With the effects of the LTRO winding down and Operation
Twist ending later this month, more stimulus is undoubtedly coming, the only question
is when. The jobs report this morning
was dismal, adding to an already weak slate of economic news. The battle over new stimulus will not only be
about whether or not we should add stimulus, but also will have a more political
bent with an election looming in November.
The Federal Reserve is supposed to be non-political, which creates
massive pressure on them not to act before the election to avoid triggering
cries political bias. The odds favor
another Fed action as the effects of prior actions fade away, the US faces a
fiscal cliff for 2013, Europe smolders, and the Fed Board now consists of a
strong majority of nominees from President Obama. Stay tuned.
Poor Mark Zuckerberg.
Within a week his company came public, making him the 2nd
wealthiest man in America, he got married, Facebook’s (FB) stock price
plummeted costing him $5 billion (on paper) and he subsequently fell out of the
top 20 wealthiest Americans. What a
week! It reminds me of a lunch I had
with Ted Turner just after Time Warner was acquired by America Online. Turner had just lost a $100 million divorce
settlement to his fourth wife, Jane Fonda; his net worth rose by $3 billion on
the buyout; and then he lost the gains when both stocks plummeted. Through it all, he had spent about $2.50 in
cash-on an Egg McMuffin. I don’t know
about Zuckerberg’s cash expenditures, although I’m imagining they were a bit
higher given he was on a honeymoon.
We have discussed the low level of treasury yields
repeatedly (the 10 year is at an all-time record low of 1.45%), but haven’t
focused on spreads for some time. The
chart below shows the collapse in the 2-10 spread since it peaked in early
2011. Typically this spread needs to
move to flat or negative to predict a recession, however, given the zero bound
of short term rates, the direction of the spread may be more important at this
time than the absolute value. If so,
then the direction of the curve is predicting a much softer economy lies
ahead.
Speaking of 10 year yields, the question begs repeating “how
low can they go?” If we use Japan as an
example, their 10-year yields touched 0.81%, the lowest since 2003. In other words, we could have a long way to
go.
May same store sales were reported yesterday, and 15 of the
21 companies we follow beat estimates.
Notable beats came from Zumiez (ZUMZ) with a 13.7% comp, TJX (TJX) with
an 8% comp, Stage Stores (SSI) and Ross Stores (ROST) also with 8% comps. Misses were reported by Nordstrom (JWN), Wet
Seal (WTSLA), and Kohls (KSS). The ICSC
Chain Store Sales comps rose 4% in May.
Q1 GDP was revised down to 1.9% from the initial release of
2.2%. Real final sales were revised up
from 1.6% to 1.7%, excluding inventory changes, vs. a 1.1% gain in Q4
2011. Lower revisions for consumption
(2.9% to 2.7%), government spending (-3.9% from -3.0%), and inventories
contributed to the reduction in GDP.
Gold suffered its worst month in 12 years in May, with the
GLD ETF (see chart below) falling 6.6% in the month. The metal is now 18.4% off its highs of last
fall, near $1510.
It’s amazing what two weeks, a soft market, and one poorly
run but very high profile IPO will do to people’s outlook. Travel website Kayak and retailer Graff
Diamonds have both postponed their IPOs, citing poor market conditions.
Financial advisors, not always the most politically savvy
bunch, are supporting Mitt Romney over President Obama in election this fall,
with 74% behind the challenger. Most of
them don’t think Romney will win, with 63% expecting the President to retain
his office.
Interestingly, the Obama campaign, which admonished negative
character assassinations in the 2008 election, has now found itself focusing
there as a way to gain ground on the challenger, who is leading in the national
polls by 4%. Both candidates are avoiding
discussing their crowning achievements in office-health care reform. At the end of the day, unless something
ground breaking comes out on either candidate personally, the state of the
economy should determine who is in office.
A weak jobs market favors Mr. Romney, a robust jobs market Mr.
Obama.
The Washington Post recently found that a mere 75.7% of
Americans aged 25-54 are working. This
represents the lowest level of working Americans in the prime working years
since 1982.
The City of Stockton, CA, which has been teetering for quite
some time, now has a new problem. The
City Council announced that they are looking at bankruptcy contingency plans
after Wells Fargo (WFC) seized the new city hall building. The city built the building for $25 million,
but has not been able to move in nor make debt payments due to fiscal
problems. This is the fourth building
seized by WFC in Stockton.
Can anyone say The Los Angeles Kings are the best team in
town?
Have a great weekend
Ned
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