Mel's Blog

July 20, 2011 Market News

July 20th, 2011 9:27 AM by Mel Samick

The (un)employment news had dominated the previous week when the reported unemployment rate had jumped to a 9.2 percent level. According to the Bureau of Labor Statistics history, only once in the past half of a century did entire year unemployment rate come in above a 9 percent range: in the years 1982-1983. We now seem to be on track for the third straight year of high unemployment and officials don't even venture into bringing up the statistics of discouraged workers who are not even part of that official number. Per the Job Openings and Labor Turnover Survey, published on Tuesday, the number of outstanding jobs as of the end of May rose slightly from 2.97 million to 2.95 million, while rate of hires remained the same at a 3.1 percent level and the separation rate has grown from 2.9 to 3.1 percent. The readings tell us that hiring is still slow while jobs are lost at a higher rate than before. News about Cisco cutting jobs in an effort to boost their performance evolved from the plan to slash 5,000 to 10,000 jobs. In the meantime, the new unemployment claims readings came in lower this week.

After years of dismal returns that led to increased investors' scrutiny of funds' management expenses, employment woes even reached Wall Street. The workforce of back office operations is shrinking and performers complain that they have to produce 50 percent more per million of bonus compensation. Companies such as Goldman Sachs, with an average per-employee salary at $430,700, and Morgan Stanley at $256,596, are still among those with the highest compensation levels.

The French Minister of Finance, Christine Laguard, had been elected the new managing director of the IMF, the former director and Dominique Strauss-Kahn was released from custody without bail and gained freedom of movement within U.S. territories. Even if charges against him were dropped in the U.S., the saga of the accusations would still continue in Paris, where French writer Tristane Banon filed a legal complaint of a similar nature. There is apparently no political comeback for the primary candidate of the Socialists in the French presidential election due in April of 2012. An organizer of the party's primaries said that the list of candidates has been decided on and that Mr. Strauss-Kahn is not on the list.

The sovereign debt concerns on both shores of Atlantic dominated the markets this past week. The IMF, under the new leadership, approved on the previous Friday, another installment of the debt crisis rescue package for Greece in an amount of over 3 billion euros, equivalent to approximately $4.2 billion dollars. The IMF move was expected after the Eurozone released to Greece its portion of the assistance in the amount of 12 billion euros ($17.39 billion). Nevertheless on Tuesday, George Soros in his editorial written for the Financial Times, expressed skepticism regarding the possibility of avoiding the default of Greece. In his opinion, the focus should be set on helping to arrange the default in an orderly manner.

At the beginning of that previous week, Moody's downgraded Portugal's government debt from Baa1 to Baa2 on the growing fear of a 2nd bailout need based on the country's inability to meet required reduced debt levels. Italy and Spain are the next candidates for the bailout and the markets opened the week on a wave of renewed concerns regarding the financial health of those two countries. Italy worked hard during the past week to push through a package of austerity measures and successfully placed the whole issue of the new bills on Thursday at the elevated rates. Large European banks and Central Banks are seriously considering the possibility of the escalation of the crisis and have begun adjusting their strategy and practices accordingly.

In the U.S., the debate over the debt continues among U.S. lawmakers and executive power members. There is still no agreement in sight and the scary word "default" appears here and there. Hard to believe that in a world where smaller members of the economic community are being bailed out for the sake of common financial stability, the zero-percent-likelihood and forever-changing-the-financial-world event of the default on risk-free U.S. debt will be allowed to occur. On Wednesday, Moody's, followed by S&P, threatened (again) to downgrade the U.S. debt on the rising probability of default.

Ben Bernanke, in his Wednesday speech to Congress, mentioned that the Fed is prepared to act again if the slowness in the economy persists. The word of potential continued government support has comforted investors for a little while, but the debt concerns seem to have now taken over. Bernanke warned on Thursday, during his speech to the Senate, that significant spending cuts would destroy the economic growth prospective, while default would be disastrous for the financial system.

Among the other news of the past week overshadowed by global events were: International Trade: trade deficit increased primarily due to the high oil prices; FOMC Minutes of 06/21-22 meeting: a hint on possible QE3 and discussion of the timing and technicalities of the government support withdrawal strategies; Import and Export Prices: export prices declined and import prices did not grow much in June due to the decline in oil prices in that month; Treasury budget: the deficit improves slowly but surely; Producer Price Index: turned negative due to oil prices decline; Retail Sales: grew slightly in June after the May decline; Business Inventories: rose in May; Consumer Price Index: declined in June for the first time in twelve months following the trend in oil prices; Empire State Manufacturing Survey: negative reading for July was better than one for June, but missed expectations by a mile; Industrial Production: rose modestly in June mostly due to the gains in utilities; Consumer Sentiment: went down in July as compared to the previous month and contrary to expectations.

Mel Samick

Information Provided by NYCB Capital Markets

Posted in:General
Posted by Mel Samick on July 20th, 2011 9:27 AM

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