Daily Commentary by Larry Baer: The following is a repeat of my
commentary taken from this week's edition of "Viewpoint."
The coming week's economic
news will likely take a distant backseat to trading activity in the equity
markets.
Just like the
"shin bone is connected to the knee bone" in the lyrics of the song
"Dry Bones" -- the future trajectory of stock prices is connected to
sequestration. You remember sequestration -- it's a huge part of
the fiscal mess Congress and the President temporarily swept under the carpet
last week as they scrambled to pass a short-term extension of the federal debt
ceiling to prevent Uncle Sam from issuing hot checks.
Sequestration refers
to the deep, automatic cuts in domestic and military spending that will begin
to take effect March 1st if Congress and the President can not reach
agreement on significant deficit reductions in another manner.
The Bipartisan
Policy Center released a report last summer stating, "the full defense and
non-defense sequester cuts for the coming year could -- due to their arbitrary
and abrupt nature -- reduce U.S. gross domestic product by roughly half a
percentage point in 2013 and cause more than one million jobs to be lost over
the course of two years.
So let's see, if we
assume for a moment that bipartisan math will likely be more accurate than
partisan math, these guys are saying Gross Domestic Product could move from -0.1%
at the end of 2012 to -0.6% by the end of 2013 and rather than growing at the
rate of 150,000 new jobs a month - the economy might only create 66,000 net new
jobs a month. I don't know about you - but I find it hard to see how the
prospect of plummeting economic growth and attendant anemic job creation can be
considered to be the building blocks of soaring stock valuations.
The closer we get to
March 1st without meaningful Congressional action to avert
sequestration - the stronger the profit taking motivation will become for stock
investors. Like a snowball rolling down hill this process can easily
morph from profit-taking to all out "flight-to-quality" buying of
Treasury debt obligations and agency eligible mortgage-backed securities.
Either way it is an exercise, should it develop, that will almost surely prove
supportive of the prospects for steady to perhaps fractionally lower mortgage
rates. Heads up.
THE
MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME
