A) Greece Sovereign Debt Crisis, now the EU & Euro Crisis The positive news, Moody's reported June 11 that Europe's major banks can absorb sovereign debt losses from Greece, Portugal, Ireland, and Spain.. First Greece overspends, then the EU, ECB, and IMF bail the Greeks out, then fear of contagion to Portugal, Ireland, Spain, perhaps Italy and even UK increases. Spain has been downgraded by Fitch from AAA to AA and on May 28 the French Budget Minister said France could not ultimately maintain their AAA credit rating. First Greece was downgraded and crisis ensued, then Spain was downgraded - next Portugal and Ireland, then later Italy. Now the value and viability of the Euro itself is suspect, along the EU banking system and overall EU financial and economic system. Until the world is convinced the EU can hold together and remain viable, market fear and volatility will continue and the USA equity markets are in limbo with little hope of regaining the 2010 YTD highs. The more the IMF intervenes to bailout the EU, the more the USA does, since the USA contributes billions to the IMF. USA taxpayers to the rescue! The EU appears to have solved the liquidity crisis, but whether the solvency crisis can be ultimately be resolved is in doubt. Hence, the viability of the EU is in question. Nouriel Roubini summed up the Euro Crisis here. The Euro has rallied and closed at $1.2116 this week, which is positive for USA stock markets.
B) USA Leading Economic Indicators (LEI) The Economic Cycle Research Institute reported their Weekly Leading Index fell to a 44-week low on June 12. Lakshman Achuthan of ECRI says no persistent downtrend and therefore no double dip recession yet. Previously, The Conference Board reported that their USA Leading Economic Index decreased by -0.1% in April. While this is an immaterial decline, it is nonetheless disappointing, and possibly disturbing, because any significant economic recovery should continue showing monthly positive gains for LEI. For the 6 months ended April 30, the LEI has increased +4.4% to 109.3 (2004 = 100.0). The LEI monthly increases in 2010 have been +1.3% in March, +0.4% in February, and +0.6% in January. Since the equity markets are also considered leading indicators, this data is not bullish for USA equities.
C) USA Economic Trends USA economic data has been overall positive and the theme seems to be "cautiously optimistic". The June 9 Fed Beige Book reported was "economic activity continues to improve". Also on June 9, Fed Chair Bernanke stated to Congress "the recovery in economic activity...has continued at a moderate pace". "Moderate" was the them of the Fed & Bernanke this past week: moderate growth, moderate pace, etc. University of Michigan USA consumer sentiment for May was the highest in 2.5 years while USA May retail sales decreased for first time in 8 months. China exports continue to show strong growth. However, OECD composite leading indicators have slowed down indicating continued but slower global growth. The semi-annual IMF World Economic Outlook (April 2010) is reviewed here.
D) USA Unemployment (Jobs!) The BLS May Employment Situation report was disappointing and has had a bearish effect on equity markets. Even though the unemployment rate decreased to 9.7% from 9.9% and total jobs increased +431,000, the private sector generated only +41,000 jobs while the public sector increased by +390,000. In April, the private sector created +218,000 jobs. Obviously, we all can't work for the government and it's the private sector job growth that will create a viable USA economic recovery. The May U-6 unemployment rate (Table A-15, seasonally adjusted) was 16.6%, down from 17.1% in April. In addition, the Gallup Poll reported underemployment in May at 19.1%, compared to 18.9% in April, which was also disappointing. However, The Conference Board's Employment Trends Index increased in May for the ninth consecutive month, is up +9% YoY, and "jobs will likely expand further in the next several months".
E) World Economic Trends Economic data has been overall positive for most of the World, especially Asia. Europe is now the weak link in the global recovery but the Euro Area might eke out some GDP growth for 2010 per the ECB. China exports continue to show strong growth. However, OECD composite leading indicators have slowed down indicating continued but slower global growth. The semi-annual IMF World Economic Outlook (April 2010) is reviewed here.
F) USA Financial Regulatory Reform Meanwhile, back in the USA, the political battle continues to reform the financial system, which creates uncertainty first within the financials sector and then within the markets. Some more information on this is posted here. After any financial reform is passed by Congress, this should eliminate the uncertainty for at least the rules of the road, and then the related financial system impact can be determined.
G) USA GDP The BEA "Second Estimate" for Q1 2010 was +3.0% and Q4 2009 was +5.6%. Economist Peter Morici has some comments about GDP and the BLS May jobs report here, "Halting Recovery Keeps Unemployment High". Morici states that the USA needs about +3.0% GDP growth to "pull down unemployment" and that recently actual GDP growth has been +2.0%.
H) USA Sovereign Debt Of note the week of May 31 was the funded federal debt exceeding $13 trillion! Even more incredible is the USA GDP is approximately $14.5 trillion. So funded federal debt is rapidly approaching the total of the entire American economy. The debt totals can be seen at USDebtClock.org. There will be a Day of Reckoning as Congress cannot stop spending, be they Republicans or Democrats. Federal spending has taken on a life of its own as Congress sends home the pork and spends on programs that are politically advantageous. When the Day of Reckoning will be, I do not know: 1 year? 5 years? 10 years? The Peter G. Peterson Foundation has the best information on this national disgrace here. David M. Walker, the former Comptroller General of the United States, is the CEO of the Foundation and has been warning about this impending disaster for years. On June 10, Mr. Walker stated, “We’re worse than Ireland. We’re two years away from being Portugal and 10 years ago from being Greece.”
I) Goldman Sachs & The USA Financial System The SEC fraud charges, and more claims under investigation, against GS also bring into question the fairness, validity, and viability of the USA financial system. The Europeans are investigating GS and Merrill Lynch of Bank of America, Deutsche Bank, et.al. There has even been a call for China to investigate Wall Street. Until the Wall Street Banksters are brought to justice and financial system reform is implemented, the USA financial system is a fraud and corrupt - the USA taxpayers and citizens are being defrauded. These investigations and charges will drag on indefinitely, probably for years. Markets could be impacted off and on as more Wall Street Banksters are hopefully removed from the financial and market systems. More financial institutions will be hunted down and an examples made of them. The 3 credit rating agencies, S&P, Moody's, and Fitch also have gamed the system. So there will be ongoing market reactions, just as with the EU, to contend with while trading.
J) USA Quarterly Earnings Season was all but forgotten for Q1 and we now await Q2 earnings season. Quarterly earnings have been very encouraging, especially in the technology, financial, and industrial sectors that I pay special attention to.
K) USA Flash Crash! The fairness, objectivity, and validity of the entire USA equities markets, and other markets, is under suspicion. Frankly, I think the entire USA financial system is being questioned, as noted below about Goldman Sachs. The May 6, 2010 Flash Crash amplified and maginified the ongoing USA financial system debacle. Are we being totally gamed, and controlled, by Wall Street? Will the USA government take control and stop the Wall Street Banksters? This Dylan Ratigan video sums it up.