Weekly Recap & Outlook – 11.11.11

Tower Private Advisors


  • The country shaped like a boot gives a boot
  • Good economics on the margin

Hey, thanks. Yeah, I know: it says 2008.

Capital Markets Recap


Top Stories


As the chart above indicates, one of the week’s big stories was the replacement of Italy’s Slime Minister, Silvio Berlusconi. That came on the heals of a big spike in Italian interest rates. As the chart below attests, interest rates rocketed higher. At one point they reached 7.50%, which marked a 50% increase from just 24 days earlier. Italy’s Senate also approved an austerity budget, which should serve to reduce the country’s budget deficit. That should appease the European Central Bank (see comments below), which seems to somewhat recognize that the solution to a debt problem is not more debt. It wants to see these problems fixed at the country levels, by getting budgets in line.

So, what? you say. Well, Italy runs a budget deficit, which means they have to borrow to fill the gap. They are not self funding.  They are always going to the international capital markets for more funds. The chart below shows it has  €37.3 billion of debt that needs to be refunded yet in 2011–and it’s due about every two weeks:  11/15…11/30…12/15…12/27…12/30.

Now take a look at Lincoln National Corporation. If its debt starts getting downgraded and market participants start selling the bonds, it’s borrowing costs will go up, but it won’t matter until they have to borrow again, which really isn’t until 2015, when it has big line of credit (yellow section) that has to be renewed.

In addition to having to constantly refund its debt, it’s the world’s third largest issuer of debt, so there is a lot of it out there. That makes Italy both too big to save and too big to fail. What’s more, the European Central Bank says it won’t just crank up the printing presses to buy Italian debt, which is the solution most often bandied about. Here’s a look at the 20 largest debtor nations–notice the distant third place Italy’s in.


…which brings us to #3 in the list. The United States has a bit of a debt problem, as I think you’re aware, and like the Italians, we seem to have an affinity for 2012. That’s when we have to refinance $1.2 trillion of debt, about 22.5% of our total debt outstanding.

This Week

In Monday’s Precap, I highlighted just four economic indicators to focus on this week. Each one of them was better than expected. On Tuesday, the NFIB’s Small Business Optimism index was released. It came out at 90.2 versus expectations of 90.0 and a previous figure of 88.9. With this week’s indicator, small business optimism has now improved for two months, following a six month slide from February through August. But it’s recouped just 35% of the six month’s decline.

The monthly Job Openings and Labor Turnover index (JOLTS) was released on Tuesday. Economists don’t bother to produce estimates for it, but it showed that there were 7.2% more job openings (3,354,000) in September than in August. Speaking of August, the indicator is now at its best level since August 2008, just before Lehman Bros. went belly up. That still leaves job openings 30% below the level of March 2007, the peak of the new millenium, when there were 4,755,000. job openings.

Initial Jobless Claims were better than expected this week. Whereas economists expected 400,000 new filings, there were, instead, 390,000. Last week’s figure was revised upward from 397,000 to 400,000. This and other indicators are subject to revisions of the data. Now, Tuesday’s NFIB survey is not. The results are tallied up, and that’s it, but with most government statistics, some of the data is estimated, and when it’s later known, the figures are revised.

Here’s a look at jobless claims, announced and revised. In the top panel, the white line is the figure that’s announced; the orange line is the revision that shows up a week later. The bottom panel, the histogram, shows the revisions. Since more jobless claims is bad, fewer good, I’ve coded the upward revisions red, the downward revisions green. Notice that most of the revisions are upward, for whatever reason.

At least one commentator has suggested that it’s the revisions that must be watched, implying that in a strong labor market the revisions will be downward. But that argument doesn’t seem to stand up to scrutiny. Featured below is the same chart going back to 1997, the earliest period for which revisions are available to me. You should notice that the quality of the chart is not as good as the one above. That’s because I intend for you to click on it to open up the full-screen version–the gigantic version. When you do, what you will see is that it doesn’t appear to be a function of recession (shaded red in bottom panel) or expansion. Rather, it appears that the estimates now are closer to the revised figures, although still favoring over estimating. Notice especially the data at far left. Then there was much more volatility in the revisions. In fact, in the last recession, there were as many downward (i.e. good) revisions in 12 months as there were in the 36 months before the recession.

Finally, University of Michigan Consumer Confidence was better than expected, jumping to 64.2 from 60.9 and above estimates of 61.5. You can see from the chart below, that at the end of August confidence had deteriorated to almost as low as the end of 2008.


Next Week

Key indicators to watch

  • Producer Price Index (Tuesday) – October
  • Empire State Manufacturing (Tuesday) – October
  • Consumer Price Index (Wednesday) – October
  • Industrial Production (Wednesday) – October
  • Capacity Utilization (Wednesday) – October
  • Initial Jobless Claims (Thursday) – weekly
  • Philadelphia Federal Reserve index (Thursday) – November
  • Leading Economic Indicators (Friday) – October

Housing related

  • NAHB Housing Market index (Wednesday) – November
  • Housing Starts (Thursday) – October
  • Building Permits (Thursday) – October

 Graig P. Stettner, CFA, CMT

Chief Investment Officer

Tower Private Advisors


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