Market Wrap-up: investors seem more confident about Bernanke’s re-confirmation but see no reason to jump back in before the State Union address

2010-01-25

Obama started getting supporters to line up for Bernanke over the weekend.  The market seemed more at ease with the re-confirmation, but recovered only marginally from last week’s mini-correction.  The concerns today revolved around what will happen to the economy once the government phases out support programs and – more immediately – how much Obama will bash banks at his upcoming State Union address.  The only good reason to own stocks was because they had sold off so much last week and perhaps there was some opportunistic short covering, since fear and uncertainty were palpable.  The Dow ended up 24 points or 23 bps, the S&P performed the best among the indices by gaining 5 points or 46 bps, and the Nasdaq was up 6 points or 25 bps.  Two of the best-performing sectors were Financials and Technology, both of which were the most-sold last week.

Existing home sales in December declined by 17%, the largest decline since the National Association of Realtors (NAR) started recording the data in 1968.  On a more positive note, prices were up by more than 6%.  Both surprises can be attributed to first-time homebuyer incentives, which were put on hold in November and then extended into 2010.  First-time homebuyers go after smaller and cheaper homes, but after front-loading their demand before the first expiration of the incentives, they can now wait into the spring for their purchases.  The monthly decline in volumes reflects first-time homebuyers patience since now they can wait for a few months to buy their homes, but this also implies the absence of cheaper home sales in the data.

Famed short-seller Jim Chanos of Kynikos Associates sees overheating and overindulgence in China.  He has been looking at shorting the China effect for more than a year now, during which time he has been formulating his bearish view on China's excesses, but critics have said that he doesn't have the requisite experience and understanding of the intricacies of China's economy in order to be able to weigh on the matter in any sort of meaningful way.  To be fair, Chanos explains that he's not calling for a collapse in China, but rather sees classic pockets of bubbles.  One indicator that Chanos points out is the very high and continued fixed capital investment as a percent of GDP, which has the implication that a country better make sure that its capital projects are economic, because they will later be burdened by depreciation, maintenance, and overcapacity if the projects are not carefully thought out, which can have a severe negative impact on the economy.  To the criticism "you've never been to China", he counters "I never worked for Enron either".  [video link: http://bit.ly/6j2JDW]

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