Better Late Than Never

With so much to talk about and so little time, we are going to waste this week’s rant by talking about what we shouldn’t talk about. We really have nothing to add on either topic.

First, Occupy Wall Street – a bunch of old hippies, young hippies, unemployed art school graduates and dispossessed liberals decided to demonstrate against Wall Street greed. In the initial phases of this movement, a few of them got maced pretty heavily by New York’s finest for occupying the doorsteps of some of the big bank buildings downtown New York. That was a public relations nightmare for the city and the Bloomberg administration, so they stopped the macing and instead let them set up camp in a city park a little ways away. They let them march around and have their drum circles and the chants so long as they don’t interfere with other people’s right to get to work or go to a dentist appointment.

The major point of OWS is that ‘we the people’ saved these greedy bastards during the financial crisis and now, they are making tons of money, not paying their fair share of taxes and being the same obnoxious jerks they were before they were saved. Whether you believe Wall Street was the cause or the victim of the last financial crisis, the program to save the financial system did in fact work, albeit sloppily. Today, we have checking accounts that work, on-line bill paying and all the other blessings of modern banking. Does this have to come with the concentration of risk in a handful of banking companies? Probably not, but during the crisis it was faster and easier for the regulators and legislators to approve a bunch of mergers between failing institutions and their stronger brethren than try to prop-up all the weaklings so they could compete in the future.

Will OWS change anything? Probably not. It might galvanize popular resentment against the rich, against capitalism, against the status quo and thus help President Obama get re-elected. If that were the plan, the timing is way off. This whole thing should have been held-up for about six months.

The other story we shouldn’t write about is Steve Jobs’ death. Sure it’s a tragedy that someone with so much to give the world is taken at the relatively young age of 56. Jobs was special, and not in the short bus sort of way. He single handedly (well, not really, Steve Wozniak was there much of the time) revolutionized three industries in that short lifetime, personal computers (which he and Woz almost invented), digital music players, and telephones. For the time being, we’re not going to give him the tablet PC because we’re not sure if that was a revolution or an evolution.

Steve was a tough guy to work for and with according to many who did both. He was demanding. He had very specific ideas of what a product or service should be and he kept those ideas and made them work. We have the iPhone to prove that some of those ideas were in fact huge improvements over the status quo.

We are sorry to know that Steve died of pancreatic cancer. That is a tough way to go. Sorry about that, you probably deserved better.

Issue of the Week

It’s not Greece for a change, or maybe it really is. We saw last week the first failure of a European bank largely due to the sovereign credit issues. A French-Belgian bank called Dexia ran into liquidity trouble because too much of their assets were in sovereign debts of troubled debtors. The response from Belgian and French regulators was swift, the customers will be saved, but the bank will have to go away. Dexia will be cut-up into several pieces and either absorbed by the Belgian or French central bank, sold to other banking companies or let fail.

What regulators did was create a bad bank, one loaded with all the crap that Dexia had acquired and let that bank fail. The healthy parts of the bank, the customer deposits, the everyday loans, the capital markets activity, the small business activities, will be salvaged. The shareholders of Dexia and many of the bank’s creditors will have to take the hit on the bad bank, but the central bankers will absorb some of it as well. When all is said and done, the markets will hardly feel anything.

If this is the fate that awaits other troubled banks, that wouldn’t be the worst thing that could happen. If the European central bankers can move this quickly time and again to resolve one failure after another, then markets may develop some grudging recognition that the worst the sovereign debt crisis can do is rearrange the order of European banking, rather than default to a recurring crisis every time one or another sovereign has trouble.

But, this is why, as much as anything else that happened last week, the European markets sparked the global rally seen last week and into this one.

Economic News

ISM manufacturing was surprising good. Instead of the guess that we’d hold steady at just above the 50% level that marks growth in manufacturing, we saw some real growth in manufacturing. The new number at 51.6% shows there is still some life in the manufacturing sector after all.

Motor Vehicle sales were also better than expected. Rather than the 12-plus million sales (at an annual rate) that were widely expected, we say 13.1 million.

ISM non-manufacturing continued to slow down but stayed well above the 50% level of no growth. The September reading of the ISM non-manufacturing index was 53.0%, dropping only a smidgen from the August level of 53.3%.

The Bank of England and the European Central Bank both left their current rates unchanged at meetings this month. The ECB move was a bit of a surprise as many thought they would cut their 1.5% rate to 1.0% in light of the weakened economic numbers arising in Europe. British rates are still 0.5%.

Don’t strike up the band quite yet, but US Payrolls expanded by 103,000 in September. Almost half of that paltry increase came from 45,000 Verizon workers who were on strike in August and returned to work in time to be counted in the September tally. Even the small increase was better than the 59,000 expected. Probably more important, 99,000 jobs were added when revising July and August numbers. Gone is the idea that August had no jobs growth at all. Now 57,000 people seem to have gotten work.

Average hourly earnings gained by 0.2% and hours worked in the economy rose 0.4%. The unemployment rate held steady at 9.1%

Weekly Stuff

We are embarking on yet another earnings season this week. That wasn’t what moved markets last week, quite the contrary. The word is that for the first time in about two years, we are going to see disappointing earnings coming from corporate America this time around. We disagree. The slower economic backdrop of the first and second quarters didn’t seem to really impact corporate earnings, why should the relatively stronger economy in the third quarter lead suddenly to slower earnings growth? We tend to think it won’t. Unlike a few years ago, when we’d had a long cycle (actually a couple of cycles) to build up detritus on corporate balance sheets, this time we’re coming off a cycle where a lot of prior mistakes were admitted and written-off.

We are at a point where the comparison quarter from a year ago isn’t very easy. So the absolute scale of the advance in earnings won’t be as impressive as it was say a year ago. But, the gains will be persistent even so. Standard and Poors is looking for a year over year gain of about 13%. If we get that, we’ll probably see a pretty good advance as some of the better earnings lift companies one by one.

Last week, stocks around the world gained, with few exceptions. Though we had good returns here in the USA, the real action was centered in Europe. Germany’s DAX was up 3%, France’s CAC40 was up almost 4%, London 3% and even the dour Swiss were up over 2%. Many of the European banks were up 10% or more. Many Asian markets and especially Latin American markets didn’t get the memo about rallying until late in the week.

US equities were good, with the S&P 500 up over 2% and the NASDAQ up over 2.5%. But, we were no Germany. Strength in US markets was fairly broad but favored the large cap indexes more than the small caps.

Bonds had a hard time with the equity rally. US Treasuries were among the worst hit sectors. Sovereign credits were generally weak in Europe, but Japan showed strength. The dollar was down last week against a basket of major currencies.

Real estate shares didn’t generally participate in the recovery in the US. But, they did overseas.

Commodities were generally higher but there were areas of weakness.

Have a great week.

Karl Schroeder, RFC, CSA, CEP

Investment Advisor Representative

Schroeder Financial Services, Inc.