The Federal Reserve Beige Book numbers were released yesterday afternoon.  The most talked about headline contained the use of the words ” widespread deceleration” compared with previous periods.  Not good to hear in the middle of a so called recovery.

However, somewhat less pronounced, were some decent economic numbers.  Travel and tourism picked up, as well as manufacturing activity in some districts.  Agricultural producers, and extractors of natural resources, reported gains in demand and sales.

Overall the report was a mixed bag with the overriding theme being one of slowing from recent periods.  The markets chose to focus on the more positive data points however, and that is encouraging for investors.  Continued perception of regime change in November may cause this positive sentiment to continue for a while longer.

The President plans to announce a proposal on Wednesday that would allow businesses to expense 100% of new equipment purchases through 2011.  The estimated cost of lost revenue is $200 billion: Joe Weisenthal at Business Insider calls it a “gigantic version of Cash-for-Clunkers” that will just pull demand forward.  I actually think that it will be more helpful than that, but it still won’t address hiring plans.

The Wall Street Journal’s op-ed today is a very good summary of the problems the Democrats have had with their economic policies.

“To put it another way, the real roots of Mr. Obama’s economic problems are intellectual and political. The Administration rejected marginal-rate tax cuts that worked in the 1960s and 1980s because they would have helped the rich, in favor of a Keynesian spending binge that has stimulated little except government. More broadly, Democrats purposely used the recession as a political opening to redistribute income, reverse the free-market reforms of the Reagan era, and put government at the commanding heights of economic decision-making.

Mr. Obama and the Democratic Congress have succeeded in doing all of this despite the growing opposition of the American people, who are now enduring the results. The only path back to robust growth and prosperity is to stop this agenda dead in its tracks, and then by stages to reverse it. These are the economic stakes in November.”

Yesterday, September 1st was a good day in the stock market.  The Dow closed up 254 points and the S&P 500 closed up 31 points.

Yesterday’s rally was different in one meaningful way as compared to the rallies of the past few months.  While ignoring a slightly negative ADP report, the market chose to focus on the first positive, significant economic data that  has been released in some time. 

1) U.S. manufacturing data was better than expected, it was actually strong 2) China manufacturing data was better than expected 3) India  and Australia reported strong GDP numbers.

These numbers, coupled with an idea we have been discussing on this blog, that the market will anticipate regime change in November, continue to point to the opportunity for a better than expected market in September, and maybe through November.

The Nikkei fell 3.6% yesterday due to continued strength in the yen combined with weak semiconductor numbers.  From the WSJ article:

“Regional semiconductor-related shares slid on worries about their demand outlook, and after Intel’s shares fell overnight following news the U.S. chip company said it would pay about $1.4 billion to acquire Infineon Technologies’ wireless unit. Intel had slashed its third-quarter revenue and gross-margin targets last week.

“The slowdown in PC demand had been priced in, but it’s a new shock when Intel cuts its outlook,” said Monex market analyst Toshiyuki Kanayama. “Investors are now watching whether this slowing demand is temporary or long term.”

Europe continues to surprise on the upside however.  Germany’s economic recovery has been stronger than expected, and even Great Britain’s growth numbers are getting revised upward.

The U.S. market is still experiencing what Ed Yardeni calls the tug of war between the Bears(double dip on the way) and the Bulls(corporate cash is high).  According to Ed: “The tug of war between the Bears and the Bulls is likely to continue.  Both sides are getting rope burns.”

A client recently sent me an interview with investment strategist Peter Schiff.   Mr. Schiff was right about the most recent debt cycle and correctly predicted the collapse of the housing market. 

He is currently very negative about the domestic market, and recommends buying gold and moving assets offshore.  Mr. Schiff believes we are heading down the path of socialism, and that government interference and borrowing will ultimately destroy our freedom and way of life in America.

While this is a remarkably gloomy outlook, and Mr. Schiff has a good reputation, the one potential positive he fails to address is:  What if there is meaningful regime change in November?

As a country we have made mistakes in the past, and corrected them.  The American people are smart.  They understand that deficit spending and government interference are bad for the prosperity of the country.  Let’s see what happens in the coming months.

Existing home sales fell 27.2% in July to a level not seen since 1995.  Inventories are at a record high of 12.5 months supply.  The median home price was unchanged at $182,600.  Refinancing activity picked up two weeks ago as the the 10 year Treasury broke the 2.80% level.  It is at 2.48% this morning, so low mortgage rates should continue to drive refinancing activity.

In yesterday’s research from Ed Yardeni, he quotes a WSJ article from August 17.  Ironically, that article, which I missed, reinforces the point I made yesterday in my blog.

In the article, Edward Pinto, who was a top official at Fannie Mae in the late 1980’s, reminds us that Congress passed a law in 1992 that imposed affordable housing mandates on Fannie Mae and Freddie Mac. 

In 1995, the department of Housing and Urban Development (HUD)announced a strategy to liberalize underwriting standards nationally.  By 2006, an estimated 30% of home buyers had put no money down.

Hence the law of unintended consequences, and evidence reinforcing the idea that maybe the government should actually stay out of the housing business.

There is a lot of chatter these days about the role Fannie Mae and Freddie Mac played in the housing bubble, and the economic crisis that ensued. 

One school of thought is that Fannie and Freddie were just following the lead of the business community in chasing profits in sub prime lending.  The other believes they did not act prudently as a for profit, government sponsored entity, which carried an implicit government guarantee.

Both of these points of view ignore the fact that in the early 1990’s Fannie and Freddie, as well as the banks, were “incentivized” by the government to make sure home ownership was available to almost everyone, regardless of the ability to pay their mortgage.  Eventually, prudence and good judgement went out the window, and hence the housing bubble.

Maybe it would be better to keep the government out of the home ownership business.

Potash Corp, ticker POT, rejected an unsolicited bid today from BHP Billiton.  BHP bid $130 a share, and POT is currently trading around $140, up 25%.  From the FT article:

“The BHP Billiton proposal substantially undervalues PotashCorp and fails to reflect both the value of our premier position in a strategically vital industry and our unparalleled future growth prospects,” Dallas Howe, PotashCorp chairman, said in a statement.

“The fertiliser industry is emerging from the recent global economic downturn, and we feel strongly that PotashCorp shareholders should benefit from the current and potential value of the company. We believe the BHP Billiton proposal is an opportunistic effort to transfer that value to its own shareholders.”

The company has a slideshow up on their website describing why the Board rejected the offer.  While the global economic recovery remains anemic, many corporations have greatly improved their balance sheets during this extended period of low interest rates.  We will probably continue to see M&A activity as corporations try to improve their growth rates by making strategic acquisitions.  Dell made an acquisition yesterday in an effort catch up to HPQ and IBM on the services side.

Over the past few weeks, there has been an escalated debate about whether or not the United States will fall into a period of deflation.  Deflation is negative for the economy.

The three tools that can be used to halt deflation are: 1) Lower the fed funds rate to 0%.  2)Increase the number of dollars in circulation, which is the equivalent of raising the prices in dollars.  3) A Broad based tax cut.

The Federal Reserve has already pegged the fed funds rate at 0%-.25%.  We will have to wait and see if the other two options come into play.  Maybe they will after the November elections.