Good Evening: After a brief bout of depression last week, the bi-polar patient otherwise known as Mr. Market went a bit manic today. Helping the old gentleman during Tuesday’s session wasn’t a dosage change to his medication, but rather some uplifting news about consumer confidence. A rush into beta-heavy stocks ensued, and even some of the speculative names that were crushed last fall are making return visits to the “new high” list. Today’s rally could carry further if enough managers start feeling left behind. There’s no telling how far rising confidence among consumes of stocks will take us. But even as last week’s worries about how we will finance all the bailouts under way and in the pipeline fade somewhat, a glimpse at our nation’s accelerating “national debt clock” will remind both investors and our elected officials that the U.S. needs to regain its fiscal health.
Prior to this morning’s open, another nuclear test by North Korea and the worse than expected Case-Shiller home price survey results pressured stock prices abroad and index futures in the U.S.(see above). Then, after opening slightly lower, the major averages were already on the comeback trail when the latest consumer confidence reading hit the tape. Jumping to 54.9 from last month’s reading near 40, the Conference Board’s measure of consumer confidence exceeded even the most optimist forecasts. No doubt the feedback loop created by rising stock prices played a role, since “current conditions” were basically unchanged and “future conditions” accounted for almost all of the improvement in sentiment. The release also changed the sentiment on Wall Street, and the averages were up more than 2% within the hour.
Tech, financial names, small caps — almost any stocks with either high betas or high short interest ratios — were all sought as the day progressed. The bank stocks were also supported by more analyst upgrades and the story you see above. If securitization was the first attempt by Wall Street to turn leaden mortgages into financial gold, the purchase accounting method used by JP Morgan and other acquiring firms is giving them a second chance to do so. The KBW bank stock index closed 4% higher. The other indexes fared almost as well, as the gains ranged from the Dow’s 2.4% to 4.75% for the Russell 2000. Treasurys, which had been up in the early going, resumed their sinking spell. Even a solid 2 year note auction couldn’t help much, as yields on the long end rose 10 bps. The dollar gave back its early gains, too, and finished with little to show for the day. Completing the reversals seen in our capital markets, commodities finished higher after some early weakness. The confidence data spawned visions of renewed demand as the CRB index rose 0.5%.
If you’ve ever seen the National Debt Clock in Manhattan , the speed at which the numbers turn over and add up is sobering. Stare long enough at it, and it makes one want to shout “stop!”, not only at the clock itself but also to our elected representative in Washington . If you click on the link above, you’ll get a quick sense of the origins of the clock and its 20 year history (did you know, for example, that it was turned off for a time when the U.S. debt was actually declining earlier in this decade?). Please note the picture in the upper right hand corner of the Wikipedia site. The site claims this photo of the clock was taken on April 19, 2008, when the total amount of U.S. government debt outstanding was a mind-numbing $9.2 Trillion. Keep this figure in mind as you click on this next site:
This “live” online version of our national debt clock is even harder to drink in. The massive numbers flash by so quickly that the visual effect is akin to financial water-boarding. Like the now-banned interrogation method, this version of the debt clock represents a form of torture for both the eyes and the wallet. It is literally hard to take for more than a few dozen seconds at a time before both a headache and a drowning sensation sets in. It gives us some numerical context for last week’s scare about whether or not the U.S.A. will some day lose its AAA credit rating. As I wrote last week, such a downgrade (and who trusts the ratings agencies, anyway?) is not imminent. Today’s market action showed the fear surrounding such an outcome is receding a bit, but it pays to note the current national debt estimate of $11.3 Trillion. This figure stood at “only” $9.2 Trillion last April, so we’ve managed to add more than $2 Trillion in debt in just 13 months.
A one time, shot in the arm to an economy facing the problems of the magnitude we saw last autumn is as understandable as it is currently financeable. The problem with the bailouts and stimuli still pouring out of Washington , however, is that they look to be more structural than temporary. Unless we find a way to kick the debt habit, we are likely to have budget deficits starting with a “T” for years to come as interest payments alone become a larger share of the federal budget. She may not have meant it in economic terms, but Nancy Reagan’s “Just say No” campaign should be trotted back out as a prescription to return us to fiscal health. Otherwise, that live version of the national debt clock will give us more than just a headache.
— Jack McHugh