Weekly Recap & Outlook – 04.08.11

Tower Private Advisors

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Capital Markets Recap

Bill Gates has conspired against me and has rendered Excel 2007 useless.  Accordingly, I enclose this Bloomberg screenshot of market indexes.

Top Stories

The country-on-the-ropes du jour, Portugal. formally appealed to the IMF today for $115 billion in financial assistance.  That did relatively little to drop the risk of holding Portugese sovereign 5-year debt, as the chart at right shows (click to enlarge.)  The chart below also reinforces the maxim that one should–if not ignore–seriously question assertions of company and country CEOs.

Speaking of CEOs, at least one isn’t afraid of the basketcase that is Europe, as Jamie Dimon told shareholders in a letter this week.  “In the unlikely occurrence of extremely bad outcomes in all these countries [i.e. the PIGS], JPMorgan Chase ultimately could lose approximately $3 billion, but we are in the business of taking risks in support of our clients and believe this is a risk worth bearing.”

With several foreign central banks beginning to raise their policy rates–the latest being the European Central Bank (chart immediately below)–there is a concern that the U.S. Federal Reserve will have to act quicker than it wants to in hiking U.S. policy rates.

Their are two closely-related reasons for this.  First, the dollar will weakens as foreign currency flows to where it is best treated (read, yield).  Second, a weaker dollar is inflationary, as goods we import become more expensive.  The Fed is going to find itself between a rock and a hard place because the other side of that coin is higher interest rates in the U.S., and higher rates act as a brake on economic activity and would be especially harmful to the dismal U.S. housing market.

What’s more, while the dollar has been getting pounded lately, there appears to be further downside to come, based on at least one technical indicator of overbought/sold-ness, as the chart below indicates.

The White House released its energy policy this week and rather than taking the risk of being labeled a radical, right-wing lunatic I will simply offer up the graph at right.  It doesn’t matter whose energy policy it is; so far they’ve all contributed to global warming via massive emissions of hot air.

This Week

Not much happened in economics this week–at least as far as the official indicators go.  There were just a couple worthy of your time. 

The Federal Open Markets Committee–appropriately referred to at times as the Federal Open Mouth Committee–released the minutes of its March meeting.  Not wanting to do a lot of reading and/or thinking I pasted a couple of sections into Wordle.  The first word cloud at right is the Federal Reserve staff’s view of the economy.  Other than “January,” not much stands out.

But look at the participants’ views, which is featured below.  These are the big names of the Fed, including the square-jawed Dallas Fed President, Richard Fisher, Charles Plosser, Janet Yellen–the Fed’s current rock stars. They obviously aren’t concerned about January, and with the worry du jour of inflation amongst the populace–and, increasingly, our key research services–being inflation, it’s unlikely that they’re trying to stave off the threat of deflation by a wishful-thinking, jawboning of the markets.

The Institute for Supply Management released its survey of purchasing managers in the service sector.  It’s officially the ISM Non-Manufacturing index.  It was released on Tuesday and will bear close watching going forward, as it is potentially signalling a trend change of the wrong sort, as I have highlighted below.  The takeaway from the figure is that the service sector remains in good shape, but a confirmation of the trend break would suggest some weakness there.

The weekly report of unemployment insurance filings, Initial Jobless Claims, was a little better than expected.  Economists had expected claims of 385,000, while the actual figure was 382,000.  Actual is a bit of a misnomer since the figure will be revised next week.  Speaking of revisions, last week’s figure was revised up from 388,000 to 392,000.  Ideally, we want revisions to bring the figures down, not up.  The closely-watched 4-week moving average of claims pointed down again, which augurs well for the future.  The takeaway is that the downsizing/firing side of the employment picture continues to improve; the hiring side remains weak.

Next Week

Key indicators to watch

  • NFIB Small Business Optimism (Tuesday) – March
  • Import Price Index (Tuesday) – March
  • Federal Reserve Beige Book (Wednesday)
  • Initial Jobless Claims (Thursday) – weekly
  • Producer Price Index (Thursday) – March
  • Consumer Price Index (Friday) – March
  • Industrial Production (Friday) – March
  • Capacity Utilization (Friday) – March
  • University of Michigan Consumer Confidence (Friday) – preliminary April
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Regional indicators

  • Empire State Manufacturing index (Friday) – April
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Graig P. Stettner, CFA, CMT

Vice President & Portfolio Manager

Tower Private Advisors

with offices in Bangkok, Paris, Fort Wayne, London, and Ossian

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