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| Daily Jurojin - Friday, April 27, 2009 |
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Friday, April 27, 2009 Growth and confidence on weekly calendarEquity investors are seemingly growing more confident by the day that the recession is a historic event. On Wednesday we'll find out with the release of first quarter growth whether or not businesses slashed inventory spending enough to help make the economy leaner and more efficient. Investors might hang out the flags and rejoice if the economy shrinks at a 5.1% annualized pace in the first quarter following a 6.3% fourth quarter decline.Hardly the sort of report that in isolation would ignite a bold new bull markets for stocks, but the official hallmark of a slowing contraction might just be enough to cement over the cracks brought to the walls of the House of America in the bear market and keep momentum to the upside for now. The economy has not faced such a severe quarterly back-to-back contraction in over five decades according to official data. Economists are pinning hope on the final quarter of 2008 being the absolute worst for the U.S. economy and estimate that if businesses draw inventories down far enough in the first quarter, it will finally show that companies have done what they need to do as final demand responded to the shock of Lehman's bankruptcy. Also this week we will get the April estimates of consumer confidence and the ISM manufacturing survey. Based upon the fact that stock markets have been rising for six weeks and that other data is pointing to bouncing along the bottom at least, we should expect further data corroborating the premise that the worst is now past. These jigsaw pieces don't, however, guarantee any sort of return to return to business as usual. Many ordinary people on Main Street are hoping that an end to the economic malaise will also mean a return to prosperity. Sadly, that's a stretch. Home prices will continue to decline and as a result consumption will remain muted. The weekend's Wall Street Journal depicted a worrying tale emerging in Atlanta, where four commercial developers continue to forge ahead with the development of office space and are hostage to the fact that rental activity has been absent in recent history. The WSJ reports that 35 associated condominium projects will deliver a 40-year glut of supply at the current rate of condo sales. And so on the one hand investors are getting frisky over an apparent return to rising revenues at major banks, while what they haven't seen on the horizon is the next leg of likely non-performing loans quite literally under construction in the commercial market. Non-performing commercial property loans at Bank of America jumped last week to 7.5%. It's involved in two of the four office projects despite the lack of demand for leases. Meanwhile it's also involved in over supplying the luxury retail mall space in Atlanta at a time when several operators have walked away while some have filed for bankruptcy. A recent 'beige book' from the federal Reserve noticed that over the past six weeks or so the demand for commercial office space had declined while supply was increasing, resulting in the reality of lower prices. Many loans on the variety of projects don't mature until 2010 and backers must be sporting their spankiest rose-tinted spectacles in hopes of a revival in demand that might never happen. For now, investors will see what they want to see and will likely rush into the equity market for fear of missing out at the wall of worry. If that happens and if recent trends continue, we should expect the yield on the 10-year note to burst through 3% this week as sentiment improves and bond supply builds. The Supreme Council of the Secret Order of Jurojin |
