Thoughts From Joe - November 16, 2012

Top Eight 

1. A new government group is challenging the structure and rules of the money fund industry.  The Financial Stability Oversight Council (FSOC) has decided to review current money fund rules with the goal of recommending changes to the SEC.  The FSOC has no real teeth on this issue.  They can only kick it back to the SEC - which has already rejected any additional reform - for further review.  However, the SEC could change course given the increased profile expressed by Bernanke and Geithner.  What does this mean at the end of the day?  It's possible the SEC will do away with stable NAV funds, but not likely until at least the end of 2013.  Stay tuned!
2. Leadership in China was handed over to Xi Jinping this week.  This was only the second handover of power in the last six decades and represents an important step toward a younger generation of leaders in China.  Mr. Xi is one of the so-called "princelings" who are descendants of prominent and influential senior communist officials.  The further Chinese  leadership moves from its hard-line communist roots, the more successful its economy can become, bringing hundreds of millions of human minds, hands, and hearts into world GDP potential.  This is a very good thing for economies around the world!
3. Today, President Obama met with congressional leaders to kickoff discussions on the "fiscal cliff."  Today's event staged more for media consumption begins the process of Democrats and Republicans coming together on the many spending and taxing decisions that will need to be made in the coming months.  Ideological differences vary, but the enormity of potential economic damage is high enough to drive toward partial solutions.  The key will be to find an action Democrats can call a "tax hike" and Republicans can call a "spending cut."  In other words, it comes down to an exercise in rhetoric over action.  At the end of it, we still face a sluggish economy where businesses and consumers remain on the sidelines due to extreme uncertainty around the economy, Europe, legislative and judicial policy.
4. Another mortgage lawsuit sprang up last week - this time against Bank of America.  Investors in mortgages underwritten by the bank sued them over $261 million of loans.  The group is seeking damages of more than $122 million.  Without commenting on the validity of this and the many other mortgage-related lawsuits, allow me to just say it's no wonder private sector lenders are not underwriting mortgages unless they are preapproved by U.S. government agencies.  Until such uncertainty is resolved, don't expect the housing finance markets to improve.
5. Fed Vice Chairman wants to tie action to economic measures.  Janet Yellen piled onto a movement at the Fed to tie actions to measures on employment and inflation.  To date, the Fed has acted on a broader set of inputs to guide the economy.  Being well aware of the challenges regarding the "trust me" approach, I do not agree with tying Fed action to economic measures.  These measures are never right and only rarely are they not significantly revised as much as a year after their initial release.  Furthermore, there are many ways to measure jobs and prices and I think allowing leeway for talented people to make judgment calls is the best approach.
6. Europe is officially in recession, again.  For the second time in four years, eurozone growth declined for two quarters in a row as the region continues to struggle financially.  Looking ahead, the European Commission is forecasting growth in 2013 of just 0.1 percent.  Not that any of this is really news, is it?
7. October retail sales fell 0.3 percent due to hurricane Sandy.  For the first time in four months, retail sales declined as shoppers in the northwest were more concerned about surviving the "superstorm."  Does this mean sales should bounce back in November, compensating both for the time off  that consumers took as well as purchases related to storm activity?  We'll find out next month when expectations are likely to be higher than usual.
8. Greece may need to perform a second write-down of their debt.  After failed talks earlier this week, finance ministers of the 17 euro nations will meet next Tuesday to discuss how to pay for a two year extension of Greek budget targets.  But no one is discussing how Greece can get back on its feet because no one believes they can.

Key Indices

Source: Bloomberg

Looking Ahead 

The Thanksgiving holiday week will be extremely light, highlighted by housing data on Monday and Tuesday.

• Earnings releases include:
  • Monday: Agilent Technologies, Nuance Communications
  • Tuesday: Hewlett-Packard, Medtronic, Salesforce.com
  • Friday: Pandora
• GlobeImmune remains listed as  "day-to-day" regarding a potential $65 million IPO.