Thoughts From Joe - July 13, 2012

Top Eight

1. Germans oppose further bailouts.Forty-one percent of respondents are "seriously concerned" about social unrest and fifty-four percent believe it is "almost futile" to try to save the euro.  Though an unscientific poll, given the other sixteen euro countries seem to be looking to Germany, the results are certainly understandable.


2. The EU softens qualifications for Spain's most recent bailout. The deadline for Spain to improve its deficit was extended by one year to 2014 after a deal was struck to provide €100 billion to the country's banks.  "Kick of the can" number 4,312.In other news, Moody's downgraded Italy by two notches to Baa2.


3. Euro-individuals may lose money on bank investments. Much more than in the U.S., Europeans believe money is safest when kept in the bank - even today.  This perception may change if bonds sold through bank branches to retail investors experience losses as may be the case in the Spanish bailout.  A strategy of diversifying exposures has not been popular in Europe due to the perception that bank deposits are 100 percent safe.  Should this perception shift, it will be non-reversible, forever changing the financial system in Europe…for the better!


4. Three municipal bankruptcies in California over the last fortnight.Stockton, Mammoth Lakes, and now San Bernadino have opted for Chapter 9 filings.  Much of the stress from the recession has been pushed down from Federal government to state and local entities.  Hence the boom in Washington and bust in local employment. 


5. China's economy disappoints at 7.6 percent growth.  The country's slowest pace of growth in three years suffered from fewer exports to Europe, difficulty in the real estate sector, and a consumer base that is struggling to keep up.  It is truly a global economy.


6. More Fed action may come later this fall.Four Fed officials mentioned the possibility of more QE during the June meeting, but a stronger desire will be necessary before any move comes.  The prerequisites are: 1) a lower/falling stock market and 2) deflationary expectations.  Neither are here, but this could change quickly.


7. The LIBOR drama continues to play out. It seemed obvious during the liquidity crisis that LIBOR was a falsehood.  When no transactions are occurring, how can you quote a reliable rate?  For more on my view,click here.


8. Why are rates so low?  The linked post by the Federal Reserve is an excellent, short read. It came to my attention via @stlouisfed - a terrific source if you wish to learn more about the Fed.

Key Indices 

Source: Bloomberg

Looking Ahead

• Tuesday brings Ben Bernanke's testimony before the Senate Banking Committee. I'll be watching for any reference to QE3, but still don't expect it to come soon.Wednesday brings a repeat performance in front of the House Financial Services Committee.
• The economic calendar is busy next week including data on retail sales, inflation, production and the housing market.
• Earnings releases include:
  • Tuesday: Yahoo! , Intel
  • Wednesday: Abbott Laboratories, Qualcomm, eBay, F5 Networks
  • Thursday:SanDisk, AMD, Cypress Semiconductor, Microsoft, Intuitive Surgical
  • Friday: Acme Packet, Freescale Semiconductor
• IPOs on the docket include:
  • Wednesday:Durata Therapeutics
  • Thursday: Kayak Software, Palo Alto Networks