The New Austerity: Be Careful What You Wish For

The New Austerity: be careful what you wish for. Trading desks talking about a piece Pimco's Mohamed El-Erian wrote in the Washington Post this morning...Paul Ryan notwithstanding, it will be a tough time for austerity buffs. It's easy to argue against cap and trade. You can cast symbolic votes to get rid of healthcare reform, but trying to starve the beast by eliminating funding for different parts of it will be a grueling, exhausting slog.

El-Erian notes: "The economy needs political courage that transcends expediency in favor of long-term solutions on issues including housing reform, medium-term budget rules, pro-growth tax reforms, investments in physical and technological infrastructure, job retraining, greater support for education and scientific research, and better nets to protect the most vulnerable segments of society."

Does that sound like The New Austerity to you? Sounds like the New New Deal to me.

The New Austerity makes the Fed the stimulus of last resort. Gridlock puts more pressure on the Fed to do means potentially MORE QE2 if the economy continues to underperform and the Congress does nothing.

Right now, the market is just gaming the Fed on QE2...combine that with a seasonally strong period and the fact that the markets historically rise after midterm elections, and the likely trend for stocks is sideways to up in the next couple months.

With the elections over and QE2 priced in, the real wildcard is...the economy. Stocks rose on a better-than expected ISM number Monday, and rose modestly on a slightly better than expected ADP report this morning. This Friday analysts are looking for 60,000 jobs created in the nonfarm payroll report, but if we get an outlier...100,000 or so...the markets will definitely react and we could quickly move to new highs for the Dow and S&P 500 (NASDAQ already hit a new high).


1) The backdoor way to lowering healthcare costs: stop going to the doctor. Two of the largest U.S. health insurers, WellPoint and Aetna posted higher-than-expected profits on Wednesday and raised their full-year forecasts. The healthcare reform bill has mandated new rules mandating how much healthcare companies must spend on healthcare costs, but it is the rotten economy that truly is making a difference: insurers are reporting lower doctor and hospital office visits, which is why WLP and AET can raise their estimates.

2) PulteGroup reported a narrower-than-expected loss(loss of $0.03 vs. loss of $0.05 consensus). Although prices rose 4.7 percent, closing fells 7.2 percent. Net orders also fell 12 percent from the prior quarter and dropped 15 percent from the previous quarter. CEO Richard Dugas notes "industry conditions are expected to remain challenging over the near term."

3) CVS Caremark falls 2 percent after earnings were inline, but revenues were just short of estimates. Pharmacy benefits revenues fell 8.6 percent as claims dropped 11 percent. However, just like rival Medco , the pharmacy benefits manager processed a greater amount of higher-margin generic drug orders.

4) Hyatt Hotels reported better-than-expected earnings ($0.06 vs. $0.04 consensus) as revenue per available room (RevPAR) rose a solid 7 percent. Helping results - improved business travel: "Higher levels of corporate and group business resulted in improved performance at convention and business hotels in particular."

5) Molson Coors Q3 earnings beat estimates ($1.28 vs. $1.13 consensus). Although revenues were just a bit shy of expectations, the brewer saw volumes rising 4 percent, realized higher prices, and continued effective cost controls which improved margins in the quarter. CEO Peter Swinburn warns that "one-fourth of the drivers of third quarter income growth will not carry over to the fourth quarter or will reverse in the fourth quarter."

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