Thoughts From Joe - January 25, 2013

Top Eight

1. President Obama laid out second-term economic plans.  We must do more to make sure that when the economy expands, the middle-class isn’t left behind, he said.  He also stressed the need for infrastructure projects and he defended the social safety net.  Our political parties need to focus on areas of common ground in order to move forward on areas of basic agreement.  The stasis in Washington we’ve experienced since the 2010 mid-terms needs to end before important progress on any front can be made.
2. Britain’s Prime Minister calls for vote on membership in the European Union.  David Cameron called for the referendum with the goal of leading an overhaul of the 27-nation bloc.  Other European nations were not happy with the planned vote by the U.K.  The longer questions remain about membership in European alliances, the longer uncertainty about the existence of such alliances will extend.  Though the European Union itself is likely safe, I continue to maintain that the eurozone – that is, the currency bloc – faces dramatic changes.
3. Dodd-Frank is less than half implemented, according to the GAO.  The Government Accounting Office blames the complexity of the task as well as difficult coordination by overlapping and interconnected regulators.  The 2000+ page bill passed in 2010, but as of today only 32 percent of the required rules have been written.  Without knowing the rules of the road, our financial system stands on the sideline.
4. The House approves bill that pushes the debt ceiling out to mid-May.  After agreeing to tax increases late on January first to avoid the fiscal cliff, Republicans have  now agreed to push the debt ceiling beyond the sequester initiation in March.  The next focus in Washington will be the $120 billion per year automatic spending cuts to begin at that time.  Elections do have consequences!
5. The German central bank said their economy is showing signs of recovery.  Pointing to a stable labor market and better view on output, the Bundesbank suggested today’s weakness won’t last long.  Likely negative GDP growth in the fourth quarter and industry projects of just 0.4 percent growth for 2013 contradict the bank’s stance.  The volatility in Europe is such that Germany’s economy is intertwined with not only other Euro-area economies but also their own reaction to coming fiscal challenges in the region.
6. The Japanese central bank raised its inflation target from 1 percent to 2 percent.  Pressure from the new Prime Minister Shinzo Abe drove this decision, though the JCB fought back by committing to no new action in 2013.  Japanese CPI hasn’t been 2 percent since 2008 and hasn’t even been positive since last summer.  The target is symbolic.
7. Does Dell’s action signal a return of the mega-LBOs?  Some say yes, some say no, but there is no doubt that the extended period of low interest rates is altering market behavior.
8. Apple experiences a rare fall from grace after earnings and guidance announcements.  Apple stock fell more than $63 or 12 percent after reporting flattening profit on record revenue.  Revenue was up 18 percent and profit also hit an all-time high, however the increase was not in-line with top-line growth, according to analyst views.  Success can beget success, but if expectations run too far ahead of reality, strong growth for many companies may not be so exciting.

Key Indices

Source: Bloomberg

Looking Ahead

• Next week is heavy on economic data capping off with January’s employment report expected to show the unemployment rate stable at 7.8 percent and nonfarm payroll growth at the new normal of 155,000.
• The Fed’s FOMC meets next week and is expected to make no changes to the current QE program.
• Earnings releases next week include:
• Monday: Yahoo! Inc., VMware, BMC Software
• Tuesday: Pfizer, EMC Corp, Freescale Semi, Vertex Pharma, Amazon.com, Broadcom, Boston Scientific
• Wednesday: Qualcomm, Citrix, Facebook, Cadence Design, JDS Uniphase, Fusion-io, Fortinet
• Thursday: Power-One, NetSuite
• Scheduled IPO activity includes:
• Monday: Stemline Therapeutics, KaloBios Pharmaceuticals