Thoughts From Joe - December 21, 2012

Top Eight

1.  Third quarter GDP is revised up due to consumer and export revisions.  GDP growth reached 3.1 percent in the quarter vs. the most recent estimate of 2.7 percent.  On the margin, this is good news however the markets view the third quarter as ancient history.  Nonetheless, a downward revision in inventory growth should support estimates for fourth quarter which would currently put the year's growth around 2 percent.  Unfortunately, political gamesmanship will decide whether activity early next year leads to a recession.
2. The NRA responded to the Newtown shootings today calling for armed guards in schools.  Since the current economic downturn began in 2008, Washington has focused on addressing many issues, but has yet to focus on where our economic troubles began: Housing finance.  The latest "shiny object" has been the fiscal cliff.  Will the next be gun ownership?
3. Home sales rose nearly 6 percent in November as inventories shrank to a 4.8 month supply.  The 5 million homes per year pace solidifies a recent upward trend, though the level of home sales remains well below the 2003 - 2006 period.  Housing data across the board are looking much better than any time since the crisis, however in all respects the market still has a long way to go before "recovering."  Can we get another housing boom with a government-controlled mortgage approval process?  I remain skeptical.
4. Buyout leverage rises to pre-financial crisis levels.  According to Thomson Reuters, private equity firms are only putting up about one-third the purchase price for acquisitions.  Rather than a scary statistic, I take this as encouraging.  If lenders are willing to take more risk in these deals given today's environment, then it's likely a sign the deals themselves are seen as less risky than the last few years.  The sooner markets get back to "normal" the sooner the economy will recover.
5. Bond investors are increasingly ignoring ratings - and for good reason.  According to a study by Bloomberg, 53 percent of the 32 country ratings changes this year did not create the expected price movement.  This week, Moody's upgraded Greece after investors accepted losses on Greek bonds.Think about that:  Greece does a cram-down and gets rewarded with higher debt ratings going forward!  I do not believe my bank would treat me that way.
6. The Libor scandal continues to spread including a felony plea by UBS.  Regulators believe "dozens" of traders and managers at various firms colluded to rig Libor over at least six years.  In addition, Fannie and Freddie have already estimated damages from the scheme at $3 billion.  Such is the difficulty with non-market indices and measures.  When benchmarks are set by agreement or polling, there will always be the potential for fudging the numbers.  Unfortunately, the current trend away from market-power (capitalism) toward rule-power will only lead to more of these "misunderstandings."  I will be more focused on this issue in 2013.
7. Surprisingly strong economic data included consumer spending and capital goods orders this week.  Personal incomes rose 0.6 percent in November while spending rose 0.4 percent, outpacing Sandy-adjusted estimates.  Also, durable goods orders were very positive for the month, rising 0.7 percent overall and 2.7 percent after stripping away volatile transportation and defense components.  There is no doubt we are getting strong economic data on various fronts, however I am not yet a believer in a private sector economy.  But I'll keep watching.
8. Voters in Japan leaned conservative, electing a new premier, Shinzo Abe.  Abe looks to initiate stronger monetary and fiscal policies targeted at ending deflation including infrastructure projects, stronger defense projects, and better ties with the United States.  When will Japan reenter the developed world economy?

Key Indices

Source: Bloomberg

Looking Ahead 

Next week will be extremely light on economic data with consumer confidence and the Chicago Purchasing Manager indices as highlights.

• There are no earnings releases of note next week.
• There is no innovation sector IPO activity expected next week.