Truth Can be Found In Macro Economic Inertia, by Art Doglione, President of Alpha Fiduciary

Basketball players know that you must watch the bellybutton, not the hands, eyes, or feet to know where a player is moving to. What can we watch for clues to what stocks will do? Macro economic inertia offers astute investors with a clear 30 thousand foot unobstructed view of the long term prospects for this highly volatile asset class.

Barclay’s slashed its GDP growth estimates for 2010 from Q3 4% to 2.5%, and Q4 3.5% to 3%, they also trimmed 2011 Q1 3% to 2.5%, and Q2 3% from 3.5%. Barclays cites little reason to expect an abrupt acceleration in consumer spending from current trends. In our “When You Come To The Fork In The Road” post dated 4/30/10 we cautioned about assuming the consumer could continue its spending pattern in the face of expiring government benefits and a weak jobs market.

The weakness in consumer spending has now spilled over to the dollar which has now erased its entire spring/summer rally while declining from +88 to now barely above its critical support level of roughly 80. perhaps the offset will be an improvement in our currently weak exports. The dollar is pricing in that the Fed will shortly crank up the presses and print more dollars, Washington’s finest are still fighting the symptom and not treating the problem.

Some positive developments this past week include BP having permanently capped its Gulf well, a major league victory for the environment. I will be watching to see if the long term effects of this tragedy are as benign as our government says they are. ISM Manufacturing Index also hit 55.5 in July Vs. an expected 54.2. While the figure was lower in July than June, it does imply economic expansion. A closer inspection of index components however reveals a slowing of exports, and faster imports.

State and local government balance sheets were again in focus as a number of municipalities shed police and other critically necessary employees. These functions may seem expendable if cuts are modest, but time will tell if it is penny wise and pound foolish.

World equity markets continued to demonstrate tremendous volatility both upside and downside, technicians note the historical correlation to this type of market behavior and significant market tops.

June Personal Income came in at 0.0%, a complete stall from May’s .1% growth and a pre cursor to future consumer spending patterns. Factory orders and pending home sales came in meaningfully below expectations which has continued to add to the steady flow of bad macro data during an otherwise good earnings season.

For those who believe large and growing governments are sustainable you may want to consider that Cuba announced plans this week to lay off one in five government workers in a pro capitalist shift. Currently the Cuban government controls 95% of its economy, yet Raul Castro spoke before its national Assembly on Sunday about the need for more Cubans to set up businesses and employ workers. He also spoke of a new taxation system favoring the self employed and those hiring workers.

Our own Treasury Secretary Tim Geithner actually declared “Welcome To The Recovery” in an op ed in Tuesdays New York Times. I wonder how the many millions of unemployed Americans and those on the verge of loosing their homes feel about the recovery.

The only good news I’ve seen on housing is that Chelsea Clinton’s wedding has boost the asking price of the home it was held in by $1.5 Million – I’d like to offer her an opportunity for a “west coast wedding” at my house! The Treasury has denied rumors that Fannie and Freddie were planning massive a mortgage forgiveness scheme as a way to bail out underwater homeowners.

Thursday’s Initial Jobless Claims which came in at 479,000 rolled into Friday’s ugly Jobs Report which showed a loss of 131K while analysts were looking for a loss of 87K. Private sector gains were at the very low end of the range. Once we have a chance to digest the details we expect we will see the Fed move toward more easing this week.

A willing and accommodative Fed is a powerful force, but macro economic inertia is clearly negative. While we would not be surprised to see equity prices rise this coming week as highly volatile patterns are resolved, leading to the beginning of a powerful selloff, prudent investors have plenty of reason to survey the asset class spectrum for alternatives to equities.

www.alphafiduciary.com