Weekly Recap & Outlook – 06.15.12

Tower Private Advisors


  • Markets expecting some Federal Reserve help?
  • Important Greek elections coming up

Capital Markets Recap


Some weeks the table above tells a story. Not this week. Perhaps European bourses rebounded just from the exhaustion of sellers  there. Okay, but what about Italy? (Knee-jerk answer: Spain got some breathing room last weekend from a Europe bailout. Italy’s next in line for problems.) It looks like it could be a money printing story. Interest rates down, dollar down, gold up. But the high-beta beneficiaries of Quantitative Easing (aka money printing) like small-caps and emerging markets barely budged. I think the last narrative’s more likely. The FOMC meets next week, and virtually every negative economic news release has elicited speculation about whether it’s enough to spur the Fed into action.

We could be heading into the weekend that seals Greece’s fate. If the Syriza party gets the nod, it’s likely to lead to Grexit, Greece’s exit from the Euro. If that happens, the results will include:

  • Severe economic consequences for Greece in the short run. Something like 17% of a Greek grocery store’s inventory consists of Greek stuff. The rest is imported and will have to be paid for with a severely devalued currency. And where will Greece get money to pay for imported groceries?
  • Currency controls implemented to prevent currency from leaving the country. The bank walk turns into a bank run.
  • Heightened contagion fears for Spain, Portugal, Italy. This is the markets’ biggest worry. (“See, Greece did it. Why can’t we?”)

And yet…

…surveys of investors don’t show a lot of bearishness. The American Association of Individual Investors shows 35.8% of respondents are bearish (second panel below), versus a the average level 0f 31.0% over the history of the survey. The so-called Fear Index, the level of volatility implied in option prices (fourth panel below), is just barely at average levels. Two conclusions can be drawn from this information, assuming it represents the overall markets, which is a stretch, given that the AAII survey is a survey of notoriously-fickle retail investors:

  1. Market participants expect little impact from the weekend’s elections. Intrade (above) confirms that elections are expected to go well.
  2. If the elections go badly it could be ugly on Monday because of the lack of fear in markets.

I’d feel a lot better about Monday if there were a lot more fear priced in. Plus, why can’t I shake Barry McGuire’s “Eve of Destruction” song?

Top Stories


That’s the countdown to the all-important Greek elections, which are being held on Sunday. The BBC, naturally, has a handy guide to the elections here. From that website comes (the passive tense is regretted) the following guide to the parties.

As to a guide to the election’s outcome, the honest assessor has no opinion on it. Indeed, I spoke to Jason Trennert, Chief Investment Officer at Strategas Research Partners, to get his handicapping of the odds. He mentioned a contact he has in the New Democracy party in Greece, who said he has become increasingly less optimistic they’re going to win. That’s the most desirable outcome from the perspective of most market participants. Jason said there is also a rumor floating around that New Democracy will win, ala the Black Sox Scandal (i.e. thrown game.) That may be why participants at Intrade are so one sided in the bets they’ve placed. There, the odds are 73% that New Democracy gets the largest share, as shown below.

Here’s an excerpt from a recent New York Times article on Intrade:

INTRADE is an online betting site with an enviable record for predicting Oscar winners and political events. It’s gotten the last two American presidential elections right. Now it’s wading into the perils of the euro zone.

Have you seen this?

It’s politics, Greek style. The thug is the spokesman for the “extreme-right” (Washington Post) Golden Dawn party. After slapping the one female politician and throwing water on the other, he is now suing both on charges of “unprovoked insults,” along with the TV station for “illegal detention” following the incident.

This Week

There were several releases this week that were quite wide of marks of economists. First off, Mortgage Applications jumped by a whopping 18%. As has been the case, much of the increase was driven by refinance activity, but purchase applications were up 13.1%, as shown below. Still, it’s hard to call the purchase application anything but a flatline. For the economy’s sake, every refinance increases disposable income to be used for spending or debt reduction.

The Producer Price Index showed that prices in May fell sharply (by 1%), and that produced a year-over-year inflation rate of 0.7%. Meanwhile, the Consumer Price Index rose by just 0.2% in May, and that helped produce a year-over-year rate of 2.3%. Initial Jobless Claims rose by 6,000 this week instead of declining by the expected 5,000.

The shocker-of-the-week award goes to the Empire State Manufacturing index, which fell from 17.09 to 2.29. As the chart, below, shows, it’s not uncommon for this series to evidence this sort of volatility, but to the extent it measures what it’s title says it does, it’s reflective of a contraction in New York manufacturing activity. The chart below also shows the tendency of the index to lag the turns in the Citigroup Economic Surprise index, one of my favorite. The red-arrowed lines below show the lag in the peaks and troughs of both indexes. If the recent past is any guide, there’s likely to be more downside in store for the New York indicator.

Finally, University of Michigan Consumer Confidence unexpectedly fell this week. It had risen smartly last week, but this week fell by 6.6%. Typically, there’s a pretty tight correlation between consumer confidence and fuel prices, but that doesn’t seem to have been the case for May.

Next Week

Key indicators to watch

  • Job Openings Labor Turnover Statistics (JOLTS) report
  • Federal Open Markets Committee rate non-decision
  • Initial Jobless Claims
  • Philly Fed
  • Leading Economic Indicators

Regional surveys


Housing indicators

  • NAHB Housing Market Index
  • Housing Starts
  • Building Permits
  • MBA Mortgage Applications
  • Existing Home Sales
  • House Price Index

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


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