Comstock Partners, Inc.
Administration Trying To Jumpstart Stock Market
January 06, 2003
The administration’s prospective fiscal stimulus plan of about $600 billion over 10 years is an act of desperation made necessary by the fact that the alternative of doing nothing is even worse. However, the failure of the Japanese economy to revive even after a full decade of monetary and fiscal stimulus indicates that the probability of a successful outcome is in serious doubt. If the economy was as good as the bulls think, this fiscal plan would not be necessary, particularly after 24 full months of extreme monetary ease. The fact is that the economy is beset by lingering structural imbalances that have not only been uncorrected, but have actually been exacerbated over the past two or three years. These are excessive manufacturing capacity, record consumer debt, a low consumer savings rate and a ballooning trade imbalance.
The administration’s own doubts about the ability of the fiscal stimulus to induce more spending by the consumer and business are revealed by the undue emphasis on the dividend tax elimination that accounts for one-half of the expected proposal. While the political cynics attribute this to a White house payoff to the wealthy, we think there is a simpler answer. Recognizing that household net worth has dropped for three straight years and that both consumer and business confidence have been hurt by declining stock prices, we believe that the Administration has aimed its program directly at stimulating the stock market as a way to boost confidence because it believes that nothing else is likely to work. Unfortunately, however, we think that this plan will misfire as well, since the market impact is likely to last only a few days, and that the real stimulation from the dividend tax proposal will not be short-term.
At the same time the economy continues to look weak despite the peculiar ISM manufacturing number. Four-week initial unemployment claims are at a three month high. While the December Challenger showed a drop in layoffs, the fourth quarter total was far higher than the previous two quarters and almost as high as the first quarter. Although December vehicle sales jumped 2.3 million units to 18.3 million, the second highest monthly total for the year, General Motors accounted for almost the entire gain due to incentives amounting to almost $4,000 per vehicle, while the big 3 Japanese companies were flat. As the sales were most likely borrowed from 2003, auto sales this year will probably decline. The old saying says, “Sell on the news”, and that is a strong possibility following the actual announcement of the stimulus package.
comstockfunds.com |
