Weekly Recap & Outlook – 11.26.10

Tower Private Advisors


  • The dollar showcases its safe-haven status
  • PIGS are back at the trough
  • Great video on Quantitative Easing
  • Bonus

Capital Markets Recap

What’s with all the red?  How about that 17.8% jump in the fear index? 

  1. The Euro is in trouble, and so is old Europe (Euro zone indexes fall). 
  2. The Euro comprises 70% of the trade-weighted dollar (dollar up 2.22%). 
  3. When the dollar rises, commodity prices fall (down are Australia, Canada, Brazil–all commodity plays).
  4. Oops, almost forgot–North Korea is back to its old tricks (dollar up, fear index up)

Top Stories

The biggest story of the week was the resurgence of sovereign debt blow-up fearsIreland is being fitted for a toe tag, while Portugal is rumored to be next in the sights of the bond market snipers.  The always-late-to-the-party (please excuse the mixed metaphors) credit rating agencies are in high gear.  Here is a look at Credit Default Swap Pricing for the PIGS.

Default insurance on each has risen since mid-October, as can be seen in the chart above.  And for some perspective, take a look at the chart below.  It adds in Credit Default Swaps (CDS) for California, Illinois, Kazakstan, and McDonald’s, the place that sells meat- and vegetable-like products.  

I’m sure I’m way out over my handlebars on this one, but the CDS market seems to be pricing in some funky outcomes for the PIGS.  Default insurance is available for a number of tenors, which is to say, years.  Since that’s the case one can determine the term structure of the insurance, just like there’s a yield curve for interest rates; the maturity is on the horizontal axis, price on the vertical.  Since the further out future offers more opportunities for uncertainty than does the near future, there is typically a higher price of default insurance for further-out debt; thus, the normal shape is positively sloped; i.e. to the northeast.

Here, then, are the term structures of the PIGS, in pigabetical order.

Things are expected to get dicey in Portugal in 2-3 years.  Pretty much normal shaped curve here, but the price jumps sharply in the next two years.

Only three countries (Venezuela, Greece, Pakistan) are in worse shape than Ireland, according to CDS spreads, and the situation is only likely to get worse there.

In Greece it’s likely a new hand of cards is dealt after two years, but this country has been in default about every other year, and even ten years out they’re still going to be afforded a huge risk premium.

Probably not surprisingly, Spain is in the least trouble amongst the swine.

Name that country . . .

 . . . and that seems to put us in pretty good company.  Here’s Sweden, one of the least costly to insure against default.  So for all those who say the U.S. is on the road to ruin, the default insurance is either ridiculously cheap . . . or they’re wrong.  Chances are it reflects the likelihood that the U.S. won’t, technically, default, which isn’t the same as saying it remains an economic powerhouse.

It’s hard to make a case where the U.S. doesn’t look really rotten 5-7 years out.  Our debt is growing at a pace that puts us amongst the worst balance sheets in the world.   That suggests that the value of the greenback is destined to fall, but it’s been my experience that folks expect that to happen too soon.  How, then, can one know when the greenback is in trouble?  Namely, when does it stop become the world’s currency of choice–it is right now.  You will know that is happening when, in a time of a global crisis the world doesn’t want to hold the buck.  For now, we’re still in that mode.  Ol’ Reverend Spooner might have said the dollar is a saven of hafety.  Don’t count the dollar out yet.

This Week

The second coming of Q3 GDP came on Tuesday.  GDP was revised up from 2.0% to 2.5%.  According to the Bureau of Economic Analysis,

The acceleration in real GDP in the third quarter primarily reflected a sharp deceleration in imports and accelerations in private inventory investment and in PCE [Personal Consumption Expenditures; i.e. consumer spending] that were partly offset by a downturn in residential fixed investment and decelerations in nonresidential fixed investment and in exports.

Housing news this week was all drearyExisting Home Sales grew less than expected, as did New Home Sales.  The broadest measure of home prices, the House Price Index, released by the Federal Housing Finance Agency, showed that home prices fell by (-)0.70% below the expectation and August figures of zero.

The Durable Goods report is always sliced and diced several different ways, ostensibly to produce a core number, something less volatile than the headline figures, which can swing widely depending on when big contracts are inked.  This month it didn’t matter how the numbers were cut up, they were dismal.  At the headline level, orders fell by (-)3.3% compared to September’s 5.0% jump.  Getting to the core of the core, Nondefense, ex-Aircraft orders fell by 4.50% compared to September’s 1.9% jump.

The Savings Rate rose slightly to 5.7%.  That’s well below the Freak Peak of 8.2% marked on May 31, but the upward trend remains in effect.  We would expect the savings rate to continue to climb as consumers continue to retrench and delever, either voluntarily or involuntarily.  That will remain a drag on the economy for some time.  We’ll see next week if Black Friday augurs well for a reduction in the saving rate.

First-time Jobless Claims fell to their lowest level since July 2008.  This week’s drop to 407,000 also took the series out of a nearly 12-month consolidation period (the dashed box below).  In the parlance of technical analysis, we would call this a breakout, and were it a stock traders might look to short it.  If they were to short it, they might target a “price” of 384.3.  That’s the measured move objective of the breakout; i.e. the height of the rectangle tacked on to its lower bound.  384.3 isn’t a heroic move; it only gets us back to mid-2008 levels, but it would provoke jubilation on the part of markets as crossing above/below round numbers (i.e. 400,000) always seems to incite some despair/enthusiasm.

The Federal Open Markets Committee released the minutes from its November 2-3 meeting.  As usual, I think the best way to look at the minutes is through a Wordle word cloud.  Sure, Wordle’s cute, but since the clouds are generated with the most-frequently used words the largest, it quickly shows the focus of the minutes.  The appearance of an atomic bomb mushroom cloud is purely coincidental.

One word that I’ve never seen mentioned in minutes is deflation.  The Fed’s policy is that to mention something makes it more likely; thus, they mention inflation a lot, but not deflation–okay, I’m making that up.  It is, however, what they’re trying to address, and lately they’ve been doing so by engaging in Quantitative Easing, which is another phrase I can’t recall ever seeing in the minutes.

Speaking of quantitative easing, several thoughtful readers sent me a link to a great video that explains quantitative easing . . . or not.  (Mom, there are a couple of bad words in it; sorry about that.)  You can view it below or by googling something like, “xtranormal quantitative easing.”  Last I looked it had been viewed 2,842,097 times. 

Next Week

A pretty important week in economics lies ahead.

The Biggies, in order of importance

  • Nonfarm Payrolls (Friday) – November; markets are primed for an increase in Private Payrolls of 153,000.
  • Unemployment Rate (Friday) – November; expected to have remained at 9.6%.
  • ADP Employment Change (November) – Wednesday; it chronically underestimates the Friday NFP figures, but it’s still considered an advance indicator for payrolls.
  • Initial Jobless Claims (Thursday) – weekly; last week the figure fell to the lowest level since July 2008
  • The Fed’s Beige Book report (Wednesday)

Housing indicators

  • CaseShiller Home Price Index (Tuesday) – September

Regional economic reports

  • Dallas Federal Reserve Manufacturing survey (Monday) – November
  • Chicago Purchasing Managers survey (Tuesday) – November
  • Milwaukee Purchasing Managers Survey (Tuesday) – November

If you’ve read this far, let me congratulate you and reward you with a treat. 

If your paradigm has shifted one time too many or you’re tired of harvesting all the low-hanging fruit, be sure to take a Buzzword Bingo card to your next business meeting.  It looks like this (right), and the way it works is you take it to your next meeting, hand it out to a few friends.  Then you cross off the square when you hear the buzzword.  First one to get bingo (in a line or all four corners) yells out “Bingo!”

There are even websites that will generate the cards for you, websites like www.businesssbuzzwordbingo.com.  You can thank me after your meeting.

Oh, and as you can probably guess, absolutely nothing in this should be taken to construe an official Tower Bank view on anything, least of all the idea that you should fritter away time in important meetings by playing Buzzword Bingo.  The investment takeaways, however, are likely to form part of our investment strategy and outlook.


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One Response to “Weekly Recap & Outlook – 11.26.10”

  1. Larry Dent says:

    I love the buzzword bingo, but it’s nothing really new, just the words change with time. In my 36 years as the Indiana factory rep for 3 M Company (Minnesota Mining and Meeting Co.) I must have attended 30,000 “meetings” (seemed like it anyway) and I used to have a great time poking fun at the “marketeers” and their latest buzz words.

    The only one I can think of these days (part timers at work) is “aligning ourselves”. This was buzz for we missed the target completely with this product and are going to try again.

    Sound familiar??? Larry Dent

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