Just When You Thought It Was Safe To Go Outside…
Jul 12, 2011
Posted by Jody Eisenman | Filed under Uncategorized
After a terrific 8 day rally between June 24 and July 7 when the DJIA rose almost 800 points, the market stopped on a dime with last Friday’s job report. Although consensus estimates were looking for a large jobs increase, the actual number came in at a paltry 18,000. As such, the nations’ unemployment rate is now 9.2%, crushing hopes that the recession was coming to an end anytime soon. At the White House, Obama cited five “headwinds” that have slowed job growth: a string of natural disasters across the globe, higher gas prices, state and local budget cuts, fiscal problems in Greece and the Euro zone, and concern about whether the government will default over failure to raise the debt ceiling.
To be honest, I think these are mostly meaningless excuses. I mean, are you telling me that companies aren’t hiring anyone because they’re concerned about what’s going on in Greece? I think the problems lie more in company’s uncertainty over the future, and the increasing health care costs via Obama care. Meanwhile, yesterday we were hit with the news that the Greek contagion may spread to Italy and even beyond. As such, the DJIA fell over 200 points the last two sessions. This morning, the futures were down over 100 points on Europe, but have now rallied back. Most economists are now looking toward a successful resolution of the debt crisis here. On or about August 2, the government must approve an increase in the debt limits in order to avoid a technical default by the United States Treasury. Meanwhile, President Obama stated yesterday that he would not accept a “stop gap” measure, and the Republicans continue to hold firm in demanding budget cuts without tax increases. What are compounding the issue are the hard line Tea Party members of congress. They are taking an extreme position in this, and are certainly influencing John Boehner, who is the current Republican Speaker of the House. Most Tea Party members want to hold the line on what they view as out of control spending, and do not believe that a default would be all that significant. With all due respect to them, I think they are dead wrong. Should we not reach a compromise and the government actually defaults, I think the effects could be disastrous. The “minor” problem would be that people don’t get paid. The major problem could be that foreigners lose confidence in the United States. In that scenario, interest rates on treasuries could rise significantly if foreign investors back away. In addition, I think this could have a major negative effect on US equities. I do believe that they will eventually reach a compromise, but it should make for a very interesting July.
