Thoughts From Joe – September 27, 2012

The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates.

NOTE: TFJ will be taking some time off to relax in preparation for an excitable end of the year including: The election, the "fiscal cliff," and a possible visit from Santa Claus to help drive consumer spending!

1. The IMF wants Europe to take losses on bailouts. The International Monetary Fund, whose stated goals include currency stabilization, has been an integral part of the bailouts to date.  Its funding comes from both euro and non-euro countries.  A bailout, by definition, should include losses.  If no one ever takes a loss, aren’t we just shuffling paper?
   
    
2. China’s stimulus sends yuan close to 5-month high. The current plan to accelerate infrastructure spending should support economic data in the short run.  The Chinese government reported that bank loans grew 30 percent in August which also helped boost the currency.  In the long run, producers (China) need consumers (Europe, America) to regain health.
   
    
3. Germans are more worried about inflation than teenage drug problems. Cultural and experiential differences abound in this world, but this one is most important when thinking about the euro.  Germans seem to equate “inflation” with social unrest and the potential for another Hitler.  The ECB is doing “whatever it takes” to save the euro – including manufacturing them as fast as they can.  These two views will not co-exist.
   
    
4. Oops.  GDP was actually 0.4 percent slower in the second quarter. Economic growth has been much slower this year than previously thought.  Revisions occurred across the board but primarily came from lower inventories which may set the stage for a bounce-back in the third quarter.  Investors often complain of the quality of economic data coming from China and elsewhere, but the quality here is not that great either.  The more important issue is where we go from here and with a potential 5 percent drag looming in the form of the fiscal cliff, it’s difficult to get very rosy.
   
    
5. The rain in Spain falls mainly on the government. Spain plans deep spending cuts to appease Germany as bailout negotiations continue.  Unrest in Catalonia continued this week as many in that region continue to talk secession from Spain.  Again, someone must take the loss. By purchasing debt to prop up pricing, all of the entities who have participated thus far must know that losses are on the way.  The question is, how much will be borne by the borrowing countries and their inhabitants and how much will be allocated to external entities.  The longer this debate continues, the longer until the regions true problems will be addressed.
   
    
6. Dividend payouts are soaring. FactSet just released its quarterly dividend study showing payouts grew to $262.4 billion, the highest level in ten years.  On a relative basis, dividend-paying stocks are trading at P/E ratios just 2.16 below growth stocks versus a more typical differential of around 13 points.  Typically, when times are tough you would expect companies to hoard cash.  Indeed, balances are high, but dividend-paying companies are doing everything they can to rid themselves of this unwanted asset.
   
    
7. The US imports a record $38 billion of goods from China in July even as trade battles continue.  On a year-to-date basis, imports from China are nearly $18 billion higher than 2011 as a stronger U.S. economy in the first half of the year drove trade.  The largest component remains computers.  As we head into the holiday season, imports will likely continue to show strength even if U.S. economic growth continues to slow.  The Chinese need U.S. consumers and, apparently, U.S. consumers still need Chinese goods.
   
    
8. LIBOR likely to be overseen by government agency.  A handoff from the British Banker’s Association – a private group – the UK’s Financial Services Authority (FSA) would place the calculation of this all-important rate under regulatory purview.  In addition, it’s likely LIBOR will no longer be entirely poll-based and will include actual transaction rates.  But at the end of the day, LIBOR will remain a largely “made-up” number.

 Key Indices

Looking Ahead

• The first presidential debate takes place on Oct 3rd and will focus on domestic policy.
• Next week is light on economic data until Friday’s employment report.  Economists surveyed by Bloomberg expect anemic job growth of 113,000 and a slight rise in the unemployment rate to 8.2 percent.
• Earnings releases include:
• Wednesday: OCZ Technology
• Innovation sector IPOs scheduled for next week include:
• Tuesday: Lifelock
• Wednesday: Regulus Therapeutics