Huge Debt Could Delay Our Recovery

by George Leong, B. Comm.

In an interview with The New York Times, investment guru Warren Buffett said that the mounting U.S. debt would be problematic as we move forward. Buffett suggested that there could be a problem with finding buyers for U.S. debt, which is used to finance the country’s stimulus plan. The problem is that China, the major buyer of U.S. debt, has speculated that it will cut down its buying of U.S. debt.

Buffett said that the country might have to print money. Whatever the case, it will be a difficult road for the U.S., as it will have to deal with the massive debt load and deficits. Yes, the economy will improve and pull out of the recession, but debt will not just go away. Unlike some of the massive debts on the balance sheet of the country’s major banks, no one is going to come forward and offer us massive grants and loans. It just does not work that way, and the way I see it, President Obama will face some tough roadblocks ahead. We still have not accounted for the overhaul of the healthcare system yet. The cost is predicted to be offset by eliminating government inefficiencies. Good luck on this.

As we sit here, stock markets are showing some topping on the charts. Markets are trading with a slight downward bias given the renewed concerns towards the global and U.S. economies ability to recover later this year. After the recent down week, markets have been unable to mount a rally after starting the week with a loss of over two percent. The 186-point decline in the DOW last Monday was the worst one-day loss for the DOW since July 2. It appears that investors are pausing given the lack of earnings and economic data last week. With the summer drawing to an end, we expect market participation to increase. Especially as we move towards the end of the third quarter, which in our view will be an instrumental quarter in seeing how the economy is doing and if there is any chance of pulling out of the current recession later this year.

The technology and small-cap areas have been attracting the focus of recent selling, given that they were the market leaders this year. In technology, PC maker Hewlett-Packard Company (NYSE/HPQ) reported a year-over-year decline in its second-quarter earnings and sales, but the numbers were above the Street estimates. This may seem positive, but keep in mind that the Street estimates were already revised downwards, so essentially HPQ only beat lower estimates. As we have discussed during the second-quarter earnings season, there may be a question of earnings quality. At this point, the third quarter will give us a better idea on the condition of corporate America.

Oil futures are hovering just below $70.00 on renewed economic concerns. A recent weak Michigan consumer sentiment report is helping to drive some selling. Traders are worried that the weak reading indicates continued weakness in consumer spending and hence GDP growth. The Russell 2000 has been moving down due to its link with the economy.

Markets are clearly at a crux. Unless we see fresh catalyst to drive stocks, we could be in for sideways trading in the near term.