Thoughts from Joe - August 10, 2012

Top Eight 

1. Bank loans are available if demand increases.  July's monthly loan survey conducted by the Fed showed a recent pickup in demand and a continued easing of lending standards for large and middle-market companies.  This story is true across the board except in mortgage loans which still must fit requirements for government support.  Because there is no regulatory clarity for banks in this sector, fewer than 10 percent of new mortgages are created independent of government-blessed guidelines.
2.  S&P downgrade of U.S. Treasury looks like a dud, one year later.  Demand for Treasuries only grew in magnitude after S&P cut the government's rating to AA+, providing further indication of either : a) how useless rating agencies truly are, or b) how perverted today's markets truly are.  I believe it is some of both.
3.  The "fiscal cliff" is already here.  According to a recent survey, 40 percent of companies say current massive fiscal uncertainty is a major reason for their spending restraint.  In 2008, the housing market crashed and Congress did not react.  Instead, there was an extended focus on healthcare followed by financial sector reform that specifically excluded housing finance.  Last year, Congress created the "super committee" to address our fiscal issues.  It failed and now we face the "fiscal cliff."  Since 2008, there has been tremendous growth in the D.C. area and, in short, this downturn is not real there.  When will our representatives understand the economic importance of their actions?
4. How NOT to borrow $100 million.  The Poway Unified School District borrowed $105 million and total payments - which don't begin for 20 years - will total north of $1 billion.  Another example of avoiding today's pain at a much greater expense in the future.  Irresponsible doesn't begin to describe this deal.
5. Job openings are their highest since 2008.  According to the latest JOLTS survey from the Labor Department, there are 3.76 million job openings today, continuing a stable growth trend.  Finally, some good news!  Actually, the overall economy has been growing in a stable, but low level since 2009.  This "new normal" still feels temporary even after three years of slower growth.  Why?  Because of the cash on the sidelines, the underlying strength of the labor force, and the desire for more activity from all components - labor, consumer, business, and government.  Unfortunately, the regulatory uncertainty we continue to slog through is holding back both the consumer and business.
6. Second quarter productivity growth was 1.5 percent and could indicate weaker employment.  Output rose 2 percent while hours worked increased a slight 0.4 percent as companies produced more with fewer resources.  The recent slowdown in productivity is consistent with a recovering economy, but the question remains: Do companies see enough demand growth to justify a hiring binge?  Not yet.
7. Industrial production in Germany - a primary driver of their economy - fell 0.9 percent in June indicating a recession is on hand.  In addition, business surveys show expectations for further braking on the economy in coming months.  Given the slow economy and negative outlook, imagine German taxpayer response to bailing out pensions in Spain, Italy, etc.  The German support for the eurozonecannot survive another recession.
8. Stock dividends are becoming the rage.  As the linked article points out, there are more S&P 500 companies paying a dividend now (402) than any time since the dot com bubble.  Many individuals are viewing dividend stocks as substitutes for fixed income.  But beware as price fluctuations can easily outweigh any expected income.

Key Indices

Source: Bloomberg

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