Summary of Fox Biz Talk

I had a brief talk on the set with of Fox Business with Varney & Co today, but there is no video available.

We began by talking about stocks. For several weeks, I have been suggesting to viewers that the S&P 500 could recover to 2700. Last Friday, the S&P 500 gapped higher and reached 2675. I did not like the gap and thought it would be quickly filled. That was yesterday. And after IBM earnings surprise and news that the Senate would vote on Thursday, with the prospect of the beginning of the government shutdown, the higher opening lifted spirits today.

I am a bit reluctant to give up on that target unless the S&P 50 falls through 2600 and then it would seem more work is needed. The S&P 500 rallied since the day after Christmas. Some consolidation shouldn't be surprising. A loss of 2600 and corrective losses can take it down to 2550, around where the 20-day moving average is found.

We talked a little about the US economy. Back-of-the-envelop calculations suggest every week the government is closed is shaving a little more than 0.1% off GDP. The shutdown has cost at least 0.7%, and that probably underestimates the impact. If the shutdown lasts all quarter and there is the underlying slower growth in the first part of the year as has often been the case since the Great Financial Crisis, Chairman of Council of Economic Advisers Hassett warned the economy could stagnate in Q1.

That is not my major concern. First, I don't expect the government to be closed for the entire quarter. There is simply too much disruption, and it is too costly politically. The wheels of justice turn slowly in any event, but now apparently there are no funds available to pay for grand jury subpoenas. Initial public offerings are halted. Some 800,000 employees are missing their second paycheck. There is a multiplier effect, which seems even greater outside the large urban centers. The President is taking a bigger hit in the opinion polls than the Democrats. Second, when the government does re-open, there will be pent-up activity--a sort of catch-up if you will.

My concern is more on the trade front. China is unlikely to meet the US demands that include the end of state subsidies for business, which gives them an unfair advantage. In terms of forced technology transfers, China cannot accept remedies for a problem it continues to deny. As what happened with NAFTA, after much flag waving and chest beating, the new agreement appears to be very much like the old agreement with the changes the Trans-Pacific Partnership would have made. Similarly, an agreement with China returns the situation to the status quo ante, with a smaller bilateral deficit for the US cannot be ruled out. However, under the WTO rules, China cannot simply favor the US suppliers unless there is a comprehensive trade agreements. Otherwise, China would likely face new charges at the WTO.

In light of the new IMF forecasts, and thinking through about the ECB meeting tomorrow, I suggest that the US was still the best of the bunch (driest towel on the rack). Earlier today the BOJ shaved its growth and inflation forecasts. The ECB staff cut its economic forecasts in December and will likely have to do so again in March. The ECB is still likely to offer new loans for banks by around mid-year. As the previous loans mature in less than a year, this complicates the banks' efforts to manage, as the regulators are encouraging reducing reliance on short-term borrowing (less than a year).

The euro held above $1.13, the lower end of its recent trading range. There is still, I think, a window for weakness around Draghi's press conference, but then investors will turn their attention to next week's FOMC meeting (patience and flexibility) and an employment report that could see job growth halved from December. Under this scenario, the euro can move back toward the upper end of its range (~$1.1450-$1.1500).