Thoughts from Joe - August 17, 2012

Top Eight

1. Germans are sending mixed messages regarding euro support. On one hand, leaders are considering ceding more power to the EU and on the other, the German constitutional court still hasn't determined whether the latest EU bailout fund is constitutional.  Also, late in the week Chancellor Merkel was said to be considering easier terms on Greece to keep them in the union.Could I be wrong in assuming the German taxpayer won't provide a continuous bailout for the eurozone? No, but the timing is the real question - this could drag on for years.On one hand, leaders are considering and on the other, the German constitutional court still hasn't determined . Also, late in the week Chancellor Merkel was said to be considering to keep them in the union.
2. Companies are holding fewer euros for shorter periods of time.   As the linked article demonstrates, not only are companies becoming focused on their cash, but they are also building in pricing structures in alternative currencies to help cushion the fallout from potential turmoil.  This is the first mainstream article of this type I've seen.  But it won't be the last.
3. Eurozone GDP fell 0.2 percent in the second quarter.  It's no secret the worsening debt crisis and lack of vision to get the economy to recover is weighing heavily on activity.  What may be surprising, though, is Greece's GDP coming in 0.8 percent above expectations!  Well, it came in at -6.2 vs. expectations of -7.0 percent, anyway.
4. Standard Chartered agreed to pay $340 million in fines just eight days after being accused of money laundering.  The agency bringing the suit was the New York Department of Financial Services, an agency created just 10 months ago. Over the last several years a significant increase in regulatory agencies and the redefinition of their actions has created confusion among market participants - not just financial companies.  While this case may have merit, there are many other regulators who could have brought it just the same as this small, regional overseer.  One step toward a recovering economy is clarity in financial regulation and with Dodd-Frank less than half complete combined with activity such as this, we can see just how far from clarity we truly are.
5. Consumers are saving instead of spending, continuing the slow recovery.  Homeowners are refinancing nearly $1 trillion of mortgage debt per year, but much of the additional cash flow is going into savings or paying down existing debt.  Uncertainty not only drives business decisions, but also drives consumer decisions.
6. Facebook experiences unlock pain.  Facebook faces extensive further unlocks with total float expected to increase 280 percent after November.  In a surprising move, Mark Z. expressed some concern over the firm's stock price freefall stating it has been "painful" to watch.  A turning point in the young CEO's tenure?
7. Markets yawned at the Ryan VP pick even as political commentators went into overdrive (nearly 200 million hits on google!).  The House Budget Chairman's focus on fiscal issues has created a focus on the government's economic health that hasn't been seen in recent months.  Let's hope the fiscal focus carries into real action - by both sides - to put the fiscal cliff to bed soon.
8. The NY Fed published a study touting extensive bond defaults not accounted for by ratings agencies.  They found 2,521 muni bond defaults have occurred since 1970, but an overwhelming majority were in nonrated issues.  This actually makes a lot of sense - the simple act of obtaining a rating indicates some level of creditworthiness. But it's weird how this story implies the ratings agencies were unaware of the unrated defaults.  They weren't unaware, they just don't view unrated bonds as part of their universe.

Key Indices

Source: Bloomberg

Looking Ahead

 Economic information next week includes the minutes from the recent FOMC meeting as well as home sales.  Both will be analyzed to confirm whether market perceptions are true: more QE from the Fed and a stabilized housing sector.  Of course, both are also potentially in conflict.

  Both will be analyzed to confirm whether market perceptions are true: more QE from the Fed and a stabilized housing sector.  Of course, both are also potentially in conflict.

• Earnings releases include:
  • Tuesday: Medtronic, Dell
  • Wednesday: Kayak Software
  • Thursday: Salesforce.com, Aruba Networks
• There are no innovation-oriented IPOs expected next week.
• Trulia filed an S-1 last week.