Farrell: Yuk, Redux

Economic news last week was a "yuk" and Tuesday saw more of the same. Industrial Production was down 1.1% last month and the prior month was revised to -.7% from the originally reported -.5%. The reason for the increase would be the auto shutdowns that have taken place. But factor out the autos and IP was still down .6%. Industrial Production is down 13.5% versus a year ago. While this is better by a good bit from the -2% monthly numbers we were seeing at the end of last year, they still qualify for the "yuk" category. It is true that recessions will be over for an average of about three months before IP turns up so we can hold that as a "green shoot" but this is, at best, less bad news and hardly good news.

Capacity utilization was 68.3% which I think is an all time low. With that much spare capacity and with high unemployment and flat wages we find it hard to make a case for inflation any time soon. If that is good news it comes at a high cost. Housing starts were much better than expected at 535,000 against the consensus guess of 480,000. Starts are still anemic at best and we wouldn't mind seeing them fall to zero since there are 1.5 to 2 million "excess" homes for sale. Clearing out the inventory of homes for sale will take a while. Since starts of single family homes have been up for three months in a row it looks like the housing market is bottoming. That is good news but there is still no hint that housing is improving, it's just less bad. Producer prices were well behaved rising only .2%. That's lower than thought since oil has been up but there was a fall in food costs.

There was a report from the Congressional Budget office that the health care plan offered by Senator Kennedy would cost $1 trillion and include only 16 million of the uninsured. That's $62,500 a pop for ten years but when have government projections been anywhere near reality. This was followed by a late report from the Senate that health care plans being kicked around would cost $1.6 trillion over ten years. To Greg Valliere it looks like there is a real threat that President Obama's campaign pledge to not raise taxes on the middle class will go the way of "Read my lips. No new taxes." But that is what political capital is for. To be able to react to the real world and not the campaign world. Joe Biden jumped ahead in the cue and said the stimulus won't save or create 3.5 million jobs but more like 600,000. And it looks like whatever is planned in the White House will have a fight on Capitol Hill as Senator Dodd has said taxing health care benefits is not a good idea while the Senate Finance Committee is kicking around a proposal to tax benefits worth more than $17,000 as regular income. This is starting to look like the gang that couldn't shoot straight.

The House voted on a "cash-for-clunkers" bill. Remember that nine out of the most fuel efficient cars are foreign made and keep in mind that in Germany where the cash for clunkers has been labeled a big success, 76% of the money spent on new cars has been on non-German makes. Something called the Fabia made by Skoda seems to be the car of choice. I've never heard of Fabia or Skoda, but evidentially the Germans have.

Tuesday's market was the first back to back 1% loss since March. Crude and copper both closed at their low of the day which makes me think that the "risk" trade is coming off. The 10 year bond moved back down to a 3.65% yield, and remember that danced with 4% only last week. The idea that rates and commodity prices are rising because of a renewed economy is fast fading. I continue to think that we're in a corrective process that will take us back to at least the mid 800s on the S&P average.