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In This Issue
Europe’s Dysfunctional Family Considers Divorce
Decision Time in Sacramento, Athens, and Washington, DC
Stat of the Week: Consumer Confidence “Highest Since 2007”
The Market Finally Rose Last Week, Despite a New List of Worries
By Louis Navellier
The S&P 500 rose 1.74% last week, but it was a rocky ride. After a very impressive rebound at the start of the week, traders decided to “retest” recent lows Wednesday, only to stage a dramatic recovery in the last hour. The catalyst for this retest was an escalation of Europe’s infighting and some criticism of NASDAQ and Morgan Stanley’s handling of the Facebook IPO. Some folks don’t need an excuse to sell. Each year, they “sell in May and go away,” but that strategy also provides opportunities for smart buyers to pick up quality stocks on dips.
Europe’s Dysfunctional Family Considers Divorce
Who’s in charge of Europe – France or Germany? It’s hard to tell, but France is certainly feeling its oats.
On Tuesday, the International Monetary Fund (IMF) called on the Bank of England to cut key interest rates and resume printing money. Then, on Friday, Christine Lagarde, head of the IMF, made a verbal gaffe to The Guardian newspaper confirming that it is “payback time” for Greece’s profligate ways.
The fact that the IMF is headed by a French woman is a bit ironic since the London property market is now being overwhelmed by wealthy French people looking for a way to avoid the top 75% tax rate that France’s new President, Francois Hollande, has promised. Meanwhile, President Hollande is pushing for common euro-zone bonds, which would raise Germany’s bond rates while lowering borrowing costs in France, Italy, Spain, and other distressed euro-zone nations. However, German Chancellor Angela Merkel adamantly refuses to co-mingle euro-zone debt, since that would tarnish Germany’s great credit rating.
Undeterred, Hollande is working on Spanish Prime Minister Mariano Rajoy and others to join his quest for euro-zone bonds, thereby ganging up on Germany. An “astonished” Angela Merkel said she will not budge on defending Germany’s pristine (AAA) credit rating. In my view, the French might want to look in the mirror and fix their own internal problems rather than promoting fiscal irresponsibility in Europe.
In the meantime, Greece was able to kick the can down the road when it received an 18 billion euro ($23 billion) injection of capital. Still, European Union (EU) leaders made it clear in Brussels on Wednesday that if Greece does not abide by its austerity reforms, it is not welcome in the EU! Fortunately, markets have already discounted a Greek exit, so the actual event won’t impact much beyond the euro-zone banks.
Decision Time in Athens, Sacramento, and Washington, DC
Watching Europe is entertaining, but we have our own soap operas in America centered in the capital cities of California and the U.S. Last Tuesday, I held a seminar in Sacramento, California for the brokerage community. We enjoyed a view of the state capital building a block away while I addressed their concerns that both California and Greece are “canaries in the coal mine” of dead-end public debt.
I did my best to reassure clients that the main impact from Greece is that the U.S. dollar is rallying. The euro stumbled to a 22-month low last week, putting downward pressure on crude oil and other commodity prices. So, thanks to Greece, our prices at the pump should continue to fall throughout the summer.
I also stressed positive trends during my talk, assuring attendees that consumer spending remains alive and well in the U.S. I stressed that folks cannot remain depressed forever and that most Presidential election years are good for the stock market, since both candidates will tell folks what they want to hear, promising prosperity (if they are elected), thereby lifting business, consumer, and investor confidence.
American voters get to choose a President and Congress in November, but California voters also get to decide in November whether or not they want to pay a higher sales tax and a 13.3% top income tax rate.
Meanwhile, the financial press keeps warning us about a “fiscal cliff” and “taxmaggedon” in 2013 if Congress doesn’t repeal certain legislation. In addition, the Congressional Budget Office (CBO) last Tuesday said that a 1.3% contraction in GDP is likely to happen in 2013 if this “cliff” is not avoided.
Some people just love to worry, but I think this “cliff” won’t happen. If President Obama is re-elected, Congress will most likely address the debt ceiling, higher 2013 tax rates, and other concerns after the election as part of their lame duck session, probably before Thanksgiving! In the event that President Obama is defeated and becomes an uncooperative lame duck, refusing to compromise with Congress, a retroactive tax solution will almost certainly be implemented by Romney early in 2013.
Stat of the Week: Consumer Confidence “Highest Since 2007”
There was not much economic news released last week, but I was pleasantly surprised by rising sentiment in the U.S. and France! On Friday, the University of Michigan/Reuters reported that May U.S. consumer confidence rose to a lofty 79.3, up from 76.4 in April, reaching its highest reading since October 2007!
French consumer confidence also rose, reaching 90 in May, up from 89 in April. Perhaps the French are feeling giddy over their recent change of power. Despite signs of recession and an escalating debt crisis, the fact that France thinks it is “taking control of Europe” seems to be lifting consumer sentiment there.
In other news, the Commerce Department reported on Thursday that durable goods orders rose 0.2% in April after falling 3.7% in March. In April, transportation orders rebounded by 2.1% but, excluding transportation, durable goods orders declined 0.6%, which tells us U.S. manufacturing is cooling down.
This slowdown in manufacturing seems to be a new global trend. HSBC reported Thursday that China’s preliminary Purchasing Managers Index (PMI) declined to 48.7 in May, from 49.3 in April. (Any reading below 50 signals a contraction.) China’s PMI has now slowed for seven straight months. However, this may be a “soft landing,” since HSBC also reported that China’s factory output rose to a seven-month high in May. On the positive side, HSBC also forecast 8.5% GDP growth for China in the second half of 2012.
In Europe, Markit reported that the preliminary PMI for the euro-zone declined to a 35-month low of 45.9 in May, down from 46.7 in April, signaling that Europe’s manufacturing sector is now in a recession.
This confluence of low PMI numbers has reawakened fears of a global recession, but 8.5% growth in China and moderate growth in the U.S. should continue to fuel slow-but-steady overall global growth.
This week’s “Stat of the Week” will likely be the Friday jobs report, but I can tell you right now that there is no way this number will hold up for long. It’s impossible to count all the new hires in May by the early morning of June 1! I believe that Friday’s job total will be revised upward in future months.