Stimulus, Shmimulus

Well.....I'm back. To those who have read my ramblings in one way, shape, or form over the years, hello again! To those who haven't, I hope you enjoy!

Being out of the big bank meat grinder is a blessing, especially when it comes to writing. I feel as if the shackles are off and I now can say what I want, the way I want to. It's back to the good old days for me! Back to the time before Grubman, before the ever-expanding pack of lawyers combed over every word, taking the life and fun out of all written pieces and reducing them to lifeless masses of investment-speak. The worst part of it is, as it turns out, all of the uber-editing and watering-down did absolutely nothing but take the fun out of the business for me. It accomplished nothing. Maybe the powers that be should have been watching the prop desk a little more and me a little less because, and you'll hear me say this again and again, you rarely get hit by the bus you see coming. But I digress. There's a whole bunch to think about this week, so LET'S GET CRACKING!

STIMULUS, SHMIMULUS

As everyone knows, politics, disguised as 2 programs (the Treasury's Financial Stability Plan and the ~$790 bln economic stimulus plan) intended to wake the US economy up from its coma, has been battering investor psyche over the past week.  While the potential effectiveness of either plan is most certainly debatable, what is not is that the past couple of weeks have turned into high season for political posturing and grandstanding. Oh joy!!! When are these politicians (on both sides of the aisle, but since there are a lot more democrats floating around these days......) going to figure out that very few of us believe that they are remotely as smart as they think they are and most of what they say is pure drivel? My (unsolicited) advice: unless you really know what you're talking about, please don't open your mouth, especially on TV. While this may sound like a random political rant, it's not. The stock market hates uncertainty more than just about anything else (save half-baked plans from the Treasury), and when the arguing and grandstanding hits a fever pitch at a very delicate time for the economy, investors are more prone to get even more nervous. Best that the loudest yammering is done behind closed doors instead of in the media.

Nonetheless, it looks as if a "compromise" has been reached and the stimulus package is as good as done. Yippee! While I'll spare going over what looks to be close to the final package with a fine toothed comb as so many others have already done, let's take a general look. First of all, depending on whom you listen to, this is either a major positive for the economy or a complete and utter waste of taxpayer money. As usual, the truth is probably somewhere in the middle. However, the crux of the issue is this: the plan is not remotely as stimulative as the government would like you to believe.  In fact, in doing a little back of the napkin calculations, it seems to me that only around 30% of the package is devoted to spending and tax cuts that are likely to have any real stimulative impact at all.  The rest, while in certain cases noble (and in others, stupid), seem destined to at best help to keep the current situation from getting worse (which is, of course, OK in the short term but potentially very costly for the dollar and interest rates in the long term). 

The other broad issue is the amount of time that the parts of the plan that are actually stimulative take to enter into the economy.  The disbursements have to be funneled through various government agencies which, as we all know, are not the pillars of efficiency.  It's like the current electricity grid: just as some electricity is "lost" as it moves along the grid, money tends to disappear as it moves through various government agencies.  So a cynic would say that the 30-35% of the package that is stimulative won't end up being even that much in the end.

Now, some might note that despite all of the above, ~$250bln is a heck of a lot of smackers, which is true.  I'm not arguing that our economy will get zero benefit here.  The problem is that many economists are looking for a stimulus-led economic pop in the second half of the year, and I just don't see it.  The numbers simply don't add up.  I think that the more likely outcome is that we'll see improvement from the terrible state we're in now, but likely only to the tune of maybe 1-1.5% GDP growth in the second half of the year.  In contrast, economists seem to be looking at 3%+ growth with some as high as 5%.  Mark my words: NO WAY.  This is likely to lead to investor disappointment in the back half of this year.  

To drive this point home, consider this: economists point out that the consumer accounts for about 70% of GDP.  This has not always been the case.  In fact, this number represents a peak. The average in the past has been about 66%, and between the mid 1950's and mid 1970's the average was about 62%.  In addition, while we've been hearing about the personal savings rate rising in the US, this process has just begun, especially with the unemployment rate very likely to go over 9% this year.  The savings rate is around 3% at last check. It was about 14.5% in 1975. I'm not saying we have to go that high, but I can say with some certainty that it's going higher than it is today.  Soooooo, assuming that this is the case, and assuming that there is some reversion to the mean in terms of consumer spending as a % of GDP, we're probably going to have to "replace" over a trillion dollars in consumer spending with other spending (read: government) in order to avoid contraction, all else being equal.  Consider this vs. the size of the stimulus package, and remember that a good chunk of that spending is not going to be on goods and services.  Net/Net: if this stimulus plan is the last one we see, I'll eat my hat.  What does this all mean?  Hellooooooo deficit!!!  Goodbye dollar!!!

With all of this said, timing is always a question and there may actually be reason for some near term equity market optimism.  Should Geithner have stayed home the other day?  Yes. Was the "announcement" of the Financial Stability Plan handled poorly?  Yes.  Is there still a lot of work to be done before we actually see the fruits of any public/private investment fund that can help take bad assets off bank balance sheets? More than likely.  Was the negative market reaction overdone?  I think so.  While this press conference and hype leading up to it should NEVER HAVE HAPPENED, I believe that the basic principles behind the plan are interesting and could potentially be very helpful in SLOWLY thawing out the credit markets.  

With all due respect to our new President, no sir, the recovery is NOT going to start with job creation.  Employment is a LAGGING indicator - always has been and always will be.  Any recovery must be born within the credit markets and I believe that Treasury is potentially taking some steps in the right direction.  I realize that the devil's in the details and we sure don't have a lot of them at the moment, but I believe that the expanded TALF plan might actually work in terms of freeing up the asset backed market (credit cards, auto loans, student loans) a bit.  Also, contrary to common perception, it seems that the public/private investment vehicle has a shot at working, at least to a certain extent, especially if the bank stress-test that's been proposed leads to further write downs in asset value (in exchange for common equity). While this doesn't sound great on the surface (and it isn't initially fabulous for bank equity holders), it may help bring the pricing issue closer to resolution which, in turn, may get the market for some of the "stuff" that's gumming up the works jump started.  

I hope and pray that Mr. Geithner learned the lessons from his predecessor and doesn't go completely changing the game mid-stream.  He CAN'T be that ill-advised, can he?  If Tim pulls a Paulson, I'm moving to France.  In sum, while we have to wait a bit longer for details as to how these various programs will work, it seems logical to believe that they will emerge, and when they do, I think that it's better than even money that they'll act as positive catalysts.   

In addition, there's the possibility that the technicals are telling us something here.  The VIX (a measure of market volatility) broke below it's 55 day moving average yesterday (the lower it goes the better).  This said, the action in the US equity markets today were a trifle disheartening as there was no follow-through from yesterday's late-day strength.  As the Dow took a peek at its low yesterday before its rally, our fingers are crossed here.  We seem to be at a critical juncture in the near term, so while I'm leaning towards the optimistic side, my confidence level is not particularly high.  

So boiling the thoughts on the equity market down here, I see the possibility of bit of a rally in the spring, although the next few sessions will be extremely important in terms of that view. The VIX is providing a tentative glimmer of hope, pessimism rules the day, and while we're not in store for ANY good news on the economic or earnings front anytime soon, expectations are so low in terms of the Treasury's plan that ANY well thought out details on even one aspect of the plan could well give the market a boost.  For those intrepid souls with iron constitutions, it might be time to take a position in SSO (levered long S&P 500 ETF) for a trade with a $20 stop in case it doesn't pan out.  

This all said, I do not expect any rally to be lasting.  I expect the trajectory and shape of the economic recovery in the second half of the year may very well leave many investors wanting and I'd expect to see yet another trip to the low end of the trading range (assuming we bounce first) as this realization hits home.  If there's no bounce, then it's to new lows I'm afraid.  In other words, equity investors would be best served having their fingers on the trigger either way (ready to react to a break down of the charts OR ready to sell into strength), especially concerning consumer-related names.  

Looking forward, I see even more government spending to be proposed later this year as a result of  the prospect of a tepid (at best) economic recovery.   If I'm right and the economic pickup is nothing to write home about, I'd have my eyes on TBT (Short US Treasuries) and use any related weakness to BUILD positions.  The more the government spends, the more worried we all should be about the state of the dollar and the eventual popping of the bubble in Treasuries.  However, with economic concerns abounding, TBT is not going to go up in a straight line from here and we're likely to have opportunities to leg in on weakness (i.e. like we saw on Wednesday). Over time however, up it will likely go (and perhaps substantially so). However, this is a story for another day........ 

Have a great weekend!

TRB