05/29/30: As we always do at the beginning of the market week, we wanted to give you a “look ahead” at a few items that we will be tracking carefully during this shorter market week. These are just a few opinions that we have, and as with life, nothing is certain about them.
1. First, here is a “week-at-a-glance” view of several key market drivers for the next four business days. Beginning today, The S&P/Case-Shiller home price index is published and The Conference Board releases its consumer confidence index for May. Texans also vote in Senate and presidential primaries. On Wednesday, the National Association of Realtors reports pending home sales for April. Thursday brings the ADP report on private payroll employment for May. Friday continues a jobs theme, as The Labor Department reports on unemployment and nonfarm payrolls for May. Also on Friday, The Institute for Supply Management publishes its May manufacturing index and construction spending figures are set for release.
What does this mean for investors? We are particularly interested in how the later part of the week unfolds with the combination of unemployment, manufacturing and construction data being released. As with everything in life, confidence is at the core of market results. The “tug of war” in markets between the randomness of the political drama in Europe and the “slow but steady” U.S. improvement is a very interesting dynamic. Which influence will be greater than the other this summer?
2. We are heavily focused on Spain’s borrowing costs and its banking system this week. Spanish sovereign bonds came under heavy pressure Monday, with 10-year bond yields climbing to as high as 6.47%, their highest point this year. By way of comparison, the price Spain must pay investors to buy their bonds is more than five percentage points higher than the German government. In addition to elevated sovereign borrowing costs, on Friday Spain effectively nationalized one of their largest banks with a plan to issue new debt rather than injecting bonds into the company.
What does this mean for investors? Spain’s “risk premium” has been steadily rising in recent weeks. Clearly, markets are reflecting that Spain and other peripheral Eurozone countries could be the next weak links in the common currency if Greece, which has been bailed out twice already, is forced out of the euro. Spain’s GDP is in the “top 20” of countries around the world and what happens there this summer could substantially impact markets.
3. And speaking of Europe, “riskier” companies on the Continent are increasingly turning to the U.S. for loans. In one more “sign of the times” in Europe, the region’s riskier companies are not using their own banks or investors to finance themselves, but are “crossing the pond” to America do so. European companies borrowed about $18 billion in the U.S. leveraged loan market this year through Friday, more than double that for all of 2011 according to The Wall Street Journal. The leveraged loan market is used by companies with high-yield or non-investment grade credit ratings, making them particularly sensitive to Europe’s debt crisis. In good times, the leveraged loan market is driven by financings for mergers and acquisitions. In the current crisis, which has not seen much M&A activity, the leveraged market is being used much more by borrowers wanting to swap old loans for new ones.
What does this mean for investors? Frankly, this is a great example of how a widespread crisis in one place can “spider out” across the globe in so many different ways that are not immediately obvious. U.S. investors need to pay attention to international political events at a level that is as high as any point in our history if they want to keep their wealth protected.
4. Flat wages are a major factor in this year’s revival of American manufacturing. In a little bit of a “good news, bad news” scenario, a significant number of American manufacturers have begun to “re-shore” some of the U.S. production jobs that migrated overseas in the last decade. Two of the largest American competitors for production jobs, China and Mexico, have seen strong wage growth (China) or moderate wage growth (Mexico). The bad news? Much of this dynamic has been generated with flat U.S. wage structures that are not keeping up with inflation. So, while employment is up, wage growth is not. With unemployment still high and global competition remaining fierce, employers in the United States are in a great position to ask unions to relax work rules and “level off,” or even reduce, wages and benefits. As one example, many U.S. companies have negotiated “two-tier” contracts with unions that allow them to hire newer workers for less money that their existing staff.
What does this mean for investors? The markets are not getting as much of a “confidence kick” from the rise in manufacturing employment as we have in the past. Simply put, even though the number of workers is increasing (good), a large surge in disposal income is not occurring because of it (not so good). A healthy rise in daily purchases, particularly from the manufacturing sector, could really help the “70% market driver” that is the American consumer. Americans also have a “healthy swagger” that occurs when factories are doing well.
If you’d like to talk with me about the above or how it could impact your investments, please feel free to call me at (205) 989-3498 or email me here.
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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