Shreds & Threads 7.8.2012

Shreds & Threads

WSJ:Weak Labor Report Fans Fears: Ben Casselman

“We had confirmation of what all of the other economic indicators have been signaling for some time, and that is a marked deceleration of the U.S. economy,” said Paul O’Keefe, director of economic research for the consulting firm J.H. Cohn and a former Labor Department official. “This is not an outlier month. We’ve seen a deceleration in job growth since the beginning of the year.”

Nearly 3.8 million Americans—28.5% of all job-seekers—have been out of work for at least a year. The average unemployed worker has been looking for close to nine months, down slightly in the past couple months but up from a year ago.

“Firms are just being very cautious about taking on permanent, full-time employees,” said Nigel Gault, chief U.S. economist for IHS Global Insight. “Where they can make do by adding more hours or adding temps, they’re doing it. They’re reluctant to commit.”

More than eight million Americans are working part-time because they can’t find a full-time job, up by more than half a million since March. Overall, close to a million more people are working part-time than in March, while the number of full-time workers has fallen by more than 700,000. Self-employment in unincorporated businesses—mostly contract employees and freelancers—is up 381,000 since March.

“There’s just nowhere on the domestic side where you can find some source of demand powerful enough to carry us forward at a rapid pace,” said Nigel Gault, chief U.S. economist for the research firm IHS Global Insight.

WSJ: Weak Report Lifts Chance of Fed Action: JON HILSENRATH

“If we get some kind of major global disturbance or some kind of problem here in the U.S. and the growth outlook deteriorates sharply, then I think more action could be warranted,” James Bullard, a Fed hawk, said in an interview last month.

“I am more leaning toward the view further action would be a response to deteriorating conditions and a deteriorating outlook,” Atlanta Fed president Dennis Lockhart said in an interview with Dow Jones Newswires last month.

Mr. Bernanke could lay down his own markers when he testifies before the Senate and House July 17 and 18 to present the Fed’s outlook for growth, unemployment and monetary policy. The Fed’s next policy meeting is July 31 and August 1.

Another key decision point for the Fed is a policy meeting Sept. 12 and 13, when officials will update their economic forecasts and Mr. Bernanke will hold his next news conference.

Mr. Bernanke has made clear he believes Fed policies can boost growth. “Monetary policy still does have some capacity to strengthen the economy by easing financial conditions,” he said at his news conference.

WSJ: Doubts Emerge in Bloc’s Rescue Deal: MATINA STEVIS

Euro-zone countries would still have to guarantee the loans their banks receive from the region’s permanent bailout fund, the European Stability Mechanism, even if it directly recapitalizes them, a senior European Union official with direct knowledge of the situation said.

“I need to make clear what the ESM can do: The ESM is able… to take an equity share in a bank. But only against full guarantee by the sovereign concerned,” the official said. He added that while the member state’s guarantee wouldn’t directly show on the government’s official debt burden, the loan “remains the risk of the sovereign.”

The official also said a second supposed breakthrough of the leaders’ summit, the creation of a central euro-area banks supervisor involving the European Central Bank, won’t be up and running before the second half of 2013.

Only once it is established will the direct bank recapitalizations even be possible. As a result of the delay, the official said it was highly unlikely that Spain’s bailout would come from the ESM. Instead, it will likely be paid out from the transitional bailout fund, the European Financial Stability Facility, which requires all decisions to be made by unanimity.

WSJ: Greece to Quicken Selling Off State Firms: ALKMAN GRANITSAS And STELIOS BOURAS

Greece’s newly elected prime minister said he would ramp up privatizations, close down dozens of state agencies and overhaul the country’s dysfunctional public sector. But he drew the line at further wage and pension cuts, as he tried to balance the conflicting demands of the country’s skeptical creditors and a restive, crisis-weary public.

“We are determined to achieve them, but in order for us to achieve them, we have to stop the recession,” Mr. Samaras told Parliament. “We will do that which we have to do…and show that we mean what we say.”

To date, Greece has failed to live up to commitments to shrink its bloated public sector, to sell off state assets, to recapitalize its banks, to overhaul its tax code and to detail some €11.5 billion ($14.2 billion) of spending cuts for the next two years.

WSJ: Fifty Years Later, a New Chance for Reconciliation: WILLIAM BOSTON And SUSANN KREUTZMANN

German Chancellor Angela Merkel and French President François Hollande will meet in Notre-Dame de Reims cathedral to celebrate half a century of friendship in a French region deeply scarred by centuries of war with Germany.

The leaders of France and Germany return to the birthplace of their countries’ postwar reconciliation Sunday to commemorate the event, a meeting that could also ease more recent tensions over how to stem the euro-zone debt crisis.

Guntram Wolff, deputy director of Bruegel, a think tank based in Brussels. “The euro will only work if France and Germany pull in the same direction.”

“Everyone should have realized by now that allowing Merkel to walk away from a summit looking like the loser is not good for Europe and it gives rise to populism in Germany,” Mr. Wolff says.

Barron’s: Up and Down Wall Street: ALAN ABELSON

what that legendary investor Gerald Loeb felt about the utility of stock analysts — in a bull market you don’t need them; in a bear market you don’t want them.

Dave Rosenberg, the chief market and economy watcher for Gluskin Sheff, who is largely free of the sins of economists adumbrated in the opening paragraphs of this screed, points out that in the 36th month of an expansion, payrolls typically add something like 240,000 slots, or three times as many as this wobbly recovery added in June.

The length of involuntary idleness averaged 39.9 weeks in June, the most since February.

But as MacroMavens Stephanie Pomboy comments, the fourth month in a row of disappointing payrolls emphasizes the likelihood that seasonal factors and weather distortions have been sending out false signals about the economy’s strength. Which fits in with her notion that in a deleveraging environment, “spurts of stronger data are the exception not the rule.”

Stephanie also warns that “with the fiscal cliff drawing nearer by the day,” the post-bubble reluctance by Corporate America to hire and expand isn’t likely to change for the better anytime soon. That’s what we like about Stephanie: You can always rely on her to see the bright side of things.

Less than encouraging, too, is that U6, which encompasses the underemployed as well as the unemployed, inched up to 14.9% in June, the highest level since February.

Barron’s: Droughts and Derechos: Extreme Weather Watch: ROBIN GOLDWYN BLUMENTHAL

“We will have wacky weather, but probably not the same wacky weather,” says weather guru Evelyn Browning-Garriss, owner and author of the monthly climate publication Browning newsletter. “There’s no chance to recover from extreme to extreme, which is typically very hard for agriculture.” She says that 72% of the U.S. is experiencing dry or drought conditions.

Historically, there is at least a year between these weather phenomena, Browning-Garriss says. But with the tropical Pacific Ocean flipping from extreme cold to extreme heat, any cool front that comes from the north could create some intense storms in areas of the Midwest that have been experiencing record high temperatures, she says. “When those two air masses meet, it’s like a car crash.”

Although she doesn’t necessarily see another “derecho,” or land hurricane, which hit parts of the Northeast hard last weekend, when it’s this hot, storms, when they start, are “spectacular.”

Barron’s: Rate Cuts ‘Round the World

In a sign of growing concern about the global economy, China, the European Central Bank, and the Bank of England cut interest rates, although the actions weren’t deemed to have been coordinated. In a surprise move, Beijing eased its lending rate to 6%, a month after another unexpected cut. The ECB cut rates to a record low 0.75%, but avoided resuming its government bond program. And the Bank of England said it would buy $78 billion of assets. German two-year yields went negative, but Spanish 10-year yields surpassed 7%.

Barron’s: The Trader: SANDRA WARD

“The path to profits has been through productivity gains,” says Donald Rissmiller, chief economist at Strategas Research Partners, an investment research firm in Manhattan, noting that profit growth has slowed and profit margins are under pressure. “If we can’t get productivity up, that’s a problem. The U.S. economy doesn’t behave well at a stalled speed. That’s the risk to the market: What does muddle-through growth do to profits?”

Investors tuned into Netflix (NFLX) in a big way, pushing the stock up almost 20% for the week, to $81.89—a level not reached since early May. The subscription-based provider of television shows and films via the Internet and DVDs gained attention after its chief executive, Reed Hastings, boasted on his Facebook page on July 3 that Netflix subscribers streamed one billion hours of video in June, a new record for the service. At that level, Netflix qualifies as the most-watched channel in either broadcast or cable television in the U.S., according to analyst Richard Greenfield of BTIG. Citigroup Internet analyst Mark Mahaney on Monday reiterated a Buy on Netflix and affirmed his $130 price target on the shares. The stock was the top performer in the S&P 500 for the week.

Barron’s: The Striking Price: STEPHEN SOLAKA

Benjamin Graham, the father of value investing, famously remarked that the stock market is a voting machine in the short run and a weighing machine in the long run.

Barron’s: Current Yield: MICHAEL ANEIRO

Fortunately for Treasury investors, all of this macroeconomic malaise added up to yet another banner week for safe-harbor government bonds. In Europe, yields on German two-year notes fell into negative territory, meaning investors are effectively paying the German government to borrow their money. On the home front, 10-year Treasury yields fell to 1.549%, from 1.648% last week, while yields on 30-year bonds fell to 2.663% from 2.755% last Friday.

As usual, peripheral Europe was there to further undermine confidence. Spanish 10-year bond yields rose above the key 7% mark again, and yields on equivalent Italian bonds rose above 6%, as the latest round of euro-zone stimulus and austerity measures failed to convince skeptical markets that the currency bloc’s problems are under control.

Last week Freddie Mac said the average 30-year fixed-rate mortgage hit a brand-new low of 3.62%, marking the 10th week of the past 11 in which mortgage rates have set or matched an historic low.

Bond investors, meanwhile, are stuck with paltry, range-bound yields. “People don’t want to buy,” wrote David Ader and Ian Lyngen, government-bond strategists at CRT Capital Group, which had surveyed investors asking what they would do in the event the Treasuries market moved higher following Friday’s employment report. “The answer was striking. Here we found 0% willing to buy. Zero. We’ve never seen that before in the long history of this survey, and the point is that no one saw a need or felt a desire to chase a rally.”

Barrron’s: Market Watch

Sell in May, Buy in July

Global Equity Research Sector Report
by S&P Capital IQ

— Sam Stovall

The S&P 500’s performance midway through this election year hasn’t been too far off base when compared with the average election year going back to 1900…. Should the market continue to mimic the average election year since 1900, and there’s no guarantee it will, we will find that:

• The worst is already behind us, as 78% of all yearly lows occurred in the first half.

• 85% of all highs happened in the second half, and 70% in the fourth quarter.

• The S&P 500 posted its strongest gain in Q3, rising 5.0% and gaining in price 61% of the time. (This data contradicts a look-back to only 1945.)

• July and August were the strongest months, gaining an average of nearly 2% and 3%, respectively. The final four months’ results have also been positive.

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