Archive for June, 2012

I Think I Can’t. I Think I Can’t.

Saturday, June 30th, 2012

The U.S. economy is becoming the little engine that couldn’t.

You, of course, remember the children’s story in which self-confidence and determination pull the little engine up and over a steep hill.  Unfortunately, after four years of struggling to gain momentum, even the little engine would likely become discouraged.

So it is with the American consumer.  The Consumer Confidence Index for June 2012 slipped for the fourth consecutive month for the first time since May 2008, dropping from 64.4 to 62.0 (63.0 was expected).

In addition, the Richmond Fed Manufacturing Survey dropped from +4 to -3 (a+2 was expected), its lowest number since October 2011.  Survey results can range from +100 to -100, with positive numbers indicating expansion and negative numbers indicating contraction.

In addition, the Bureau of Economic Analysis (BEA) announced its third estimate of gross domestic product (GDP) for the first quarter of 2012, but left the annualized rate at just 1.88%, a percentage point below the growth rate for the fourth quarter of 2011.

The U.S. economy may not be in a recession, but it’s sure not feeling like an expansion, either.

Even Germany’s Credit Is Slipping

Friday, June 29th, 2012

Greece.  Italy.  Spain.  Ireland.  Even France has experienced a wavering credit rating.  But Germany?

Germany has been Europe’s voice of reason, a financial pillar among a creaky, malfunctioning continent with the financial foundation of a sand castle.

We previously asked whether Germany would have the stamina to lift up the rest of Europe or be dragged down by its bailout-addicted brethren.

One sign that Germany is being sucked into the European sinkhole is that Egan Jones just downgraded Germany’s credit rating from AA- to A+.  Granted, Greece is unlikely to see anything near an A+ rating in our lifetime, but for Germany, it’s a stumble, if not a fall from grace.

It’s not that Germany is being irresponsible.  It’s that its debtors are not paying up.  According to, “Germany is owed EUR700B of which perhaps 50% is collectible … Germany’s debt to GDP was 87% as of 2011. However, increasing Germany’s debt by EUR700B to EUR2.9T for its indirect exposures raises the adjusted debt to GDP to 114%.”

We can only hope that it’s not a sign of things to come.  Yet, as an increasing number of European nations decide that they’ve had enough austerity, without so much as trimming a few vacation days, it’s unlikely that socialism will give way to pragmatism anytime soon.

In fact, Germany’s resistance to printing money as a way out of the sovereign debt crisis is increasingly making the country the odd man out in Europe, even though printing money is a sure path to hyperinflation.

Maybe Germany should leave the Eurozone instead of Greece.

Healthcare For All – Like it Or Not

Friday, June 29th, 2012

The U.S. Supreme Court’s decision to uphold the Constitutionality of Obamacare by a 5-4 vote will mean different things to different people.

Even its impact on healthcare companies will vary.  Health insurers will face pricing pressure, although those that benefit from Medicaid spending stand to benefit from increased funding.  However, the ruling limited the law’s plans to expand Medicaid, determining that the federal government cannot without a state’s entire Medicaid allotment if it fails to participate in Obamacare.

Medical device companies, likewise could feel some strain, while manufacturers of diagnostic tests and hospitals could benefit.

The S&P 500 Comes Up Short

Friday, June 22nd, 2012

The S&P 500 fell more than 2% yesterday, recording its worst one-day drop since December.  Was it disappointment with The Fed?  A sudden realization that the market shouldn’t rise when the economy is sinking?  A “fat finger” computer glitch?

There were plenty of reasons for the fall – and collectively they do not bode well for the U.S. economy:

  •  The Philadelphia Fed Survey fell unexpectedly to -16.6 for June, registering its worst reading since August 2011.  New orders, shipments and average work hours were negative this month, suggesting an overall decline in manufacturing business.  The decline was the second in a row, as the reading was -5.8 in May.

  • The HSBC China Manufacturing Purchasing Managers’ Index fell to 48.1 in June, down from 48.4 in May.  It was the eighth consecutive reading below 50.  A reading below 50 indicates contraction.  A continuing economic slowdown in China would slow orders from china’s trading partners.
  • Moody’s Investors Services downgraded 15 global investment banks after the market’s close.  Dick Bove, Vice President of Equity Research at Rochdale Securities called the downgrade “absurd,” arguing that the American banking industry’s balance sheets have improved “dramatically” over the past four years.  He noted that liquidity as a percentage of assets is at a 30-year high, bad loans are down and reserves against them are up.
  • Goldman Sachs recommended shorting the S&P 500, with a price target of 1285, which is about 5% below where it was when Goldman Sachs made the recommendation.
  • The S&P GSCI, a commodities index dropped to its lowest level since 2010.  It’s down 22 percent from a February peak.
  • The U.S. Labor Department reported that the four-week average of applications for unemployment benefits was at its highest level since September.

That’s a lot of bad news for one day.  No wonder traders followed Goldman Sachs’ advice.

Pretzel Logic

Friday, June 22nd, 2012

When Fed Chairman Ben Bernanke said recently that he did not expect The Fed to initiate any additional monetary stimulus, apparently stock traders weren’t listening.

The recent run-up in stock prices was based on conjecture that The Fed would respond to the still-weak economy with major action – perhaps yet another round of quantitative easing.

Instead of announcing quantitative easing, though, the Fed announced the expansion of Operation Twist on Wednesday. Under Operation Twist, which is designed to lower long-term interest rates to stimulate borrowing and investment, the Fed has been selling $400 billion of short-term bonds and using the funds to buy longer-term securities.

The extension through the end of 2012 added another $267 billion in bond sales. The measure is not very controversial, but an extension is also not likely to be especially effective, given that long-term rates are already at record lows.

Bernanke did not rule out further action. If none is taken, the “fiscal cliff” will become a little steeper.

Bad News Boosts the Market

Tuesday, June 12th, 2012

In the strange world of investment management, bad news is often good news.

That was the case last week, as the S&P 500 gained a hefty 3.7%, more than reversing its 3% loss from the previous week.

The market rose 2.3% on Wednesday alone – its largest single-session percentage gain so far this year – amid signs that the already tepid economic recovery is slowing further.

So why did the market rally?  Because traders speculated that the Federal Reserve will react to the slowing economy with additional stimulus.

Fed Chairman Ben Bernanke didn’t even hint at any immediate plans for a third round of quantitative easing or any other steps to stimulate the economy.  The European Central Bank (ECB), likewise, left its benchmark interest rate at 1.00%.  However, ECB President Mario Draghi said that actions would be taken if needed.

So the chance that another round of stimulus may take place is enough to boost the market 3%.

S&P 500 Chart

Given that economic growth remains anemic and the unemployment rate is at 8.3% and is generally creeping up, not down, previous rounds of stimulus have had virtually no long-term impact.

Short-term, though, markets love quantitative easing, which makes investments in stocks appear desirable by making investments in other assets undesirable.

So if quantitative easing doesn’t help the economy and provides only a short-term boost to stock prices, maybe the Fed should just float a few rumors … plan a faux round of quantitative easing to give the markets a boost without any cost or harm to the economy.

The Pain in Spain, Part 2

 Spain added to the good-bad news last week, as Fitch downgraded Spain’s debt rating from A to BBB after the country held a successful debt auction.

A teleconference last week between G-7 finance ministers to discuss Spain’s banking system, along with other Eurozone problems, failed to yield any specific plan for addressing the crises, and Fitch followed up yesterday by dropping ratings on two major Spanish banks, Banco Santander S.A. (STD, SAN.MC) and Banco Bilbao Vizcaya Argentaria S.A. (BBVA, BBVA.MC).

The downgrades, from A to BBB, came in spite of a weekend agreement by the Spanish government to a European Union bailout of up to EUR100 billion, or about $125 billion.

Spain joins Greece, Portugal and Ireland in the growing list of bailees.  Soccer anyone?

Compared To What?

Tuesday, June 12th, 2012

The U.S. dollar is the strongest it’s been in a year-and-a-half.  Is this renewed strength a sign of American economic strength?

In a way – but it’s all relative.  The euro broke to a new low recently, and the dollar and the Japanese yen were both stronger, because of a flight to quality.

Japan, which is still recovering from last year’s earthquake and tsunami, has enormous debt, as does the U.S.  So if the dollar and yen are strengthening, it’s a sign that the euro is in deep, deep trouble.

The yield on 10-year U.S. treasury bonds hit a new low recently, at 1.45%, as did the 10-year German bund (1.18%) and the 10-year British gilt (1.53%).

 Is Europe Burning?

Even the ever-bullish MarketWatch was noting a swoon in global markets, due to “fresh concerns that the European currency union is nearer to dissolution.”

As MarketWatch’s David Callaway noted, “Investors are rushing to safe havens in preparation for financial Armageddon, the long-feared run on European bank deposits that is expected to develop once Greeks awake some Monday morning this summer to find out the euros in their bank accounts have turned into devalued drachmas.”

 The Pain in Spain

In addition to growing conjecture that Greece is going to exit the euro, there is growing conjecture that Spain’s banks will need to be bailed out.

Recently, the S&P 500 broke below 1300.  Not coincidentally, at pretty much the same time, the yield on Spanish bonds went much higher.  Shortly afterward, the International Monetary Fund made a statement that it is considering bailing out Spain.  Shortly thereafter, the IMF made a statement denying any potential bailout.

So what’s really happening in Spain?  The answer is anyone’s guess, but if you’re considering investing your life savings in Spanish bonds, you may want to reconsider.

At least the price of oil is dropping.


Key Indexes

YTD (As of 5/30)

S &P
500 (SPX)


Composite (COMP)


Crude oil (NMN: CLN2)


Spain Ibex 35 (XX:IBEX)


Japan Nikkei 225 (JP:100000018)


Hong Kong


Russia RTS


Euro vs. dollar (EURUSD)


Treasurys (return) (10_YEAR)


index (DXY)


CBOE Market
Volatility Index (VIX)