May 29, 2012

Consumer Confidence Waning

Stocks and commodities are both finding a bid this morning after the Case-Shiller home price index fell at a slower pace than expected, declining by 2% in the first quarter vs. expectations of a 3% decline.  Warmer than normal weather helped drive better than expected sales across the country’s snow belt.  For March, prices declined by 2.6% after a 3.5% decline in February.  May consumer confidence missed expectations this morning massively, coming in at 64.9 vs. expectations of 69.2. 

Moody’s Investor Services has issued a report on Europe suggesting that 25% of leveraged buyout firms with debt maturing before the end of 2015 could default.  Moody’s feels that the refinancing risk “remains large and worrisome given our expectations of protracted macroeconomic weakness combined with the weak average credit quality” of the issuers.  The net is that it’s still difficult to find yield.

The Wall Street Journal is reporting that the two largest beneficiaries of the overall weakness in Europe have been US Treasuries (see chart below) and German bonds.  The article noted there is a shortage of safe investment options.  I’m hoping that was an observation and not a new realization.

APAC markets were strong last night in anticipation of China’s central bank taking measures to boost growth.  The country managed their growth better than most through the downturn, however, weakness in Europe combined with restrictive capital conditions have pushed the economy towards a significant slowdown.  Vietnam’s VN Index has outperformed all global equity markets except two after the government decided to cut interest rates earlier this year from three year highs.  It seems that investing where there is stimulus is profitable everywhere, not just the US. 

Jobless benefits will be cut next month for 70K Americans, most of which are among the long-term unemployed.  Government reductions are affecting these individuals sooner than expected. 

It appears that weakness in the European periphery countries may help Germany achieve what it has been unable to accomplish in hundreds of years of wars: dominance of Europe.  The Economist is calling for a form of federalism and centralized bank supervision combined with mutualization of all of the region’s debt.  “The euro zone’s problem is not the debt’s size, but its fragmented structure.  Taken as a whole, the stock of euro zone public debt is 87% of GDP, compared with over 100% in America.”  In other words, Germany is under levered, and the article suggests they should take on the obligations of the rest of the continent in exchange for control over the finances of these countries.  Sixty-seven years after the end of WWII, this thought has some on the continent concerned. 

A recent IMF report has found that while profits in the US are soaring, the increase hasn’t benefited wages yet.  The study found that the only developed countries where workers have fared worse than in the US are Greece and Spain-dubious company indeed. 

Auto sales in the US have been strong for the past nine months, but recently have been slowing.  Sales for May are up mid-single digits, solid growth but well below the double digit gains we have been seeing for the majority of 2012. 

Memorial Day weekend marked the beginning of summer.  For our local sports teams, the Kings are still going, facing the Devils in the Stanley Cup Finals.  The Lakers and Clippers both were knocked out in the second round of the playoffs.  Clipper fans are thrilled with the showing and are looking forward to next year while Laker fans are disgusted and wondering how the rebuilding will occur.  The Dodgers still have the best record in baseball, leading the Giants by 6.5 games.  The Angels have won seven in a row, and have pulled up to .500. 

Have a great day


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