Tower Private Advisors
- Greece and China
- Doublethink and a mini Orwell primer
- Lots of economic stuff next week
Capital Markets Recap
A tale of two countries beset the markets this week. One is #34 in a ranking of countries’ Gross Domestic Products, behind such stalwarts as Nigeria (#33) and Pakistan (#28). The other is ranked #3, behind the U.S. and Eurozone. The first, of course, is Greece; the second China. In Greece it’s the worst of times, where it is trying to reign in its public spending, while the workers strike. In China, it’s sort of the best of times. It’s economy is on a rampage and a government with some foresight is trying to put the brakes on things to reduce inflationary pressures. Both stories should lead to some buying opportunities. In the case of Greece, the Euro will eventually become a good buy. For now, it’s taken the U.S. buck’s place in the ranking of nowhere-to-go-but down. In the case of China, the move will temper that country’s growth, such that it falls to the high single digits. The monetary tightening in China will also lead to some buying opportunities in the companies–and countries–that have what China needs, namely commodities. So, mining and mining equipment stocks, and countries like Australia (ETF ticker: ECA) and Brazil (ETF ticker: EWZ) should be on your radar screen. Here is what the WSJ Online had to say about the subject.
Most commodities dropped Friday after China unexpectedly raised reserve requirements for banks, a move aimed at staving off inflation. It was the latest in a series of plunges related to China and stretching back a month, as investors fear lending restrictions are a signal that the world’s hottest major economy is looking to cool down.
But gradual steps to prevent China’s economy from overheating will arguably benefit markets in the long run without slowing growth too much in the short term. Besides, the possible harm to global economic growth doesn’t compare with Greece’s struggle with its debt, which threatens to undermine the European rebound and also weighed on markets Friday, or with the uncertain nature of the U.S. recovery.
“I don’t think [the restrictions] will have a huge impact, even on China,” said David Wyss, chief economist at Standard & Poor’s.
March crude settled 1.5% lower at $74.13 a barrel and most-active May copper ended off 1.8% at $3.0950 a pound. But the declines, similar to those seen the last time China raised reserve requirements in January, are more dramatic than the policy moves themselves. Indeed, weeks after the first lending restrictions were introduced, the International Energy Agency raised its 2010 oil demand forecast, with China accounting for a quarter of new consumption.
“You cannot ignore the power of the headline,” said Paul Ting, an energy industry consultant specializing in China. “But ultimately a headline has to be substantiated by physical evidence, and I’m not sure the physical evidence is going to be that strong in terms of deterioration of demand coming out of China.”
Read the entire story here.
Markets around the world were buffeted by the changing news about Greece. Here’s a look at Google searches on some important phrases over the last thirty days.
It never hurts, though, to double check what looks like a popular search phrase to something totally American, like a celebrity. So, being the guy who always bombs the Trivial Pursuit Pop Culture category, I went to the People magazine website to find out who is hot right now. Turns out it’s some guy I never heard of: John Mayer. Well, here’s how “Greece debt” fares against “John Mayer.” Not well, it turns out. (That’s John Mayer searches in red; Greece is the flatline.)
Figuring I was on a roll with the Google Insights tool, I decided to check out a search of Toyota. Not surprisingly, John Mayer gets pushed aside. What is surprising is where a search of Toyota is most popular. You’ll never guess until you check out the map below. Other than Toyota stock, what does that have to do with anything? I don’t know, and am not prepared to come up with some clever insight, which is the norm.
Here’s the progression of Greece headlines on the Bloomberg terminal this week.
Monday: PIMCO’s El-Erian Says Greece Needs Aid
Tuesday: Greek Aid Package Considered by EU
Wednesday: Germany, France Demand Greek Budget Cuts
Thursday: EU Demands Greece Fix Deficit, Vows ‘Determined’ [GPS:but unspecified] Action to Staunch Crisis
Friday: Stocks, Euro, Commmodities Drop on Concern Over Greece
Whaddya bet the European chiefs talk over the weekend? If so, that will still leave the rest of the PIGS.
Here’s some other stuff that hit the Top Stories.
- Disney Profit Tops Analysts’ Estimates on TV Gains, Stabilizing Parks
- Toyota Corolla Steering Complaints [are you kidding me?] Are Being Reviewed by U.S. Regulators – Honda’s recalling cars with faulty airbags. Guess what, Ford’s expected to edge Toyota out of #2 position.
- Motorola talked more this week about splitting itself up and finally confirmed it today. The was up a sharp 7.2% today on a sharp increase in volume.
- President Obama seemed to back away from earlier comments about [banker] compensation (didn’t he anoint a Pay Czar?) in saying that he doesn’t “begrudge” the $17 and $9 million bonuses given to JPMorgan’s Jamie Dimon and Goldman Sachs’ Lloyd Blankfein. “I know both those guys,” he said. Oh, I bet you do. Check out the list below. That’s the list of top donors to the President’s 2008 campaign for the White House. Looks to me like Lloyd should have pushed for a higher bonus. Your cynicism is excused.
Now seems an appropriate time for you to brush up on phrases that might come in handy. “Doublespeak” was not a phrase the George Orwell came up with in 1984. He coined “newspeak” and, appropriate for these times, “doublethink,” which he said was holding, “…simultaneously two opinions which cancelled out, knowing them to be contradictory and believing in both of them…”)
- Google appears to be taking advantage of the focus on Greece to launch a full frontal attack on anything it might own. It announced a social networking (think Facebook) add on to Gmail. (Facebook is the second most popular destination on the internet behind . . . you guessed it, Google.) Later in the week it announced it was looking for cities wherein to deploy its own version of high-speed internet access–just, of course, to show it’s possible. Make that higher speed internet, 100 times higher.
Not much happened this week–on the domestic economic front, that is.
Inventories, which were the majority of the strength in fourth quarter GDP, fell this week at the Business and Wholesale levels. Both releases this week fell dramatically. The narrower Wholesale version fell by (-)0.8%, while the broader Business inventories (includes wholesale inventories) fell by (-)0.2%. Both were expected to have been positive. Because of strong sales in December, the ratio of Inventories:Sales fell sharply, to almost the lowest levels of the decade, as the chart from the Census Bureau shows. The biggest declines were seen in Automotive (-2.5%), Metals and Durable Goods (both -3.1%). If this trend doesn’t change, we could see considerable downward revisions to Q4 GDP.
Initial Jobless Claims (below) fell by 40,000 (by 43,000 from an upward revised last week figure) to 440,000, in contrast to an expectation for a drop of (-)15,000. That level was still higher than the 432,000 we saw the week of Christmas, so until that figure gets taken out, we’ll consider the trend suspect. Furthermore, the four-week moving average only ticked down slightly, so both will need to be closely watched.
We wrapped up the week with the month’s first look at University of Michigan Consumer Confidence, which fell slightly, from 74.4 to 73.7, which was below the consensus guess of 75.0.
In contrast, next week is heavy with data.
Tuesday - To start the week off we get a look at the Empire State Manufacturing survey from the New York Federal Reserve Bank. That index had shot up early in 2009–well into expansion territory–before coming down to more subdued, yet still expansionary levels. Economists expect a slight improvement occured in February. This is a survey of attitudes and views, not of hard data, so it’s doubtful there will have been any weather effects. In the afternoon, we get the first of four housing data points in the form of the National Association of Home Builders Housing Market Index. This could show some weather-related effects, as a portion of the survey is determined by homebuyer traffic. Like the Empire State survey, this indicator bounced sharply–although more like that of a dead cat–only to come back down. No change is expected.
Wednesday – Housing Starts and their pipeline Building Permits are announced. The former is expected to have risen modestly, while the latter is expected to have fallen. Later in the morning, we get the twin release of Industrial Production and Capacity Utilization. Both are expected to have continued their recent improvements, but with 27.4% of capacity idled there is still a lot of slack in the economy. Industrial production is broken down into three sectors, Mining, Utilities, and Manufacturing. In December, utility output rose by 6.0%; manufacturing was flat; mining grew by just 0.2%. With the weather of the last couple of weeks, it’s easy to see where the growth likely came from in January.
Perhaps the week’s most-important release is the 2:00 release of the Minutes of the FOMC’s January meeting. It will give more of the background to January’s rate decision (nothing) and the associated news release. From all accounts, the Federal Reserve is going to begin shifting from targeting primarily the Federal Funds Rate to addressing the Discount Rate, the rate that banks pay to borrow from the Federal Reserve. This should serve to raise the floor of all short-term rates, and will serve as the first baby step in monetary policy tightening. We might see hints of this thinking in the minutes. They could be the week’s market mover.
Thursday – we get the Producer Price Index data, which should show mild inflation across all items, but more subdued inflation when food and energy are factored out, the so-called Core rate of inflation. We continue to maintain that, while inevitable, the timing of inflation’s arrival is farther out than most expect. Initial Jobless Claims are released, and economists expect a rise of 5,000, but the weather is guaranteed to have played havoc with the figures and should be highly suspect. Later in the morning we get the release of the Philly Fed survey, the Philadelphia Federal Reserve’s survey of economic activity in its district. It and the Empire State survey have tended to track each other over time. Both are expected to coalesce as shown in the chart at right. Finally, for Thursday, the Leading Economic Indicators are released. They’re expected to have risen by 0.5%, which is slower than December’s 1.1% pace and marks a slowing trend (lower highs) for the series. In the chart below, one can see the monthly change in the bottom panel; the indicator’s level, which is at a five year high, in the top panel. If green shoots are a slowing pace of decline, then withering shoots must be what we’re seeing here, where the rate of improvement is slowing.
Friday – we wrap up the week with Consumer Price Index data. It’s message won’t be much different than that of the producer-level data. Naturally, with raw material costs a fairly-small input into consumer goods, the increase there is muted at the consumer level The year-over-year pace of inflation for all goods is expected to be +2.8%; on a Core level 1.8%.
Graig Stettner CFA, CMT
Vice President & Portfolio Manager
Tower Private Advisors
Portugal | Italy | Greece | Spain