Mid Year Summary-2012

The first half of 2012 was a wild one, with domestic markets soaring in the first quarter, taking a hard dive early in the second quarter, and then closing with one of the strongest June performances in years. Contradicting most estimates, the S&P 500 (chart below) out performed bonds and commodities in the first half of the year, rising 8.6%.  The stock market gains haven't helped consumers as consumer confidence and spending for June fell to their lowest levels of the year.  Unemployment claims have been rising and are back near the highest levels of the year. 

In spite of a weakening economy, US stocks have been routinely assigned the dubious label of "best nag in the glue factory" as other major economies are fading much faster than the US.  Europe is obviously a disaster, but the Chinese are suffering after tight monetary policy and inflation combined with the major slowdown in Europe to slow their economy more than officials had hoped.  Additionally, China's biggest competitive advantage-people-have become more expensive.  Not to buy, but for labor.  China's export machine grew on the backs of low-cost labor.  As capitalism (and access to the internet) spread, workers demanded better wages to afford the better life being promised.  Over the past eight years the government has mandated significant wage increases on manufacturers, deteriorating the country's labor cost advantage, pushing many to move to lower cost markets or in some cases back to the US.  Combined with slow exports to Europe, the weak labor market has put pressure on growth in China.  Factory output in June grew at its slowest rate since November 2011, with the PMI of 50.2 barely in the growth range. 

Obamacare is front stage once again, right where the President doesn't want it to be in an election year.  The President spent all of his political capital in 2010 getting the healthcare act passed, and has spent the past two years pretending it didn't exist.  The Supreme Court ruled the act unconstitutional last week under the commerce clause-which effectively means Congress can't force consumers to participate in health care plans.  This is a key component of the plan.  The bigger headline went to the Court's affirmation of Congress' ability to levy taxes.  Remember that Obama spent a lot of time explaining that taking money from people and adding it to the government coffers wasn't a tax?  The Supreme Court clarified that it indeed is a tax.  More taxes, that should help the unemployment rate. 

As usual, consumers and businesses will lose on the health care ruling.  Businesses now face certain increases in benefit costs, and an estimated 20 million consumers may lose their health care coverage as businesses opt for the cheaper government plan.  Create a new entitlement program we can't afford, tax the hell out of businesses so they can't hire new employees, push 20 million people off private insurance onto the government dole, all to add 10 million uninsured to the ranks of the insured.  That makes sense-in Washington DC and Oz. 

Wal-Mart (WMT) celebrates 50 years of business this week.  The company's stock, which had languished for years, recently has moved to new highs (see chart below).  The catalyst to the stock jump?  Well, fundamentals are certainly solid as higher end consumers trade down to the bargain basement prices at WMT.  Additionally, the jump in the stock price seems to coincide with the Mexican bribery investigation.  Um, whoops.

Amazing as this might sound, college football has finally taken its first step towards sanity.  While every team sport in the world conducts a playoff, college football's top division has refused to comply, instead engaging in a year end menagerie more akin to gymnastics judging than a major team sport.  Finally it appears that we will see the beginning of a playoff system, even though it will only include four teams initially.  How they are chosen, where they will play, and who will choose them is still undecided, but the steps are being made.  The absurdity of the arguments against the playoff are similar to the double-speak used in the famous book Catch 22. Maybe we'll get a true playoff system-my hope is it happens before the Social Security system goes bankrupt!  The clock is ticking. 

Have a great week

Ned