29 Jun 2012 Bright Spots

News this week has been mixed, but there have been some bright spots to celebrate. The beleagured housing industry may finally be turning around. The manufacturing sector had a couple pieces of good news well. If you work in the White House or among the Democratic leadership, yesterday’s surprising announcement from the Supreme Court that the President’s health care bill had largely escaped overturn was undoubtedly a bright spot.  And today we are greeted with news that Europe’s leaders have found a way to avert a Spanish banking collapse.

New home sales started us off, rising a stately 7.6% in May, which was the best rate in more than 2 years. The buying spree brought supply down to 4.7 months at the current rate, which is the lowest since 2005, according to Econoday. The economic data firm attributed some of the sales strength to price concessions from home builders with both the median and the average prices declining in the low single digit range on a yearly basis.

The Case-Shiller Index release this week, indicated that home prices might be gaining some traction as distressed property competition declines and demand increases. The seasonally adjusted composite index for 20 of the nation’s largest markets surged 0.7%, an unusually large gain, according to Econoday, only last exceeded in April 2010 and before that in August 2009. The gain in April is also the third in a row, for the longest streak since early 2010.

The good news in housing continued in the existing homes market as pending sales of existing homes bounced 5.9% in May. This gain follows a 5.5% drop in April and was spread across all regions.

Manufacturing, long the stalwart of the American recovery has been showing signs of weakness the last few weeks, particularly at the micro level as reported by the regional Federal Reserve Banks. The Richmond and Kansas City Banks continued the trend started in the last couple of weeks by the New York and Philly Feds as they reported significant contraction in their manufacturing metrics.

A bright spot came this week from the Lone Star State as the Dallas Fed reported that the second largest manufacturing state actually saw an increase in activity. The Dallas general business activity index rebounded to plus 5.8 in June from a minus 5.1 in May.

Another bright spot had a national scope as the government reported that factory orders for durable goods rebounded 1.1% in May following a 0.2% drop in April. Econoday noted that aircraft orders were responsible for the largest portion of the bounce as the index rose 0.4% with transportation excluded. Auto manufacturers saw new orders for motor vehicles climb 0.5% after a strong 5.7% jump in April.

The Supreme Court surprised the nation by upholding the constitutionality of the funding mechanism of President Obama’s signature health care legislation on the grounds that it was a ‘tax’ and that Congress had the right to impose taxes as it sees fit. Liberals can celebrate that the law survived a formidable legal challenge from 26 states, preserving Obama’s legacy. But at the end of the day, the bill remains hugely unpopular.

Conservatives can celebrate that Chief Justice John Roberts chose to take the high road and reject activism that is rampant in the lower courts. Robert’s legacy is now assured. As Noah Feldman of Bloomberg puts it, “Roberts now enters the pantheon of true judicial conservatives, judges who hold back from activist results no matter how it affects presidential politics. By helping the court avoid making history, Roberts’s place in history is assured.” We and his court can also celebrate keeping a bombshell-of-a-secret in Washington for three long months! There’s a bright spot if ever there was one.

There’s lots of celebrating right now in the global capital markets as bright news comes from across the pond that Euro-area leaders found a way to save Spanish banks by sticking it once again to the taxpayers of more responsible countries, namely Germany. German Chancellor Angela Merkel was hornswoggled then extorted by France, Italy and Spain who gave her no option but to go along with their demands.

The immediate crisis may have been averted, but at what cost to the lasting fabric of the Euro? And has anything really changed? In essence, Euro governments can access rescue loans without relinquishing control of their economies. That dynamic and socialism are the roots of Europe’s problems. Not a bright spot, but a punt at best.

Whether the week’s bright spots amount to any serious light providing economic direction is clearly debatable. The loudest voice, the stock market is up 3.1% this week. But the wiser bond market as measured by 7-10 year US Treasury Index and by the Barclay’s Aggregate Bond Index yawned, and are unchanged for the week.

As we approach the November elections, political indicators will shed the most light on the near-future of the US economy. While businesses will continue to strive for profits, making the best decisions they can, and the economy limps along at 1.9% (GDP released this week), don’t expect major improvement in growth until the wall of uncertainty is torn down politically.

Never in my investing career have I seen so many  significant hurdles standing in the way of economic growth. Until major questions are answered regarding expiring tax cuts, a draconian $1.3 trillion in mandatory government spending cuts, rising employment and healthcare costs, growth of burdensome regulations, and continued deficit spending, US GDP will remain coiled under a lid of oppressive uncertainty. Our own elected leaders have proven capable of doing what England, the Confederate States, Germany, Germany and Japan, and the USSR were unable to accomplish – bring the American economy to its knees.

The potential of this country remains as great as it ever was, but policy uncertainty holds it prisioner. The legislative and executive branches are locked in impasse. Quite simply, until there is greater clarity on policy direction in this country, there is little reason to expect a majority of businesses to meaningfully invest in domestic growth. For the next four months the search for bright spots will be in the political skies.