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March 17, 2010 – Stock Rally Says Economic Boom, Fed Shows Concerns

The Fed says that a zero percent funds rate is needed for an “extended period.” The Fed shares
my concerns on housing and job creation, with housing starts at depressed levels. Treasury
Secretary Geithner has overly optimistic growth and job creation, which does not jive with the
FOMC or me. The weekly chart for the Dow shows the upside potential in an overvalued market.
Continued Mixed Message from the FOMC Meeting
While the FOMC says that economic activity continued to strengthen with a stabilizing labor market, the
important fuel for growth is uncertain.
• Household spending is expanding at a moderate rate but remains constrained by high
unemployment, modest income growth, lower housing wealth, and tight credit.
• Business spending on equipment and software has risen significantly. However, investment in
nonresidential structures is declining, housing starts have been flat at a depressed level, and
employers remain reluctant to add to payrolls.
• While bank lending continues to contract, financial market conditions remain supportive of
economic growth.
• Although the pace of economic recovery is likely to be moderate for a time, the Committee
anticipates a gradual return to higher levels of resource utilization in a context of price stability.
The Fed says, “With substantial resource slack continuing to restrain cost pressures and longer-term
inflation expectations stable, inflation is likely to be subdued for some time.” I say that inflationary
pressures are building. You see it at the super market, in the drug store, healthcare premiums, and at
the gas pump. With lower incomes, Americans see a higher cost of living on Main Street USA, while
Wall Street gets record bonuses. Recent ISM reports show rising Prices Paid.
The Fed stated that the zero to .25% federal funds rate will be needed for an “extended period” as I
expected. The quantitative easing whereby the Fed purchases $1.25 trillion of agency mortgage-
backed securities and $175 billion in GSE debt will end as planned at the end of this month.
A Key Statement for me is “housing starts have been flat at a depressed level, and employers
remain reluctant to add to payrolls.” Without improvements on these two important fronts the US
economy is positioned for a double-dip.
Single-Family Housing Starts have stabilized at about 500,000 units annualized. This does not
move the needle in the NAHB Housing Market Index, which remains depressed below a reading of
20, when 50 is neutral. Some are putting a positive spin on “flat at a depressed level” but in my
judgment with the tax credits set to expire at the end of April, the risk is for a double-dip in housing and
banking, which is how “The Great Credit Crunch” began at the end of 2006 and through 2007.
Some say there is pent up demand for new homes. I disagree with that as three million homes are
likely to go through the foreclosure process in 2010. With the price of building materials on the rise
home builders will not be able to compete with the pending glut of homes in resale. Also keep in mind
that more homes are being occupied by extended families.
Is Treasury Secretary Geithner more upbeat than the FOMC?
The theme from the Obama Administration can be summed up as the worst of “The Great Credit
Crunch” is behind us, but the country still faces significant and ongoing challenges that begins will high
unemployment. The Administration expects 3% growth in 2010 and 4.3% in 2011 and 2012. That would
be a boom as the FDIC closes 500 to 800 community banks. The Administration projects 100,000 jobs
created per month in 2010, 200,000 in 2011 and 250,000 in 2012. If the Fed agreed, they would have
removed the “extended period” from their statement, and Main Street unemployment rates would stop
rising. Unemployment here in Tampa Bay is 14.3% in Pasco County and 12.7% in Hillsborough.
It seems to me that most economists inside and outside of the White House are considering this
economic recovery as typical and out of the text book. This is where I disagree, as the text book
describing the end of “The Great Credit Crunch” has yet to be written and several more chapters
remain to be discovered.
The weekly chart for the Dow favors higher prices, but beware of the downside risk. My annual
pivot is 10,379 with today’s resistance at 10,778, and annual and semiannual resistances are 11,235
and 11,442. With ten of eleven sectors overvalued according to ValuEngine my prediction
remains – Dow 8,500 before 11,500! Healthcare is undervalued by only 3.2%.

Chart Courtesy of Thomson / Reuters

That’s today’s Four in Four. Have a great day.

Check out the latest Main Street versus Wall Street on Forex TV Live each day at
1:30 PM. The next broadcast is Monday, March 8, 2010.
http://www.forextv.com/Forex/custom/LiveVideo/Player.jsp
Richard Suttmeier
Chief Market Strategist
www.ValuEngine.com
(800) 381-5576
As Chief Market Strategist at ValuEngine Inc, my research is published regularly on the website www.ValuEngine.com. I
have daily, weekly, monthly, and quarterly newsletters available that track a variety of equity and other data parameters as
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“I Hold No Positions in the Stocks I Cover.”