September 2, 2011: Market Update

A Reverse Goldilocks Scenario

Considering just how bad the economic data was this week, you may be surprised to know that the markets look to finish only slightly lower.  Some analysts have coined this phenomenon “The reverse Goldilocks.”  You’ll remember that it was the introduction of QE2 last September which marked the start of the large rise in the equity markets and the end of QE2 in June which shortly thereafter marked its top.  So as with Goldilocks, analysts are hoping for an economy that is neither too weak nor too strong but one that is just weak enough to require the Fed to intervene again.  We might be there.

The economic data released this week presented the optimal picture of an economy in retreat.  We won’t call it a recession yet, but it is causing concern amongst economists and investors alike.  The three biggest data points were as follows:

1. August Consumer Confidence: 44.5 vs. 52 expected, 59.6 in June.  This reading is the lowest level since April 2009 which marked the bottom of the last recession.  It paints a rather dire picture of people’s attitudes toward the economy and their feelings about their personal prospects.
2. Q2 Productivity and Costs: -0.7% vs. -0.5% expected and -0.3% preliminary.  Decreasing productivity generally suggests that corporate profits could come under pressure.  However, it could also mean that companies have reached the limit on the amount of work they can squeeze out of the existing work force and begin hiring back the millions of workers laid off during the recession.
3. August Nonfarm Payrolls: Unchanged vs. +75K expected.  Private payrolls +17K vs +156K in June.  Unemployment rate remains unchanged at 9.1%.  Simply put, jobs just aren’t being created.

Despite the Federal Reserve Chairman’s non-committal speech last week in Jackson Hole, the chances of further action at the next FOMC meeting September 21^st seem likely.  To highlight this point of view, two deficit hawks that sit on the board of governors have indicated this week that they could be persuaded to consider further intervention.  Chicago Fed’s Charles Evans and Minneapolis Fed’s Narayana Kocherlakota both made statements that “suggest a more aggressive policy may be needed” and “further accommodation might well be appropriate.”  If the deficit hawks are softening then further accommodation can’t be far behind.  President Obama will give a speech in a joint session of Congress on September 8^th.  We would not be surprised if he begins to lay the foundation for further stimulus.

And finally we come to the story of the week.  A recently released study found that twenty-five of the hundred highest paid CEOs earned more last year than their companies paid in federal income tax.  In addition, at a time when lawmakers are facing tough choices in a quest to slash the national debt, it found many companies spent more on lobbying then they did on taxes.  Admittedly, this study is controversial since it compares CEO pay to current U.S. taxes paid, excluding foreign and state and local taxes that may have been paid, as well as deferred taxes which may or may not be paid.  Most of the companies cited found issue with the study with a General Electric spokesman saying, “GE pays what it owes.”  Know you know.

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