Wednesday, August 22, 2012

Markets slide after "fiscal cliff" assessment by CBO

Dow fell 30 (early losses pared by late day buying), decliners over advancers 3-2 & NAZ was up 6 (helped by another big gain at Apple). The Financial Index was down pocket change in the 204s. The MLP index lost 2 to the 393s & the REIT index was essentially even in the 262s. Junk bond funds were mixed & Treasuries were higher after a month of selling. Oil slipped but gold gained to go over $1650, a new high since early May.

AMJ (Alerian MLP Index tracking fund)

Click below for the latest market update:

Treasury yields:

U.S. 3-month	0.101%
U.S. 2-year	0.263%
U.S. 10-year	1.717%

CLU12.NYM

...Crude Oil Sep 12

....96.40

...

0.28 (03%)

Photo: Yahoo

Massive spending cuts & tax hikes due next year will cause even worse economic damage than previously thought if DC politicos fail to come up with a solution, the Congress Budget Office (CBO) said. Without Congressional action to avoid a "fiscal cliff," Americans should expect a "significant recession" & the loss of 2 M jobs, the CBO said in its gloomiest assessment yet. The economy is already being "held back" by the mere anticipation of the cliff & the uncertainty surrounding it. "The sooner that uncertainty is eliminated, the better," the CBO said. Neither Dems nor Reps have shown a willingness to back away from fixed positions on either budget cuts or extension of tax cuts originally enacted during the administration of George Bush. The "cliff" refers to the impact of expiring tax cuts & automatic spending reductions set for 2013 as a result of successive failures by Congress to agree on some orderly alternative method of addressing the deficit. The CBO said failure to avoid the cliff would deliver a shock to the economy that would cause GDP to shrink 0.5% in 2013. Previously, the CBO had forecast full-year GDP growth of 0.5%. The main reason for the gloomier outlook now versus the last estimate in May is weakness in the global economy, the growing uncertainty about what Congress will do & a determination that the cliff is somewhat steeper than the May estimate suggested. That estimate did not include expiring payroll tax cuts & the end of extended unemployment benefits, the CBO said. Factoring in the end of those streams of cash to Americans would increase the shock. Were Congress to resolve everything, the most optimistic scenario, the CBO said the economy would continue to grow, albeit weakly. Economic growth under this optimistic scenario would be modest in 2013 at 1.7%, with an 8.0% unemployment rate compared with 9.1% should the US go over the fiscal cliff. The CBO anticipates that the first half of next year will be particularly difficult, with GDP shrinking 2.9%, followed by a slight bounce-back with H2 growth of 1.9%. But these are far worse than its previous projections of a 1.3% H1 contraction followed by 2.3% H2 growth. These thoughts are chilling.

U.S. Budget Deficit to Reach $1.1 Trillion in 2012, CBO Says

Photo: Yahoo

The Federal Reserve (FED) is likely to deliver another round of monetary stimulus "fairly soon" unless the economy improves considerably, according to minutes from the central bank's Aug meeting. While the meeting was held before a recent improvement in economic data, including a stronger-than-expected Jul reading for employment, policymakers were pretty categorical about their dissatisfaction with the current outlook. "Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery," the FED said in its minutes. Some officials raised concerns about whether the FED presence in the markets for Treasury & mortgage-backed securities, but others agreed with staff analysis showing "substantial capacity" for buying new assets. The FED held policy steady, but signaled a renewed readiness to act amid lingering softness in the economy. The minutes showed the central bank is actively considering a "flexible" bond-buying program, which could suggest that no upfront amount will be announced. officials saw significant risks to an already weak economy, which grew at a sluggish 1.5% annual rate in Q2. The risks include a worsening of Europe's financial strains & the looming budget cuts & tax hikes, which have become commonly known as a fiscal cliff. Many officials supported pushing back the likely timing of an eventual interest rate hike, which the FED currently sets at late 2014. But they decided to defer the decision to the Sep 12-13 meeting, when the central bank will release a new round of economic forecasts. Even actions by the FED will not be good enough to counteract inaction in DC.

Many on FOMC Favored Easing Soon if No Pickup in Growth

U.S. July Home Resales Rise to a 4.47 Million Rate

Photo: Bloomberg

Sales of existing homes homes climbed in Jul from an 8-month low, adding to signs housing activity may pick up in H2. Purchases of previously owned houses increased 2.3% to a 4.47M annual rate, according to the National Association of Realtors. The forecast called for a rise to a 4.51M rate. Buoyed by cheaper properties & record-low mortgage costs, demand for real estate is bolstering the industry that helped trigger the recession. The median price of an existing home jumped 9.4% from a year earlier, the biggest 12-month gain since Jan 2006, to $187K from $171K in 2011. Compared with a year earlier, purchases increased 11% before adjusting for seasonal variations. The number of previously owned homes on the market climbed 1.3% to 2.4M. At the current sales pace, it would take 6.4 months to sell those houses compared with 6.5 months at the end of the prior month. A 6 months supply is considered “normal.” Housing is mending, but slowly.

Sales of U.S. Existing Homes Increase From Eight-Month Low

Markets did like to hear about the looming fiscal cliff the US is facing. But it's coming if congress doesn't get its act together which looks doubtful before the Nov elections. This gibberish is holding back economic recovery. Then it's a matter of patching together this & that. There is just so much talk that can make this approach look intelligent. The economy is facing increased taxes when current rates expire at year end. That's not all. Budget cuts will kick in as mandated by legislation to reduce the deficit. Speaking of deficit, the limit on the debt borrowings is approaching. Just one more problem for Congress to fix. Big Ben may have a lot of influence, but there is just so much that even he can do with this mess.