Blue chip stocks are mixed this week with the Dow up 1% and S&P500 down 1%. Tech stocks are lower, with the NASDAQ 100 and Morgan Stanley High Tech index down 3%. Semiconductors fared worse with the SOX down 8%. The Internet index is down 3% for the week. The Russell 2000 is up 1% with the Utilities adding 2%. Transports lost 2%. Financials fell with the AMEX Securities Broker/Dealer index down 4% and the S&P Bank index down 2%. Biotechs rose 1% and the S&P 400 Mid-cap index rose 1%.
Prices of government securities fell all along the curve with the 2 Year Treasury yields rising 8 basis points to 4.72%, 5 Year yields up 7 basis points to 4.91%, 10 Year yields up 5 basis points to 5.21% and 30 Year yields rising 2 basis points to 5.53%. Agency and Mortgage yields are up 3 and 4 basis points respectively. The dollar is about a half of percent stronger with crude oil up slightly to $31.27 and gold down $4.40 for the week. The 10 Year Dollar Swap is wider by a basis point to 85.
We are taking a break from our usual Mid-Week Analysis for this week with the following Report from Oz which takes a lighter look at the idea of "growth at any price."
REPORT FROM OZ
Policies for a New Economy
by Rob Peebles
Three cheers for Robert McTeer. The Dallas Fed governor has found the cure for the ailing U.S. economy. In a recent speech to the Richardson, Texas chamber of commerce, McTeer explained that what the economy needs is more consumer spending. According to Associated Press McTeer said, "If we all join hands together and buy a new SUV, everything will be OK."
Amen! This analysis not only on the mark it also provides long-awaited absolution for the chamber members lunching in the Dallas high tech corridor. Thankfully, no less than a Fed official has proclaimed that it was not tech companies who created too much supply, but consumers who had demanded too little.
Admittedly, McTeerss call for a resurgence in consumption at first sounds silly. For years Americans stopped spending only long enough to fill out home equity loan applications. But that is the beauty of the insight. In the era of financial innovation, no one really knows how much is too much.
Thankfully, by McTeers analysis, the economy is hardly "dead." Rather, like a shopper who finds Tiffanys unexpectedly closed, the new economy just has the blues. This is nothing a brisk walk around the mall wont cure.
The problem with McTeers admonishment to spend, however, is that the Fed has an abysmal record when it comes to moral suasion. (Irrational exuberance in 1996, anyone?) What this policy needs is the force of law. Hence, I recommend the following to kick-start this economy right in the pocketbook.
1. Create a cabinet level position with the title "Consumption Czar." This individual would rally consumer sentiment, preach optimism and educate consumers about debt consolidation loans. Ivana Trump would make a good first choice. If unavailable, Larry Kudlow, as an economist might say, is an imperfect substitute.
2. Introduce consumption coupons. A twist on World War II ration stamps, the consumption coupons would prevent Americans from making a savings deposit without proof of purchase of a consumer durable. On second thought, get Kudlow on this immediately.
3. Tax the remaining domestic manufacturers into oblivion, or at least offshore. Everyone knows that money allocated to the U.S. manufacturing base is money that could be better spent on a leather sofa.
4. Immediately pass legislation to permit (nay, encourage!) auto equity loans. A few consumers still insist on putting a wad of cash down when they purchase a new car. This untapped equity is a drag on the economy and banks should be allowed to loan against it. Then get a growth kicker as Wall Street packages these loans and sells them to pension funds.
5. Pass current legislation to toughen bankruptcy laws immediately. Banks and credit card companies, the drivers of the new economy, must be protected at this critical juncture.
6. Establish a new government sponsored enterprise called Indentured Servant Mae. This innovative institution would provide consumer loans secured by the future income of the borrowers offspring. The term "Collateralized Baby Bonds" screams "suitable for pension funds."
7. Rethink debtors prison. Theres nothing like the stick to make the carrot look appealing.
8. Institute a negative sales tax.
9. Hold a "Spending Summit" at the White House.
10. Use the Summit as an opportunity to introduce SIN buttons (Spend It Now).
Clearly, Fed posturing alone can not get the consumer to turn off the TiVo and get to Best Buy. Bold policy is also required. But until such a plan is implemented, please ask not what your economy can do for you, ask how large an SUV will you buy for the economy.