Volatility Easing as Europe Struggles

August 17, 2011

Equity futures have a small bid this morning as volatility appears to be settling down. After spiking to 48 last week from 17 in the last week of July, the VIX has eased back near 31. From a week ago Monday (Aug 8) until this past Monday (Aug 15), the market put in a record 5 of 6 trading days with 90% of stocks moving in a single direction (up or down).

The Producer Price Index (PPI) for July rose 7.2% vs. expectations of a 7.0% increase. The core measure, ex-food and energy, rose 2.5% vs. expectations of 2.3%.

DELL reported a soft quarter last night, and the stock is weak this morning, down 8%. Founder and CEO Michael Dell is trying to sell the story that consumers need three devices-a tablet, mobile phone and PC. Based upon DELL’s results and those of Apple and other mobile device makers, it would appear that consumers are choosing two of the three.

Target posted a solid quarter, beating both EPS and sales. Revenue increased 4.6% in the quarter and guided full year EPS higher. Home Depot also posted slightly better than expected results.

As the President and a slew of candidates begin the longest run-up to an election I can remember, the #1 topics are jobs, spending, and taxes. The chart below, courtesy of the Big Picture, shows the mix of government spending on the left, and the surplus/deficit on the right as well as the accumulated deficit. Social Security and Medicare/Medicaid account for 43% of this year’s budget (FYE Sept), and 70% of tax collections. Defense accounts for 20% of total spending and 32% of collections. I’d love to know what is included in the $500 billion “other” category.

Expect news of various programs to continue coming from Europe as the economic and debt situation there continues to overwhelm the resources of the ECB and the will of the German people. Yesterday an idea was floated to add a tax on financial transactions. The difficulty in implementation is that the ECB doesn’t have taxation authority, so each jurisdiction would be required to propose and pass the tax. Last week there was an attempt to stem market pressure on the banks by restricting short-selling in their shares. Is anyone else thinking of Don Quixote?

Weak growth across the continent may finally be impacting Germany as their Q2 GDP grew only 0.1%, the lowest rate since early 2009. The ECB grew at 0.2% in the second quarter.

The corn market has taken a sudden turn as demand from China accelerates. Last month China placed a single order for 21 million bushels of corn, more than analysts had expected the country to buy in a single year. Corn prices have doubled in the past year. Ethanol production consumes roughly 1/3 of US corn production. In other commodity news, China announced that it might be short 2 million metric tons of sugar this year. Sugar for October delivery jumped 2% yesterday. Could these changes in purchasing by China signal an increase in consumer demand and possibly an easing in the demand for industrial materials?

The President has promised a “major speech” on jobs and debt reduction in September. That's what we need-more speeches. How about some substantive policy recommendations?

Speaking of the President, I have some advice for him for the 2012 election. Get off the air! I have never seen someone who makes more speeches, yet says and does nothing. Talk about over exposure! He reminds me of Robert Redford in The Candidate, who says to his campaign manager after winning a hotly contested election, "Now what?" Obama is great at running for office, just terrible at occupying it.

According to Investment News and a Spectrum Group survey, financial advisers who don’t use social media are at a disadvantage when they seek clients. The firm found that affluent investors, who were slow to adopt social networking, are catching up fast.

Texas Governor Rick Perry has become the latest entrant into the Republican Presidential Primary. The Governor made a splash yesterday by saying it would be “almost treasonous” for Federal Reserve Chairman Ben Bernanke to “print more money to boost the economy.”

I know it is a poor use of my time, but I really enjoy watching the lunacy that goes on each day in Washington. Congressman Eric Cantor, one of the lead negotiators for the Republicans in the recent debt ceiling discussions, relayed some funny (OK, not so funny) comments that came out of the negotiations. According to Mr. Cantor, at one point Nancy Pelosi said “Some people just make too much money.” Always entertaining.

Have a great day

Ned