Thoughts From Joe - January 11, 2013

Top Eight 

1. The Defense Department is already cutting back in expectation we go off the "Spending Cliff" in March. Defense Secretary Leon Panetta has ordered cuts of $52 billion this year and frozen civilian hiring.  The post-fiscal cliff temperature in Washington is tepid indicating the end of urgency. 
2. Jack Lew likely to be next Treasury Secretary. President Obama has nominated the White House Chief of Staff to replace Tim Geithner who is scheduled to step down at the end of this month.  Lew is very different from Geithner signaling a shift to a less public Treasury Department that is more content with getting the daily duties done rather than making the big splash with major announcements.  This is also a good indication that the administration feels future challenges to be faced by the department will be more mundane as the economy muddles through.
3. Another round of bank settlements for mortgage activity occurred this week. Bank of America, Citigroup, JP Morgan, Wells Fargo, and five other large home lenders settled government lawsuits this week over lending practices that led to the liquidity crisis.  Cash will be used to make some borrowers whole and support mortgage activity today.  Unfortunately, the march to punish lenders has not included much clarity on how home purchases should be financed in the future.  The best we have is listed in item #5 below.
4. Money market mutual funds are now disclosing daily share prices. Perhaps representing an olive branch to the SEC, major fund families have decided to disclose the underlying NAV for their money funds - though the money funds themselves will retain a stable $1 NAV.  Additional disclosure is usually a good thing and this is another example.  However with additional information comes the responsibility to analyze it properly.  Fund health can never be broken down to a single number so it remains important to utilize market expertise when evaluating investment choices.
5. Consumer regulatory agency sets new mortgage rules for private sector lenders. The CFPB approved two ways for lenders to ensure borrowers can afford loans.  First, total debt payments cannot exceed 43 percent of pretax income.  Second, loans must qualify under Fannie Mae, Freddie Mac, or Federal Housing Administration guidelines.  In other words, if the government says you can get a loan, you are approved.  If not, tough luck.
6. Chinese IPO inactivity affecting private equity. The IPO was to be the primary exit point for private equity in the region, but IPO market challenges are leaving investments in limbo.  No one said investing in China would be easy.  This is still a learning experience, but China's dedication to integrate their financial system globally leads me to believe a long term market will exist.
7. Unemployment in the eurozone reaches another record high. Though only moving up one-tenth, November's rate of 11.8 percent is indicative continued deterioration within the currency union.  To make matters more difficult, Germany's trade unions are preparing demands for large pay increases and they are getting more traction this time around.  The fact people won't move from Spain (27 percent unemployment) to Germany (5 percent unemployment) for a job is illustrative of the underlying problem that will bring down the currency union.  Labor immobility makes monetary policy within a region ineffective.  It's very convenient to use the same currency when transacting, but attempting any guidance on economic activity under this system is a nonstarter.
8. The Federal Reserve made record profits while providing monetary stimulus.  The Treasury is due to receive nearly $90 billion or 17 percent more than last year, with profits primarily coming from increased earnings on mortgage investments.  The Fed's objectives do not include profitability, but the agency does tend to be profitable.  The economic effect of this profit is simply a reduction in overall money supply - a very tiny reduction.

Key Indices 

Source: Bloomberg

Looking Ahead 

• The upcoming economic calendar is heavy including retail sales in December and an early look at manufacturing in 2013.
• Earnings releases next week include:

o Wednesday: eBay

o Thursday: Intel Corp, Xilinx Inc.

• There is no innovation sector IPO activity expected next week.