From a disorganized beginning over a month ago the 'Occupy Wall Street' movement has grown into an international phenomena of the 99% of tax payers that have been demoralized, disenfranchised, and 'un-stimulated!' I cannot speak to the 47% of Americans who pay no tax and will not likely do so.
Initially the talking heads of the financial media mocked and downplayed the message and resolve of these random protesters. Now it has been discovered that a substantial percentage of this frustrated group is very intelligent, articulate, and determined. Their message is crystal clear. Their hatred/disgust is palpable!
Over two decades of flat earnings, declining purchasing power, and job loss appears to have come to an unruly head. A tremendous amount of angst has been directed at the 'over levered/reckless' financial institutions who were made 'whole' by their good friends in powerful political positions. This 'largess' has simply been added to the 'public balance' sheet effectively doubling the national debt. The protesting tax payers have had more than enough of that bad act. It is a long overdue wake up call to the financial parasites throughout the world who have endangered and threatened the entire global economic system.
It is my hope that these protests mature into a focus towards the policy makers and our fearless/delusional elected leadership who are front and center as originators and enablers of much/most of this turmoil. For 30 years the economy has had to endure endless/mindless government spending/deficits, failed policy/regulation, self interest/vote buying, and various levels of incompetence/corruption. We are left with a bloated unproductive bureaucracy and trillions of dollars in debt. The more that is 'spent/borrowed' the worse conditions get. Government interference and meddling is the problem. Leadership who agitate and create a 'class warfare' atmosphere pitting employees against business desperately need to be replaced. Governments who do not guarantee to live within their means should never be elected - ever! US Federal spending is running at an unsustainable 25% of GDP. 2011 has the potential to record a setting deficit in excess of the $US1.4T in fiscal '09. It is becoming apparent that money supply 'genie' is out of the bottle and out of control. It is time for 'real' leadership to 'occupy' the Whitehouse. With any luck the 'social experiment' has/will come to an end before any more irreversible damage is inflicted on a vulnerable and fragile economic system.
All will be worth it if we move toward to coherent and realistic restructuring and restriction of the rules and responsibilities of the political process. The message needs to be sent that no one is 'too big too fail' and you cannot do 'whatever it takes' in order to rescue or support 'selected' interests. Currently the Euro political types are calling for a 'big bazooka' or 'quantum leap' approach in policy (read: more debt) to solve the problems which too much debt created. That mindless 'solution' will guarantee tragic results!
This is not a failure of capitalism/free markets but rather an obvious failure of the political machinery on ALL levels. The beginning of the end was in 1992 when the government insanely required Fannie Mae and Freddie Mac to direct a substantial portion of their mortgage financing to 'sub prime' borrowing. By 2007 the mind boggling 55% of 'junk' lending quota was reached and the rest is a sad history. A true free market/capitalistic system works best when it is allowed to cleanse excesses (read: moral hazard) to ensure that critical fear/greed (read: risk reward) balances exist. That means - no more stimulus, government job creation, or deficit financing solutions. After all the wasted 'blank check' trillions solution Obama has now altered his political message/sound byte from jobs 'saved or created' to now jobs 'supported!' Job 'saved or created' has come with a cost of $US250k/per vs the job 'supported' at an $80k/per price tag. I guess they figure that is a major cost saving measure? It is prime time to harness the power and influence which many dysfunctional politicians wield. It is time to respect those who foot the bill and who directly contribute to the health of the economic system. It would be an ironic tragedy if these very real protests ultimately increase the power, influence, and the importance of political and policy mandates/madness.
In the meantime, Fitch is not waiting for 'structural change' and is down grading any 'too big to fail' financial institution which has 'indulged' in Ponzi balance sheet master minding - and with 'negative outlooks.' S&P downgrades Spain by a notch to AA- also with a negative outlook. High unemployment levels, tighter financial conditions, and persistent levels of public and private sector debt were cited has major headwinds. UK jobless has reached 15 year unemployment highs to 2.57 million or 8%. Credit Suisse sees 66 European banks failing the latest stress tests. It is expected that Euro banks will need as much as $137b to make them 'whole' and solvent. The Chinese trade juggernaut lost some momentum as it's surplus shrivelled for the second straight month - it's slowest pace in 7 months. The G20 finance ministers and central bankers will spend the weekend in Paris in the 'hope' of pulling this debt & credit nose dive out of it's dangerous spiral. Expect an historic can kicking 'wall papering' job and conditions to worsen before they improve.
In the US, consumer confidence continues to deteriorate despite encouraging retail sales and record exports levels. Retail sales are 5% higher than 2008 levels which is impressive considering that 7 million less people are working. 5% fewer people are working yet spending has increased 5%. Recent auto sales doubled expectations. Exports have also registered record recovery growth nearing almost $US200b/month.
Earnings season is now in full swing with companies beating at a 70% rate in early reports. All eyes will be fixed on the expected 'miserable' earnings of the badly beaten down banking sector. I suspect much of the stock price downside has been factored into expectations. The critical ailing housing market shows signs of recovery with increased sales and declining inventories.
On the week the DJIA was up 4+%, S&P 5+%, and Nasdaq improved almost +7%. The major markets have quickly reversed the July to September free fall to a slightly positively year to year increase. Technology and energy stocks led the gain supported by positive corporate news. S&P short interest as a percentage of float has recently jumped to an over sold 4.4% reading. A significant proportion of this week's rally was probably the result of nervous short covering. Significant resistance levels for the DJIA is at the 11,800-11,900 area, S&P 1,250, and Nasdaq 2,660.
In commodities, despite bearish USDA World Agricultural Supply and Demand estimates the Agra Grain complex posted an impressive 5-15% rally from very over sold, well supported levels. It was the 4th consecutive monthly upward projection by WASDE for global stocks-to-use data. Prices remain very attractive at current levels. A retest of current low levels would be attractive entry points. The crude oil price has rallied to intermediate resistance at $US88/bl despite revised IEA data calling for less 2011 and 2012 demand. A close above $US90/bl would break crude above a 6 month downtrend and imply a retest of the $US94/bl (200dma) level. Gold is consolidating at the $US1,675-90/oz level and a probable retest of $1,620/oz critical support. Silver which is currently above $US32/oz appears vulnerable to a retest of the $US28-30/oz level. Copper is well supported in the $US3/lb level.
In Canada, a persistently strong housing market is supporting fairly strong economic data. Employment conditions continue to improve despite a slightly widening August trade deficit. Canada factory sales are at the highest level in 3 years.
Sinopec China agrees to buy 100% of the assets of Daylight Energy for $US2.1b for oil and shale gas reserves. It is a significant move for a Chinese entity to buy more than a minority interest for a Canadian corporation.
In an interesting report based on current valuations Canadian Banks are reported to be among the most levered at an average of 22:1 (worse than US and China, better than Europe) with the lowest cash-to-deposit ratios of 3% (better than Europe) in the world.
A 'system outage' misstep by tech whipping boy RIM generated a tremendous negative outpouring and a major public relations fiasco. Within a few days the system was restored, the CEO apologized, and an 'inconveniance settlement' was promised. RIM appears to be on a very short leash and desperately needs a few technological break through to reassert their reputation and limit market share loss.
The S&P/TSX closed fractionally above 12,000 and at significant residences. A move above 12,200 would imply a rally to near 13,000 the 200dma. The TSX/Venture has rallied 15% to 1,550 resistance. Continued commodity strength would imply another 15% rally from current levels. Tax loss selling pressure should limit any strength until the beginning of 2012 for junior resource stocks.
Bottom Line, the G20 has told the Euro Zone that they have a week to get their house in order which may be beyond wishful 'Leaf's winning the Stanley Cup' thinking. The extent of the private sector 'haircut' on Greek debt holdings are to be determined along with a 'credible' plan to recapitalize of Europe Banks and the installation of a 'firewall' protecting other countries from Greece's woes. I suspect that the G20 will be substantially disappointed on October 23rd. The US is expected to record at least the second largest budget worst deficit on record. The gap between spending and income will remain above $US1T for the third straight year. Just as concerning the US Senate has passed a bill that would punish countries which manipulate their currencies (unlike themselves) like China. Within moments China fired off a warning retaliatory short by weakening the Yuan. These fearless elected officials need to be reminded not to pick fights that they cannot win! Fortunately economic data has remained resilient to positive. However, until government spending and influence is dramatically reigned in and controlled any economic upside will be limited at best. At some point people (protesters included) will come to the realization that the more a government spends the worse conditions get. Any subsequent moves that are made to support the Keynesian spending madness will take conditions from worse to fatal. I have no faith that the policy makers will come to that conclusion anytime soon!
In the meantime seat belts and crash helmets are in order should the politicians continue to step on the gas while ignoring the speed & spending limits!
'Everyone wants to live at the expense of the state. They forget that the state lives at the expense of them!'
Frederic Bastiat
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