Economics

Investing Ahead of a European Recession

December 14, 2011
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Investing Ahead of a European Recession

Investing ahead of a recession is like a trip to the dentist for a filling when the Novocain isn’t quite right. You know you are in for some pain, but it’s unclear just how much, and how long it will last. Europe is accepting the German path forward, which will at a minimum, lead to plenty of pain for many countries. Spain, Portugal, Greece, Belgium, Italy, and France are all experiencing, or likely to experience, a recession. Forward looking indicators are declining, confidence is dashed, austerity being implemented, European financial assets down sharply, and interest rates higher. The ECB is taking a minimalist approach to fighting the recession and the 17 countries in the Eurozone have different agendas, interests, and policy aims. In the background of the economic recession, there...

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ECB Cuts Rates 25 Basis Points to 1% – Hawkish Press Conference Q&A Squashes Hopes of Sovereign Debt Purchases in Larger Amounts

December 8, 2011
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ECB Cuts Rates 25 Basis Points to 1% – Hawkish Press Conference Q&A Squashes Hopes of Sovereign Debt Purchases in Larger Amounts

The ECB issued a terse press release detailing an interest rate cut for the main refinancing operations of the Eurosystem (from 1.25% to 1.0%) commencing on December 14th. In addition, the ECB cut rates on the marginal lending facility and deposit facility by 25 basis points. This move was widely expected and had a limited impact on the euro or equity markets. The press conference and Q&A (45 minutes later) with financial reporters was where the real action took place. The only market friendly outcome was the announcement to extend lending to European banks from a one-year to a three-year term. The collateral requirements for these loans are also being loosened. The press conference was predominantly hawkish. When asked about hints earlier in the week that the ECB could...

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ISM New Orders – A Strong Indicator of GDP Growth Improved Sharply in November

December 2, 2011
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ISM New Orders – A Strong Indicator of GDP Growth Improved Sharply in November

The financial crisis in Europe detracts from a normal focus on the underlying strength of the US and global economy. Despite the US economy being relatively solid, an escalating Eurozone crisis has the potential to derail economic growth because of the enormity of the impact from a financial seizure. While the solution to the Eurozone liquidity and structure crisis is being debated, there continues to be very resilient economic data from the rest of the world. US GDP data is set to recover towards the 2.5%-3.0% range based on the strength coming from retail sales, manufacturing, and the labor market. It is relatively rare for the market to have a flat year of returns when earnings grow sharply in a non-recessionary environment. Clearly, valuation multiples for the S&P 500 have...

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China Starts Monetary Policy Easing Cycle & Rest of World Provides Additional Liquidity

November 30, 2011
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China Starts Monetary Policy Easing Cycle & Rest of World Provides Additional Liquidity

Overnight, financial market sentiment turned around pretty dramatically. The China A-Share market sold-off by 3.3% and approached the vicinity of recent lows. Fears started to mount that Chinese central bankers were going to be slow to ease monetary policy based on continued inflation concerns. After Asian markets closed, the People’s Bank of China announced that reserve ratios were being cut by 50 basis points, from 21.5% to 21.0%. The move was somewhat of a surprise and has started a turnaround in sentiment in the financial world. The reserve ratio cut is significant because it is the first time reserve ratios have been cut since 2008. China’s central bank has been allowing reserve ratios to generally trend higher since 2006 when the ratio used to be in the high single...

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Black Friday Retail Sales Strong – Demonstrate the US Economy is Nowhere Near a Recession

November 28, 2011
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Black Friday Retail Sales Strong – Demonstrate the US Economy is Nowhere Near a Recession

A number of Black Friday retail sales surveys were released over the weekend. All measures pointed to a robust start to the holiday shopping season. Strong data were received from the National Retail Federation, ShopperTrak, and Comscore. None of the individual sales measures are completely reliable, but the collective strength is likely indicative of a higher growth rate in holiday retail sales relative to a year ago. This result, if it holds through the entire holiday season, would be impressive given how US Consumers have continually (and wrongly) been expected to roll over. The National Retail Federation (NRF) estimated that Black Friday weekend sales were up strongly, achieving new highs in sales volume. The NRF puts a survey together in conjunction with BIG Research. The strong sales estimates from...

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“Super” Committee – Lack of Progress Heightens Risks to Economy and Financial Markets

November 21, 2011
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“Super” Committee – Lack of Progress Heightens Risks to Economy and Financial Markets

The US “Super Committee” failed to make any progress on the sole task it was created for: deficit reduction. It now appears probable that there will be an announcement today stating the committee has “failed to reach its mandated goal of reducing deficits over the next 10-years by $1.2 trillion dollars”. An announcement of this sort would be particularly discouraging because the committee looks unable to achieve even partial success. At a time when the global economy and financial markets are experiencing a crisis of confidence in the future, this result is a major letdown. The US economy has been incredibly resilient despite the confidence-sapping political ineptitude, and the political/financial breakdown in Europe. The main issue with a potential “lack of result” announcement from the Super Committee is not...

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US Housing Permit Activity Improves – Strongest in 3-Years

November 18, 2011
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US Housing Permit Activity Improves – Strongest in 3-Years

Housing is slowly and steadily showing signs of a bottom. Housing permits are required in most states before a housing start and are a leading indicator of overall housing demand. Housing permits improved to 653k which represents a 10.8% increase from September and a 17.6% improvement vs. last year. Both single-family and multifamily permits improved. Mortgage rates falling to 4% have helped housing affordability improve to the best levels in a number of decades. The combination of lower rates, growing median incomes, and falling house prices have all contributed. The longer-term outlook for housing is sound and buyers today should generally expect price appreciation over the longer-term. The market remains almost entirely focused on Europe. The financial crisis in the Eurozone is the most important driver and risk to...

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Magnifico! – Getting to Know Mario Draghi & Analysis of the ECB Monetary Policy Press Conference

November 4, 2011
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Magnifico! – Getting to Know Mario Draghi & Analysis of the ECB Monetary Policy Press Conference

The global equity markets have been held hostage by fears of a crisis since the summer. Taking another step back; crisis fears, macro, and policy responses have really been driving all financial markets since the summer of 2008. To be clear, the economy always has a meaningful impact on the investing environment, but the recent four years have been remarkable. Sound and prudent public policy has been of paramount importance, and a necessary condition, towards stabilizing the economic and business environment. The importance of the change at the helm of the ECB this week cannot be overstated. Now there are hardened and unrelenting cynics in the investment community, often quite vocal, who will say that nothing matters and the global financial system is inevitably doomed. Those who have read...

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ECB Cuts Rates 25 basis points – Dovish Comments From Draghi

November 3, 2011
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ECB Cuts Rates 25 basis points – Dovish Comments From Draghi

The ECB cut interest rates by 25 bps down to 1.25%. This was somewhat of a surprise cut as many expected Draghi to start his tenor by demonstrating some hawkish resolve – consistent with the views of departing ECB President Jean-Claude Trichet. Draghi presents a viewpoint that inflation is expected to fall further while highlighting that monetary growth is only moderate. He appropriately downgrades the forecast for Eurozone GDP growth and points out the “intensified downside” risks to the Eurozone economy. He goes on to point out that inflation is likely to fall below 2% in 2012. These are important comments because they immediately reveal that Draghi has a more dovish inclination relative to his predecessor. The ECB has more room to cut rates and the comments regarding the...

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Welcome to the ECB Mario Draghi!

November 1, 2011
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Welcome to the ECB Mario Draghi!

Who is Mario Draghi? Today is day #1 of a new job for Mr. Draghi, the President of the ECB, which right now is the world’s most powerful position in finance. Under normal circumstances, that position would be the Chairman of the Federal Reserve Board but at the present moment, the ECB President will have more of an impact on the direction of the global economy in 2012. I wish I could outline a viewpoint on whether Mario Draghi tends to be more of a hawk or a dove. Based on a read of the few writings and speeches that are archived it is difficult to have a strong impression. Here is what I came across which I believe to be concrete: Mr. Draghi’s CV: Undergraduate Degree from La...

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Personal Savings Rate – Lowest Since 2007!

October 28, 2011
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Personal Savings Rate – Lowest Since 2007!

The personal savings rate is an item of contention and debate as the profligacy of the US Consumer has been in focus throughout the 2000s decade. During the height of the housing market boom, the savings rate got down to zero and at times was even negative. US Consumers in the aggregate were thought to be dis-saving – spending through total income. Many years later, the data were subsequently revised and the savings rate was altered to slightly positive rates during the mid-2000s time period. The data have some volatility on a month-to-month basis but I note that the data released this morning from the Bureau of Economic Analysis print a savings rate of 3.6%. For 2008, 2009, 2010, the rate has been over 5%. For the first and...

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Eurozone PMI – Continues to Slow as Europe Bickers

October 25, 2011
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Eurozone PMI – Continues to Slow as Europe Bickers

Economies don’t function well in a “crisis steady state”. In Europe, the business environment has been surprisingly good during the third quarter despite what seems like a concerted effort to induce a collapse. A number of consumer and industrial companies pointed out that growth hasn’t fallen off a cliff and if Europe can simply instill some confidence business could pick up. Unfortunately, Europe seems intent on going at its own pace, and not treating the current financial crisis, well, like a crisis. The longer the “fix” gets dragged out, the greater the odds that the Eurozone leaders talk the region into a recession. A recession is massively counterproductive to solving Europe’s fiscal woes because it creates the need for more austerity and more spending cuts. It is not difficult...

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