Monday Markets – The 3 Percent Solution

We're getting that pullback we expected – let's hope it doesn't go too far!

The watered down version of the stimulus is already spooking the markets and I am firmly in the camp with those who think we should be committing more, not less, to boost this economy.  The opposition naysayers seem to think that only money spent by people getting tax refunds (see cartoon from last stimulus) goes back into the economy but, to the extent that some of that money is saved or used ot pay off past debts – it is wasted from the point of view of STIMULATING the economy.  Government spending, on the other hand, is just that – SPENDING.  Whether it is hiring a person to do a job who was previously unemployed or buying laptops for schools, stimulus spending does work as advertised so killing appropriations for NASA (as was done this weekend) only serves to put less money in Aerospace firms and killing Food Stamps (also chopped) only serves to give less money to supermarkets, food retailers and farmers – not to mention the people who starve to death in order to cut a Billion off a Trillion dollar spending bill…

It's hard to look at the original list and try to find the logic in what was completely cut: Head Start, Education for the Disadvantaged, School improvement, Child Nutrition, Firefighters, Transportation Security Administration, Coast Guard, Prisons, COPS Hiring, Violence Against Women, NASA, NSF, Western Area Power Administration, CDC and Food Stamps or to see how reducing Public Transit by $3.4Bn (people have less money so let's take away their buses, which are bought from GM and cut driver jobs so even more people have to walk) or School Construction by $60Bn (which would have created tens of thousands of jobs) really accomplishes an improvement over the first bill.

Of course, like the TARP, the headline spending of $800Bn is nothing compared to the TRILLIONS that will be committed by the Fed and, hopefully, some of that relief will actually find its way to struggling homeowners this time.  I am advocating a 3% solution – giving a 3% mortgage to anyone in America who can make the payments.  For a person with a $200,000 mortgage at 8%, this would drop the monthly payment from $1,467 a month to $843 a month (42% less) and even a 6% mortgage ($1,199) would drop 30% at 3%.  Would knocking off 30-40% of your monthly mortgage help you?   Would it cut down on a significant amount of foreclosures?  Would it save the commercial real estate market?

How about if we extend the 3% deal to people who are paying 18% on their credit card debt?  A family with the average of $6,000 in credit card debt pays $90 a month in interest alone.  At 3% that amount drops to $25.  You can even raise the minimum principal payment requirement to 3% and you are still saving people half their monthly credit card bill while putting them just 3 years away from paying down their credit rather than the endless treadmill most families find themselves on.  The Fed is already giving money away for 0.25% so the lenders would be making 2.75% on the loans, better than a 5-year note pays!  For those who cannot make THOSE payment obligations, THEN we can set up a bad bank but why not rescue 90% of the troubled assets first rather than saddle the government with millions of unpayable loans. 

If you can think of 10 people this would help then imagine how many people this would actually help.  Don't forget the government is already loaning money at 0% – just not to you and the government also already pays 35% of mortgage interest anyway in the form of tax deductions so this program would net cost very little to implement but it would put hundreds of Billions of dollars back into the hands of homeowners and business people, put cash back into the banks as old mortgages are paid off and no longer discounted as "bad assets" and maybe even ignite some interest in home buying (as we are knocking 1/3 off the effective cost of a home). 

Feel free to send this to Congress or the Senate(who even have a phone number you can call).

Two weeks ago we ran the Big Chart and our big concern was hitting the 50% off line with the SOX, all of Asia and the CAC already across.  Every single index we track was at least 40% off their highs and the CAC was actually retesting the November low in what I called "Freak Out Friday."  Things were looking so bad that morning I had to call for calm but we never even went as low as last Monday so everything is relative! 

Sadly, the only real improvement over Jan 23rd is the CAC coming back over the 50% line (almost right on it now) and the FTSE, which crossed above 40% off it's highs and is, surprisingly, the World's leading index from that perspective, off just 37% from the 2007 top.  Sadly the FTSE is the only major index that is less than 40% off and the Dow is closest at 41% but we are a long, long way from feeling better about this market.

US market watching will be easy this week as we watch the action between 45% and 40% to see which way things break.  We don't like to see the Dow up there all alone at the 40% line and, if another $800Bn isn't going to move us above that line – I'm not sure what will.  The magic numbers on the Dow are 8,217 and 8,066 but we really need to hold 8,217 if we want to see the other indexes playing catch up.   We also need to see some positive action on the CAC, which is dragging the EU markets down.  France is still on strike and the strike has spread to French colonies like Martinique and Guadeloupe, causing chaos in those tourist destinations as they begin to run out of goods on islands were almost everything is imported.

Certainly the global Dow chart (right) is nothing to get excited about as the entire index is off about 50% from it's highs and pretty much drifting along at that level.  Emerging markets are in tremendous pain although Chavez said "The global economic crisis hasn’t touched even a hair of the Venezuelan economy."  This seems kind of strange with oil at $40 but we can take it with a grain of salt as Chavez is campaigning for a Feb 15th referendum to amend the constitution to allow him to seek another term in 2012.  Oil accounts for 93 percent of Venezuela exports and crude oil prices have dropped 72 percent since touching a record in July.  Venezuelan consumer prices rose 30.7 percent in January from a year earlier, the highest annual inflation rate in Latin America. Chavez said that curbing inflation is a “battle for everyone.”  

Over in Asia, the Nikkei pulled back sharply off a strong open, harshly rejected off a 2.5% gain to end up down 1.3% for the day, a clear reversal on the 5% rule and they have just one chance to re-test 7,900 before making a very ugly pattern.  Brokerage Nomura holdings led the financials down with a 14% drop after saying they would issue $3.3Bn in stock to raise capital.  The Hang Seng added a point and the Shanghai Composite hit 2.5% on the button but is running out of gas as they approach the critical 55% off line at 264, which is a must this week as Shanghai has to lead Asia out of the sub-50% basement.  China is making several moves to bolster consumption with programs aimed at their 700M rural residents.

Europe is being held down by the energy sector this morning, as well as concerns about the passage of a US stimulus package.  There is a G7 meeting at the end of the week, which is a much bigger deal to them than to the US press, who barely mention it.  BCS came through with BTE earnings and jumped 11% this morning – the bank said they have no need for fresh capital but still expect a rough 2009.  Barclays is the World's 3rd largest bank so maybe (and I know this is blasphemy) Whitney and Roubini are wrong and we will survive this crisis.   NYX announced a loss but a lot of it was goodwill impairments and I'm ready to pull the trigger on those, buying the stock around $21 and selling the March $20 puts and calls, hopefully for $5 before the premium washes out post earnings.  That's net $16 if called away at $20 and net $18 if put to us on March 20th, which is just about their non-spike lows. 

We'll be watching 8,217 on the Dow to see if it holds. Obama speaks to the nation this evening and we won't be hearing about the Treasury plan today.  Tomorrow we get Wholesale Inventories at 10 but not much going on until Thursday data-wise when we get Jobless Claims, Retail Sales and Business Inventories.  There are tons of earnings still to come with some tough ones on Thursday that I mentioned at the end of Friday's comment section which have us concerned about the end of the week – but let's get through the beginning of it first!