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).
The information set forth was obtained from sources which we believe reliable but we do not guarantee its accuracy or completeness. Neither the information nor any
opinion expressed constitutes a solicitation by us of the purchase or sale of any securities. Past performance is not a guarantee of future performance.
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
