IMF Indescretions

May 16, 2011

Issues at the IMF and a weaker than expected Empire Manufacturing have equity markets opening soft this morning. The overriding concern continues to be what happens when QE2 expires in the next few weeks. Market participants appear to be lowering their risk profiles in anticipation of QE2 ending, even though the effects of the Fed’s action will remain in place as they have indicated a desire to sustain the size of their balance sheet, effectively leaving stimulus in place, albeit at a slightly lower level. Earnings reports are almost complete for the quarter as 435 constituents in the S&P 500 have reported, with 313 surprising to the upside and 114 missing EPS, slightly less than the 360/136 ratio of last quarter.

The issues I mentioned at the IMF are of your basic public official variety, where the head of the IMF, Dominique Strauss-Kahn, has been charged with attempted rape and a criminal sex act on a New York hotel maid. John Lipsky, the #2 leader in the IMF, has been tapped to lead the organization while DSK deals with the legal fallout of his alleged actions.

Flooding along the Mississippi is now at levels not seen since 1973. The river is up to 50 feet above normal in spots, and officials have begun opening flood gates to relieve pressure on the river before flood waters hit Baton Rouge or New Orleans. Scores of farms and refineries are either under water or will be soon. New Orleans is the largest port by volume in the Western Hemisphere, and a shutdown could exacerbate ongoing economic weakness.

The US government issued its annual report on Friday, and one conclusion was that Medicare would run out of money five years earlier than last year’s estimate, now 2024 vs. 2029. Social Security will run out in 2036, one year earlier than previously estimated.

Oil officials are doubting the viability of plans to increase Iraqi oil production from 2.6 million to 12 million barrels per day by 2017.

India’s wholesale price index rose to 8.7% last month, which could be a precursor for additional tightening of the country’s monetary policy.

NASDAQ and ICE dropped their $11.3 billion bid for NYSE Euronext, leaving Deutsche Boerse as the likely acquirer of the exchange.

The Treasury Department reported that China had trimmed its holdings of US government securities in March, possibly indicating reduced confidence in US markets and economic policy. Japan increased its holding slightly while Hong Kong decreased its holdings.

APAC shares were weak last night as concerns about Europe’s debt situation moved back into center stage.

If the NBA held a championship series with the Lakers or Celtics, would anyone care? We’re about to find out.

Have a great day

Ned