Good Evening: U.S. stocks finished a strong August on a down note, causing investors to wonder what awaits them during the seasonally weak months of September and October. With some strong (though admittedly junior) economic data released this morning, today’s downdraft had little to do with the U.S. economy. Global market participants were instead more focused on political and economic events in China, Japan, and Brazil. It’s hard to say whether nascent worries on these fronts will morph into genuine concern, but perhaps such volatility should be expected when governments around the world become so involved in economic affairs.
China’s stock markets were hit hard overnight, as stories circulated that bank lending cooled off dramatically in recent weeks after setting a torrid pace during the first half of ’09. Other equity markets suffered, too, as did most commodity prices. A lot has been riding on Chinese demand, and all threats to its voracious consumption of raw materials sends tremors through world markets. An earthquake of a different sort hit the Japanese archipelago when the DPJ party tossed out the long-ruling LDP. Handicapping just what policy changes might be in store for Japan is a difficult task, but any move away from the sclerotic LDP might be very good for the Japanese economy. Unfortunately, it’s hard to be optimistic about President da Silva of Brazil and his latest oil policies. “Lula” looks like he’s sponsoring a government grab for some of Petrobras’s most valuable energy assets, reminding both domestic constituents and foreign investors that this formerly leftist leader has not forgotten his roots.
Global stock prices and U.S. equity index futures were thus under pressure prior to this morning’s open in New York. Futures would no doubt have been lower still had some takeover activity not been part of the early news flow. Disney threw its arms around Marvel, while Baker Hughes announced its intention to acquire BJ Services. Sellers of energy, materials, and other commodity sensitive names overwhelmed the M&A activity, though, and the major averages were soon down between 1% and 1.5%. The skid was halted when the Chicago PMI vaulted all the way back to the neutral 50 mark this morning, a level last seen when Lehman was still breathing. Though I didn’t see the exact figures, I’m told Dallas and Milwaukee PMIs were both supportive of better economic growth, but it will be tomorrow’s national number (and especially the services survey that follows on Wednesday) that will be more revealing.
After the pop following the Chicago PMI release, equities then went nowhere fast for the rest of the session. A small upside flourish at the bell helped most indexes halve their losses for the day, with the Dow (-0.5%) faring best and the Dow Transports (-1.5%) bringing up the rear. Treasurys were in a summertime mood most of the day, finishing with modest gains. Yields fell between 2 and 7 bps. The dollar gave some ground after being firm this morning, but it didn’t help commodities. The stories out of China brought an early autumn chill to the pits, especially in those pertaining to energy. Led by a 4% decline in crude oil prices, the CRB index fell 1.6% today.
“Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. If it stops moving, subsidize it.”
— Ronald Reagan
Though not cited as often as it used to be, this quotation attributed to our 40th President became a philosophy of what good government should try to avoid. More often than not, lower taxes, less regulation and a dislike of subsidies were policy goals in the U.S. for more than two and a half decades. As the financial crisis reached its zenith during the fall of 2008, however, many Americans believed Warren Buffett (and others) that the philosophy behind these policies was at the root of our financial problems. Voters really didn’t need much convincing and hey swept Barack Obama into office with a demand for change. Well, change is here, and its the subsidies that have arrived first. Stand by for higher taxes and heavier regulation.
This increased role of government in our economy has left many investors looking overseas for ideas, hoping to cash in on the growth they see in the BRIC nations (Brazil, Russia, India, and China). Emerging markets have thus housed the leading equity markets for years. As this weekend’s news flow from abroad highlights only too well, the BRIC nations, too, have their political risks (see stories below). Reports of a reversal in China’s overly easy lending policies were the rationale behind today’s decline in both stocks and commodities, and few want to see the green shoots of Chinese demand wither any time soon. And just when investors were starting to think Brazil offered the best mix of growth, resources, and enlightened policy-making, along comes Lula with his loony idea to loot Petrobras and leave shareholders holding the bag. Is this what a bull market in government-sponsored economic activity really looks like?
We all know Russia disdains capital and private property, and we also know that the risk of investing in China involves having the mandarins in Beijing foist the wrong 5 year plan on its hard-working citizens. We also know that Brazil used to be little better as an investment destination than places like Venezuela, Bolivia, or Argentina, but the move against Petrobras today was still a shocking reminder that looking overseas carries as much political risk as subjecting our dollars to the “new normal” here at home. If Ronald Reagan’s big government version of the political economy becomes the Modus Operandi everywhere, then returns on capital will likely shrink. It’s possible that even the return OF capital will become an issue in some countries. Investor sentiment and economic growth are fragile enough without throwing into question the countries that have been trying to lead us out of the Great Recession.
So what’s an investor to do? Wouldn’t it be interesting if one of the safest place to put one’s money during the next few years is in a nation where it has been treated so shabbily for the past twenty? I’ll have more to say about Japan later this week, but with two lost decades almost under their belts (the Nikkei peaked in December of 1989), the Japanese might finally be due. Then again, and in the interest of full disclosure, I might be early with this call. My Chicago Cubs now have 10 lost decades under their belts, and I’ve been bullish about their prospects for a quarter of a century.
— Jack McHugh
Stocks Decline, Trimming S&P 500’s Sixth Straight Monthly Gain
Japan DPJ Election Win Brings ‘Bloodless Revolution’
Asian Currencies Drop, Led by Rupee, as China Cools Lending
Lula Increases State Control Over Brazil Oil Reserves