Thoughts From Joe - October 19, 2012

Top Eight

1. Britain takes another step away from the EU, with no objections from Germany.  The budgets of the EU (which includes Britain) and the eurozone (which only includes members of the currency union) will be split, according to a proposal submitted by German Chancellor Angela Merkel.  Britain does not want to find itself lending fiscal support to currency union members as those struggles continue.  This is entirely rational and appropriate.  Increasingly, the eurozone will find itself on its own with only the German economy attempting to support weaker members. The budgets of the EU (which includes Britain) and the eurozone (which only includes members of the currency union) will be split, according to a proposal submitted by German Chancellor Angela Merkel.  Britain does not want to find itself lending fiscal support to currency union members as those struggles continue.



2. Housing starts reach their highest level in four years.  The annualized pace of starts rose to 872,000 in September as building permits for future starts also rose significantly.  According to the National Oceanic and Atmospheric Administration, September 2012 tied with 2005 as the warmest September on record.  Even so, there's no denying a boomlet in the housing sector today.



3. The mix of workers to non-workers continues to move in the wrong direction.  Since 2009, over 8 million people have been added to non-labor force rolls while just 800,000 have been added to the actual labor force.  The lack of labor force participants drives down the unemployment rate measure.  Though from a partisan source, the continued disruption in our workforce cannot be denied.



4. Spain would like to be bailed out without austerity restrictions.  The union's new bailout mechanism includes requiring such restrictions in exchange for funds, but Spain is attempting to negotiate its own special deal.  This is reminiscent of Greece, Portugal, and to a lesser extent, Ireland.  At what point will Germans begin to feel the costs of eurozone exit do not meet the continued and growing costs of bailing out their neighbors?



5. September retail sales rose 1.1 percent after a 1.2 percent increase in August.  In addition, sales rose a solid 0.9 percent even after stripping out volatile auto and gasoline prices.  One of the two saving graces today is our continued propensity to consume.  The other is strong(er) balance sheets across the board for corporates, banks, and consumers.



6.   Debt-for-dividends deals have been on the rise due to high demand from junk bond investors. There were 14 dividend recap deals in the third quarter with six of them at leverage of 6x or more.  Institutional investing in the bond and stock markets remain closely tied to market indices.  This leads to a consistent minimum level of demand in these markets - no matter the valuation.  Though junk bonds are at historically low yield levels south of 7 percent, many investors are compelled to own the market.  This leads to opportunities such as the dividend recap issuance we are seeing today.  Sometimes "absolute" value analysis should trump its "relative" brethren.



7. Japan set to replace China as largest foreign holder of US Treasuries.  In the last year, China has dropped its holdings of US Treasuries by nearly $1 trillion while Japan continues to grow its reserves.  Where are the fearmongers who have been so concerned about China's hold on our debt?  The fact is we remain the "dirtiest sock in the drawer" with regard to quality and depth in our government bond market.  Safety seekers will continue to find Treasuries at the top end of the quality spectrum for the foreseeable future.



8. Citigroup's Vikram Pandit stepped down from the CEO position at Citigroup.  The board ousted Pandit after nearly five years at the help of the company.  Taking over is turnaround specialist Michael Corbat who has been running Citi's so-called "bad bank."  Expect more difficulty for the "big banks" as regulators continue to target them including the most recent statement by Federal Reserve Governor Daniel Tarullo to limit the size of individual banks. 

Key Indices

 Source: Bloomberg

Looking Ahead 

Next week's Fed meeting will be a "pulse-taking" session on the economy after September's QE3 (or QEternity) was announced.  I don't expect anything market-moving to result.

  I don't expect anything market-moving to result.

• Next week's economic calendar doesn't begin until Wednesday with data on home sales followed by durable goods and the first estimate of third quarter GDP later in the week.
• Earnings releases include:
  • Monday: Yahoo!
  • Tuesday: Facebook, VMware, Broadcom, Juniper Networks
  • Wednesday: EMC, Teradyne, Akamai Technologies, Zynga, Fusion-io, Symantec
  • Thursday: VeriSign, Apple, Amazon.com, Acme Packet, Expedia
  • Friday: First Solar, Aegerion Pharma
• There are no innovation sector IPOs scheduled for next week, however GlobeImmune remains "day-to-day."