8/25/2010
By Brian Sozzi, Research Analyst

The last couple of months have been rather eventful for global equity markets.  Seemingly each day there are conflicting signals regarding the sustainability of the U.S. recovery, the impact from the implementation of deficit reduction measures in the EU, and how will the cool down in red hot China unfold.  Second quarter earnings did very little to minimize investor trepidation when it comes to risk assets.  Corporations beat on earnings handily, enacted share repurchase plans, spun stories of positivity, and served up in line 3Q forecasts by and large.  However, the market has not bought into such tales, believing them to be folly as three-months of souring economic data may well metastasize in second half earnings.

All of these occurrences have been a futile lesson in market dynamics, lessons that I hope investors are writing down and saving for later reference.  Through the litany of daily headlines, however, a sole message has reigned supreme.  The geeky, unknowing of the common person's trials and tribulations members of White House's economic team have been dead wrong in assuming that stimulus measures are the holy grail.  To be specific, stimulus of any kind that does not address others aspects to the GDP equation directly, in addition to cutting taxes that spur job creation and capital deployment, is unwise.  In my view, the Administration has intruded in private markets to facilitate artificial demand, which boosts temporary factors (jobs, wages), which in turn raises the prospects for re-election.  The impact of Big Government is currently being fleshed out in the housing market, where existing home sales declined 27% last month as sales were pulled forward to capture a tax credit.  In spite of the Fed induced low mortgage rates, what are trends in housing signaling?  They are saying that those in the private market are afraid to leverage up their personal balance sheets given economic uncertainty, which is derived from a tax (Bus tax cuts expiring=increase in taxes) and spend Administration that is out of touch with common folk.  Fancy a glimpse at what the U.S. has received for its $814 billion "investment" made in 2009...

...Minus the impact of the stimulus plan, the CBO estimates GDP would have fallen some 2% in the second quarter of 2010.  Yes, that is fallen 2%, instead of the 2.4% increase that is likely to be revised lower this Friday.  Within that number there is ton of unused capacity in the system, and with unused capacity there are people sitting at home collecting unemployment benefits or ticking the days off until benefits are used up.  The underemployment rate, according to Gallop, hit 18.4% in July, not much removed from the April peak of 20.4%.  Among the major classes, 18-29 year olds employed part-time but want full-time work are 16.6% underemployed.  These are young adults not utilizing their college degrees to the maximum, sitting on debt, mostly because stimulus measures have been short-term oriented/misguided.

Big deal, the government tosses money to a state to aid in the paving of a highway, yielding temporary employment or a boost in wages (overtime) for those that did not get laid off.  How about the government stops penalizing the local, family-owned paving company by eradicating uncertainty on healthcare costs and the specter of higher tax rates, so that company can hire a 25 year old to engineer a new way of paving a road or a new paving product, which brings about a more lasting job.  That lasting job could branch from there; the money earned could buy food at the local supermarket and clothes at the mall, for example. 

Can life be so easy?  Even if it were, I believe this Administration would find a way to make it complicated.

Brian Sozzi
Wall Street Strategies