Market Update – July 2, 2012

Quite the rally!  European leaders said that they would (1) speed up plans to create a single supervisor to oversee the euro zone’s banks; (2) use bailout funds to directly boost the capital of banks (without increasing sovereign indebtedness); (3) would not take priority in the capital structure above existing creditors.  The idea is some sort of debt sharing with fiscal oversight.

Trial balloon.  I read the short (one and a half-page) press release from the summit.  To me, it read like they were floating a trial balloon to see how it went over.  It didn’t exude confidence to me.  But, apparently the market liked it.

Here are some of the problems…(1) Overseeing banks did not prevent our financial crisis – and we were only overseeing banks in one country; (2) the funds for the bailout have to come from somewhere…so they will increase sovereign debt of the donors (the more “successful” members of the EU); (3) nothing has structurally changed about Greece, Spain or Italy – they’re still running deficits, they still have too much debt, they have high unemployment.  No question, if we pool all of our money together, they can survive for longer.  But, this isn’t a solution.

What do the Germans get?  Germany insisted that there must be a euro-zone-wide agreement to transfer control of budgets to the EC.  The Germans want the new commissioner to be able to strike down national budgets that aren’t in line with monetary-union rules.  They want to be able to fine countries that run large deficits.  Maybe they could send a letter that says, “you’re spending too much, so you need to send us some money.”  That should solve the problem.

Monti vs. Merkel.  This recent summit is being portrayed as Italy’s Monti having spanked Germany’s Merkel.  It makes you wonder if this was decided based on a bet on the Euro Cup soccer match (where Italy beat Germany).  The German people are not happy with Merkel about this summit.

Can you back that up?  The EU’s two rescue funds may only amount to about 20 percent of the outstanding debt of Italy and Spain.

Germany getting ready to say goodbye to Greece?  German newsweekly Focus reported that Finance Minister Schaeuble had told MPs in Chancellor Angela Merkel’s Christian Democrats (CDU) and the sister party, Christian Social Union (CSU), to get ready for Greece leaving the euro zone and a Greek state bankruptcy.

China is slowing.  China’s official purchasing managers’ index (PMI) fell to 50.2 in June, above expectations but down from 50.4 in May, the National Bureau of Statistics said on Sunday.   It was the lowest reading since November.  Economists are expecting the worst slowdown in the past 13 years.

Commodity rebound.  Indexes that measure a broad group of commodities rose 4% – 6% on Friday.  Oil rose 9%.   I’m not sure how much of a rebound we can have without China.

U.S. vs. the world.  Q1 U.S. quarterly profits from abroad dropped $48 billion.  Profits created within the U.S. were up 10% YOY.  Profits coming from the rest of the world dropped 12% YOY.

IPOs starting back.  All four initial public offerings scheduled for the past week were able to price and trade.  This even included an unprofitable pharmaceutical firm named Tesaro.

Maybe the individual mandate is not a mandate.  If you can be fined, but not jailed for not buying insurance, this is an economic choice.  People might find it easy to decide not to insure (without any stigma).  If many people decide to do this, the death spiral could begin (where only the sick buy insurance).  (Part of the problem is that the fine may not be high enough relative to the cost of insurance to discourage people from gaming the system.)

There was an experiment at a day-care center in Israel where parents were fined for arriving late (to pick up their children).  When they started using this fine, more people started showing up late because they felt like it had become an economic option.  It was no longer simply being a bad person.  Clearly, the day-care center was giving them a choice.  This may be the same way that people think about the health care tax – simply a choice.

How many will choose to pay the tax?  The CBO predicts that four million people will choose to pay the IRS rather than to buy insurance coverage.

Comments from the BIS’ annual report.  (Remember, the BIS is the central bank to all of the nation’s central banks.)  “The financial sector needs to recognize losses and recapitalize.”

Another BIS comment.  (Remember…it’s hard to raise capital when investors don’t trust your balance sheet.) “As we have urged in previous reports, banks must adjust balance sheets to accurately reflect the value of assets.”  All but four of the 28 companies in the Euro Stoxx Banks Index (SX7E) trade for less than half of the book value of their equity.  This tells you investors don’t believe the companies’ book values. We have similar issues with many of the largest banks in the U.S.

Hide the problem.  Balance sheet problems are being masked by low interest rate policies and large-scale asset purchases.

I guess I shouldn’t have bought that.  Bank of America’s $2.5 billion purchase of Countrywide has cost it $40 billion in real estate losses, legal expenses and settlements.

Don’t let kids read my blog!  The National Center for Health Statistics says that 5% of American 12- to 19-year-olds use antidepressants, and another 6% of the same age group use medication for ADHD—in total, about four million teenagers. Around 6% of adults aged 18 to 39 use an antidepressant.   According to the U.S. Centers for Disease Control and Prevention, 62% of Americans aged 12 and over who take antidepressants have done so for two years or longer; 14% have taken them for 10 years or longer.

CrackBerry or “cracked berry”.  Research In Motion’ stock dropped 19 percent, the biggest decline in more than a year, after posting a loss and delaying the next BlackBerry operating system.  Five years ago, when everyone was referring to “Crackberrys”, would you have ever thought that Blackberry and RIM would get crushed like this? The shares have now lost 95 percent of their value since peaking in mid-2008, cutting the business’s market value to $3.9 billion. RIM shipped 7.8 million BlackBerrys in its last fiscal quarter, which ended June 2. A year earlier, it shipped 13.2 million BlackBerrys.

Crushed by the i-phone.  It’s the fifth anniversary of the i-Phone.  217 million have been sold.

Tele-napping.  Based on a survey of 1,013 American office workers, conducted in June by Wakefield Research, 43 percent watch TV or a movie and 20 percent play video games while officially working from home.  In addition, 24% admit to having a drink.  (Lets face it…a drink does make TV even more fun.)  Twenty-six percent say they take naps (watching TV can wear you out).   Of course, people aren’t working all the time when they’re working at the office.

Delaware incorporation.  Nearly half of all public corporations in the United States are incorporated in Delaware. Last year, 133,297 businesses set up here. And, at last count, Delaware had more corporate entities, public and private, than people — 945,326 to 897,934.  Delaware collected roughly $860 million in taxes and fees from its absentee corporate residents in 2011. That money accounted for a quarter of the state’s total budget.  One address (1209 North Orange) is the legal address for more than 285,000 separate businesses.

Personal trainers.  From 2001 to 2011, the number of personal trainers grew by 44 percent, to 231,500, while the overall number of workers fell by 1 percent, according to the Labor Department.  For personal trainers, the median hourly wage is less than $15.  (In the interest of full disclosure, I have a personal trainer.  His name is Ronald McDonald.  Remember, we all have different goals.)

Have a great week.

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