Where Is Our Stimulus Plan?

When talking about the incoming Obama Administration’s fiscal stimulus package, it’s easy to take heart from the pragmatic brainiacs that are coming to run policy in Washington.

Unfortunately, though, the executive branch only gets to propose legislation. Then it goes into the hands of the Congressional leadership, and that is where the picture gets ugly.

Checks and Balances?

The House and Senate leadership shoulder a great amount of responsibility for the mistakes in lending that got the United States into trouble in the first place.

Due to political correctness and a dreamy attitude toward the benefits of home ownership, they encouraged Fannie Mae (FNM) and Freddie Mac (FRE)— which have Congressional mandates — to get into the business of buying risky subprime loans. And they allowed them to ramp up their leverage to obscene levels to boot, all while taking millions of dollars in campaign donations from FNM and FRE executives.

Moreover in the fall last year, Congressional leaders allowed the Treasury Department to railroad through some of the most irresponsible legislation of all time, the Troubled Asset Relief Program. And they have failed to take any responsibility for the lack of oversight into a program that has dispensed $350 billion in taxpayer money to banks with no strings attached.

They can complain about it all they want, but they had the chance and wherewithal to prevent it and they did nothing but posture.

To make matters worse the same leadership — Barney Frank in the House and Chris Dodd in the Senate — will be helping to guide the stimulus plan through Congress. Already legislation that was promised to be done by January 20 will certainly be delayed until mid-February, and perhaps beyond. The longer it takes them, the more ineffective it will be and the more special interests it will serve.

I am normally a glass-is-three-quarters-full kind of guy and a relentless optimist. Yet when it comes to the politics of the stimulus package, I believe that foreign and institutional investors are right to despair. This is one situation where we need to keep our hopefulness in check.

As currently proposed, a grab-bag of tax credits and infrastructure spending will not put a screeching halt to the recession.

Turn Up the Volume

How do we know that foreign investors are not with the program? The volume is lacking. Tthe main reason stocks have gone up at all in the past month is the lack of intense selling as buying has been very lackluster.

Above you can seen this very dramatically in the NYSE Selling Pressure and Buying Power Indexes kept by Lowry’s in Florida. I’ve highlighted the indexes’ results over the past month and a half in yellow. Notice how the Selling Pressure index, at top, has come down steadily while the Buying Power Index, at bottom, rose only until the end of November and then flattened.

If we were really experiencing the first leg of a new bull market…

…the Buying Power Index would be rising every bit as much as the Selling Pressure Index is falling. At one point, they would cross, and then for the next few years Buying Power would dominate over Selling Pressure and you’d have a bull market.

A cross to the downside (Selling Pressure over Buying Power) predated the current bear market in the late summer of 2007, so until we have a cross to the upside (Buying Power over Selling Pressure) we need to be skeptical of rallies. I’ll keep an eye on it for you and keep reporting back.

Global Confidence Collapses

Meanwhile, across the Atlantic, confidence in the16-country Eurozone has collapsed in the past few months to the lowest levels since 1985.

The weak December reading on the Economic Sentiment Index, a measure of industrial and consumer sentiment compiled by the executive branch of the European Union, reminds us of the uniquely global nature of the recession as production plunges and unemployment rises concurrently around the world.

The cross-sector slowdown has European economists and executives worried that this downturn could be the worst the continent has seen since the early 1970s.

German Bundesbank president Axel Weber warned that economic growth data for the fourth quarter is likely to be worse than expected as downside risks identified just last month by the European Central Bank are already emerging.

In Spain, a country particularly hard hit by the housing bubble, unemployment has surged to 13.4%. That is a catastrophe not just for Madrid policy makers but for the Continent.

In France, layoffs at automobile manufacturers Peugeot and financial services giant BNP Paribas has brought headline unemployment to nearly 8%.

In Germany, exports fell 10.6% in October after a fall of just 0.6% in October as demand for luxury cars fell in the United States and elsewhere.

All of these developments will pressure the ECB to cut its interest rate target from 2% and join the U.S. and British central banks in a near-zero rates.

Emerging Markets Hit Hard

Meanwhile, the fortunes of the emerging markets rely explicitly on demand for finished goods in the West. American and European consumers have been forced to stop their consumption binge, and the resulting slowdown in global trade has transmitted the contagion worldwide.

In Taiwan, exports in December were down 47% from last year as demand for electronics components for assembly in China has fallen off a cliff.

Korea’s exports were down 17.4% in December, following a fall of 19% in November, as industrial output falls by the largest margin in 21 years.

Even China hasn’t been spared, and in fact it may turn out to be the worst effected. Exports there fell another 2.8% in December, following a 2.2% fall in November. Compare this to growth of 19% just a few months prior. On Friday, China released its fourth quarter 2008 business climate index. According to economist Jim Walker, the reading of 107 was the lowest in the index’s history, down 25% year over year. Another key China indicator, the Business Cycle Signal, shows 30% rate of decline, which is not yet as bad as the 1998 period but well on its way.

The key point here is that economic activity among consumers, manufacturers and commodity providers are declining in unison and long-term indicators which have always helped us foresee a future upturn are not even close to showing signs of life. As a result, I think that the recent advance in emerging market stocks, and especially China, will turn out to be great opportunities for short-sellers. Banks should suffer the most, as foreign investors flee and bad debts rise.

I recommended that my newsletter subscribers add short positions in China and Europe to profit from these problems. Ultimately, of course, U.S. and European consumers will lead the world out of the global slowdown. It won’t happen as soon as everyone would like, but it will happen. In the meantime, remain cautious and keep your equity allocation under 40% and check out my Traders’ Advantage service for more short-term trading ideas.

This article was written by Jon Markman, contributor to InvestorPlace Media. For more actionable insights likes this, visit www.InvestorPlace.com.