GOOD NEWS, BAD NEWS 6/20/2008

This has been a classic ‘good news – bad news’ week for the markets and the economy. The continued pressure on equities has driven most major market indexes south for the week, approaching their January and March lows. The culprit, the price of oil and investors ‘throwing in the towel’ on many regional banks. The May 30th issue of Signature Update suggested that this may well take place and while none of us appreciate lower market values, we can now breathe a collective sigh of relief. The good news? When things get uncomfortable for the masses, and they are, decision makers get moving… and they are.

Bush’s pronounced support for renewed oil drilling may not bring immediate benefits, but it will open up energy sources and ultimately increase supply. China’s decrease in consumer oil subsidies was met with an immediate drop in oil values of almost $5 per barrel. Will you feel this at the gas pump? Not yet, but it is part of a trend that actually started a few weeks before when the Saudi’s called for an Oil Producers and Consumers Summit. We’re not suggesting that the price of oil won’t see further increases, but we are saying that influential forces are gathering to do something about the problem – that they’re doing so to save their own skins and protect their profits is almost irrelevant. What they’re doing will continue to drive domestic demand to lower levels, may increase domestic production enough to meaningfully reduce our dependence on foreign oil supplies, should help curb the growth of international oil demand, and may well reign in the effect speculation has on the oil market. That’s a lot! Keep your fingers crossed, your air conditioning down, and drive your commute-mobile more often than your SUV.

Speculation does not always mean manipulation and there is an important place in our markets for commodities speculators. They bring much needed liquidity and can even out some of the seasonal ups and downs of various commodities prices – we’ve also seen that sometimes they can also make a bad situation worse. This may be one of those situations in which we have to take the good with the bad.

The Federal Reserve has now clearly shifted its focus towards containing inflation. The jobs report issued as of May 31^st, while not great for those out of work, represented some added support towards moderating inflation. Inflation can not be sustained without a corresponding increase in personal incomes, and incomes aren’t likely to increase while unemployment hovers above the 5% mark. Inflated prices only stay that way while demand stays strong. A weaker jobs report and stable personal income data, coupled with higher consumer prices leads to lower demand, which moderates inflation and ultimately brings prices down.

The effects of a still weakened housing market have already rippled through our economy. Ripple may not be the right term; think surf crashing against a battered coastline and that’s a more apt descriptor. But several of the national home builders report seeing the early signs of increasing demand. This is also supported by the number of offers being presented on foreclosed properties – the bargain hunters have begun to reappear in the market and they are traditionally at the forefront of increasing demand. That said, we still have many months of housing inventory to absorb before we can expect to see any meaningful increase in home values. What may then follow, after months of subtle increases, will be ‘write-ups’ in portfolio values for those battered financial institutions that so painfully had to disclose ‘write-downs’ earlier this year, which will finally bring some relief to the depressed values of these institutions. This may well come late in the economic cycle, but it may be an important contributor towards increased equities values.

Brian Wesbury’s comments this week are titled ‘The Phantom Recession is Already Over’ and it worth paying attention to. He writes, ‘While some of the analysts who had forecast a recession are willing to admit they were wrong, others are now claiming the reasons we are not in recession’, and then goes on to make one of the best cases I’ve read for economic stability rather than recession. He’s not talking about meaningful growth, but he is asserting that the media continues to have it wrong. Read Wesbury’s comments at (http://www.ftportfolios.com/Commentary/EconomicResearch/2008/6/16/the_phantom_recession_is_already_over).

Finally, late last night I listened to several commentators, analysts, traders, and economists on CNBC debate which of the presidential candidates would be best for the markets and the economy. Many would say this is a slam dunk and lean towards the republican candidate; not so. Nearly each one present reflected a mixed opinion, citing reasons why either candidate could be good for the markets – not one of them suggested that either candidate would be bad for the markets. I had to listen to some parts of this over and over to make sure I was hearing this correctly. The markets dislike uncertainty and as long as there is no clear leader in the presidential race there will be no clear direction in the markets. The Fed isn’t likely to make major moves in the mean time. What’s left is the consumer, and in spite of low consumer confidence levels, core consumer and business spending is up by double digit increases over the last three months. And that doesn’t happen during a recession!