Weekly Update: 17 euro nations . . . 17 cans for Merkel to kick?
We may have our differences, but when it comes to can kicking, we’re good. Both the Senate and House passed continuing resolution bills to fund the government through the end of the fiscal year in September, leaving the debt-ceiling suspension on May 18 as the next big hurdle. And that’s a soft date—extraordinary measures should extend the deadline deep into summer. For the past few years, we’ve been all about kicking the can. But here’s the thing—is Angela Merkel a kicking-can (not a German can) person? Is Mother Germany willing to kick the can for Cyprus? Jumping from country to country—Greece, Portugal, Cyprus (whose economy is roughly the size of Scranton’s)—Merkel probably has little stomach for the peripheral southern tier, and they probably feel the same about her. But the ECB, which for all intents and purposes is controlled by Germany, wants to protect the euro and wants assurances before it agrees to bail out this tiny island that has served as a Russian tax haven. By itself, an implosion of the Cypriot bank system is a risk to some wealthy Russians, not a worldwide risk. But what makes Cyprus important is what it reveals about how some governments are planning to deal with a systemic bank failure, for in Cyprus, that’s what this is.
The explicit confiscation of depositor savings with the ECB’s blessing is a dangerous precedent likely to shake the confidence of other euro-based deposits. What happens in Italy or Spain if customers think their deposits may be taxed? The overarching risk is a breakup of the euro, which the market may assume is as unthinkable as the Lehman bankruptcy filing (Lehman’s stock price was high until it went to 0). Encima Global says a key variable—the equivalent of Treasury Secretary Paulson’s views on Lehman—will be German sentiment regarding the debt strategy. The current German approach is to use degradation of the ECB’s and euro-system’s balance sheet, hoping the U.S. upturn will be strong enough to lift all boats including property values in Spain, tax collections in Greece and German exports which have slowed to a crawl. Whether by explicit confiscation like Cyprus exhibited last weekend or more incipient inflationary means through time, European savers ultimately will bear the burden of the European experiment. Europe remained high on our list of potential disruptive market forces this year, but only through the recent poor performance of European banks, not in the outright elevation of peripheral spreads. This doesn’t appear to be happening—yet. And at this writing, it’s not clear what the new Cypriot plan will be.
Many have been expecting a correction (and likely as a result, haven’t been getting one). But market technicals suggest a pullback is due. The NYSE Composite Index, a proxy for the broad equity market, is currently farther above its 200-day average than at its early-May 2011 peak before a 21% correction or at its mid-April 2010 top just prior to a 17% sell-off. Volume on the latest rally from mid-November has been very light. If we get a sell-off, we wouldn’t expect it to be as deep or prolonged. ISI notes equity fund inflows continued for the 11th consecutive week and are on track to be the most in seven years; the Fed’s balance sheet has expanded by $256 billion year-to-date—growth this week’s FOMC meeting suggests will continue for the time being; and house prices are surging (more below). All of this argues against “Sell in May and go away,’’ ISI says. Still, there are signs this rally is in need of consolidation, and the market needs something for its next catalyst. Could it be Europe, again?
Housing’s uptrend intact February existing home sales, starts and permits rose, as did the buyers’ traffic and sales components in the monthly NAHB sentiment gauge. As the spring selling season starts, stories are proliferating of already frenzied home buying in many markets where the pendulum has swung from an excess of homes a few years ago to a shortage. The lack of supply—the number of homes for sale is down 19% from a year ago—is putting upward pressure on prices. The FHFA price index has risen 12 straight months. One reason few houses are going up for sale is about 20% are still underwater, so their owners can’t afford to sell. This suggests home values and owners’ equity might recover much of their declines of recent years before supply matches up with demand.
Manufacturing’s uptrend intact Broad-based gains in new orders, shipments and employment pushed March’s Philly Fed survey back into positive territory, bringing it in line with other manufacturing data. The Markit flash PMI for March also rose on encouraging increases in employment and orders. The fact manufacturing has held up in the face of fiscal uncertainty bodes well for activity later this year. As greater clarity emerges regarding government fiscal issues, this could release pent-up capex demand. Core capital goods have been among the few steady negatives in the Conference Board’s leading indicators index, which increased 0.5% in March, in line with expectations.
Labor market’s uptrend intact The four-week moving average in initial claims ticked to its lowest level since December 2007. This suggests the labor market is shifting into a higher gear, with claims having held up relatively well so far through the higher taxes arising from the fiscal-cliff deal, sequestration’s budget cuts and the messy Italian elections. Claims, of course, only characterize the separation side of the labor market, not the hiring side. Gulp!
Europe’s issues extend beyond Cyprus The PMIs for France fell deeper into contraction territory in March to levels last seen in early 2009, Germany’s manufacturing and Ifo business-climate indices also fell unexpectedly, and surprise declines in the preliminary March eurozone manufacturing and services PMIs signaled widening contraction. With heightened political uncertainty in the region, the data dashed hopes for an early end to the eurozone recession and suggested increased downside risk.
Education’s debt drag Student loans are now the second-biggest consumer debt category, having grown at an 11% annualized rate the last four years. Most of the debt is held by those under 40, and delinquency rates are rising. It’s a concern because the balances don’t disappear even in bankruptcy, and being delinquent means mortgages aren’t available. It’s estimated the higher delinquency rates are removing 4% of potential borrowers from the housing market—not enough to derail the recovery, but enough to put the onus on employment growth. Gulp!
Four-year-old bull hasn’t eased retirement fears Twenty-eight percent of Americans have no confidence they’ve saved enough to retire comfortably, the highest level in the 23-year history of the annual Employee Benefit Research Institute (EBRI) report. Longer life expectancies are partly to blame. The Society of Actuaries says a 65-year-old male retiring this year can expect to live 20.5 more years and a female can expect to live 22.7 more years. But another EBRI study says dwindling savings rates also are a factor—the percentage of workers saving for retirement collapsed to 66% in 2013 from 75% in 2009. And the savings rate as a percent of disposable income currently is 2.4%, up from the recession’s bottom but still very low by historical standards.
France has great pastries but they aren’t cheap In 1984, the average U.S. household spent 16.8% of its annual post-tax income on food. By 2011, that had fallen to only 11.2%. The U.S. now devotes less of its income to food than any other country—half as much as households in France and one-fourth of those in India.
There’s a health disparity gap too As the average life expectancy for Americans increases, most of the gains are going to the most affluent and the disparity is widening, research shows. A Congressional Budget Office study found that in 1980, life expectancy at birth was 2.8 years more for the highest socioeconomic group reviewed than the lowest; by 2000, the gap had widened to 4.5 years.
Congratulations, Harvard, but you aren’t getting into the Final Four As a Penn grad, I get tired of hearing about Harvard. But even I have to acknowledge my fellow Ivy League school, which won its first March Madness game ever in the NCAA basketball tournament, stunning No. 3 seed New Mexico late Thursday night. As I tour Notre Dame with my daughter and alumni brother, I can’t help but root for the Irish but since I have to go home tomorrow, and in case the Mister reads this, “Go, Sparties!’’