Thoughts From Joe - October 26, 2012

Top Eight

1. The U.S. government is suing Bank of America over mortgages sold to Fannie and Freddie.  In a follow-up (not likely the last) to the suit filed against Wells Fargo two weeks ago, the U.S. government is seeking at least $1 billion of restitution in connection with loans underwritten by Countrywide which was subsequently purchased by Bank of America.  Our economic mess began with the total annihilation of the mortgage finance industry.  Instead of discussing how to rebuild the world of housing finance, we continue to sue the major players, driving them away from this market.  The economy cannot recover without a stable source of funding for home purchases which remains in our distant future.



2. Earnings season continues recent trend downward.  Troubles in Europe and the "fiscal cliff" seem to be the most widely-sited reasons for disappointing reports on both the top- and bottom-line reports.  The world economy remains near recession as consumers go on strike, governments fear default, and investors fight central bank efforts to push them out the risk curve.



3. The ECB's Mario Draghi made a plea to the German parliament to give him control of the region's banks.  By consolidating the bank regulatory authority in Europe, the ECB hopes to strengthen the financial industry and loosen de facto capital restriction in the region.  Though Germany is just one of the 17 parliaments that need to be convinced, they are by far the most important.  At this point regarding regulatory and bailout positions, as goes Germany, so goes the rest of the eurozone.  In a related story, the former Prime Minister of Italy wassentenced for tax fraud.  Even European leaders, it seems, don't pay their taxes!



4. A group of CEOs call for deficit action in Washington.  More than 80 CEOs of large companies are encouraging agreement during the upcoming lame duck period to push forward on fiscal responsibility.  CEOs have to live fiscally responsible.  It's a new concept in Washington.



5. Orders for durable goods rose in September, and third quarter GDP came in stronger than expected.  Much of the increase was due to aircraft orders, which were previously reported and discounted by the market.  Similarly, strong growth in GDP was driven by an increase in government expenditures.



6. Greece gets further reprieve.  Creditors - meaning the IMF and the ECB - agreed to provide another 2 years of leeway prior to enforcing budget targets.  If Greece goes down, the dominos will tumble.  This will not be allowed until Germany realizes it is more costly to maintain the eurozone than to kill it.



7. Foreign direct investment into China overtakes same in the United States.  During the first half of the year, about $59 billion flowed into China versus just $57 billion into the U.S.  Make no mistake about it, China's growth is irreversible over the long term.  As another 600 million or so people enter the business economy the world's economic engine of strength will shift from the U.S. to China.  But the road is very long and potentially quite bumpy.  Think decades, not years. 



8.  The Federal Reserve's Open Market Committee met this week with little takeaway aside from continuing to monitor the situation.  

Key Indices

Source: Bloomberg

Looking Ahead

• Next week's economic calendar includes data on income and spending, consumer confidence and rounds out the week with the employment report.
• Earnings releases include:
  • Tuesday: Pfizer, JDS Uniphase, TripAdvisor, Equinix
  • Wednesday: First Solar, Exelon,
  • Thursday: WebMD, OpenTable, Yelp, LinkedIn
  • Friday: Threshold Pharma,
• Upcoming innovation sector IPOs include:
  • Singulex - Thursday, November 1 ($74mm)
  • GlobeImmune - "day-to-day"