History May Not Repeat, But it Certainly Rhymes

June 15, 2011

After rocking yesterday to the biggest gain in a month, equity markets are pulling back hard this morning. Why all the volatility? Blame it on the economic data I mentioned would be coming out in Monday’s note. Yesterday, retail sales posted their first negative month in 10 months, but were better than expected, declining by 0.2% vs. and expected decline of 0.5%. PPI was also reported yesterday, with the headline number rising 7.3% and the core number 2.1% vs. expectations of 6.8% and 2.1%. Today, CPI came in above expectations at 3.6% for the headline number and 1.5% for the core number. Industrial production and capacity utilization (chart below) also came in worse than expected. The Empire Manufacturing report declined to -7.8 versus expectations of 10.0. The NAHB Housing Market Index came in at 13 in June versus expectations of 16 and 16 last month.



Pandora priced its IPO this morning with a coveted single letter listing, P. Typically a single letter listing has been reserved for high profile, blue chip companies, however, the NYSE is attempting to woo tech companies to the big board by offering the coveted tickers. Zillow has filed to go public with the symbol Z, and the exchange is supposedly holding I for Intel should they migrate to the big board.

I was negative on the economics and environmental impact of ethanol subsidies in Monday’s note, and in response to my musings (just kidding), the Senate decided to vote on a measure to eliminate the subsidy yesterday. The bill failed, but obtained 34 Republican votes, a striking number given their unwillingness to eliminate tax breaks. The Congressional Research Service said the US spends about $1 trillion per year on “tax expenditures”, i.e. tax subsidies.

The Greece situation continues to deteriorate, as European officials struggle with how to structure another bailout without triggering a Greek debt default. This scenario sounds a lot like what the market faced a year ago. History may not repeat, but it certainly rhymes.

Moody’s is looking at the credit rating of BNP Paribas, Credit Agricole, and Societe Generale because of their exposure to Greece. The rating service put all three banks on ratings review.

It shouldn’t come as a surprise to anyone that our government is inefficient in handling the various programs we have tasked it with. Bureaucracies in general are efficient at enhancing their power without being especially efficient, however, the latest revelation coming from a Los Angeles Times investigation showed that the US Social Security Administration mishandled at least $8 billion in payments in 2009. Wow!

APAC markets were mixed last night after China raised its bank reserve requirement ratio again. The Shanhai fell 0.4%, the Hange Seng -0.3%, ASX 200 -0.4%, Kospi -0.4%, and Taiex -0.2%. The Nikkei rose 0.1%, NZX 0.6%, Kuala Lumpur 0.3%, and Indonesian shares rose 0.8%.

The British government is planning to “ring-fence” bank activities, in other words separate retail units from investment-banking. Not surprisingly HSBC, Royal Bank of Scotland, and Barclays have opposed the idea, saying it will reduce their capacity to lend and raise expenses. I say this is an idea which is long overdue and should be readdressed here in the US. The Gramm-Leach-Bliley act of 1999, which removed the restrictions of Glass Steagall and allowed the combination of retail and investment banking units, was one of the top contributors to the global financial crisis. While former Fed Chairman Paul Volcker has called for a repeal, officials in the US have brushed off attempts to “ring-fence” our banks. A skeptic would think that the lobbying and campaign contributions by the major banks are playing a role in keeping this common sense legislation from occurring.

Consumer discipline has been a bugaboo issue for the past 20+ years as consumer debt has risen faster than incomes. The SNL skit below highlights the thought process issues facing the American consumer. Hope you enjoy.



Jean-Claude Trichet, president of the ECB, defended the viability of the Eurozone by comparing its disparate member economies to that of the US states. What Mr. Trichet misses in the argument is that the authority backing the US Dollar, the Treasury, also has the ability to influence tax policy, whereas there is no tax policy for the ECB. The ECB must rely upon its member states to maintain fiscal discipline. The Euro is the purest form of fiat money, backed only by the good faith of its members.

In sports the College Baseball World Series begins this weekend from Omaha. If you like baseball at all, you should tune in to a few games. Great baseball and typically very exciting finishes. In the NHL, the season will finish tonight as the Canucks travel home for game 7 against the Bruins.

Have a great day

Ned