Weekly Recap & Outlook – 05.07.10

Tower Private Advisors


  • Europe
  • Good payrolls
  • Quiet week next

Prior Posts

Capital Markets Recap











And then there’s Europe . . . ka-bam!

For a while the markets marched upward and were pretty sanguine about the problems in Greece.  Bailout news pushed the dollar down and stocks up, but market participants now seem to be fully dialed in.  Enough voices have sounded off on the problem, including Moody’s which issued a “Contagion Alert,” saying that all of Europe could be affected by problems in Greece and Portugal.  (Please see my post Europe’s Web of Debt by clicking here to see the most obvious linkages.)  But that doesn’t explain Italy’s performance, which was the worst of the group, above. 

May 7 (Bloomberg) — Italy is not among the countries most at risk from Europe’s spreading debt crisis and its credit outlook for 2010 remains stable, Moody’s Investors Service said.

“The effort required for the country to keep the debt under control seems relatively modest compared to other European countries where corrections are brutal.”

 A better explanation is found in a word used recently:  de-risking.  That is, investors are reducing risk across the globe.  And that can most easily be seen in the VIX, which was shown here in detail last week, and which is updated below.

I’m a bit surprised at the defensiveness going into the weekend.  I think we’re closer to a weekend rescue by the Europeans than we are a blow-up, but there’re millions of votes against me.  The VIX went out at its highest levels of the week, as shown in the chart below.  I include commentary below to suggest why the fear might be warranted.

It seems that Europe’s leaders don’t have the same fears that market participants do as judged by the words they’ve used this week (highlighted in a soothing pink, below), the following from a Bloomberg story titled, “EU Bids to Defend Euro, Tighten Rules in Greek Crisis.”

Leaders of the 16 countries sharing the euro plan to endorse a 110 billion-euro ($140 billion) aid package for Greece and mull ways of capping budget deficits to strengthen the management of the $12 trillion economy at a summit in Brussels tonight.

“We have to accelerate the regulation of the financial markets,” German Chancellor Angela Merkel told reporters before the summit. “We also have to take steps to secure the stability of the euro overall, that means a firm commitment by all that it is our common currency but also internally that we stiffen the Stability and Growth Pact including possible treaty changes.”

Europe’s failure to contain Greece’s fiscal crisis triggered a 4.3 percent drop in the euro this week and led the U.S. and Asia to rally around in a bid [huh? missed that] to prevent a global sovereign-debt crisis from pitching the world back into a recession.

The Brussels summit won’t announce new measures, instead sending a political message that the euro-area governments are united and willing to act, a French official told reporters on condition of anonymity. The summit started at 7 p.m. Final press conferences are slated for 10 p.m.

The spreading contagion prompted Group of Seven finance chiefs to hold an emergency conference call today, though no communiqué was put out afterwards.

Here’s a look at the change, from last Friday, in the price of insuring against default in sovereign debt (i.e. Credit Default Swap spreads.  For example, today, the cost of insuring against a default by Italy rose by 60%, and that’s in spite of Moody’s soothing comments, above.











Top Stories

Sure, they’re rioting in Greece, burning things, etc., as is their wont in those countries with prodigious amounts of social spending, and yes some birds in the Gulf will die today, and some flights in Ireland will be cancelled because of ol’ Eyjafjallajokul (Iceland’s volcano), but in the U.S. we were most rattled by the bone-numbing drop in the Dow this week (see “One wild day!” above, for more).

We’re told, now, that was caused by a Citigroup–firm denies the charge, naturally; a Bloomberg headline said, “Citigroup Finds ‘No Evidence’ of Erroneous Trading”–trader who hit “B” for billion instead of “M” for million.  Notice, on your Selectric’s keyboard, that B is separated from M by just a solitary “N.”  And we’re supposed to believe that was it?!  There aren’t too many securities that could tolerate a multi-billion share trade, and yet this is the first time it’s happened?  One thing’s for sure:  somebody’s testifying before Congress over that one.  It’s likely, though, that a trading error did trigger some massive program trading, triggered by the dramatic price decline.

Fortunately for some folks, the NASDAQ is cancelling some trades that occured after 2:40 today, but only if they traded at more or less than 60% of the last price prior to 2:40 (click here to see if you were one of the lucky ones.)  Not surprisingly, in one of its headlines today, Bloomberg listed the uncertainty behind the action as a reasons that stocks were falling today.  Unfortunately for some folks, the NASDAQ is not cancelling some trades.  There was a tale on Bloomberg of Mark Watson, an attorney, who thought that yesterday “seemed like the end of the world was coming,” and sold his 26 shares of Apple for $223.99.  The stock closed the day down just $246.25.  He had paid $189 for the stock in 2007.  Naturally, “I would not have done it had I known there was some type of technical error or glitch.”  Maybe if I sell quick I can get out before everyone else.  That’s it!  The world’s ending, so I’ll get off before the music stops. 

There were a handful of Goldman Sachs headlines this week.  The partners at Goldie gave Lloyd Blankfein (blank-fine) a standing ovation on his return to the office.  That contradicted rumors that there were those inside the firm who have been muttering that he should go.  Apparently, during his Congressional testimony, he appeared surprised to know that only certain sophisticated investors were able to invest in particular securities.  He holds the offices of CEO and Chairman of the Board of Goldman, CalPERS, the California Public Employees Retirement System voted to have those roles split. 

While we’re on investment banks, Bear Stearns former CEO Jimmie Cayne testified before Congress about the demise of his firm.  Predictably, he blamed the market for its collapse.  Well, if the market’s the folks who wouldn’t lend Bear Stearns funds in the overnight Repo market because they were afraid they wouldn’t get paid back, then, yes, the market is the reason.  There is a more likely passel of reasons, not the least of which is Mr. Cayne’s habit of leaving for days to smoke pot and play bridge–sort of playing bridge while Bear Stearns burned.  It was also the result of ill-placed mortgage related speculations.  All told, it was a combination of hubris, leverage, and an overnight-funding model

Jimmie Cayne has to be one of the reasons we know the name of Kenneth Feinberg, the nation’s Pay Czar (anyone else troubled by the proliferation of czars?), whos–according to Bloomberg–is reviewing $500,000-plus pay packages at 150 firms.  Phwew, that was close.

America’s chief regulatory agency, otherwise known as Congress, took up the matter of credit card fees, and I was all geared up to take them to task, until I realized maybe it wasn’t regulation, after all.  In fact, it might just be deregulation.  Apparently, Patrick Leahy wants merchants to be able to offer a discount for customers paying cash.  All in favor . . . ?

This Week

This was one of those weeks where only one report matters, and as usual, it’s the Nonfarm Payrolls report.  It came out this morning and showed an above-consensus addition of 290,000 jobs, whereas economists expected just 190,000.  At first glance, it all looks good.  Last month’s payrolls figure was also revised upward from 162,000 to 230,000.  What’s more, the inventory rebuild continues to help employment, as Manufacturing Payrolls increased by 44,000, instead of the 20,000 that economists guessed at.  Last month’s payrolls revised upward from 17,000 to 19,000, as well.  Average Weekly Hours Worked rose from 34.0 to 34.1.  All of that comes from the Establishment Survey, which surveys 140,000 businesses and government agencies. It covers 410,000 worksites.  Note that the Establishment Survey includes government workers.

The Unemployment Rate, however, comes from a survey of 60,000 households.  Here’s a portion of the BLS’s description of the Household Survey.

The sample is selected to reflect the entire civilian noninstitutional population. Based on responses to a series of questions on work and job search activities, each person 16 years and over in a sample household is classified as employed, unemployed, or not in the labor force.

People are classified as employed if they did any work at all as paid employees during the reference week; worked in their own business, profession, or on their own farm; or worked without pay at least 15 hours in a family business or farm. People are also counted as employed if they were temporarily absent from their jobs because of illness, bad weather, vacation, labor-management disputes, or personal reasons.

The Household Survey is also broken down by demographic, so the unemployment rate is shown for Asians, teenagers, those with Bachelor’s degrees or higher.  In contrast, and not surprisingly, the Establishment Survey is reported based on industry.

As we’ve pointed out here in the past, the Unemployment Rate is likely to go up as the economy improves, and that’s because as jobs are added those who would like to work become more enthused about their employment potential.  In short, the Labor Force–those working and those who who would like to work–will expand.  That’s exactly what happened in April.  The Labor Force grew by 805,000, to within 3,000 of the year-ago figure.  As a consequence, the Unemployment Rate rose from 9.7% to 9.9%.  The Unemployment Rate rose for all but the Hispanic, teenager, and high school-only graduates demographics; the Asian demographic saw no change.

As to industries, in the Goods Producing Sector (i.e. non-service), the biggest gain was in Durable Goods manufacturing.  The entire sector added 65,000 jobs.  In contrast, the Service Sector added 166,000 jobs, and the biggest gains there were in Professional and Business Services (+80M) and Leisure and Hospitality (+45M).

The Dow is up down by 22 points at 9:56, so market participants still seem to be shell shocked from yesterday’s roller coaster ride.

The Credit Crisis/Lost Decade/Bear Stearns debacle was supposed to reveal that the emperor had no clothes, or–playing on the whole nakedness thing–that a lot of folks were swimming without appropriate attire when the tide went out.  I’m talking about the supposedly new-found prudence of the American consumer.  After the fecal matter hit the air circulator, the Savings Rate, the percentage of Disposable Personal Income that is saved, jumped to 6%.  After that, we were on our way to 12%, the 1980s level of lore.

Not so fast, Helmet!

We decided that, well, we sort of liked all that stuff we were buying.  We’ll have plenty of time to reduce our debt.  As you can see, above, we’re back to the average of the last ten years, saving just 2.7% of disposable income.

Other reports were less moving, or at least they didn’t lend themselves to cool charts.

  • Initial Jobless Claims fell by (-)4,000; economists expected (-)8,000
  • Pending Home Sales rose by 5.3% in March
  • ISM Manufacturing rose from 59.6 to 60.4; economists expected 60
  • ISM Service Sector was flat at 55.4; economists expected 56

Next Week

Tuesday - the NFIB releases its monthly report on Small Business Optimism index.  Economists look for a modest improvement, from 87.8 to 88.0, but this index looks sickly.  Small business sentiment is–basically–lower now than in the last 20 years.

Thursday Initial Jobless Claims will be released, and economists expect a 1% decline, from 444,000 to 440,000.  Yawn.

 Friday – they do expect a nice-sized 0.6% increase in Industrial Production, which reports on factory output in the Mining, Manufacturing, and Utility sectors.  That same report includes Capacity Utilization, which, while looking sickly, is expected to perk up, but just to 73.7%.  Finally, we get the release of University of Michigan Consumer Confidence.  If economists are right, we could see a higher low as confidence grinds higher.  On a longer-term basis, though, it’s still abysmal.

That’ll wrap up next week, and let’s hope it’s a a kinder one for financial markets than this one has been.

Happy Mothers day to all of you moms.

Graig Stettner, CFA, CMT

Vice President & Portfolio Manager

Tower Private Advisors


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