Tower Private Advisors
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Capital Markets Recap
Judging by the Dow Jones Industrial Average, it was a wild week–okay, a wild two days–but in the end finished just 0.16% higher, as shown below. ECB chief, Mario Draghi dragged the market lower on Thursday, while a better-than-expected-but-still-pathetic [for this point in the recovery] jobs report regained the lost ground.
There were a number of stories this week about LIBOR, Knight Trading, and MF Global. It doesn’t matter so much what the stories were about–at least to me and the point I’m trying to make, they don’t–as that they highlight yet another assault on investor confidence. Imagine investor confidence as a twisted sort of Jenga ® game. Think of all the scandals and confidence-sapping events that are conspiring to destroy investor confidence:
- MF Global
- Goldman Sachs
- Bernie Maddoff
- Goldman Sachs
- Flash crash
- Goldman Sachs
- LIBOR rate fixing
- Goldman Sachs
- Knight Trading (guess who threw KT a lifeline)
Recall that Mario Draghi featured prominently in last week’s WR&O, having said that the Europeans would do would whatever it takes to save the region (“and believe me, it will be enough.”) Well, it’s not like we should be skeptical about everything that politician’s say, but we should be skeptical about everything politicians say. It turns out, according to Der Speigel, that many member of the ECB didn’t know anything about Mr. Draghi’s pledge to do whatever it takes. Whatever it takes almost assuredly involves buying the bonds of troubled countries. They are so over-indebted that the yields on their debt threatens to chew up much of their GDPs. Tony Crescenzi, at PIMCO, reminded readers this week that,
“No amount of central bank liquidity by the Federal Reserve, the European Central Bank (ECB) or any other central bank can possibly fix what ails the developed economies. The ECB, for example, can’t fix the fact that Italy ranks 109th out of 183 countries in providing electricity. Nor can it fix the fact that Spain ranks 133rd in the ease of opening a business…Central bankers can do nothing about these competitiveness issues.”
Mr. Draghi, in throwing cold water on market participants, said that nothing would happen before the permanent rescue fund is set up. Most think that will take the shape of the European Stability Mechanism (ESM, of course) being granted a banking license. The Wall Street Journal, in an article this week, said that Germany and Finland, which has made rumblings, recently, about leaving the Euro, altogether, are staunchly opposed to the idea.
Here’s the problem, while The Economist is putting out stories about the almost-inevitable bailout of Spain, the European authorities do nothing other than pledge things, hold summits, forge agreements, resolve this or that.
The above-mentioned PIMCO piece featured another one of that firm’s smart people saying:
When it comes to Europe there is only one thing we can say with certainty: This crisis is not over yet.
Oh, and then there’s this. In a daily e-mail I receive that sums up the latest and greatest stories, sandwiched between a story about “Greece, running out of cash…” and one about MF Global, was this headline: Leaders of France and Italy rally for eurozone. The Wall Street Journal article quoted France’s leader, Hollande, as saying, “we will do everything so…that the eurozone is defended, preserved and consolidated,” while Italy’s Monti said, “the eurozone stability, which is at stake, is so vital that we can’t allow ourselves to be distracted for even one minute.” What they didn’t say is that if Spain goes there will be no money left for Italy, and France desperately wants the world to believe it’s not in trouble, but it is, too.
The biggest report of the week was today’s monthly report on Nonfarm Payrolls. It showed that 163,000 jobs had been added in the month of July. Economists had expected a much lower 100,000 figure, and the previous month’s figure was a mere 80,000.
Last Friday, I said something like that might happen.
So, combine that with chastened economists who want to get a forecast right–they’ve been on the wrong side (optimism) and need to get on the right side (currently, pessimism)–and you’ve got a recipe for a positive surprise in the Nonfarm Payrolls–August’s biggest release–which kicks off the second half rally that is typical of election years. I’m just guessing, not promising.
Unemployment Rate rose from 8.2% to 8.3%, which amounts to an increase of 0.1%, but only just barely and because of rounding. In fact, the unemployment rate rose from 8.2165% to 8.2535%, a change of just 0.037%, amounting to what the Bureau of Labor Statistics called, “essentially unchanged in July.” Manufacturers added 25,000 jobs last month, which more than doubled the economists’ guess of 10,000 and last month’s 11,000.
The financial markets are strange creatures. It seems that most market participants expect the Federal Reserve to embark on another round of Quantitative Easing (QE), aka money printing, even though the returns from each round of QE has been diminishing. To do that, though, the Fed will first need to see more weakness in the economy–and they’re watching for it. The Federal Reserve said, in its press release earlier this week:
The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.
That seems to suggest they’re going to watching the data carefully for signs of weakness, and if that’s the case, a weaker jobs report would have likely pushed the Fed closer to embarking on the next round of QE. Yet, the market has rallied sharply today on the news of a better than expected employment report. Still, it really only takes out yesterday’s Mario Draghi-induced slide.
While that’s really the news the market was waiting for, there were a couple of other notable reports. In terms of regional activity, the Dallas Federal Reserve Manufacturing Activity index dropped like a rock, from an expansion-zone reading of 5.8 to a contrationary -13.2. Meanwhile, back in Milwaukee, the Purchasing Managers Index (PMI) for that region fell from 60.2 to 46.7. Now, I’m not familiar with Milwaukee’s manufacturing might–sounds like something from a bygone era–but it is just up the road from Chicago, which might be important. Indeed, there’s a pretty close correlation between the two areas, as is evidenced from the chart below, which plots the PMIs for both regions. This is not promising. The horizontal line marks the theoretical demarcation between expansion and contraction.
‘Bout it. Initial Jobless Claims rose by 8,000 this week over last week.
Finally, the word cloud below sums up what Federal Open Markets Committee‘s press release of this week. I admit to recreating the word cloud (www.wordle.net) until it produced the beautifully falling “economic” at the end.
Key indicators to watch (not many)
- JOLTS Job Openings
- Nonfarm Productivity
- Initial Jobless Claims
Graig P. Stettner, CFA, CMT
Chief Investment Officer
Tower Private Advisors