Weekly Recap & Outlook – 06.01.12

Tower Private Advisors


  • Spain getting ready to circle the toilet bowl
  • A fix for emotion-driven investing
  • Lousy payrolls report

Capital Markets Recap

Out of time

Top Stories

Spain is really stepping in the mierda. Its 10-year bond has yielded more than 6%–the old danger level–for three weeks straight. Its spread versus Europe’s version of Treasury notes, the German Bund, has reached an all-time high. Similarly, Credit Default Swaps on Spanish 10-year bonds, have reached new highs, edging out Italy, slightly, for the title of third worst of the PIIS–that’s right; Greece is in a league of its own now, leaving PIIGS a more interesting acronym. For now, though, Sweden and Switzerland look to be solid leaving the acronym a bit of a stretch versus a more traditional spelling.

Getting nervous? Ready to cut your losses? From where I sit, what I read, and what I see, the fear is getting palpable. This week the 10-year Treasury note reached an all-time low of 1.51%. Buyers of it are not interested in a return on principle; they’re interested in a return of principle. Flows into bond funds have continued to grow in 2012, despite dividend yields on solid companies easily exceeding yields on most solid, fixed-income investments. The so-called Fear Index, implied volatility on S&P 100 index options, has jumped by 67% since the end of April.

Read on.

Carl Richard is the author of the excellent book and website, The Behavior Gap, where he chronicles and addresses the gap between what would be rational, Spock-like thinking and our emotion-freighted thinking.

Clicking on his mug below will open a new window in which he suggests a solution for your tendency–and many others–to sell at the wrong time and buy at the wrong time. Just a refresher: the time to buy is when things look worst; the time to sell is when they look best. What do you do? Well, at least watch his video where he addresses swearing off stocks and suggests, instead, a more disciplined approach.


On the other hand, some folks aren’t troubled by Spain at all, as witnessed by this beaut, which just sold for a cool $35,000,000.

This Week

Jussstttt a bit outside…

That’s how today’s release of Nonfarm Payrolls could be characterized. Economists were looking for growth in Nonfarm Payrolls of 150,000. That reading, alone, would have been pretty lousy, which makes the actual +69,000 downright bad, especially given that the population is growing in the neighborhood of 160,000 per month. That’s the headline figure, and together with the Household Survey, it produces the Unemployment Rate, which rose from 8.1% to 8.2%. Speaking of the Household Survey, it told a different story this month in rising by +422,000. Three-month moving averages of both, however, look similar. Still, the trend in both measures is upward, based off the 2009 low. Regressions from the beginning of 2010 show a much flatter rising trend. Hours Worked fell by 0.1, from 34.5 hours to 34.4. In addition to this gloom, the April jobs number was revised downward to 77,000 from 115,000. Had that not happened, the markets would have undoubtedly dealt more kindly with this month’s shortfall. In short, there was no joy in Mudville today. Private Payrolls (the headline number includes government jobs) were lousy; Manufacturing Employment fell; Average Hourly Earnings were down.

Perversely, this bad news could end up helping investors, but likely only after a string of more bad news. That’s what will be needed for the Federal Reserve (the Mighty Casey?) to push on another string, attempting to goose the economic by Quantitative Easing, aka money printing. Our BCA service summed it up like this,

The May U.S. payroll report was much weaker than expected – if this trend continues QE3 may be firmly on the table.

In traditional quantitative easing, the Federal Reserve would buy fixed income securities–although it doesn’t have to; it can buy whatever it wants. Buying bonds would, one way or another push rates down, and you might ask, “well, how much further can they go down?” By the miracle of math, they can go down by 75%, just a like a stock that’s fallen by 75% can always fall by 75% more. And, what’s more, while lower interest rates, themselves, might not induce more house buying or more car buying, the increase in the money supply will have to go somewhere, and some of it will make its way into stocks, and–at least at the margin–that’ll push stocks higher. Via the wealth effect–hey, look at that, I’m worth more–that will translate to more spending.

Indeed, one of the biggest beneficiaries of Quantitative Easing will be gold, and the barbarous relic rose sharply today, as evidenced in the chart below.

Next Week

Key indicators to watch

  • Federal Reserve Beige Book
  • Initial Jobless Claims
  • ISM Non-Manufacturing

Regional surveys

  • ISM New York

Graig Stettner, CFA, CMT
Chief Investment Officer
Tower Private Advisors


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