Weekly Recap & Outlook – 03/05/10

Tower Private Advisors


  • Emerging markets bubble warning
  • Sovereign credit worries settling down . . . for now
  • Nonfarm payrolls better than expected, or so they say

Prior posts

Capital Markets Recap

In a sure sign of a top for the market–I am not kidding, I have added an emerging markets index to the table below.  From 12 months ago the EEM is up by 100.60%.  If it’s any consolation, I’ve added it after a (-)1.33% pullback from year-end.  Fortunately, we’ve had emerging markets exposure in client portfolios since, at least, November.

Market Chart of the Week

Top Stories

Greece moved a step closer to getting out of the woods with a bond issue that most considered successful.  The ten-year note issue was priced to yield 6.31%, which represents a 2.63% spread to the U.S. version of the security, and according to Bloomberg, that was 2.90% higher than the German Bund, “Europe’s benchmark securities.”  That should give the country some breathing room, as most smart people think a yield of 7% or more would have been devastating for the country.  Furthermore, Greece’s parliament passed $6.5 billion in budget cuts this week, and, predictably, the police had to break out the riot gear to keep the proletariat from storming parliament. 

We have featured Sovereign Credit Default Swap spreads here for the past several weeks.  Although displayed in various incarnations, at base they represent the cost to insure against default.  They keep bond issuers honest, as they reflect a default risk that the credit rating agencies only reflect afterthe issuer has defaulted.  They have been likened to being able to speculate on the likelihood of one’s neighbor’s house going up in flames.  There’s an incentive to douse the joint with gasoline and flick a Bic.  Naturally, therefore, they come under scrutiny and get a lot of blame.  The head of Germany, Angela Merkel, is fixing her sights on toward such derivatives.  Here’s an excerpt from the Bloomberg terminal.

“German Chancellor Angela Merkel said that Greece doesn’t need financial aid, as she turned her focus to restricting the use of derivatives to halt “speculators” from exploiting countries’ budget deficits.

“Credit-default swaps, where you insure your neighbor’s house just to destroy it and make money from it, that’s exactly what we have to curb,”

Merkel said at a joint press conference in Berlin today with Greek Prime Minister George Papandreou. Merkel said the question of a bailout for Greece “absolutely doesn’t arise.” She praised the Greek government’s “huge effort” in passing a 4.8 billion euro ($6.5 billion) austerity package, which she said makes her optimistic that a rescue won’t be needed.

If the truth be told–and that’s generally a good idea–Germany doesn’t want to bail out the profligate Grecians, so it fixes the blame on a typical target, [insert short sellers or CDS buyers here].  The memory of George Soros earning billions (?) by betting against the British pound is still fresh in memories.  If Greece doesn’t stay afloat, there are serious risks to the Euro, not to mention the European Union, itself, not that it might unravel entirely, but the fabric certainly could start to fray.  If Germany has to bail out Greece, it faces its own brand of unrest.

Pet peaves section

  • People who say, “I have to be honest with you . . . “  Oh, smashing, so when you don’t preface with that I should expect a lie?
  • People who say, “can I be frank with you?”  No, that’s alright; I prefer lying.

Citigroup‘s board said CEO Vikram Pandit deserved a bonus for all of his hard work in 2009 (dripping sarcasm).  Admirably, he stuck to his pledge to accept only $1 per year until the company returned to profitability.  The company’s compensation committee chair, also the chairman of Alcoa, said, about the decision,

We really didn’t care at all about the stock, but we thought it was really neat how it almost finished the year at exactly half what it started at.  I mean, can you believe it, just 5 cents away, from $6.72 down to $3.31?  We think that’s a great accomplishment. The committee took into account the substantial progress made against Citi’s strategic priorities.

While we’re on the big financials, JPMorgan edged out Goldman Sachs in investment banking ranks, earning more fees.  The boys at Goldie were likely too busy trying to figure out how to stick it to the next Southern European basket case.  Fordproceeded to pull a JPMorgan as it edged out General Motorsin monthly sales for the first time since 1998.  A Bloomberg story said that the 1998 episode was only because GM workers were on strike.  The last time it had happened before that was in 1970, when GM’s workers again walked out.  The news certainly wasn’t lost on Wall Street, which pushed Ford’s stock to another high (click here to see a chart).

Keep an eye on gold.  It’s finally beginning to move up relative to most commodities, after doing so against only a handful.  One of the most successful investors over the past couple of years has been John Paulson, subject of The Greatest Trade Ever, by Gregory Zuckerman,who profited obscenely by getting against sub-prime mortgages. 

He took that success on the road by opening a fund in 2010 that would invest in gold and gold miners.  He had expected to raise billions from invesotors.  Instead, he has raised $90 million and added $250 million of his own.  Since the beginning of the year, gold is up by 3.3%, likely not what the hedge fund investors in his fund had expected.  We were even approached about investing in the fund, and when they come knocking on our doors–a few guys with hayseeds still in our teeth–something’s up.

This week, the Bloomberg terminal featured a story that suggested that George Soros‘ piling into gold is pushing the price up, “by doubling his bet in a market even he considers a ‘bubble’ “  At the World Economic Forum in Davos, Switzerland, he said–according to the same article,

“When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment,” Soros said at the World Economic Forum’s annual meeting in Davos, Switzerland, in January. “The ultimate asset bubble is gold.”

That’s not an encouraging sign, a hugely succesful investor buying into a bubble, nor is the increasing number of exchange-traded funds focused on gold–the miners and the metal–and we largely remain on the sidelines with respect to gold, always aware that we could be wrong.  Gold will be immensely important to your financial health, but now is not the time.  Don’t get worked up just yet.

This Week

So long savings; hello spending.  Mixed labor picture.

Personal Income rose by less than expected (0.1% v. 0.4%), while Spending rose more than expected (0.5% v. 0.4%).  That left the Savings Rateto contract to 3.30%, below what was expected.  Over the last 25 years, the savings rate has averaged 4.75% and many expect the savings rate to head back to those levels.  In spite of the unexpected drop, the expected trend is in place and is displayed below.  As the stock market (S & P 500; bottom chart) climbed, investors saw their net worths increase and felt little need to save from income.  At the 2000 and 2007 market peaks the savings rate reached its nadir.  Then, as the market fell, the opposite occurred: net worths fell, and savings from income rose.  Although this week’s figure marks a lower low–and thus a warning that the trend may be in jeopardy–the longer-term trend remains intact.

Two ISM reports came out this week, Manufacturing and Services.  The former was weaker than expected–although still suggestive of growth in manufacturing–while the latter was stronger than expected.  The service sector figure also moved up sharply from the January reading.

The labor picture wasn’t stellar, but could have been worse.  Initial Jobless Claims fell from last week’s big jump.  From 496,000 they fell to 469,000, about in line with economists’ expectations.  That drop was enough to point the four-week moving average down, but we still appear to be in a rising trend begun near year-end.  Claims will need to drop by another 25,000 before the uptrend will be in jeopardy.  The previous week’s figure was revised upward by 2,000.   We need to start seeing downward revisions.

The week’s biggest report was the Nonfarm Payrolls report, and we got a sneak preview of it with Wednesday’s Employment Change report from Automatic Data Processing.  It suggested that (-)20,000 jobs were lost in February, which was as economists had expected.  Today’s report showed that (-)36,000 jobs had been cut.  That was quite a bit better than the (-)68,000 that economists had expected.  Surprisingly, instead of a (-)15,000 cut in manufacturing jobs that the consensus was expecting, Manufacturing Payrolls increased by 1,000.  What’s more, January’s +11,000 manufacturing jobs was revised upward to +20,000, although the overall payrolls figure from January was revised to the worse, from -20,000 to -26,000.  Average Weekly Hours fell by 0.2, from 33.9 to 33.7.  Finally, the Unemployment Rate held steady at 9.7%.

The folks at The Liscio Report summed it up like this:

All in all, it looks like the labor market continues to stabilize, but it’s not really turning around. We think it would be a mistake to write off this month’s employment numbers as nothing but a weather report; there’s very little evidence for that. The labor market continues to behave in a fashion typical of post-financial-crisis recessions, a sharp fall followed by extended flatness.

That sentiment wasn’t shared by the chief economist of Miller Tabak, Dan Greenhaus, who said,

“today’s employment report is a real win-win.  If it was considerably negative, it would be dismissed as snow-induced and a snapback was all but assured.  On the other hand, if the report was better than expected, and it was, then it demonstrates a strong jobs market in spite of weather related factors.”

Miller Tabak is what is known as a “sell-side” firm.  They’re on the selling side of securities and research.  We, on the other hand, are on the buy-side, as we generally are buying securities.  It seems to me that Mr. Hothouse revealed the hand of all sell-side firms, and he highlighted a reason we tend to discount what they have to say.  In essence, he said, we’re going to spin this to the positive one way or the other.  If it’s weak, we’ll blame it on the snow and call for a “snapback” in March.  If it’s strong, we’ll say that it shows the strength of the economy in spite of the weather.

What’s more, and finally, the survey has a ±101,000 confidence interval, so the BLS is 90% confident the final figure will be in a range of (-)136,000 to (+)64,000. 

Next Week

Not much coming at us next week

Tuesday – the National Federation of Independent Businesses releases its Small Business Optimism index.  Like so many other economic indexes, it’s on the mend, with strong year-over-year improvement but still far, far below historic levels.

Wednesday – we get the first of two inventory reports, on this day, Wholesale Inventories.  Given that the biggest source of strength in the Q4 GDP report was inventories, these releases will need to be watched closely.  So far, the strength in inventories has been only because the pace of cutting inventories has slowed.  We have yet to see inventories actually grow.

Thursday – as with every week, Initial Jobless Claims are released.  Economists expect them to have dropped by (-)19,000, to 450,000.  Our econometric model calls for 444,000.

Friday – preliminary March University of Michigan Consumer Confidence is released.  Economists expect it to be unchanged from the end of February.  The week’s last report is Business Inventories, and the same comments above apply.

Graig Stettner, CFA, CMT

Vice President & Portfolio Manager

Tower Private Advisors


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