MorningWord 10/7/13: The headlines this Monday morning don’t sound pretty. But oddly they aren’t too different to those from last Monday when we also woke up to find the S&P 500 futures trading down similarly (around 1%.) And need I remind you, the SPX index basically closed flat on the week, a period that saw the rhetoric on the government shutdown and the debt ceiling heat up rather than calm down.
Don’t get me wrong people, I am not optimistic for an easy compromise to the issues in Washington, and any resolution is likely to come down to (or past) the wire (Oct 17th) as it has in similar situations since the summer of 2011. For the better part of the last week Wall Street economists have been steeping on top of each-other to predict what the negative implications of a sustained govt shutdown, or much much worse, a debt default will be on Q3/Q4 GDP and how the timing of the rifts in Washington on fiscal issues have all but made it a certainty that the Federal Reserve is unlikely to take their foot off of the easing pedal. (Estimates on a debt default’s effect on GDP are around -4%)
Which brings us to QE, those that had been looking for a Taper can’t really be happy that the Fed 2 weeks ago stated that the economy was too weak to pull back from their $85 billion a month bond purchases. At the time, many thought that the Fed was looking at the calendar for the deadlines in DC the next month and realized that the timing wasn’t right to Taper. And now budget and debt disruptions and the damage they are doing to the economy make that assessment all the more likely to continue.
But from where I stand, the stuff in Congress is a red herring, diverting our attention from the real underlying weakness that persists in growth the world over. Just this morning the World Bank cut its growth estimates for Asia and China (here) and while Europe’s recent equity out-performance is the result of a massive sentiment sentiment shift on the region, the Citi Economic Surprise Index for the Eurozone has been weakening of late and just closed below its 50 day moving average for the first time since June (below), which could signal the bounce of the bottom was just that, a dead cat bounce.
So I guess in sum, the shutdown and the debt ceiling while really important, may be distracting us from other signals. While they clearly have the potential to wreak havoc on growth expectations, the VIX at 17 is telling us that most big players expect a resolution sooner rather than later. The main event is likely to remain the health and visibility of corporate earnings, which also are affected by the goings on in Washington, but with cash levels on U.S. corporate balance sheets at record highs on almost every metric, the continued insistence by C-level execs to pay and increase dividends and buy back their stock as opposed to spending on r&d and capex is troubling. In my mind there remains a massive disconnect between price action and fundamentals of many publicly traded stocks. So pick your poison if you’re a bull, continue to ride QE-finity because things suck so bad in the economy, or try to not be the last guy holding the bag when the Taper hits because things are only marginally better.