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Oh boy. I’m going to have a busy weekend. My inbox is flooded with your comments, questions and insights on the bad debt bank/nationalization solution. I haven’t read through all of them yet, but the ones I have read are great.
I’ll be printing your responses on Monday, with comments where appropriate, so be prepared for a rather lengthy issue of Daily Profit.
*****Q4 GDP numbers are out today. The U.S. economy shrank at a 3.8% annual rate. Sounds bad. But it wasn’t as bad as economists were expecting. They were looking for a 5.4% decline.
Stocks are down in response, even though this is better-than-expected news. Many analysts were expecting Q4 GDP numbers to be horrible, and possibly the worst that we’d see. So since the number wasn’t as bad as expected, we can perhaps think that stocks are down because of a perception that the worst GDP number is yet to come. That’s the bearish argument.
The bulls, of course, would stick to the idea that 2008’s fourth quarter will prove to be the worst, and there’s potential upside in GDP numbers going forward.
*****How do we know which view is correct? The short answer is that we won’t know until stocks either rally or fall below current support levels. But that’s not really all that helpful right now.
The Dow is zeroing in on support at 8,000 again. Now, I tend to track the Dow Industrials because it’s the most recognizable index. But the S&P 500 is a more representative index examining price action. So the support level at 800 on the S&P 500 is far more significant that Dow 8,000. And that’s a good thing, because, on a percentage basis, the S&P 500 is farther above support than the Dow Industrials.
We’ve got two more heavy weeks of earnings reports coming. So far, earnings season has gone fairly well. We haven’t seen any serious drops, and that suggests that stocks are well-priced for the earnings numbers we’re seeing. If we continue to avoid any serious earnings surprises, I can’t help but think we’ve got potential for a rally.
Stocks are clearly cheap. All that’s missing is some confidence that they aren’t on the verge of getting even cheaper.
*****I want to add an interesting development to our discussion. It concerns the Obama administration’s stance on China. The Obama’s stimulus plan has been taking most of the headlines. But the recent suggestions by Obama and Treasury Secretary Geithner that they believe China is manipulating its currency is big news.
On the one hand, it’s clearly a political move. The Obama administration will clearly gain some political goodwill in Congress with the currency manipulation talk. After all, constituents use China’s "cheap" currency as the convenient whipping boy for the loss of American manufacturing base and ballooning trade balance.
Plus, if you go after China, you scare the Treasury market, which is constantly paranoid that China will start dumping T-bills. And there are currently some benefits to getting money out of safe-havens and into the economy.
On the other hand, as this New York Times article points out, the weak dollar policy of the Bush administration is complicit in the trade imbalance. In particular, this author suggests that the weak dollar’s effect on commodities and oil prices made the trade imbalance appear worse than it really should have been, had the dollar remained strong.
Now, labeling a country a currency manipulator is a big deal, because it means that trade sanctions could be imposed. And while certain industry groups favor tariffs on Chinese imports, I think most realize that there’s little benefit from protectionist strategies.
Vice President Biden is softening the rhetoric a bit, saying that the U.S. has made no judgment that China is manipulating its currency. He does acknowledge, though, that the U.S will be "blunter" with China concerning trade matters.
One thing seems clear – the Obama administration wants changes in the trade relationship with China. And that could lead to some positive developments in future negotiations.