Thoughts From Joe - March 1, 2013

Top Eight

1. Sequester spending cuts will lead to another recession according to several state governors.  The coming $85 billion in cuts begin today, but will not ramp in quantity until later this month.  These cuts were never intended to be initiated.  Instead, they were meant to be so ridiculous as to pressure Congress to compromise on budget negotiations.  Unfortunately, members have become so divided it seems their propensity to accept pain (to be felt by the electorate in the form of a slowing, uncertain economy) is outweighing any particular desire to address our long-term fiscal problems.
2. The GDP estimate for fourth quarter turned slightly positive.  The Bureau of Economic Analysis revised its estimate from -0.1 percent to +0.1 percent, much lower than expected due to further inventory draw downs.  The decrease of inventories sets up potentially solid growth in the first quarter as those inventories are replaced.  You don’t have to sell it for it to be counted in GDP!
3. Italian voters decide on deadlock, flirting with default and a boot out of the euro.  None of the political parties received enough votes to form a government as voters expressed anger about austerity and a desire to retain internal sovereignty rather than delegating it to the European Community.  Italians will not be ruled by Germans.  Neither will Greeks, Spaniards, nor Cypriots.  Certainly not the French!
4. The housing market continues to show signs of stabilization.  Though percentage increases of today’s data seem impressive, the market is only stabilizing.  Where it goes from here is the question.  As long as the government retains control of who gets a mortgage and who does not, it is hard to imagine this “planned market” performing near its potential.  Only true mortgage reform providing a comfort level that encourages secondary, securitized activity will lead to a strong housing sector.
5. Bernanke sticks with his story that QE is helping the economy and will be continued.  In his Senate testimony this week, the Fed Chairman stressed the need for Congress to solve the sequestration issue soon saying that all spending cuts are not created equal.  Ever so slowly, Bernanke is increasing rhetoric that Congress is standing in the way of recovery – not the Fed.  Unfortunately, he must risk the independence of the Fed to push Congress to do the right thing.  It seems they feel little pressure from the electorate.
6. Moody’s downgraded the U.K. to AA1 from AAA.  The country’s Chancellor George Osborne followed up with statements that austerity efforts will continue.  In the downgrade notice, Moody’s cited rising debt and “a deterioration in the shock-absorption capacity of the government’s balance sheet.”  Moody’s and Fitch are downgrading issuers around the world in preparation for a U.S. downgrade.  Does anyone care what the ratings agencies think?  If markets are any indication, the answer is “no.”
7. Consumer confidence rose solidly in February after falling over the previous three months.  The Conference Board’s measure rose to 69.6 from 58.4 in January which was its lowest level in the previous year.  This could be construed as the consumer shaking off the 2 percent payroll tax increase which likely depressed confidence in January.  Also, given we have been through several “deadlines” on the fiscal front, it is likely consumers are not too concerned about sequestration, the debt ceiling, etc.  But we should all remember that The Boy Who Cried Wolf did not end well.
8. Personal income fell 3.6 percent in January, reflecting bonus payments that were moved forward into 2012 for tax purposes.  The bounce in income was largely expected by economists as was a 0.2 percent increase in consumer spending.  The U.S. economy is 70 percent consumer spending which means even a slight increase or decrease largely drives overall GDP.

Key Indices

Source: Bloomberg

Looking Ahead

• Next week’s economic calendar is light with focus on Friday’s employment statistics.
• Earnings releases next week include:
  • Monday: Arena Pharma
  • Tuesday: VeriFone, Infinity Pharma
  • Wednesday:  Solarcity Corp.
  • Thursday: Finisar, Pandora,
• There is no scheduled IPO activity in the Innovation sector for next week.