Apr 8, 2011

Budget Impass

April 8, 2011

The big news of the day is the inability of our leaders to come up with a budget for the fiscal year ending in September, a process which should have been completed in 2010. As I mentioned last week, they are squabbling over a few billion dollars. At this moment a shutdown is scheduled for midnight tonight. I haven’t run through the math, but I’m guessing that a 2-3 week shutdown might save more than our leaders are discussing right now.

The fallout of our inability to deal with our fiscal issues is putting pressure on the dollar and bond markets, while helping commodities to rise once again. WTI crude is now trading at $111 per barrel, the yield on the 10 year treasury note has risen from 3.17% in mid-March to 3.6% today, and the Euro is up to 1.44 (chart below).

A large 7.4 magnitude aftershock hit Japan yesterday, pushing equity markets down while damage was assessed and the country waited out another tsunami warning. Fortunately there was no tsunami, damage was limited, and there was no damage to the Fukushima nuclear power facility.

Same store sales for March were stronger than expected as 18 of the 24 companies we follow posted better than expected comps. Costco led the way with a 13% jump in comps, followed by Saks at 11%. Weak comps were posted by Gap (-10%) and Stage Stores (-5%).

First quarter earnings season kicks off next week with Alcoa reporting on Monday. The Street is forecasting a 13% increase in sales , the first double digit increase since 2006.

In a well telegraphed move the ECB raised their benchmark interest rate by 25bps to 1.25% in an effort to fight inflation. The market is pricing in two more increases of 25bps each, to 1.75%, by year end. Germany’s booming economy and inflation were cited as the key reasons for the increase. Concerns about the impact on the struggling PIIGS countries (Portugal, Greece, Ireland, Italy, and Spain)may be overblown as these countries (ex-Italy) are now paying lower than market rates on their debt anyway. In addition to the ECB, China, India, Poland, and Sweden have raised interest rates this year to battle inflation.

Portugal will become the third country in the euro zone to request help from the EU. Portuguese Prime Minister Jose Socrates told authorities in Brussels that the country needs aid, something that has appeared inevitable for several weeks. "It is time to assume the responsibility to the country," Socrates said. "It is in the name of national interest that I tell the Portuguese people that we need to take this step."

PIMCO filed with the Securities and Exchange Commission for approval of its first real estate investment trust with a $600 million initial public offering. PIMCO REIT would buy commercial and residential mortgage-backed securities and other types of commercial and residential real estate debt, according to P&I.

The Curse of the Bambino appears to be alive and well, and I can’t say I’m not smiling with the Red Sox starting 0-6. They’ve ended my Angels’ season far too many times. The Yankees are traveling to Boston this weekend, and I’m hoping for a Yankee sweep.

Have a great weekend


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