Thoughts from Joe - September 14, 2012

The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates.

Top Eight

1. The Fed went all out this week with an open-ended QE3, extension of the low rate language, and continuation of "Operation Twist." The Fed has now provided more non-traditional easing than most anyone has requested. Will it work? Probably a more relevant question is, once we realize it doesn't work, will the debate shift to what Congress should do, or will we simply continue discussing more of the same?
   
   
2. Private-equity buyouts on track to reach highest total since 2007 - but there's a catch. About $28 billion in deals have been announced in the U.S. this year which puts us on track to top 2007's $51.1 billion, according to Dealogic. But many of these deals are being done with private equity shops on both sides of the transaction. One reason could be uncertainty around the capital gains tax in 2013 - better to lock in gains today at the lower rate than risk a 20 percentage point increase in taxes. This is just one way current uncertainty coming out of Congress is affecting how business gets done.
   
   
3. Moody's raises specter of possible U.S. government rating cut. The ratings agency is looking for solutions in 2013 that produce stabilization and then a downward trend in debt-to-GDP in order to retain its Aaa status. Given S&P's downgrade of the U.S. 13 months ago, investors have had plenty of time to adjust to a "non-AAA United States" world. Markets have proven that even post-downgrade, the U.S. remains the "least dirty sock in the drawer."
   
   
4. Chinese economic slowdown is something to watch closely. Industrial output grew a still-impressive 8.9 percent, but registered the slowest growth rate since May 2009. Chinese economic activity is inherently difficult to measure and many distrust the official government statistics. One recent analysis suggested an overbought real estate market in much worse shape than the U.S. in 2008. The fact is China has produced the world's goods for many years and now that the consumers are taking some time off, the country is and should be struggling. Will the government's central planning help navigate the country to the other side (whenever that comes) or will dislocations grow unchecked, and perhaps even unnoticed until a reversal (bubble-popping) becomes inevitable?
   
   
5. Household income falls to 1995 level, adjusted for inflation. Median household income fell to $50,054 in 2011 according to the Census Bureau. The consumer continues to hurt, primarily due to the job market, but also the housing sector. On the other hand, our culture of consumerism continues as displayed by the hype around this week's iPhone announcement.
   
   
6. Industrial production fell by the largest amount since the height of the crisis in 2009. The 1.2 percent drop in August resulted from across-the-board drops in manufacturing, industrial and utility output. On a longer term basis, manufacturing has been trending up for three years. Here's hoping this is data point is a one-off event.
   
   
7. Germany's top constitutional court rejected efforts to block the euro area's latest bailout fund. In a decision that was widely expected, but still offered a boost to markets, the court ruled the ESM bailout facility as constitutional under German law as long as it includes binding rules that won't force Germany to provide unlimited funds. In other words, every bailout dollar will still have to be approved by Germany going forward - as it should since they are the primary source of bailout funds. In other news, Denmark decided not to join the euro currency union for now. Gee, I wonder why?!
   
   
8. Old jokes about Greece selling the Parthenon are not so funny anymore. Foreign-based lenders to Greece have rejected the latest proposed austerity package as not providing a clear path toward debt payment. As part of a plan to address their financial situation, Greece has announced it will lease up to 40 uninhabited islands for as long as 50 years to developers who would create high-end tourist resorts.

Key Indices

Source: Bloomberg

Looking Ahead

• There will be a break in economic data next week - which is usual for mid-month - but we will get some important data on housing and factory sector.
• A lot of Fed governors are speaking next week which should provide some additional information around the QE3 decision this week. We know Jeffrey Lacker from the Richmond Fed has refused to go along with the idea of additional stimulus for some time. His Tuesday speech on "Maximum Employment and Monetary Policy" should be quite interesting.
• Earnings releases include:
  • Wednesday: Adobe Systems
  • Thursday: TIBCO Software
• Innovation sector IPOs scheduled for next week include: GlobeImmune and Trulia on Wednesday.