Our Pundits Continue to Wait Out Capitol Hill Moves

Our pundits were once again glued to the drama playing out on Capitol Hill, despite an ongoing earnings season that continues to churn out terrible results. Of particular interest were the Obama administration’s stimulus plan and its idea for a so-called “bad bank.” Our pundits were split on what impact those programs would have on the economy and whether it would lead to an outright recovery any time soon.

ISI policy analysts Andy Laperriere and Tom Gallagher echoed Feb. 3 what many of our experts said: Some kind of a policy response is needed and speed is of importance. They warned the United States is at a point where it can resolve its crisis like Sweden, generally viewed as a successful and decisive remedy in the early 1990s, or Japan, which had a piecemeal response and “after several months it became apparent it wasn’t working.”

Barry Knapp, U.S. strategist at Barclays, isn’t sure any policy will be able to counter the horrendous earnings being delivered by corporations. He said recently policy euphoria will be short-lived, and “additionally, 45% of the S&P 500 has reported and earnings are tracking a 31.5% year-over-year loss – a level that if maintained for the balance of the year would produce an earnings number close to our -21% year-over-year estimate for 2009,” he wrote Jan. 30. That’s not exactly a rosy scenario.

Albert Edwards, a market strategist at Societe Generale, is even gloomier about this year. “We remain at the bearish extreme of the market. It is not a pleasant place. It is cold, dark and damp. People either don’t speak to you or send you abusive emails,” he wrote, with a tinge of humor. “In this industry, commentators like to bring clients ‘good’ news. Hence, despite the once-in-a-generation collapse in the global economy, virtually every economist was looking for a soft landing. Similarly, now we are in the deep, deep recession no one felt able to predict and commentators are busily looking for signs of economic recovery.”

Ed Hyman agrees. There’s nothing great coming over the horizon soon, wrote Hyman. His data-rich surveys at ISI Group noted Feb. 2 that layoff announcements averaged almost 50,000 a week for the preceding 13 weeks. “Bottom line, businesses are cutting back,” he wrote.

Rising job losses, among other things, isn’t giving investors much confidence. Citigroup’s Tobias Levkovich noted investors pulled $112.8 billion out of stock funds in the fourth quarter, almost half the annual fund outflow of all of 2008. He said no clear point is in sight for a recovery, writing in a Feb. 2 note “we doubt there is any one piece of data that will provide the panacea that investors crave.”

So is there any good news? Maybe. Richard Hoey, chief economist at Bank of New York Mellon (BNY) thinks there will be a recovery — albeit a gradual one. The bright side is that “policy makers have a correct diagnosis of the severity of the financial crisis and should continue to be proactive in responding aggressively to it,” he wrote Feb. 2. “However, even after the recession is over, we do not expect a strong economic rebound in the early quarters of recovery. The end of economic decline by mid-2009 is likely to be followed by several quarters of subpar recovery.”