Since I last wrote in May, the market drifted downward only to work its way back up to the same level again. This story is much the same as it has been so far this year. Today the S&P 500 is flat for the year, though up over 30 percent from the closing low date of March 9, 2009. Given these wide fluctuations in value, we have to ask ourselves whether current levels make sense. I believe that they do.
• The ISM Manufacturing Index for June came in at 44.8. This is the sixth month in a row where the number has increased and the highest number since August 2008.
• The U.S. Personal Savings Rate in May was 6.9%, up from 0.8% in August, 2008. People are working towards building a safety cushion. In the short term, this has hurt our economy as consumers represent roughly 70 percent of total expenditures, but in the long-term, this is a necessary and healthy structural change.
• The opinion of George Soros is often insightful. On June 20, he told Polish television that the worst of the global financial crisis "is behind us."
• China's economy, the third largest in the world, may be well on the road to economic recovery. According to a Bloomberg article, there are indications that China's economy may have expanded 7.8 % in the second quarter due in large part to the government's aggressive 4 trillion Yuan ($585 billion) stimulus package and the easing of restrictions on bank lending.
On the political front, there are developments in Washington that give most Americans some hope for the future. Here are my top interests:
• The Public-Private Investment Program (PPIP) has begun. This is good because the buyer will pay a price at the level at which the new buyer can finish the project (e.g. build the building), and make money. Until now, institutional real estate has been frozen. A Boston lawyer in the field tells me that not a single large (100,000 sq. ft) building has sold in Boston or Cambridge this year. So the program creates economic stimulation by getting buildings moving again, resulting in bringing the buildings back into use by hiring construction crews, realtors, building management teams and so forth. It is a whole lot more than a bank bailout; it will be job creating.
• In a memorandum to department and agency heads, President Obama moved to prevent agencies from denying states the right to pursue certain cases (generally consumer health and safety). Agencies had been claiming federal government had the right to preempt states. In addition, the Supreme Court, which is the third arm of government and not the administration, recently found in Wyeth v. Diana Levine, that a warning label didn't remove one's constitutional right to trial by jury, although Wyeth had tried to argue it did. These two events mark a dramatic reversal of the advances corporations had made to deny recourse for harm suffered as a result of their products or business practices.
• The administration also continued to demonstrate a willingness to discuss and act upon issues long swept under the carpet. On June 26, the White House appointed Lynn Rosenthal as the first-ever White House Advisor on Violence Against Women. For the first time, staff within the White House will be dedicated specifically to advising the President and Vice President on domestic violence and sexual assault issues. On June 22, President Barack Obama extended some benefits to same-sex domestic partners of federal employees. He also extended benefits to partners of State Department Foreign Service officers.
• The Senate Judiciary Committee has begun to weigh Judge Sonia Sotomayor's nomination to the Supreme Court. I'm watching the Chamber of Commerce, which has not yet determined whether to endorse her. If they choose not to, and if she is seated (as is widely expected), she will have the distinction of being the only Supreme Court Justice not endorsed by the Chamber since they began their endorsement practice with Justice Clarence Thomas in 1991. I'd like to see a Supreme Court Judge that was not grateful to the Chamber.
• Most importantly, the administration has also FINALLY begun to address the issue that I had stated as most troubling for investors: the speculation and greed, which played such a large role in our economy's collapse.
• Treasury Secretary, Timothy Geithner testified before both the House Financial Services and Agriculture Committees on the government's plan to regulate derivatives. Trading firms will operate under "substantial supervision and regulations," including conservative capital requirements and strong business conduct standards. He stated that the system should also include regulation to prevent "market manipulation, fraud and other abuses," and be fully transparent, he said.
• Reinstatement of the uptick rule is likely. Senator Ted Kaufman, Democrat from Delaware said in an interview with MarketWatch, "If the SEC doesn't move because they can't get three votes, I will have to do something ... It is pretty clear that there are people in the marketplace driving down stocks in an abusive manner and something should be done about that." Senator Kaufman is a long-time top aide to Vice President Joe Biden and was a prominent figure in the Obama-Biden transition to the White House so probably speaks with administration approval.
• Treasury Secretary, Timothy Geithner has described The Consumer Financial Protection Agency proposed by the administration as an agency that will have one purpose: to protect consumers from the sort of loans that led to global collapse in the first place. Top concerns include mortgage schemes, credit card fees, overdraft fees, and difficult-to-understand contracts. Although the banking industry (having pocketed the taxpayer bailout funds) is determined to fight it, the national debate will lead to something.
To sum it all up, I see a lot of encouraging news out there. Though GDP growth may continue to suffer for a while and unemployment may remain high, I do believe we have again achieved a backdrop against which stocks should be able to trade on underlying earnings. Companies which have strong balance sheets and can generate their own growth should be able to rise again.