Farrell: Tuesday Outlook

The stock market was cruising for a nice, quiet summer session with a respectable gain when the head of Suntrust Bank was alleged to have told a rapt audience of Atlanta Rotarians the banking industry is likely to face more credit losses and the commercial real estate industry may falter through 2010. Well, duh! First, I think we all know that by now; second, what else could he say since all bankers need to buy themselves as much cover as they can; and, third, talk about a slow news day if that's what took the momentum out of the market. But with the market up well over 50% from its March low, up 5% in the prior five sessions, and up 17% in the last six weeks maybe any sort of negative news could be used as a profit taking excuse.

I would have thought the op-ed piece Nouriel Roubini wrote in the Financial Times would have been a better excuse to sell off. Professor Roubini of NYU is justly famous for having been uniquely accurate in foreseeing the mess we got into. He fears a "W" shaped economic path ahead with a chance we have a setback after a nice recovery. He fears that the government might halt its stimulus too soon before a natural pace of activity asserts itself and we re-enter a recession. Or that they stay too generous too long igniting inflation which would be accompanied by rising interest rates which would snuff out any recovery. Sort of a damned if you do and damned if you don't scenario.

I wouldn't want to debate the learned Professor in public. He would easily make mincemeat of me, but I wonder if he isn't overly worried about the prospect for inflation. Inflation needs rising wages and we are so far from that. Rising unemployment, stagnant wage growth, a severe cutback in consumer wealth and a growing propensity to save push the threat of inflation way down the road. The recent Central Bankers meeting in Wyoming seemed to ring with the conviction that underlying demand is still fragile and rates will stay low for a long time. Chinese Premier Wen Jiabao stated over the weekend that China faces pressure from the slowdown in the demand for exports and despite a 4 trillion Yuan ($585 billion) stimulus program it's "difficult to boost demand in the short term" to fill the gap. The "output gap" or the difference between actual GDP and an estimate of potential GDP (an inexact measure to be sure) is figured by the Congressional Budget Office to be a yawning 7%. Add to that the fact we need to create about 100,000 jobs a month just to accommodate new entrants into the job market — and we are still losing hundreds of thousands of jobs per month — and I would put inflation down towards the bottom of my list of worries.

Tuesday will see the Case Shiller Home Price Index and the hope is for a glimmer of improvement. April was off -18.1% from a year ago, May -17.1% and with the recent better news from the housing sector the hope is that June's number will continue the recent trend. We will also get the Conference Board's estimate of consumer confidence and after the disappointing University of Michigan number don't expect a lot. The Treasury will offer $42 billion in two year notes in the first of this week's three part auction series. The short maturity should attract buyers but we'll see how much goes to overseas buyers.