Thoughts From Joe - December 7, 2012

Top Eight 

1. November was the worst month for IPOs since December 2008.  Twelve IPOs worth $6.4 billion were pulled during the month, the most since December 2008.  Only six companies got out, making it the slowest month since November 2008.  I've seen speculation that investors are more focused on harvesting gains ahead of tax law changes than laying the groundwork for future gains by participating in the IPO market.  Whatever the validity of this theory, it should reverse quickly in the new year as investors must reach for gains no matter the tax rate.
2. In at least some ways, the healthcare startup world is benefiting from the ACA.  According to the linked Economist article, incubators are gaining solid volume in terms of new company applications.  What is also clear is that a multitude of these startups are on the IT side of healthcare to help deal with the tremendous data challenges as a result of the ACA.  Is this going to lead to better health care or simply more bureaucracy?
3. Moody's downgrades the bailout funds for the eurozone.  The ESM and the EFSF dropped from Aaa to Aa+ and retained a negative outlook for the fund mechanisms.  Two thoughts: 1) if individual eurozone countries are downgraded, bailed out, and then the bailout platforms are downgraded, what's next?  2) Given these along with a few other downgrades recently by Moody's, are they gearing up for a U.S. Treasury downgrade in the first quarter?  Also, if they downgrade everyone else before downgrading the U.S., is it really a downgrade or are they just revealing a lack of confidence in their own methodology?
4. Plan for eurozone banking union hits obstacles in Germany.  EU leaders will meet next week to discuss transferring authority over the financial sector from individual countries to the EU.  This is an extremely important move and an incredibly difficult pill to swallow.  It's important today because individual regulators are telling their banks to stay away from riskier eurozone investments.  And it's a difficult pill because giving up control of fund flows within your borders is a huge step toward dropping individual sovereignty.
5. We are about $32 billion away from the debt ceiling.  In the initial proposal on the fiscal cliff, the President included the ability to raise the debt ceiling without coming to Congress.  It seems there could be enough votes to get this through the Senate as a stand-alone bill.  At the current rate the government is spending, the Treasury will hit the debt ceiling of $16.4 trillion very soon, but they can borrow from pension and other funds to keep the government at pace through February.  Imagine what would happen if a corporation decided to borrow from their employee's pension or 401(k) plan to fund the company.
6. Oil production in the U.S. rises to a 15-year high.  September's average production of almost 6.5 million barrels per day was the highest measure since January 1998.  Horizontal drilling and hydraulic fracturing are driving production in ways not imagined just a few years ago.  Leaving aside for a few minutes the importance of becoming energy independent, imagine how quickly technology is changing the factors of life all around us.  With creative destruction running at warp speed - even in today's slow economy - it is critically important to be open to change, to accept change, but also to drive change.
7. The unemployment rate dropped to 7.7 percent and payrolls grew by 147,000 in November.  Superstorm Sandy had her effects on the data, but they were mostly in the realm of lowering expectations making these consistent numbers look that much better.  It's interesting the unemployment rate continues to drop even as payroll growth remains low.  The answer to this mystery is an ever-declining labor participation rate which dropped 0.2 percent to 63.6 percent.  This is down from 2008's average of 66.0 percent - or about 7 million people.
8. Germany's Bundesbank drops growth outlook significantly.  The country's central bank dropped growth estimates for 2013 a full 1.2 percent from 1.6 percent to just 0.4 percent.  In related news, the ECB seems to be signaling a rate cut in the near future.  Germany is holding up Europe.  The benefits of Germany continuing to do so are a strong economy driven by exports to other eurozone nations.  If these benefits stop accruing, the cost of exiting the euro may become lower than the cost of staying in.

Key Indices 

Source: Bloomberg

Looking Ahead

• There are three focal points for economic data next week:  Wednesday's Fed meeting, Thursday's retail sales report, and Friday's CPI release.
• Earnings releases include:
  • Monday: Peregrine Pharmaceuticals
  • Thursday: Ciena Corp, Adobe Systems, VeriFone Systems
• Upcoming scheduled IPOs:
  • Solarcity, December 11, $150mm