Thoughts from Joe - August 3, 2012

Top Eight

1. Home prices rise in all 20 cities of the Case-Shiller Index. In fact, the index rose at a record monthly rate of 2.2 percent in May, though the index remains in the red over the last twelve months.  Not only do consumers depend on a recovering housing market but so do small businesses. Many typical non-VC backed startups have historically been funded by home equity and now that capital is not available.  A housing price recovery is truly needed to get back to consistent growth.
2. Europe remains in high debate about sovereign debt purchases. German Chancellor Angela Merkel is losing coalition members in her stand against further ECB debt purchases to keep interest costs down for weaker nations in the eurozone.  But is she aligned with the German people?  I think so, and I think the bureaucrats are going to lose on this issue leaving "eurozone unity" to become the next great oxymoron.
3. Jobs in the U.S. grow, but not by much.The 163,000 new jobs just edged out the 125,000 jobs needed each month to simply keep pace with labor force growth and the unemployment rate rose slightly to 8.3 percent.  Some good news:  The rebound in job growth from sub 90k levels helps eat into the jobs problem.  Any net growth is good news!
4. Small banks lobby to extend unlimited deposit insurance beyond 12/31/12. At issue is the Transaction Account Guarantee that was put in place during the liquidity crisis to provide unlimited insurance for noninterest bearing accounts.  The problem is this guarantee is just another reason to keep money on the sidelines rather than circulating through the economy. These are the "unintended consequences" so many were concerned with in 2008 when such powerful regulatory programs were coming out weekly.
5. Fannie/Freddie's regulator disallows principal forgiveness, favoring taxpayers.  Ed DeMarco, who heads the FHFA, which is overseeing both Fannie and Freddie in conservatorship, declared taxpayers would be hurt overall by the proposed plan of principal forgiveness for certain mortgagees.  DeMarco has done an excellent job of protecting taxpayers, which is his job as conservator.  But he has also said many times that if the government wants Fannie and Freddie to foot the bill for bailing out borrowers, the power lies within Congress and the Executive Branch.  In other words, DeMarco will be no one's scapegoat.  Good for him!
6. U.S. dollar inflows doubled to $157 billion in first six months of the year.  The Fed is getting a boost from additional inflows as these dollars have to be placed somewhere. The money supply has increased an incredible 33 percent since 2008 but there remain few signs the economy is on lift off.  The fact is, the Fed's money supply tinkering is not going to drive the economy. Only clarity out of Washington on financial regulation, fiscal policy, health insurance, etc. will allow business managers to make appropriate long-term financial decisions.
7. Treasury plans to sell floating rate obligations.  Corporations have been issuing floaters for a number of years, but recently issuance has tailed off.  Shouldn't the government issue floaters when the option for lower coupons is at least a possibility?
8. The Fed decided to do nothing this week.  Though QE3 was a possibility, the Fed decided to delay any additional stimulus at this time.  The next FOMC meeting is September 13 - will the Fed move during the height of the election season?  It's possible!

Key Indices

Source: Bloomberg

Looking Ahead

• Economic releases next week are not of much importance.  Some additional information on second quarter growth will be released but is not expected to be market-moving.
• Earnings releases include:  
• Monday:  Broadsoft, Alnylam Pharma, Halozyme Therapeutics
• Tuesday: Orexigen Therapeutics, Sarepta Therapeutics, Anthera Pharmaceuticals, Rackspace
• Wednesday:  Savient Pharmaceuticals, Nuance Communications
• Thursday:  NVIDIA, Arena Pharmaceuticals, Fusion-io, Amylin Pharmaceuticals
• Friday: Horizon Pharma
• IPOs expected next week include Stemline Therapeutics (delayed from this week) and Peregrine Semiconductor.