Government Out Of Control

Charts: The S&P 500 closed at 1102, up .6%. The broad index reclaimed the key 1100 level, but on weak volume. Overall the technical picture is that of a Great Moderation era bull market that is about 3-years old because the sleepy mega-cap Dow index is the strongest and the growth oriented small-cap Russell 2000 is the weakest. Defensive stocks like utilities are outperforming as we would expect in a very old bull market on its last legs. This bull market is moving about three times faster than normal. If this pattern were to stay in place until a new bear started we would have about 6-8 more months of stock market gains.

Fundamentals: Weekly continuing jobless claims dropped by over 300,000. But strength in the private sector is tempered by an out-of-control government deficit machine. The Senate’s healthcare bill originally contained a provision for a “public option,” a government healthcare system to compete against the private sector as Fannie Mae competes with private mortgage companies, squeezing many of them out of existence since Fannie’s growth is fueled by government debt. The public option has now been replaced by a byzantine scheme to expand Medicare coverage from 65-year olds to 55-year olds. Obviously the next step is to lower the age to 45 and then 35, etc… Also, Team Obama has figured out how to spend the $200 billion of unused TARP money without Congressional approval, arguing that unused TARP money is a kind of surplus that didn’t exist before. Of course the Federal government does not have a surplus here and a deficit there; it simply has one gigantic deficit. The stock market will ignore Federal deficits until the bond market forces the issue through higher interest rates. This week’s treasury auctions have been very sloppy, interest rates have jumped up and overseas buyers are stepping away from US government debt.

Geopolitics: Earlier this week Yemeni rebels attacked a Saudi border village and may have held it for awhile. By Thursday the Saudi Army had pushed the bad guys back into northern Yemen, unleashing 37 separate air strikes and firing 310 missiles. Fighting continues on both sides of the border. In southern Yemen, mass demonstrations are ratcheting up as Al-Qaeda in the Arabian Peninsula takes advantage of the northern war to rabble-rouse. Yemen’s oil is located in the south and the bad guys would dearly love to get their hands on it.