Weekly Recap & Outlook – 08.24.12

Tower Private Advisors

Below

  • Stocks finish down for the first week in seven
  • Markets getting readied for Greece departing the Euro
  • Fiscal cliff begins to take shape

Capital Markets Recap

 

Stocks took a breather this week, and anyone who says he can explain the reason for that doesn’t know what he’s talking about. Millions of transactions by market participants, motivated by varying factors combined to, in aggregate, push stocks down. This was the first week in seven that stocks (the S&P 500) closed down. That’s the longest streak in 2012.

Top Stories

Here is a selection of story headlines that I think mattered to markets this week.

on Europe…

  • Eurozone is in danger of runaway capital flight
  • France and German signal no extension for Greek reform – this is called testing the market’s response to cutting Greece loose. Market participants seem to have resigned themselves to this outcome.
  • Merkel faces pressure over Greece’s eurozone membership – and this is why that happened
  • Greek austerity measures are most brutal in EU history, study funds – and the studiers ought to know, seeing as how they hail from the Central Bank of Ireland, a country subjected to austerity. From the story summary: “Greece’s tax increases and spending reductions since 2010 amount to 20% of its gross domestic product. Now, that’s a fiscal cliff.
  • Debt auction yields funds for Germany at 0% interest
  • Spain’s borrowing costs fall in auction of short-term debt – 12-month rate fell from 3.918% to 3.07%
  • ECB says sovereign-bond intervention has yet to be considered
  • Greece’s appeal for more time to reform could unnerve markets
  • Spain calls for unlimited bond-buying program from ECB – guess who’d benefit from that

on the U.S. economy…

  • U.S. household income is lower than when recession ended – inflation-adjusted household income down by 4.8% from June 2009 and June 2012
  • U.S. faces recession if “fiscal cliff” isn’t averted, CBO says
  • Fed minutes signal more b0nd-buying support among members
  • Most Americans think economy is getting worse
  • U.S. cancels defense contracts worth $2.15 billion – giving us a feel for what the fiscal cliff will look like. Additionally, a local defense contractor is anticipating a 6% layoff as it anticipates defenese budget cuts.

and stuff, in general…

  • Morgan Stanley funds have unusually high exposure to Facebook – and MS was the lead underwriter of the IPO. Coincidence? I doubt it.
  • iShares aims to introduce short-maturity bond ETF
  • Apple becomes world’s most valuable public company – but trees don’t grow to the sky
  • Belize confirms failure to make payment on 2029 bond – that’s normally called a default and–sheesh!–they’ve only got this one bond
  • Berkshire cancels [credit default swap] contracts on $8.25 billion in municipal debt – this, the firm of the guy who referred to derivatives as “weapons of mass financial destruction.”
  • IMF and World Bank warn nations to brace for higher food prices
  • FlexShares seeks SEC approval to launch 6 dividend ETFs – just how many of these do we need?

 This Week

The economics front was even more boring this week, what with just a couple of noteworthy releases. New and Existing Home Sales were released. Watching housing improve is like watching paint dry, as can be seen from the picture immediately below. Existing home sales were better than the prior month but not quite as good as expected. New home sales were 6.3% better than the prior month, but big percentage changes like that pale in comparison to the big slide in new home sales over the last five+ years.

Initial Jobless Claims rose by 4,000 (yawn) and were 7,000 higher than expected. Here is a look at jobless claims over the past several years. They’ve come way down from their peak, but the improvement of late has been more grudging. In fact, claims are right up against the rising trendline established in 2007, and for almost 12 months the readings have been confined to the orange box shown.

Lastly–at least as far as I’m concerned, the minutes from the Federal Open Markets Committee meeting of July 31/August 1. As usual, the best way to look at these minutes is with a word cloud, as shown below. Last week’s WR&O highlighted the downward trend in inflation–and maybe the FOMC highlighted the trend, too–but one wouldn’t think it deserves the prominence it received (the word size reflects its frequency of use in the text). I think the Fed mentions it in the hope that it’s triggered, as the Fed would love a little inflation right now. To be fair to the Federal Open Mouth Committee, I’m guessing the discussion at least partly involved a discussion of the potential impace of price increases in the grains on general inflation.

Next Week

Key indicators to watch

  • Q2 GDP – round 2
  • Personal income, spending, and savings
  • Initial Jobless Claims
  • University of Michigan Consumer Confidence

Regional indicators

  • Dallas Federal Reserve Manufacturing Activity
  • Richmond Federal Reserve Manufacturing Index
  • Kansas City Federal Reserve Manufacturing Activity
  • Chicago Purchasing Managers index
  • National Association of Purchasing Managers – Milwaukeee

Housing related indicators

  • Case-Shiller Home Price Index
  • Mortgage Applications
  • Pending Home Sales

Graig P. Stettner, CFA, CMT

Chief Instrument Officer

Tower Posthumous Advisors

 

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