Oct 3, 2011

Go Lions!

October 3, 2011

If it’s Monday then Greece must be in the news, or at least Detroit. Greek officials issued an official acknowledgement that they will miss their deficit targets this year. The government will proceed with plans to cut thousands of public sector jobs to qualify for additional foreign funds. The cuts are expected to save $8.8 billion and bring the 2012 deficit down to 6.8% of GDP. Eventually this game will have to end and they will default, and most market participants are hoping this happens sooner rather than later to help contain the crisis.

The ISM Manufacturing index came in at 51.6 this morning vs. expectations of 50.5 and last month’s 50.6. Remember that this is a diffusion index, anything above 50 indicates expansion. Constructing spending rose 1.4% month over month vs. expectations of a slight decline and last month’s 1.4% decline.

Speaking of a crisis, CDS on Morgan Stanley have spiked to 490 from 157 on July 1st. The Bloomberg graph below shows Morgan Stanley’s CDS (yellow) vs. Wells Fargo (white), Bank of America (orange), Goldman Sachs (pink), and an average of the sector (blue). The higher price on these instruments represents an increasing level of concern about Morgan’s ongoing viability. With the exception of the fall of 2008, CDS for Morgan are at all-time highs.

The increase in concerns about liquidity and viability is not restricted to the US financial services sector. Spreads are increasing globally and liquidity is getting tighter. If another liquidity squeeze were to occur, it would be more global in nature as opposed to 2008, when it was primarily a Western problem.

The US Senate is expected to vote on a bill that would attempt to push China to allow the yuan to appreciate. I’m not sure how much leverage we have over our largest creditor, nor whether it would help our competitive position or just hurt that of the Chinese vis a vis Vietnam and other low cost producers.

The Economist is reporting this morning that the Bank of England is preparing for another round of quantitative easing. Rising unemployment and a stagnating economy are putting pressure on the bank to act.

APAC markets were weak last night with the Hang Seng dropping 4.4%, Nikkei 1.8%, and ASX 200 2.8%.

The long delayed Keystone XL pipeline doesn’t appear any closer to obtaining approval than it was at the beginning of the year, in spite of an environmental impact report showing there would be no negative impact to the environment. The approval has been caught up in ideological red-tape despite the significant economic impact of the pipeline. Estimates have ranged from 90-120K high paying union jobs being created by the pipeline construction and operation, a number which includes jobs required to support the new workforce. The estimated impact on the price of domestic gasoline is a decline of $.50-$.75 per gallon, which would equate to an additional $100 billion plus back to consumers in the form of lower costs.

The recently ended third quarter was the worst since 2008, with the S&P 500 declining by 14%. The market has been down the past five consecutive months. The Russell 2000 declined by 22% in the quarter and is down 18% for the year. Across the globe performance was even worse, with Russian down by 34%, Italy and Germany 32%, France 31%, Brazil 29%, and China 28%. Japan was only down 9% in the quarter, and was the best performing major market.

I mentioned Detroit earlier, and this beleaguered town is finally getting some good news. Detroit is the only major city in the US to suffer a significant net population outflow over the past decade due to a horrible economy, rampant crime, plummeting property values, and soaring taxes. Now, just when there doesn’t seem to be any relief on the horizon, the Lions have opened the season 4-0. I haven’t checked, but I don’t think I’m out too far on a limb in saying that this is the first time ever the Lions have opened 4-0. Additionally, the Tigers won the AL Central and are in the playoffs against the Yankees, with the series tied at 1-1.

Have a great day


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