And That's The Week That Was
Brounes & Associates
By Ron Brounes
June 9, 2012
When all else fails, bring back Bernanke. With equities in “full-blown” tailspin over the past few weeks, the Fed talking heads picked up the stimulus dialogue and set the rumor mill in motion. Some believe new actions may be needed in the aftermath of the horrid labor releases. Others feel that the disappointing data does not really change the long-term economic picture and merely represented a correction from the early-year labor strength due to unusually warm weather. Some worried about the “contagion” impact from Europe (and even a slower China). Others point out that interest rates are already quite low and the jury is still out about the true impact of Quantitative Easing (parts 1 and 2). For his part, Dr. B. reiterated that he and his cohorts are “prepared to act” if need be, but stopped well short of promoting any new stimuli. He also took another stab at Congress for failing to make the tough budgetary decisions regarding taxes and spending and warned about Europe-style consequences. The Fed next meets on June 19.
While Fed dissension is a relative rarity, such behavior has long been the norm among politicos. Obama continued his Romney-bashing (much to ex-Prez Clinton’s disapproval), while also taking shots at the Republican party in general. The Administration has attempted to shift blame for sluggish labor and other economic concerns from O. and onto those “obstructionist” Republicans who have refused to approve Obama-led programs that would hire more teachers, construction workers, and government employees. If only they would rubber-stamp all of his policies, the economy undoubtedly would be rocking along (and the stock market surging). Meanwhile, Republicans continue to bash said policies as the main reasons for the current “challenges” faced at home, in Europe, in China, in the Middle East (and certainly in his “homeland” of Kenya).
In the aftermath of the Facebook IPO debacle, NASDAQ officials apologized to the industry for its technical glitches. (That and about $40 million will help ease the burden on frustrated brokers.) Housing got a bit more decent news about its long-anticipated recovery as homebuilder Hovnanian posted strong earnings and gave a solid outlook for the sector. JP Morgan Chase continued to face the wrath of investors and regulators as news spread that the highly controversial Volcker Rule may have helped prevent the massive hedging losses incurred.
Investors took a break (at least temporary) from the latest bearish pessimism (double negatives?) and found value in the carnage of the past few weeks. Stocks surged to their best weekly performance of the year on speculation that the Fed and European Central Bank may act again to help stimulate the global economy. Likewise, China put its money where its mouth is and lowered its lending rate for the first time in three-and-a-half years to combat the ill-effects of its trading activity (or lack thereof) with Europe. Oil reversed its losing trend as well (perhaps also temporarily) on hope of upcoming Fed moves. Bernanke threw a bit of water on the flames with some comments late in the week that served to reduce the enthusiasm for new stimuli (and making him the poster child for the ultimate rage of Congress…besides Obama).
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Could there be compromise in the midst? During the week, Germany appeared to concede to its long-objected-to euro-zone bonds, BUT only if other countries would give up certain sovereign rights and transfer governing powers to Europe. What say you, newly elected (liberal) Prez of France? The G7 lent its two cents (in fairly harsh terms) that European leaders need to get their acts together and fight off the growing debt crisis (that is entering panic mode). Portugal will be trying to prevent its banking sector from going the way of Spain’s by injecting $8 billion-plus into the system to cover loan losses. Meanwhile, bailout-bound Spain claims that its government has lost the confidence of investors (and access to the capital markets) as its 10-year government security has been yielding in excess of 6% for three weeks now (when the comparable German bond pays 1.2%). While the ECB left its rates unchanged at 1% for the 6th consecutive time, it claimed to be “ready to act” as the downturn continues throughout the region. (Sounds like they are stealing Bernanke’s rhetoric). ECB Prez Draghi seemed to lend a bit of optimism to the ongoing pessimism by stating that the markets were “underestimating the political leaders’ commitment to addressing the euro crisis.” (Funny, Bernanke never says that about US politicos.) While China cuts its interest rates in an implied expression of concern about the euro-zone, the head of the sovereign wealth fund, China Investment Corp (CIC), said it has been trimming back positions in European stocks and bonds and remains concerned about a global contagion.
Closer to home, factory orders dropped by 0.6% in April, another sign of a weaker manufacturing sector, though the ISM – non-manufacturing index (which covers about 90% of the economy) increased by a better-than-expected amount. Labor got a reprieve from last week’s disastrous releases as jobless claims fell for the first time in five weeks and the Conference Board issued a report that implied the recent slowdown in unemployment would be coming to an end. The Fed released its Beige Book which showed the economy continued to expand at a moderate rate. Hiring continued as a steady pace; manufacturing expanded across most districts; housing may be on the mend; and price pressures remained subdued as energy prices were in contraction mode. Policymakers do seem to be following Bernanke’s lead as the report expressed concerns about the lawmakers’ role in addressing the budget needs as 2013 approaches.
On the Horizon…The economic calendar focuses on inflation as investors get a new look into the domestic price pressures now that oil prices have plummeted from the highs of a few weeks back (don’t forget about Iran, however). Retail sales reveal how active consumers have been, particularly after the labor picture began deteriorating from its recent strength. All eyes remain on Europe as leaders begin to talk compromise (though plans for Greece’s exit from the EU never seem too far from the forefront). The G20 meeting is schedule for June 18 (just before the Fed meeting) and surely everyone will be sharing their two cents over how to handle the seemingly never-ending problems. What would you like to see CIC (China)?
(c) Brounes & Associates