Market Update — June 27

Some key ideas and numbers from articles I read on Tuesday.

EU

Get out!  A recent poll showed that more than 75% of Germans want Greece to leave the EU.  A majority of French and Spaniards feel similarly.  (Seeing the Spanish and French throw stones is like me telling someone that they have bad hair.)

Soros.  George Soros says that if this week’s European conference fails, the euro could be doomed.

The typical summit.  Since the Greek crisis started, that have been 18 EU summits.  The standard format is 36 hours of haggling and then a communiqué is issued (promising a joint effort to boost growth, promote jobs and curb “speculators”).    Those evil speculators…

We need Europe.  Fifty percent of S&P 500 operating profits come from overseas markets.  Half of these are from Europe.  In aggregate, Europe is the United States’ largest trading partner.

Italian yields.  Italy paid 4.712 percent to sell two-year paper on Tuesday, a new high since December.  The yield paid on a 3-month bill was 2.362 percent, up from just 0.846 percent a month ago. For six-month paper, it leapt to 3.237 percent from 1.737 percent in May.

Ten year yields.  Spanish ten-year yield is back up to 6.81% and the Italian ten-year is at 6.17%.

Spanish credit default swaps.  It now costs $585,000 a year to insure $10 million worth of five-year Spanish sovereign bonds against default. This cost has increased from closer to $300,000 at the start of the year.

BRICs

Currency depreciation.  For the first time in 13 years, the real, ruble and rupee are weakening the most among developing-nation currencies (approximately 11 – 13% this quarter), while the yuan has depreciated more than in any other period since its 1994 devaluation.  Investors are fleeing Brazil (high consumer default rate), Russia (oil exports are at 18 month low) and India (widening budget deficit).  There is also fear about Chinese home prices.

BRIC nations are important.  The four BRIC nations are among the eleven largest economies worldwide.  Their combined GDP was $13.3 trillion last year (up from $2.8 trillion in 2002).  Their share of the global economy has increased from 8% to 19%.

BRIC performance.  In the past decade, the MSCI BRIC index increased 281% while the S&P 500 increased 34%.  The real and yuan increased more than 30%.  Local currency debt in the BRIC countries increased 86% in dollar terms since October 2005 while US Treasuries increased 48%.

Chinese income.  The average disposable income of urban Chinese households rose to ~$3,000 per capita in 2010.  This means a family of three earns $9,000.  This is a tenfold increase since 1980.  In 2000, the average income was $760 per person.  In the largest cities, the average disposable income is $12,000 per capita.  The government figures ignore bribes, under-the-table payments, large gifts, etc.  The average disposable income may actually be 90% higher!

Random

Commodity funds.  The total invested in commodity funds has more than doubled over the past five years to more than $400 billion in 2011. The daily volume of trades in energy futures is now 25 times higher than daily global demand for energy.

Mac users are more upscale.  Orbitz found that Mac users spend $20 to $30 more a night on hotels than PC users.  This is 20% – 30% of the average hotel cost booked on Orbitz.  Mac users are 40% more likely to book a four or five star hotel.  (The obvious intuition is that Mac users are wealthier.  But, maybe it’s just the PC users are used to lousy service.)

Income differences.  The average household income for adult owners of Mac computers is $98,560, compared with $74,452 for a PC owner, according to Forrester.

Low rates.  If your money compounds at 1.6% (the yield on a 10 year UST), it will take more than 43 years to double your money.  It will take much longer with a money market fund.

Bond fund flows.  Approximately $173 billion has flowed into bond funds during the past year.

Banking is weak.  Mergers and acquisitions, the IPO market, lending and trading are all relatively weak.   In April, there were 6.5 billion trades on average per day, compared with 12.1 billion at the market’s height in 2008.

Election update.  A recent WSJ / NBC poll showed that 47% favor President Obama while 44% favor Governor Romney.  President Obama’s lead is even larger (50% to 42%) in the twelve swing states.

Fed may extend zero interest rates to 2015.  In June, six out of 19 officials indicated they thought the first interest rate hike should come in 2015, up from four at their April meeting.

Have a great week.

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