Stock Rally Says Economic Boom, Fed Shows Concerns
Housing and job creation are worries, with housing starts at depressed levels.
Editor's Note: This article was written by Richard Suttmeier, chief market strategist at ValuEngine.com, which is a fundamentally-based quant research firm in Princeton, New Jersey, that covers more than 5,000 stocks every day.
Continued Mixed Message from the FOMC Meeting
While the FOMC says that economic activity continued to strengthen with a stabilizing labor market, the important fuel for growth is uncertain:
- Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.
- Business spending on equipment and software has risen significantly. However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls.
- While bank lending continues to contract, financial market conditions remain supportive of economic growth.
- Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.
The Fed says, "With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time." I say that inflationary pressures are building. You see it at the supermarket, in the drug store, health-care premiums, and at the gas pump. With lower incomes, Americans see a higher cost of living on Main Street USA, while Wall Street gets record bonuses. Recent ISM reports show rising Prices Paid.
The Fed stated that the zero to .25% federal funds rate will be needed for an "extended period" as I expected. The quantitative easing whereby the Fed purchases $1.25 trillion of agency mortgage-backed securities and $175 billion in GSE debt will end as planned at the end of this month.
A key statement for me is "housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls." Without improvements on these two important fronts, the US economy is positioned for a double-dip.
Single-Family Housing Starts have stabilized at about 500,000 units annualized. This doesn't move the needle in the NAHB Housing Market Index, which remains depressed below a reading of 20, when 50 is neutral. Some are putting a positive spin on "flat at a depressed level," but in my judgment, with the tax credits set to expire at the end of April, the risk is for a double-dip in housing and banking, which is how "The Great Credit Crunch" began at the end of 2006 and through 2007.
Some say there's pent up demand for new homes. I disagree with that as three million homes are likely to go through the foreclosure process in 2010. With the price of building materials on the rise, homebuilders won't be able to compete with the pending glut of homes in resale. Also keep in mind that more homes are being occupied by extended families.
Is Treasury Secretary Geithner more upbeat than the FOMC?
The theme from the Obama Administration can be summed up as "the worst of 'The Great Credit Crunch' is behind us," but the country still faces significant and ongoing challenges that begins with high unemployment. The Administration expects 3% growth in 2010 and 4.3% in 2011 and 2012. That would be a boom as the FDIC closes 500 to 800 community banks. The Administration projects 100,000 jobs created per month in 2010; 200,000 in 2011; and 250,000 in 2012. If the Fed agreed, they'd have removed the "extended period" from their statement, and Main Street unemployment rates would stop rising. Unemployment here in Tampa Bay is 14.3% in Pasco County and 12.7% in Hillsborough.
It seems to me that most economists inside and outside of the White House are considering this economic recovery as typical and out of the textbook. This is where I disagree, as the textbook describing the end of "The Great Credit Crunch" has yet to be written, and several more chapters remain to be discovered.
The weekly chart for the Dow favors higher prices, but beware of the downside risk. My annual pivot is 10,379 with today's resistance at 10,778, and annual and semiannual resistances are 11,235 and 11,442. With 10 of 11 sectors overvalued according to ValuEngine, my prediction remains: Dow 8,500 before 11,500! Health care is undervalued by only 3.2%.
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