3/25/09 (Obama Broke? Durable Goods Up?)

Traders,

Yesterday the market pulled off and gave back a couple percent. Obama came out defending his budget deficit even though the government’s own Congressional Budget Office shows his proposals seriously in the red. Even Senator Gregg mentioned that at conservative estimates (using the CBO numbers) the government would be paying $600 to $800 BILLION in interest alone - we WILL go Broke.

However – the president doesn’t want to budge on spending money for Healthcare, Energy, and Education – even if it meant eliminating the middle class tax cut (which he avoided to answer).

In one sentence he says "his people's" projections are for a GDP growth rate of 2.6%, while the CBO and others are in the 1.9 to 2.2% and thus based on "HIS" projections we will be cutting the deficit.

(Cutting the deficit NOT by cutting spending but “hoping” for growth to pay it down. The spend now to “hopefully” grow later.)

Then in another sentence he says NO ONE can predict what growth is going to be 4, 6, 8, or 10 years out. Well if that is the case – then WHY would "his people's" estimated be correct and why is he spending NOW (increasing the deficit massively) based on his projected HOPE of growth.

He argues that companies should not speculate on tax payers money, but I would argue that is exactly what he is doing with this massive spending bill – speculating on growth in the future. Let me remind you he is NOT cutting the deficit, he is increasing it massively – based on the speculative growth rate that in the future growth will pay it down. Why bother having a Congressional Budget Office if you are not going to even use their estimates and who is HIS people to say the Congressional Budget Office is wrong? Who are his people?

The argument here is NOT about healthcare, education, and energy – the argument is let’s FIRST reduce the deficit and debt – get the government’s balance sheet cleaned up, fix the economy, and strengthen our currency. THEN after we do that (if it takes a 6 months, a year, 2 years) – THEN we can have the healthcare, education, energy spending debate as to how much we CAN afford to spend. He is justifying his ideology and ignoring how he is going to pay for it and it is all predicated on his people’s prediction of growth in the future. It’s an ALL IN bet – because if he is wrong and depending on how wrong he is – the interest on debt could be massive and Senator Gregg is correct – he could bankrupt the country.

The administration reminds me of the GM dilemma – what sank GM was not selling cars (in 2006 they had record sales) – it was the massive debt and deficit spending – GM had to borrow money JUST to pay their billions in interest payments. At some point debt WILL destroy a company or country.

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Durable goods jump!

Durable goods unexpectedly jumped on a rebound demand for goods. It was a massive increase of 3.4% ( the biggest in one year). It seems to be indicating that the economy might be finding a bottom – however once we pull back the numbers we start seeing that it’s not retail as much as it is defense. Bookings for military equipment jumped by 35% (Lockheed won a $5 billion military contract for example). Non-defense goods (excluding aircraft) climbed 6.6%. Additionally – looking further into it – there was a huge push to move out inventory at steep discounts.

One economist pointed out this jump is an anomaly as it reflects a larger increase in defense and while there was growth in non-defense it was also based off the gluten of inventory that was moved at steep discounts (in some cases for losses.) His expectations is for a more volatility as inventory needs to be pushed out and companies are still in cost cutting modes. The important number that he reflected was growth in new orders has significantly dropped (Boeing had only 4 aircraft orders, down from 18 a month earlier) – indicating that when old inventory is pushed out – new orders indicate a slowdown and not to read too much into this durable good number. I tend to agree.

Futures made a small spike from the news.
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Failed Government Debt Auctions!!!! The first crack….

The U.K saw something very concerning – for the first time their bond auctions failed for regular debt (they DID have two previous failures in 2002 and 1999 – but they were not regular debt auctions and did attract about 95%). The U.K. gilts fell after demand at action of the bonds fell short of the amount offered. The market sold off hard as realization that the government could not finance its own debt.

On the other side of the Pond – we (the U.S.) will not have that problem – WHY? Because Bernanke just printed $300 billion (he is printing money to buy the nation’s debt) – this country will not let its bond auction fail if that means we have to print money out of thin air!

This is one of the reason that China is requesting a new world reserve currency and will bring it up at the G20 meeting in London. You just can’t keep printing money and not finance it. At some point someone will stop buying it (or there is not enough money to buy it) – then you have failure. I am sure that China was not happy with Obama’s speech about more spending – when our government can’t even sell enough treasuries to cover it (30% will be financed by printed money by the Fed.) China is our largest creditor – if they don’t want to buy it anymore, are showing a lack of faith, and now will ask for a new reserve currency – maybe we should start listening (if we value them buying our debt.)

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Futures Pre-market

The futures got a good pop from being flat after the durable goods orders surprised the market, but I think as people read into it – it could be just a one month anomaly. The spread is in – expect arb traders to short futures and buy the basket if the spread remains.

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Support / Resistance

Well after being well into resistance levels – thus creating new supports we are now in a range to create new levels (or are we)????

INDU 7500 (7750) 8000 (We fell over 100 points yesterday down below the 7700 line. A move to 7500 or 8000 is in the cards.)

NDX 1200 / 1250 (We are now backed off and below the 1250 line. Where too – I think people are trying to figure that out.)

SPX 800! (That is a big number – do we close above it?)

RUT 400 / 425 (Again – above 400 – that is a big number do we remain above it?)

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Gold 900+ (Gold came off as we saw people rush to equities – the lemming law.)

Silver 13+

Oil 50+ (Oil is coming off this morning but still 52+ )
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Conclusion

As much as politics should be out of the market – it’s here. We can’t ignore what is going on in the treasury markets around the world, China’s request and concerns, nor Obama’s budget proposal. They will all determine the fundamentals of the market. Obama needs to come to reality about the economy and the government’s balance sheet. I am not denying that Healthcare, education, and energy are important and he has very valid concerns and we need to address them (so how) – but we SERIOUSLY don’t have the money to go on a massive spending spree (SERIOUSLY) – it doesn’t matter if you want to blame Bush, Republicans, Congress, or Democrats.

The reality is we are all in this sh#t storm together and we can’t afford to put this country into massive debt by deficit spending and printing money – pinning ALL our HOPE based on a speculative forecast of growth to reduce the debt (especially if his people’s forecast is incredibly rosy compared to other economist, government agencies, and members of both parties). He truly is the President of HOPE. Because we really are HOPING that it grows as much as he says it will – because if it doesn’t this country will SERIOUSLY be in the hole in 4 years.

The Chinese are right to be concerned – we just can’t ignore that concern. We need MORE than just HOPE.