Without the US Consumer the Global Pie Shrinks
03/15/09
Good news for the US economy means bad news for the world economy - for the time being at least. The U.S. census bureau said Friday that the U.S. trade deficit had narrowed more than expected to $36 billion in January, from $39.9 billion in December. The improvement was better than economists had expected and reflected the fact that crude oil imports dropped to the lowest point in three years and demand for a wide variety of other foreign goods from autos to heavy machinery and household appliances declined. The deficit has now reached the lowest level in six years. It looks like the world is going to have to live without the US consumer for a while. China found that out just this past week. Exports plunged 25.7% in February year on year, even though this year February did not include the Spring Festival holidays, and so was substantially longer than February 2008. Exports contracted to $64.90 billion, while imports slumped 24.1 percent to $60.05 billion. The resulting trade surplus was the worst ever, as Barron's puts it. $4.8 billon in February, from $39.1 billion in January and over $8 billion in the same month last year. China will reduce export taxes to zero and give more financial support to exporters as it tries to increase its share of global trade in the current crisis, the country's commerce minister announced on Monday. It's probably not a good idea to announce so publicly a drive to increase China's share of the global export market, right now. The world has suffered a collapse in demand but China's share of exports has risen dramatically over the past several months. Statements like this will have to be addressed at the G20 meeting this weekend. As Morgan Stanley's Stephen Roach was quoted in Barron's recently, while "the original excesses were made in America, where consumers went on a wild binge, fueled by the credit and housing bubbles, the rest of the world, and particularly China, was delighted to go along for the ride." The global pie keeps shrinking and China should increase domestic consumption rather than subsidize its export sector.
To feed our voracious appetite for consumption, we ran massive trade and current deficits, importing surplus savings from abroad. And that, he laments, seemed a perfect fit for the developing countries of Asia, whose exports exceeded a record 45% of the region's gross domestic product in 2007. What's more, it was China "that led the charge," boosting its exports to 40% of GDP, double the percentage seven years earlier. Nevertheless, China faces daunting problems, which may make certain decisions at least understandable. The pressure to fix the export sector is clearly rising. It employs workers and feeds the people more and better than agriculture. Meanwhile, global trade and demand collapsing and so are the currencies of many of China's competitors and customers," said Isaac Meng, an economist with BNP Paribas. "This is putting huge pressure on China's export industries and the government to push all the buttons to boost the economy." Even in these troubling times, however, one finds reasons to be hopeful. The good news involved February car sales, which are up substantially and suggest that some government policies are getting consumers to go back to buying cars, although this was accompanied by bad numbers on car exports. As I said in my newsletter four weeks ago: If I had to make a prediction, it would be this: The US consumer is probably going to consume a lot less over the next 5 years. The Chinese consumer on the other hand will consume a lot more over the same time period. The trade deficit seems destined to improve further. The world needs to look for other customers to buy their stuff.
Stock markets around the world recovered this past week. The S&P 500 is up 10% since Monday's close, but the average stock in the index is actually up 14.18%, which means that stocks with the smaller market caps are outperforming. Market breadth during this three-day rally has been exceptional, with 483 stocks up, 1 stock unchanged and 16 stocks down. 19 of the top 25 best performing stocks were financial stocks. That gives us an idea where the rally was ignited: the banks. First, Citigroup said that it was profitable (pre-one time write offs) throughout the first two months of the year, which was followed by a similar statement from Bank of America. Second came various statements from representatives of both parties who questioned the current interpretation of FASB 157. That opened the path for the potential modification of valuating assets with limited market liquidity, or so the thinking went in the markets. Thirdly, Barney Frank, chairman of the U.S. House Financial Services Committee said that the up tick rule would or should be re-introduced with a month or so. Last but not least, Sheila Bair Chairwoman of the Federal Deposit Insurance Corp. said in an interview with American Public Media's "Marketplace" radio program: "So we think that that is absolutely true that the assets [on banks' balance sheets] are worth more than the current market conditions assign to them. And so that, yes, over time there will be significant profits from these." Now THAT is a statement I like and it provided tinder enough to fuel the best rally in months. Many are even predicting that this bear market may be over. Without commenting, let's look at some long term charts. The following chart shows the S&P 500 going back to 1980, when the index traded at 102.
If you start there and go up to the all-time high in October of 2007, you get 1,474 points. The 0.618 Fibonacci retracement of that advance returns the SPX to 665.23, which is a virtual bull's-eye with last week's lows at 666.79. Close enough for government work. This suggests that perhaps we have seen the low. I mean THE LOW. Of course, that doesn't preclude some retests of that low, but it is possible that we have put in a bottom. At the very least, I am expecting a rally that is enticing enough to extinguish the pervasive bearishness. Performance anxiety is an interesting thing. If this market rallies to the point where the major indexes are showing positive returns for the year, anybody who is not 100% invested will underperforms. At that point everybody has to get in, regardless of price. For this and other reasons I believe that this rally must be bought, not sold!
Hermann Vohs
"History is a race between education and catastrophe."
H.G. Wells
Hermann Vohs is president of Cales Investments, Inc., a registered Broker-Dealer. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions. Opinions expressed in these reports may change without prior notice. Hermann Vohs and/or the staff at Cales Investments, inc. may or may not have investments in any of the markets cited above. Hermann Vohs can be reached at 303-765-5600.
This information is not to be construed as an offer to sell or the solicitation of an offer to buy any securities.
