Market Update – June 19, 2012

Here are some of the stats I’ve read and thoughts I had today.  While I try to read (and pull stats) from reputable sources, I am unable to check every stat.  (I don’t say this in response to an error; rather it’s in anticipation of errors.)

More from Reinhart, Reinhart and Rogoff.  The researchers (who are well known for their research about debt slowing the economy) released a new paper.  They found 26 times when developed countries had debt-to-GDP levels above 90% for at least five years.  They confirmed their prior findings of slower growth.  But, their key new finding was that the high debt / slow growth lasted an average of 23 years.  By the end of the median episode, GDP is approximately 24% below the GDP level that would have been predicted by a continuation of the pre-debt trend.

Lets get back to Spain!  Spain’s 10-year bond yield jumped to 7.17%.

The Germans are angry.  Many commentators are suggesting that Germany should do more for Greece.  But, a recent study by Credit Suisse has said that Germany has risked an amount equal to ¼ of its GDP if the worst case scenario occurs.  That would be like the US risking almost $4 trillion.

Lower revenue expectations.  Europe accounts for 22% of the revenue earned by S&P 500 companies.  Sales for companies in the S&P 500 rose 6.5% in the first quarter, the slowest pace since they began expanding again in 2009.  The average of the preceding eight quarters had been 10.7%.  Expectations for the next twelve months are down to 4.7%.

HARP helps banks more than homeowners!  Mortgage servicers could get as much as $12 billion in revenue this year refinancing mortgages under the federal Home Affordable Refinance Program, or HARP, according to data compiled by Nomura Holdings Inc.  Borrowers who refinance mortgages through HARP, on the other hand, stand to save between $2.5 billion and $5 billion this year, according to an analysis by The Wall Street Journal of Nomura’s figures.

Weak job stats.  Since President Obama has been in office, 780,000 private sector jobs have been created and 600,000 public sector jobs (mostly at the state and local level) have been eliminated.

Unemployed veterans.  Nearly one of every three young male veterans (age 18 – 24) was out of work last year.

The search for yield.  Telecom-services stocks are up more than 12% YTD and utilities have outperformed the S&P this quarter by 10%.  These sectors are trading at 15-year high valuations relative to the broad market.

Fannie and Freddie.  Today, Fannie, Freddie and other U.S. agencies back $6.3 trillion of the $10.3 trillion in residential mortgages outstanding.

French Socialists.  The Socialist Party together with left-leaning independents won 314 seats in the lower-house National Assembly, compared to 191 seats for the center-right Union for a Popular Movement, giving President François Hollande’s party an absolute majority of the 577 parliamentary seats, exit polls showed.

Flight from risk.  The Credit Suisse U.S. Liquid Corporate Index tracks almost 1,300 U.S. investment-grade corporate bonds with an average maturity of about 10 years.  Its spread widened to as much as 1.865 percentage points over Treasuries of similar maturity this month, the highest since January.

Uncertainty.  Ben Bernanke wrote a paper in 1980 explaining why uncertainty matters.  He said that since most investment is irreversible, uncertainty “increases the value of waiting for new information [and thus] retards the current rate of investment.”  Other researchers compared an investment opportunity with stock options and said that if an investment is irreversible, uncertainty raises the value of hoarding cash and waiting to see what happens.

It’s difficult to quantify uncertainty.  We’ve always had the VIX index.  But now, some researchers have created an uncertainty index.  It counts how often uncertainty related to policy changes is mentioned in the newspapers, the number of temporary provisions in the tax code and the degree to which forecasts of inflation and federal spending differ from each other. The index hit its highest in 25 years during last summer’s debt-ceiling battle and remains high.

Small banks.  More than 90 bank deals have been announced YTD.  As a result, 2012 is shaping up to be the biggest year—as measured by number of deals—for bank mergers since 2007, when there were 286 transactions.  There are 6,643 small banks across the U.S.

Have a great week.

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