Thoughts From Joe - January 4, 2013

Top Eight

1. The "fiscal cliff" was avoided - or at least pushed down the road and redefined.  The agreement wards off much of the fiscal drag that would have occurred in the absence of a deal, but sets up another "cliff" around negotiated spending cuts.  Given this is the first real bipartisan agreement in Washington in at least two years, I'd like to feel good about the climate there.  Unfortunately, when the Democratic senate leader compares the speaker of the house to a dictator and the speaker responds "Go F#*$ yourself," I find it difficult to feel good about future agreements.
2. Minutes from the FOMC meeting in December show some disagreement about future QE.  Markets reacted briskly to news that "several" FOMC members backed QE halt or cut well before the end of2013.  The Fed has now set the rules for increasing interest rates at inflation expectations above 2.5 percent or unemployment below 6.5 percent.  Will they come forward with similar metrics around QE?  It doesn't sound like there is much agreement on how well this program can work or how long they can keep it up.
3. Moodys states that more steps are needed for U.S. to save its Aaa ratings.  Specifically, the company stated "further measures that bring about a downward debt trajectory over the medium term are likely to be needed to support the Aaa rating."  It's the word "trajectory" that is tricky as that implies a long, steady series of government profits that are not doled out to voters.  This will be difficult at best.
4. Holiday sales activity has been challenged according to early statistics. Growth of holiday sales has been at its slowest since 2008 according to MasterCard Advisors data. Spending rose 0.7 percent in the two months leading up to Christmas.  People had been worried about going off the "fiscal cliff" on January 1^st, but this data confirms the cliff was reached much earlier.
5. New auto sales in France hits 15-year low.  New car registrations fell a shocking 14 percent in 2012 as automakers continue to reduce hours on assembly lines.  Public subsidies drove sales in 2011 but the new age of austerity is hitting this industry harder than most.  The artificial activity driven by government support programs can lead to disappointment when it doesn't translate to broader economic growth.
6. December's employment figures continued recent strength in the labor markets.  The unemployment rate ticked up to 7.8 percent as the economy added 155,000 jobs during the month for a total of 1.8 million jobs during the year. Hourly earnings rose 0.3 percent for the second month in a row bringing the year's total to 2 percent, exactly offsetting the coming increase in payroll taxes to begin this month.
7. Sovereign debt issuance will drop significantly in 2013. Debt to be refinanced by the G-7 plus BRIC nations will be $7.38trillion vs. $7.6 trillion in 2012.  The reduced issuance puts downward pressure on yields all else the same.  The U.S.is an outlier here as our outstanding debt will eclipse Japan's putting us as the largest debtor in the world.  (see #3 above regarding our current Aaa rating by Moodys.)
8. Lower electricity use causing problems for many providers.  Even with the success of so many electrical gadgets, usage is growing at less than 1 percent vs. 7-8percent in the mid 1900s when manufacturing was driving economic growth.  In response, utilities are leaning on government-blessed guaranteed profit margins that are in place to encourage infrastructure investments.  Yet another move away from free market activity.

Key Indices

Source: Bloomberg

Looking Ahead

• The economic calendar is light next week both in terms of number ofitems and their importance.  However, earnings season kicks off with Alcoa on Tuesday.
• Richmond Fed President Jeffrey Lacker will give a speechon the year's economic outlook on Tuesday.  This could be interesting as Lacker is a long-time dissenting voter on the FOMC.
• Alcoa is the only earnings release of note next week.  The company traditionally is the first to kick off the quarter's earnings season.
• There is no innovation sector IPO activity expected next week.