, and we can place the one-time request for you. If you do not make a change, your distribution will proceed as scheduled.
