Buongiorno!

July 11, 2011

“I could end the deficit in 5 minutes. You just pass a law that says that anytime there is a deficit of more than 3% of GDP all sitting members of congress are ineligible for reelection.”-Warren Buffet

Futures are down hard this morning and bonds are rallying as the focus in Europe shifts from Greece to Italy. Italian and Spanish bonds both fell today, pushing borrowing costs relative to bunds to euro-era records. Meanwhile, the discussions about Greece are still evolving, and now a partial default is being considered.

Earnings season kicks off tonight with Alcoa reporting after the close. The aluminum giant’s earnings release typically marks the beginning of earnings season. The street is looking for a 180% improvement in EPS this quarter vs. last year.

There has been quite a bit of discussion about ending the Euro, especially coming from the German populace. However, both Germany and France like the Euro because, without it, the D-Mark and the Franc would be much higher vs. other global currencies, thereby weakening their exports and output. The exact opposite may be said for the peripheral economies that would otherwise have weak currencies, such as Greece and Italy. So the PIIGs have much more negotiating leverage than is generally acknowledged. It’s a tightrope for both sides as the stronger players are in a weaker than perceived position and vice-versa.

The NY Times is reporting that government benefits accounted for 20% of American’s 2010 incomes. Many of those payments are set to expire this year. Moody’s is estimating that $37 billion could come out of the US economy this year due to the expiration of benefit plans.

The Economist analyzed every “successful” IMF rescue and found that the common thread was a combination of spending cuts and taxes. They found that the maximum amount of spending cuts as a percentage of deficit reduction was 83%, with the remainder constituting tax increases. Personally, I'm trying to remember a successful IMF bailout, however, assuming they exist, I doubt there are enough data points to use that 83% figure as a baseline for future deals.

Demonstrating that sound tax, spending, energy and regulatory policies can lead to stable economic growth, Canada’s economy created twice as many jobs as expected in June.

Food prices in China continue to surge, hitting a new three-year high. Inflation rose 6.4% last month, compared to an increase of 5.5% a year ago. Food prices were up 14.4% from last year.

After spiking in the first quarter, cotton pricing has collapsed. The chart below shows the dramatic, near 50% fall in cotton since February.

Derek Jeter picked up his 3000^th hit over the weekend in dramatic fashion, hitting a home-run. The overall ERA in the MLB so far this year is the lowest (3.95) since 1992. Some are attributing the reduced run production to the end of the “steroid era.” The US Women’s team won an amazing game in PK’s vs. the Brazilians, 3-2. They move on to the semi-finals of the World Cup. As regular readers know, I am not a fan of THE Ohio State. I smiled a bit over the weekend as they chose to vacate all of their 2010 victories and the 2011 Sugar Bowl for using ineligible players. It is obviously a desperate attempt to avoid losing scholarships, bowl appearances, and television money in the future.

Have a great day

Ned