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Busch: Summertime Blues Hits Investors

Monday, 6 Jul 2009 | 11:21 AM ET

I have been warning clients for about two months that the mid-June-mid-October time period is the danger zone for a mood shift and it looks like we're on schedule. Last Thursday signaled the turning point in the Spring Awakening portion of our supposed/suspected economy recovery. While the Obama administration and other optimists attempted to spin the jobs data as best they could, the fact remains that companies continue to shed jobs at an alarming rate for so late in a recession. Worst still, the initial jobless claims and continuing claims are showing no initial inflection points. Almost by definition, this means the job shedding will continue at a similar pace.

Next up, we have news out of the wealthiest state of the union saying they will issue IOUs instead of paying state vendors. California's politicians can't come to agreement over budget cuts or tax increases to resolve the $26 billion gap in their finances. The state has imprudently relied on revenues from elevated real estate values and consumer tax sales taxes that have dropped precipitously (-$13 billion yoy) and left the state at a fork stuck in the road. Gov. Schwarzenegger wants big spending changes without raising taxes, but can't get the Democrats on board. This could only get worse if somehow the federal government got involved and offered to bail them out.

The change in sentiment is not contained solely in the United States. After a stunning victory earlier this year and raising expectations of more free market moves, Prime Minister Manmohan Singh's government disappointed today with a less than stellar budget. India announced plans to borrow a record 4.51 trillion rupees ($93 billion) and risks a possible downgrade by the ratings agencies. They are currently at the lowest end of the investment grade spectrum and a drop would force many institutional investors to dump. Their fiscal deficit is expected to rise to 6.8%, a 16 year high. The major disappointment centers around the lack of major asset sales of government owned enterprises. The Bombay Sensex dropped 5.5% today.

As we head into the G8, the dour and somewhat despondent UK Prime Minister Gordon Brown is set to deliver a rather downbeat assessment of the world. Gordon Brown will say there are "warning signs around the world" that the fledgling recovery is in peril according to the FT. "The prime minister fears that the April meeting of the G20 in London did not cement the economic and regulatory reform message. He said this week's summit in L'Aquila should be "a second wake-up call for the world economy"....The British prime minister is also worried about the poor state of some bank balance sheets, falling trade, protectionism and rising unemployment." (If he has time, he'll share concerns about swine flu, hurricanes, and the state of the national football team.)

Now, earnings season is upon us with drastically reduced expectations for profits. For the S&P 500, Q2 earnings are expected to have fallen by 35% and are expected to be down 21% for Q3. This was before Friday's job data which cast a pall over stocks. Anecdotal evidence showing the Obama stimulus package is not moving fast enough and may actually be negatively impacting the normal flow of federal purchases is also weighing. All of these are showing the mood shift has occurred with questions arising over government finances, consumer spending, and foreign growth. Let's see how far we go.

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Andrew Busch
Andrew Busch

Andrew B. Busch is Global FX Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece andreach him here and you can follow him on Twitter at http://twitter.com/abusch .

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