Thoughts From Joe - March 15, 2013

Top Eight

1. The Dow hits all time high while more broad-based indices struggle upwards.  The streak of 10 increases in a row ended Thursday, tying the most daily consecutive increases since 1992.  The chart below shows activity around the last 17 such occurrences, highlighting how weak this rally has been compared to those throughout history.  Additionally, it is difficult to tell what this streak means for future returns given these past performances.

Source: Bianco Research

2. Job openings are rising, but employment turnover has yet to normalize.  In January, job openings rose 2.2 percent , but remain lower than the 3.8 million level seen just a few months ago.  A measure of people quitting and companies hiring has remained stagnant for several months indicating there is more room for improvement in the labor market.  When people start quitting jobs they can do in their sleep and begin taking on higher paying, more challenging jobs we will be one step closer to a recovered jobs market.
3. Retail sales in February rose the greatest amount in five months as consumers ignore payroll tax hikes.  Sales were up 1.1 percent as consumers spend more on cars, building materials and through internet marketers.  Higher gasoline prices also figured into the increases which are measured as price times quantity.  But overall this was a very positive showing by the consumer.
4. Republican and Democratic budget plans remain far apart.  The current Republican proposal passed by the house is similar to the one passed last year that Senate Democrats summarily rejected.  And the proposal by Senate Democrats is not aimed at balancing the budget anytime soon, which is a prime objective of House Republicans.  Stuck in the middle are the targets of sequester which has Senators scrambling to implement stopgap measures protecting their own districts from cuts.
5. HARP gains traction.  The Home Affordable Refinance Program was responsible for nearly 1.1 million mortgage refis in 2012, more than double the year earlier.  Lower mortgage payments reduce turmoil in the housing sector and feed more cash into the economy through consumer spending.  In late 2011, HARP was revamped to provide lenders more protection when working with mortgagees to find a workable payment solution.  A reduced risk of being sued by the government, it seems, has encouraged lenders to work with borrowers more closely.
6. Ireland officially exits "crisis" with debt issuance sold to the public.  The country sold £4.3 billion of benchmark 10 year bonds, which was double the size of most market expectations.  This completes most of the country's long-term funding needs for the year.  Ireland is a shining example of how a European country can exit freefall.  Though the swallowed austerity has been harsh, driving GDP down nearly 10 percent in the process, the economic gains prior to the crisis provided incentive for the population to endure.  Unfortunately, many southern European countries did not experience strong economic gains leading up to the crisis and are now faced with the question: Why should we suffer if we haven't seen the upside to the euro?
7. Illinois settled charges it misled municipal bond investors regarding the health of its pension funds.  When issuing $2.2 billion in bonds, the state "misleadingly omitted to disclose the primary driver of the increase" in its underfunded pension - insufficient contributions.  Municipal bonds continue to live in the most opaque, perplexingly complicated corner of the liquid investment markets.  There have been many scandals over the years but none that have allowed investors to significantly increase their ability to assess risk and reward in the sector.
8. Spain's youth unemployment currently stands at 55 percent.  Prime Minister Mariano Rajoy said the government will enact more than 100 measures and spend €3.5 billion over four years to reduce youth unemployment.  The question stands: how much of Germany's money will other European nations spend before revolt ensues?

BONUS ITEM: Did the Russians create dollar dominance in world trade by accident?  The Bretton Woods conference post World War II set up the dollar for at least a century of dominance in world trade.  The linked book review discusses the theory that one of the chief architects in Treasury was actually a soviet spy.  Perhaps the best example yet of unintended consequences?

Key Indices

Looking Ahead

• Next week's economic data will focus on the housing sector which will  provide a backdrop for the Fed's FOMC meeting.
• Earnings releases next week include:
  • Tuesday: Adobe Systems
  • Wednesday: Oracle
  • Thursday:  TIBCO Software, Micron Technology
• IPOs in the innovation sector expected to price next week include:
  • Tuesday: Tetraphase Pharmaceuticals - $82mm
  • Wednesday: Enanta Pharmaceuticals - $64mm
  • Thursday: Marin Software - $91mm