Tower Private Advisors
- A new view of charts, narrated
- Strong ISM Non-Manufacturing report
- Recent visit with Williams Inference Center
- The Inflation Project – Federal Reserve Bank of Atlanta
- Another reason to be depressed: U.S. Debt Clock
Capital Markets Recap
It is not a misprint that the Dow Jones Industrial Average closed at precisely the same levels today and a week ago today, just wierd.
Market Chart of the Week
And now for something completely different . . .
(Click the play button)
Just one this week: Greece
Know where it is? The homeschoolers* I tuck in at night pretty well nailed it. How do you do?
* Yes, you may unsubscribe now. Yes, they’re socialized, whatever that means.
Greece is in deep doggie scata (thanks, Jerry) based on the horrendous performance of its bonds and credit default swaps. This despite the repeated protestations of folks like Greece’s finance minister George Papaconstantinou who, according to a Bloomberg story this morning, said “there will be no need for additional measures after the EU and IMF put together a rescue plan last month.” You’re forgiven for thinking this seems eerily similar to the repeated 2008 protestations of folks like Lehman Brothers’ CFO Erin Callan, Morgan Stanley’s CEO John Mack, and Bear Stearns’ pot-smoking, golf/bridge-playing CEO Jimmy Cayne.
Here’s a look at the action in Greek bonds of late.
CDS spreads imply a 32% probability of default.
On March 4, 2010, Greece sold a 5 billion Euro 10-year bond. It was oversubscribed by a factor of almost 3x; i.e. investors submitted bids for 14.5 billion Euro vs. 5 billion issued. According to Bloomberg, the head of Greece’s debt management agency said,
This was a very, very good deal. We had some very tough measures that were shockign to a number of Greeks, but that is what it took to regain credibility in the markets.
Credibility, maybe, but another feature of the debt auction evidenced stupidity. When the bonds were issued on March 4, the Greek authorities wanted to punish those nasty hedge funds and, accordingly, ordered those administering the auction to exclude hedge funds from the action. Since when are fewer bidders at an auction a good thing? No matter. Buyers of the issue are now nursing 7.5% losses, as the yield has rocketed from 6.37% to 7.35%, the price performing accordingly.
The next domino expected to fall after Greece is Portugal, and here’s the action in that country’s debt and credit default swaps. Portugal’s finances don’t look all that different from ours, with the big exception of market liquidity for government debt. Notice, here, though, the distinctly different trend in yield. So far, a higher high has yet to be registered, suggesting the trend for yields is lower.
So far, it’s looking like sovereign debt risk is going to be the biggie for markets in 2010. That’s a known-known. A known-unknown is that there will be spillover effects. This might be the best characterization of the issue.
Very strong service sector report in a light week.
There wasn’t much going on in the world of U.S. economics this week–the reporting of it, any way. We got the ISM Service Sector (aka Non-Manufacturing Index) composite on Monday. It showed a nice increase from the month earlier (to 55.4 from 53.0)–a further move into expansion territory–and that was better than expected (54.0). As always, with these surveys, it’s important to drill down to the component indexes. In that regard, there is little to fault in the report.
- The number of industries reporting growth is now at the highest level since January 2007
- The number of managers reporting growth is at the highest since mid-2007
- The price index was quite subdued
- The new orders index rose to its highest level since the first quarter of 2006
- Inventory sentiment (i.e. managers who felt inventories were too low) rose fell to a post-1997 high; i.e. the bias is toward increasing inventories
- The backlog of orders recorded its second-highest (post-1997) level.
Pending Home Sales rose by 8.2% on a month-over-month basis, after having fallen by (-)7.6% in January; they rose by 17.3% on a year-over-year basis. Initial Jobless Claims, however, rose more sharply than expected, to 460,000. Economists had forecast 435,000; the prior release was 439,000, which was revised up to 442,000.
In contrast to this week, next week is jam packed. By week’s end we’ll have a much clearer view of the economy’s strength. The basket of releases covers a vast swath of the economy.
Tuesday - while economists provide no estimates for it, the relase of the NFIB Small Business Optimism index will be important to watch. The year-over-year change in the index has been impressive, but optimism remains at all-time low levels since 1975, but for a nasty dip in 1980.
Wednesday – we get the release of Consumer Price Index data, and economists expect it to have remained subdued. The core rate of consumer inflation is expected to be 1.2% on a year-over-year basis. It’s only been lower than that once in the last 30 years, and that was at the end of 2003, which marked the end of the cyclical bear market that had begun in 2000. For now we see little threat of inflation. There is ample slack in the economy, wages are not increasing, lending is not picking up, and yet the spread between inflation-protected Treasuries and nominal Treasuries (i.e. the inflation premium) is pushing two-year highs. Gold is perking up, but not alarmingly so. Its action seems more the result of currency and sovereign debt fears. The Fed will release its Beige Book in the afternoon. There aren’t any graphs in the report, just a summary of economic activity for the country, along with 12 regional reports.
Thursday – Initial Jobless Claims are on deck first, and as of today, there are no consensus estimates available. Our handy forecast of same is a troubling increase of 24,000, to 484,000. Hopefully, it’s wrong, as that’s the wrong direction. The Empire State Manufacturing index, produced by the New York Fed is due out at the same time, and it’s expected to show a New York state economy firmly in expansion territory, although the index has only a nine-year history. The Philly Fed survey–the Philadelphia Federal Reserve’s comparable report–is due out at 10:00, and it should show a similar result. The all-important twin release of Industrial Production and Capacity Utilization is also due out. The former is showing signs of life; the latter is just now above the worst levels of the last 43 years (inception). Since inception, however, capacity utilization has been in secular decline. Somehow, the capacity of today must be different from that in 1967. You think? The day’s economic releases wrap up with the NAHB Housing Market Index. This survey of builder sentiment is expected to rise one point (from 15 to 16). Depending on the color of your glasses, that’s either a 6.7% increase (yippee) or still 78% below the 2005 highs. Regardless, it looks like something has to give, as builders are more enthusiastic than new home sales suggest, as shown in the chart at nearby.
Friday – monthly report of Housing Starts and Building Permits will likely give those same builders some things to contemplate. Economists expect that housing starts rose from 575,000 to 610,000 and that permits rose from 612,000 to 623,000. With the Fed officially ending its purchase of mortgage-backed securities to support low mortgage rates, the average 30-year mortgage rate has crept up to 5.21%. Like a fledgling robin, the housing market has been kicked out of the nest. Now to see if it can fly. These releases, however, will be for the month of March, when the purchase program was still in place. The week’s last release will be the University of Michigan’s Consumer Confidence report. Economists expect it resumed its grudging climb, but it presently sits 15% below the average of the index’s history, as can be seen below.
That’s all folks.
Graig Stettner, CFA, CMT
Vice President & Portfolio Manager
Tower Private Advisors