Jun 1, 2012

Get Ready for More Stimulus!

June 1, 2012

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


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