Weekly Recap & Outlook – 05.27.11

Tower Private Advisors


  •  Risk on, again?
  • Ugly economics, bouyed consumer, go figure

Today’s theme song comes from the Steve Miller Band…

Time keeps on slippin’, slippin’, slippin’

Into the future

Time keeps on slippin’, slippin’, slippin’

Into the future

Time keeps on slippin’, slippin’, slippin’

Into the future

Time keeps on slippin’, slippin’, slippin’

Into the future 

Capital Markets Recap

Of late, the stock market has been described as risk on/risk off–sort of a Karate Kid market. Lately, it’s been in the latter mode, with rallies being sold, and pessimism increasing. If the two highlighted items, below, are any indication, we’re likely to be going back to the risk-on setting. Optimism has been coming down a lot. Small-cap stocks (first green highlight) are the high-beta area of the U.S. market; they rallied this week; the CBOE Volatility Index pulled back, suggesting that investors became a bit more sanquine this week.

Top Stories

Endgame is the title of a new book by John Mauldin. The title refers to that time when governments can no longer roll over their debts. Greece continues to inch closer and closer to that point, as evidenced by its 5-year Credit Default Swaps. In plain english, the price of ensuring against a default by Greece has increased by 42% since the beginning of the year. And so, naturally, the Greek Prime Minister vowed to, “press ahead with new austerity measures,” according to a Bloomberg story. Oh, and, Sir, the IMF says it, “may not release [the] next tranche of Greek aid.”

What’s more, the ECB has called the Greece problem “contained.” You might recall that word was used by Ben Bernanke to describe the housing crisis in the U.S. early on in its so-called containment, which containment nearly brought the world’s economy to its metaphorical knees.

  • Hewlett Packard floated its biggest debt issue yet, with $5 billion worth of two and three-year floating rate paper. Here’s my take on that. HP is not, to my knowledge, stupid. Long-term corporate bond deals have been coming with ridiculously low yields, so there’s no shortage of appetite for such things. And everyone knows that interest rates are going up–that’s the only direction they can go, right? My guess is that it’s a combination of two things. Corporate bond spreads (the incremental yield offered over Treasuries) are very low, and there probably is a general fear or rising rates, making these bonds even more saleable; meanwhile, HP is not worried about rates rising. That’s a $5 billion bet against rising rates.
  • The U.S. issued its shares of American International Group saw this week and raised $8.7 billion for itself–the U.S., that is; not AIG. That’s sorta like an IPO…
  • …but unlike this one…as you might know, LinkedIn, the professional’s version of Facebook had a–how do you say?–successful IPO last week. The shares were sold at $45, and, just like in the Tech Bubble heyday, they rocketed to $122.70. ‘Trouble is, the newly minted millionaire insiders can’t cash in on their success for half a year. An analysis by Gamco says that the shares could fall to $30 once insiders and investment bankers are free to sell. I sort of feel cheated–’seems like I ought to get some of that dough. Here’s a company–just like Facebook–that wouldn’t be worth a dime without user-created content. Not worth a dime . . . hmm; betcha it heads that way.
  • A story on the Bloomberg terminal this week said that U.S. farm exports were expected to jump to a record that is 26% higher than last year’s tally. But with much of the nation well behind historic marks that has to become increasingly questionable.

This Week

I’ve expressed the concern, for a number of weeks now, that the economists have been overestimating the strength of the economy . . . badly. Here is an updated chart that shows the economic surprises. When the economic releases are coming out better than what economists have been expecting the index goes up; when they overestimate, it heads down. My concern has been that the stock market (the S & P 500) in orange has sort of decoupled from economic reality. I realize that a good portion of S & P 500 earnings come from non-U.S. sources.

Fleetwood Mac said it this way:

You can go your own way

Go your own way

You can call it

Another lonely day

You can go your own way

go your own way

Indeed, the economic statistics have been souring. Here is just a handful of them that I have cherry-picked to support my contention.

  1. The Chicago Federal Reserve National Activity Index turned down this week
  2. Core Capital Goods Orders fell this week; biggest decline in six months
  3. The broadest measure of U.S. home prices, the House Price Index, fell by 2.5% in the first quarter, the biggest decline since the end of ’08
  4. Second coming of Q2 GDP remains unchanged at 1.8%, in contrast to economists’ expectations for an increase to 2.2%
  5. Initial Jobless Claims have stubbornly remained above 400,000, with nasty implications (chart below)
  6. Personal Income and Spending have stalled out, stymied by gas prices
  7. Pending Home Sales fell by 26.8% on a year-over-year basis

And, yet, University of Michigan Consumer Confidence continues to rebound in the face of factors like those  above and high gas prices and a lackluster employment picture.

Last Week

Next week is likely to produce some economic fireworks

Key indicators to watch

  • ADP Employment Change report (Wednesday) – May
  • ISM Manufacturing (Wednesday) – May
  • Initial Jobless Claims (Thursday) – weekly
  • Non-farm Payrolls (Friday) – May
  • Unemployment Rate (Friday) – May
  • ISM Service Sector (Friday) – May

Regional indicators

  • Chicago Purchasing Managers index (Tuesday) – May
  • NAPM Milwaukee (Tuesday) – May
  • Dallas Fed Manufacturing Survey (Tuesday) – May

Housing-related indicators

  • Case-Shiller Home Price Index (Tuesday) – March (!)

Have yourself a dandy Memorial Day Weekend.

Graig Stettner, CFA, CMT

Vice President & Portfolio Manager

Tower Private Advisors


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One Response to “Weekly Recap & Outlook – 05.27.11”

  1. Larry Dent says:

    Since you are a fan of Fleetwood Mac (Me to) keep in mind that the group folded when Mic Fleetwood got cheating on Lindsey Buckingham.

    My point? What will happen when the cheating economists finally get caught in their own reteric?

    Things are not all that rosy!

    Larry Dent

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