06/18/12: We hope that you had a great Father’s Day weekend! 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 the week. These are just a few opinions that we have, and as with life, nothing is certain about them.
1. What’s next for Greece? More attempts at coalition and cuts. Greece’s conservatives won a narrow victory on Sunday, giving hope that a coalition government (and staying in the euro zone) is at least a possibility. Over the next few days, coalition talks with the Socialist Pasok party and possibly other factions will be required for the New Democracy party to have a parliamentary majority. Even though the New Democracy party ran on the platform of renegotiating Greece’s current austerity plan with its international lenders, Germany and other European creditors have already made it very clear that little, if any, leniency is left.
What does this mean for investors? The immediate outcome of the election is likely to ease to some degree the imminent threat of breakdown of relations between Greece and the euro zone. However, we view any coalition government that might be formed to be so fragile, and the financial challenge so large, that the Greek crisis is far from over.
2. Spain and Italy will continue to be a major market focus this week. Spain’s 10-year government bond yield soared above 7%, while corresponding Italian yields were up to 6.03%. The key point to remember is that Greece, Portugal and Ireland all succumbed to bailouts when their government bond yields hit the 7% level. In Spain, questions over the Spanish banking sector will persist, with clarification this week on how much money will ultimately be needed. Non-performing loan data held by Spain’s banks just hit an 18-year high of 8.72% in April. Also, Spain has both bond and bill auctions this week. In Italy, increasing political pressures of an early election are likely to be the backdrop for the direction of borrowing costs.
What does this mean for investors? That “government-driven” market volatility appears to be “here to stay” for awhile. It seems to us that the only way to get true confidence back in the markets is to let private enterprise drive them. Currently, it appears that almost all market direction is coming from what governments will do next. We look forward to the day when we are talking more about a company’s innovative new product impacting markets than what politicians, both here and abroad, are up to next.
3. Will the G20 meeting this week help increase the “firewall” for Europe? The G20, which is starting a two day meeting in Mexico today, could increase the IMF’s firewall beyond the $430 billion agreed upon in April, according to Mexican President Felipe Calderon. The group is also considering measures that will include cutting debt for some countries and pledges of more stimulus by others. Also, the U.S. and the EU could be pursuing a free-trade agreement by the end of the month which could jump-start growth in both regions and somewhat “flank” the current austerity versus stimulus debate.
What does this mean for investors? In our view, Europe is going to need a long time to get its underlying problems addressed, and probably will not be able to do so without a stronger centralized presence, mainly in its banking sector. Remember, the EU currently has no equivalent to our Federal Reserve, FDIC or Treasury Department to completely coordinate policy. In the meantime, the succession of “stop gap” measures from the international community will continue.
4. The selling of many small banks in the United States certainly seems to be a “microcosm” of the larger American economy. Amazingly, more than 90 bank mergers have already been announced this year, the majority of which are small community banks selling out to larger rivals. In addition to the fact that their “core business” is under assault (e.g. falling loan demand, increasing problem loan charge-offs and eroding fee income), many bankers are just “sick and tired” of the large amount of federal regulations impacting them. If you own your own company (or are involved in one), does all of this sound familiar?
What does this mean for investors? The drop in the ranks of community banks hits the American economy in the one spot where we need help the most, job creation for small business. This free market private enterprise dynamic, and not government, is what will lead the way to better, and more sustained, economic times. Access to capital is vital to any American business, and community banks serve this function for many companies with less than 50 employees.
Please 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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