Thoughts From Joe - December 14, 2012

Top Eight 

1. Europe took a significant step toward saving the euro.  By ceding some regulatory power over the banking industry to the ECB, the 27 nations of the EU sent a strong message of community regarding the group's financial sector.  The new powers are quite weak (for example they don't address winding down a bank), but negotiations will continue in the near future.  If the 17 nations of the euro retain individualized banking authority, capital flows will remain difficult when member nations experience weakness.  But even with a super-regulator, I wonder about the incentives for banks to remain invested in country debt where credit problems occur.
2. The Federal Reserve made two significant announcements this week.  First, they will begin purchasing $45 billion of Treasuries per month which will replace "Operation Twist" which expires this month.  Basically, instead of selling short Treasuries and buying long, they will only be executing the purchase side.  Second, they moved to a more "rules-based" method of setting interest rates by targeting an unemployment rate of 6.5 percent and an inflation rate of 2.5 percent.  These announcements are significant in terms of policy changes, but not very significant in terms of affecting the economy.
3. Significant money market fund changes are coming.  The Financial Stability Oversight Council (FSOC) as well the SEC are strongly in favor of altering the structure of money funds including variations of:  capital cushion, access constraint, and variable NAV.  After fighting long and hard against all three of these options, it seems the industry has resigned itself to some combination of these items.  Though implementation isn't likely until 2014, this will be an important debate for cash investors to monitor in the next year.
4. The "fiscal cliff" continues to remain top of the headlines.  The debate about going off the cliff on December 31 is ludicrous.  As evidenced by a multitude of surveys, anecdotes, and actual economic data, businesses have already reigned in important decision making due to our fiscal uncertainty.  We went off the cliff some time ago, the question is: what now?
5. Negative interest rates are filtering into bank accounts in Europe.  UBS and Credit Suisse recently announced fees on Swiss Franc deposits as that country's yields have turned decidedly negative.  Given the Fed's ramping up of monetary stimulus through QE recently and the minor effect it is expected to have, one can only expect that eventually the Fed will consider pushing yields into negative territory.
6. Expanded FDIC insurance is set to expire at year end.  A bill that would have extended unlimited FDIC insurance through the TAG program failed in the Senate this week, disappointing community bankers who fear losing deposits.  It is very good that this program should expire.  Banks should compete for deposits as well as loans based on their reputation, credit quality, and other characteristics.  The more we try to turn banking into a utility, the worse credit availability and service will become.
7. Just 39 percent of qualifying companies are taking advantage of the JOBS Act exemptions.  The Ernst & Young study also reports that nearly 75 percent of new IPO registrations are classified as "emerging growth companies."  Just because you make it legal, doesn't mean it becomes the dominant way of doing things.  At the end of the day, the market sets the price and if disclosing additional information gets you a better price, you are likely to do so - no matter how loose the legal restrictions may be.  The JOBS Act loosened restrictions, but market discipline remains intact.  This is very good!
8. Italian leadership is up in the air.  After saying earlier in the week that he wouldn't run next year, Italian Prime Minister Mario Monti is sending signals he may be interested.  The confusion comes as a result of former prime minister Berlusconi suggested he would like to run for another term.  Monti is a technocrat - which I've come to believe means he does the right thing rather than the political thing.  Berlusconi is a politician.  Under Monti, confidence in Italy has increased.  Should he step down, Italy could return to the crisis spotlight rather quickly.

Key Indices

Source: Bloomberg

Looking Ahead 

An unusually large amount of data will come out next week as entities push forward their releases ahead of the holiday calendar.  Housing data will be interesting to watch as confirmation of a housing recovery could go a long way to allay concerns around the fiscal cliff.

• Earnings releases include:
  • Tuesday: Oracle Corp
  • Wednesday: Jabil Circuit
  • Thursday: Micron Technology, Red Hat Inc., TIBCO Software
• IPO Activity: SolarCity raised a less than expected $92 million after pricing at $8 per share vs. expectations of $12 - 15 per share.  Nonetheless, the stock rose to $11.79 on its first day of trading.