02/21/12: We hope that everyone had a good Presidents Day weekend! In the markets, as in life, there are no guarantees but everyone is entitled to their opinion. Here’s our opinion on four major decisions that could have impact on markets and investors this week:
1. Here’s a “week-in-a-glance” view of what’s coming up in the next four days. Beginning today, the Federal Reserve Bank of Chicago releases its index of national economic activity for January. On Wednesday, the National Association of Realtors publishes sales numbers for existing homes for January. Thursday brings data on jobless claims for the most recent week. The end of the week on Friday provides information from The Commerce Department for new home sales in January while The University of Michigan issues its final reading of consumer confidence for February.
What does this mean for investors? The primary key to markets in the United States is activity by the American consumer, which is roughly 70% of the “driver” of our economy. Along with high profile headlines from Greece to Iran, it is important to remember that what our consumers are experiencing here at home, from housing sales to jobs to overall confidence, is an incredibly important market force. Data for this week is heavily focused on that dynamic.
2. What’s the “real deal” on Iran and world oil markets? No doubt, the “stare down” between Iran and the West is having an impact on prices, which are approaching levels last seen in 2008 and are threatening to depress economic growth world wide. However, according to the International Energy Agency, oil markets can indeed cope with Iranian supply disruption. Iran normally exports 2.2 million barrels of crude per day. OPEC’s current “spare” capacity level is 2.82 million barrels per day, more than enough to make up the gap. Large producers such as Saudi Arabia have already begun to increase their production to take up the slack. Also, many refineries will soon stop producing for seasonal maintenance, lowering the demand for Iranian oil anyway. Finally, the EU has a substantial inventory of oil and petroleum products that could help weather a disruption.
What does this mean for investors? This is a great example of how the “perception” of the problem can be worse than the “reality” for markets. Primarily, markets are nervous that the verbal sparring could get worse, particularly when the Iranians have threatened from time to time to block the Strait of Hormuz. The perceived threat is more of a “higher price driver” than what the production numbers (and reserves) really show.
3. Just like the sun coming up, another day brings more market news from Greece. It’s amazing how much impact this nation’s finances have had on the “perception” of the world economy over the past year, particularly when you consider that their GDP is about the size of Dallas-Fort Worth. This past weekend was no exception, as the approval of a new bailout (we/re really getting Greek “bailout fatigue” around here) is having an impact on markets. Basically, the deal calls for a 53.5% loss for private debt holders on the nominal value of bonds. National central banks are not a part of the debt swap. The goal of the initiative is to lower Greece’s debt to 121% of GDP by 2020 from 160% presently. The main problem that we see in long-term execution of the deal is that to hit these GDP targets, the minimum wage in the country will need to fall by as much as 22%.
What does this mean for investors? Again, this is a “perception” and “reality” issue for markets. While the short-term market “perception” will be favorable, we really wonder if the Greek population will continue to politically accept it. The “reality” is that Greece is already in a pronounced recession due to austerity cuts by the government and the country’s anemic export profile. On top of the recession, you need a pronounced wage cut and pension reductions to make the GDP targets work. Will that really “sell” to the citizenry? To us, this is a serious “reality threat” to execution. Recent riots in the country certainly seem to be bearing that out.
4. The Federal Reserve is “quietly” taking on the most pronounced regulatory role in its history. We’re all “tuned in” to the Fed’s central role in American monetary policy. However, since the passage of the Dodd-Frank financial reforms in 2010, the Fed has been instrumental in setting sweeping regulatory changes in the U.S. financial industry. According to this morning’s Wall Street Journal, this is being accomplished by directing banks on how much capital they should have, what kind of trading they can engage in and what kinds of fees that they can charge on products like debit cards. Despite the fact that these changes are the most pronounced since the Great Depression, the Fed has done it almost completely without the type of public meetings that other agencies conduct. It seems to us that the Fed needs to engage in the same kind of “transparency” in its Dodd-Frank activities that it now does in communicating broader monetary policy moves.
What does this mean for investors? Simply put, markets are more volatile when governments can “move the goalposts” on investors, and this is just another example of it. The problem here is that a significant amount of potentially “market moving” data is not being openly debated where potentially better “consensus solutions” can be made. As our own Alabama Senator Richard Shelby states in the article, the Fed is far from perfect, and the 2008 housing crisis is “Exhibit A.” It is ironic to us that a major objective of Dodd-Frank was more open discussion to avoid future problems and that the agency most charged with implementation is not following the example.
Email me here or call me at (205) 989-3498 if you have any questions or concerns about your current investments.
Senior Vice President
Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.
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