Reader Mail!
Starting last week, we saw some of the market's biggest momentum trades sell-off on basically positive earnings reports. I'm referring to Apple (Nasdaq:AAPL), VMWare (NYSE:VMW), F5 Networks (Nasdaq:FFIV) and many of the other tech companies that are helping companies lower costs or are associated with the surge in handheld gadgetry.
But last night, Qualcomm (Nasdq:QCOM) reported good numbers and the stock is actually higher. NetFlix (Nasdaq:NFLX), too. Though not in the same sector, Caterpillar (NYSE:CAT) is also up after good numbers.
Could we be seeing a shift from the "sell first" mentality that emerged last week?
Well, if we are, it's coming against a backdrop of deteriorating economic news.
New unemployment claims jumped back up to the 450K level, durable goods orders took a nosedive, and Standard & Poor's cut Japan's credit rating on debt concerns, and also said that Portugal, Ireland Greece and Spain were stuck in recession for 18 months.
*****Now, let's get to your letters on the "austerity vs. growth" topic. I received a ton of letters from you, with some very well though out responses. I wish I could reprint them all, but I'd probably have to pay for the extra bandwidth this letter would require.
So I've selected some representative ideas, and edited them as well. Oh, and so you know, austerity is the unanimous choice.
*****Yochanan Q. wrote:
As an investor, it's easy to say that I ONLY want what will bring growth figures to our economy....that does not mean that that is the right choice. We can continue deficit spending in hopes of economic growth but such growth will NOT be bigger than a growth in the deficit!
Too often, we as Americans are more concerned with what goes on in our own backyard than what's affecting the country as a whole. Hard to imagine that changing much, but it's a good sentiment.
*****Jon V. wrote:
Why in a global market economy with open boarders and free trade are AMERICANS paying 3 to 10 times what Europeans and Canadians pay for Rx drugs? While I do believe in free markets, the Feds policy is imposed and not a function of market forces. I believe that the removal of income generation from fixed incomers in also a huge part of the lack of consumer activity. But part of the decline in the status of our country has been the shifting of wealth from the people to the banks.
The observation that lowered interest rates effects a wealth transfer from fixed income investments is a good point. It's almost as if Americans pay twice, we contribute to Social Security for the current retired generation. Then our own retirement income gets redirected back to support economic growth.
I personally do not support completely free markets. Aren't high prescription prices (and high health care costs in general) a function of a free pricing environment? I would also add that the wealth transfer to banks might be even more stark in a completely free market. Some regulation that reflects the will and needs of the people is a good thing...
*****George G. wants to change the question:
Austerity or growth: Are those really the only two choices?
Good point. Too bad politicians, and many Americans alike, tend to think in either/or terms.
*****Leigh P.wrote:
For the long term heath of the Nation ,,, but not in my trading accounts!
I expect this attitude would become even more prevalent if true austerity measures were imposed.
*****Jayne K. wrote
I feel that continued fiscal spending is warranted as long as it's focused on business sectors that are innovative and that promise future growth of our economy NOT a revival or re-invention of existing businesses. For example, I don't support pouring dollars into reviving standard construction activities. Put $$$s towards sustainable, green construction, development of structures that can withstand the tempestuous weather conditions which are part of our future: high winds, flooding, drought, etc.; and intelligent housing rather than luxurious housing (as I'm convinced that the homes currently constructed run the risk of being destroyed by natural occurrences and will no longer be purchased as investments).
No doubt that increased energy costs are a big drag on growth, and will continue to be so. We could even say that the lost capital from energy is being up for by lower interest rates and rising debt.
If there's one investment we desperately need, it's energy.
*****John H. gives us the perspective from the UK:
You ask " Would you sacrifice U.S. GDP growth (and probably employment growth) for fiscal austerity?". My comment is that we must be balanced and accept a not too strong currency together with some growth.
With this in mind I must congratulate your government (with a little help from Gordon Brown) for steering our economies during the last troublesome years.
Unfortunately, we in Britain now have political dogma masquerading as analysis. “Little government” is their goal and the reason why 500k public posts will disappear. Somewhat magically the private sector is expected to absorb these immediately.
Even before the “disappointing” -.5% GDP figures people were feeling miserable (apart from bonus laden bankers) and there is a lack of confidence. Once again we are told that there is no alternative.
I seem to remember your great FDR had more understanding and a better solution. Hopefully before it is too late we will concentrate, with the rest of Europe, on measures that promote economic growth.
I can't help but think Americans would be quite angry if 500,000 government jobs were cut (unless they were all at the IRS). Also, there is a noticeable difference between presidents like FDR and the ones we've had lately. Gone are the public works projects that made America an exciting country.
*****R. D. Read wrote:
We are beyond the point where trimming the Federal budget with a pair of pruning shears will be effective; it is time to break out the chain saws and wholeheartedly attack an over-grown bloated federal deficit. To this end: entire ineffective wasteful Federal agencies should be willfully "axed". Political/military expansion of the American Empire must be drastically curtailed.
Better austerity now than utter disaster in the future.
While the geo-political landscape has changed, I wonder how cuts to the military budget would be perceived. It's hard to imagine they would be popular...
*****Jerry R. wrote
Families and the US Government cannot continue to live on credit card
purchases indefinitely. Austerity hurts. That is a painful truth. In the government's case, rolling back employment levels and salaries to 2006 or 2008 and banning raises until government salaries are back in line would hurt
Maryland and Virginia. It might mean that a new 2,700 page
regulations about the use of a CaliforniaRecreational Area would
never ever get done again.
Gradually privatize Social Security and redo the Medicare system. A
little pain for everyone who works or pays taxes as we wind down the
entitlements.
No doubt there are plenty of boondoggles in government. And Social Security is a flawed system. But I can't help that privatizing it, and making it a for-profit business would help.
*****Jeff C. quotes tennis great Jon McEnroe
Government spending to encourage growth? To borrow a phrase from John McEnroe; you can't be serious! We had an almost $1 Trillion dollar 'Stimulus program jammed down our throats with the assurance of the Obama Administration that (1) unemployment would not exceed 8% and that by now, February 2011, unemployment would be at 7%. We were told there were "hundreds of shovel ready projects ready to go." There were none and they knew it. Unemployment did not go down and economic activity did not pick up. Growth will not come from more government, but rather from private investment. You want more economic growth? Cut taxes! Cut corporate taxes which are now the second highest in the industrialized world.
Let's recall that the $1 trillion stimulus was proposed by the Bush administration and approved under Obama with support from both political parties. There's little doubt money could have been better allocated, but isn't that always the case when politicians are spreading the pork?
I totally agree that corporate tax rates are a problem. But so are subsidies and loopholes. The entire corporate tax structure needs fixing.
*****John C.wrote:
I'm for austerity.Perhaps letting the bad businesses (banks, autos etc) fail would have accomplished 2 years ago what tightening our belts now would do.
The economy and markets would have dropped much lower but would have formed a much more solid floor from which to grow
And perhaps this country would actually be headed in the right direction now as a whole instead of teetering on this paper precipice.
"Let them fail" sounds good, but I think we forget how close the global economy came to collapse. That floor upon which to grow could have taken many years, if not decades, to emerge. And those auto companies have turned out to be pretty good business once they were truly restructured.
*****Dan B. wrote:
Yesterday I read that England is currently undergoing a lot of riots over food and their rise in prices. As much as I hate to see people loose their job, if it is a government job and there isn't anyway to pay for it, then the painful reality is that it needs to go.
Definitely there is no change from all of the money we spent on the banks that "are too big to fail."
Tell me, Ian if they are too big to fail, why did they? Why would the govt. bail them out? Is this corporate welfare just another example of the wealthy taking advantage of the American public?
Too big to fail really means too big to let them fail. It wasn't until Lehman was refused aid that we saw just how deep the problems were, and just how bad the financial crisis could get.
And yes, anytime large amounts of money are thrown around, people take advantage. Remember how many false claims came in after hurricane Katrina? You'd like to think that people have a better moral compass. Unfortunately, you'd be wrong.
*****Ivan W. wrote:
Of course I would sacrifice tax eater jobs for substantial reduction of expenditures. It is a felony to lie to congress but just politics when they lie to us or each other.
Yes, Ivan, I want to see political change more than anything else.
*****David W. wrote:
Why not have the US government act more like a business, spending money to make money/create jobs that effectively increase the demand for US goods or toward future technology that would put the US ahead of other countries in a decade..
With the revolving door between companies like Goldman Sachs and Halliburton, some might argue that government is too much like a business now! But seriously, as a business, the U.S. government has missed earnings estimates regularly, carries a negative P/E and has diluted its share count.
I still wonder what it would have been like of Ross Perot had become president...
Thanks again for all your comments. You always make for a good discussion.
