Thoughts From Joe - February 1, 2013

Top Eight

1. New legislation could drive internet sales tax.The Main Street Fairness Act would give authority to collect taxes to states that have chosen to enter an interstate compact to charge sales tax to internet retailers.  There are good arguments on both sides of this debate, however I think the intentions behind sales tax clearly argue for an even application across the consumer base.  To date only 24 states have entered the compact, however should this bill become law, expect more states to follow.
2. Gross Domestic Product turns negative in the fourth quarter. In addition, personal spending grew just 0.2 percent during the quarter even as income grew a whopping 2.6 percent.  Tax mitigation strategies that drove income into 2012 from 2013 are to blame for the growth of income, indicating another hurdle for further growth this year.
3. The Fed makes no change to its monetary policies.The Fed will continue to purchase $40 billion per month of mortgages and $45 billion of Treasuries with the goal of driving rates down to allow for further drops in the unemployment rate.  Unfortunately, they are losing the battle asmortgage rates hit a four month high this week.  According to a separate surveys by Bloomberg and CNBC, 56 -57 percent of respondents do not believe the Fed's actions can drive unemployment down.
4. The unemployment rate pushed up slightly as payroll growth remained solid at 157,000 in January.  The current 7.9 percent unemployment rate is not consistent with job growth over the past few years as people drop out of the workforce and demographics continue to work in the wrong direction.  For all of 2012, job growth was about 2.2 million and the labor force increased by about 1 million, netting just 1.2 million in true growth.  Depending how you slice it, we have only recovered about 2 million of the original 8 million jobs lost in the downturn.
5. Consumer confidence falls to lowest level in fourteen months.  The drop from 66.7 to 58.6 appears to have been driven by the payroll tax increase.  If even confidence measures normalize from here, the hit to household income is likely to restrain first quarter consumption growth.
6. Home prices fell slightly according to S&P/Case-Shiller index.  Many cities have turned upward recently with those that got hit the hardest in the downturn leading the way.  Home prices are artificial because mortgage lending is driven by government stimulus in the form of Fannie, Freddie, and the FHA.  In fact, Karl Case - one of the inventors of the index - stated this week on Bloomberg radio that he was having trouble getting a mortgage.  (start at 9:16 in the link)
7. The United States is seeking criminal charges against RBS in Libor probe.  Given RBS is owned by the UK government, are we saying the UK has committed crimes against the United States?  Before thinking this is ludicrous, recall Bank of America is being held liable for Countrywide's actions prior to their acquisition.  Until we find a balance between regulating the financial industry and encouraging financial activity, expect credit to remain tight for the general consumer.
8. Real immigration reform looks possible in the near future.  President Obama called on Congress to move swiftly on this important topic with the goal of legalizing existing residents and reforming the system overall. "Laws or ordinances unobserved, or partially attended to, had better never have been made " - George Washington.

Key Indices

Source: Bloomberg

Looking Ahead

• The economic calendar is very light next week and Fed members will be largely out of sight.  Thursday's productivity and labor cost data will likely headline.
• Earnings releases next week include:
  • Monday: Gilead Sciences, Acme Packet
  • Tuesday: Shutterfly, Expedia, Zynga, Millennial Media
  • Wednesday: Atmel, Yelp, Akamai
  • Thursday: ON Semiconductor, Teradata, SunPower, Nuance Communications, Alnylam Pharma, LinkedIn, OpenTable
  • Friday: AOL
• Stemline Therapeutics ($38 mm) and KaloBios Pharma ($65mm) went IPO last week.  Scheduled IPO activity includes AutoGenomics looking to raise $65 million.