Sunday, February 26, 2012

High Oil Prices, Iran and the Global Economy

As Middle East tensions continue to increase, the United Nation’s International Atomic Energy Agency reported last week that Iran is ramping up its production of high-grade uranium.  As a result, oil prices continue to rise -  a barrel of Brent crude oil traded up to $125 in Europe (+17% YTD), while WTI oil in the U.S. traded at $109 a barrel (+11% YTD) on Friday (see long-term price trend chart on page 3). Other contributing factors include: 1) oil supply disruptions in Sudan, Syria and Yemen, 2) increased oil demand as the global economy expands, 3) a possible increased gasoline demand during the summer driving season and 4) speculative commodity trading activity. 


Given oil’s pervasive use across the global economy, persistently high prices may broadly increase product input costs (affecting corporate profits) and dampen consumer spending (wage growth still remains stagnant) – factors that could stress the fragile economic recovery.  Investors have focused on the benefits of reflation (central bankers printing money) which has driven many asset prices higher.  A period of elevated oil prices could move the discussion toward the potential for inflation (short term) and deflation (longer term).

As the U.S. Economy Stabilizes, is the Eurozone Less Confused?

In the U.S., consumer sentiment data continues to improve, new home sales seem to be improving (although the data is a bit confusing), and weekly jobless claims remain at the lowest level in almost four years. In the Eurozone, as Germany’s business confidence index increased to a seven-month high, economic data across the region remains mixed. Regarding the Greek mess, its creditors continue to work on restructuring the country’s debt and the process: 1) remains confusing, 2) has fatigued both stakeholders and observers and 3) has not removed concerns of a potential default.


The improving U.S. data is constructive but should be tempered by the oil dynamics mentioned above, as well as potential economic weakness in other geographic regions. While some market pundits suggest the U.S. can decouple itself from other economies, that outcome is rarely the case (although the potential impact may be muted). The reappearance of concerns about other peripheral countries, such as Portugal and Spain, are worth monitoring.

Sunday, February 19, 2012

Messy Mortgages in San Francisco, New York and Beyond

Last week, a San Francisco city audit of almost 400 home foreclosures reported that 84% had faulty documentation and/or irregular processing.  Problems with information in the Mortgage Electronic Registry System (MERS), a Reston, VA based intermediary in processing mortgage, was also cited. (MERS was set up in 1995 by Fannie Mae and Freddie Mac, along with several of the larger market participants - its motto: "process loans, not paperwork".)  Various sources believe the San Francisco results are representative of continuing problems across the U.S. mortgage market.  Separately, New York Attorney General Eric Schneiderman is suing Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co. for improper foreclosures and the use of poor MERS data.


As the U.S. housing market seeks stability, we are reminded of the lack of integrity in the processing of both mortgage filings and foreclosures. 
Note: while the audit focused on foreclosures, the inaccurate MERS data can cause problems in the purchasing and refinancing of existing homes as well.

Are the Markets "Breaking Out or "Breaking Down"?

“Quantitative easing” by the European Central Bank in mid-December triggered the current market rally.  Since then, 1) U.S. economic data has improved (increases in manufacturing, decreases in unemployment claims and recent stability in the housing market), 2) the Bank of Japan continues to provide monetary stimulus to avoid deflation in its economy, 3) China may provide assistance to the Eurozone and 4) a meeting of Eurozone finance ministers on Monday may clarify what happens with Greece (but promises have been made before).

Within this mix of cross-currents, many markets have moved higher benefiting from monetary intervention (printing money) rather than changes in fiscal policy (addressing government debt issues), but trading volumes have been low.  The bulls suggest that the lack of investor conviction is associated with the early stage of an economic recovery.  At the same time, recent weakness in the Dow Jones Transportation index (perhaps impacted by increasing oil prices) as well as a decline in the price of copper may suggest that short term market momentum slowing.  Investor reaction to Monday’s meeting in Brussels (will they bailout or blowout Greece?) will likely influence the direction of global markets.

Sunday, February 12, 2012

More Greek & Eurozone confusion, and how it all started

A week ago, an agreement to address Greece’s debt problems seemed close at hand. Last week, in a dramatic display of socio-economic instability, several Greek government cabinet members resigned, labor unions pursued a nationwide strike and its citizens rioted in the streets.  Eurozone leaders are increasingly concerned that the Greek government cannot deliver the changes required in order to provide additional funding and debt restructuring. German Finance Minister Wolfgang Schaeuble said, “the promises from Greece aren't enough for us anymore" and "with a new austerity program they are going to first have to implement parts of the old program and save”.  At the same time, Greek citizens are losing faith in both their government and Eurozone leaders as their living standards collapse (Note: unemployment is over 20%).


While many participants in this tragedy had hope for a resolution to the Greek mess, the magnitude of the problem, the number of financial moving pieces and the decreasing level of trust among the various players (which was never high to begin with) may be too great to overcome. Note that while there is no shortage of finger-pointing at the moment, this problem started before Greece’s entry into the Eurozone (June 2000); when corrupt Greek politicians, who colluded with investment bankers, misrepresented the country's financial viability and naive Eurozone leaders, eager to expand their franchise, approved Greece’s Eurozone membership.

Are Global Markets Becoming More Uncertain?

Early last week, as many global equity markets approached a 20% or more increase from their October lows, some market participants announced the arrival of a new bull market driven by 1) improving global economic data, 2) stabilization of Eurozone economic dynamics and 3) a significant declines in market volatility. By week’s end, investors seemed slightly less confident as Greek troubles lingered and Chinese trade data for January had its biggest decline since 2008.


It is likely that economic cross-currents will continue to test the durability of many investment strategies.  In this environment, consistent execution of investment plans is critically important.  Notable increases in European and emerging market equity volatility, as well as short-term weakness in the shares of firms such as General Electric Co., may indicate that the strong move up may be losing steam.

Sunday, February 5, 2012

Greece's Tragedy:Is This the Final Act?

After seven months of discussions and missed deadlines by Greece and its creditors, a resolution, perhaps a default, may be close at hand. Yesterday, Greek Finance Minister Evangelos Venizelos said “There are still open issues” and "the moment is very crucial. Everything should be concluded by tomorrow night. We are on a knife-edge”. As Greece seeks significant forgiveness on its sovereign debt obligations, as well as additional funding from Eurozone participants, it has been resistant to demands for lowering its costs, eliminating holiday bonuses and reducing its minimum wage.

At this point, the protracted negotiations seems less about Greece and more about avoiding the potential shock wave a Greek default may unleash – resolution of this uncertainty may occur within days. Against this backdrop, economist Kenneth Rogoff shared the following comment in yesterday’s  Financial Times related to deleveraging and controlling the debt crisis:  “the U.S . still has a few years to go – and the EU could have a decade.”

Markets Rally as U.S. Unemployment Drops and Global Manufacturing Avoids Contraction

Most global manufacturing data released last week suggested an expansion of manufacturing activity – (investors feared a contraction in China and Europe). On Friday, the U.S. Department of Labor said the unemployment rate fell to 8.3% (a three-year low) and payrolls increased by 243,000 in January (with strength in most sectors). At the same time, the labor force participation rate (people in the U.S .either working or looking for work - 16 years and older) dropped to 63.7% - the lowest level since 1983. In the U.S. equity markets, after 263 of S&P 500 companies reported quarterly results; earnings are up 3.3% and revenues are up 6.5%. Notably,, Inc. reported weaker than expected revenue growth (the stock took a strong negative hit) andFacebook filed for its Initial public offering (current investors are happy, prospective investors have concerns about valuation). 

Global markets continue to benefit from strong corporate profits, along with the positive effects of monetary policy by central banks in the U.S. and Europe. Regarding the declining and problematic labor participation rate, a persistently high 23.3% youth unemployment rate and other metrics suggest that a structural change may be underway. Regarding the markets, some participants and strategists, fearing they are “being left behind”, are becoming more bullish - while confronting the usual list of unresolved economic headwinds. Sometimes momentum begets momentum.