July 8, 2011: Market Update

Monkey See, Monkey Do

Despite a shortened trading week and some negative news today, the markets did a pretty good job plodding ahead to finish the week higher.  There was a lot of news but few real developments and trading volume remained on the low side.  The volatility index dropped and investors were left wondering whether the recent market gains would hold.

The most important non-news event is that an agreement has yet to be reached between the White House and Congress over the looming debt ceiling limit.  In this game of chicken, neither side wants to be the first to make concessions.  However, there is talk that “secret” meetings have been going on between President Obama and House Speaker Boehner resulting in a general framework for compromise.  Some analysts put the odds at 60% of a small increase in the debt ceiling of $1-$2 trillion which may already be priced in to the market at these levels.  These same analysts assign a 20% chance to both a larger increase of $3-$4 trillion which would be bullish for markets, and the need for emergency measures to prevent a default which would be quite bearish.

Even though neither side wants to consider the consequences of a default on U.S. debt, the White House is rumored to be working on a “Plan B”.  Among the ideas being floated are the following:

• A “mini-deal” which would raise the debt ceiling by $1-2 trillion and kick the can down the road until next year.
• A radical deal in which the Treasury’s would sell some it its $300 billion holdings of gold to the Federal Reserve, thereby giving the Treasury enough liquidity to pay bills until the debt limit is increased.
• The use of the 14^th Amendment by the White House, which may give the President the power to sidestep Congress to ensure that “the validity of the public debt of the United States… shall not be questioned.”

The issue will be resolved one way or another.  There are too many consequences, both economically and politically, for a resolution not to be crafted.

While the debt ceiling was the major news story this week, the issues in Greece continued to simmer on the back burner.  After passing austerity measures last week and receiving assurances from the IMF that further aid was coming, it looks like there may now be another wrench in the works.  Part of the plan put together by both France and Germany was to extend the maturity of Greece’s debt obligations.  Over the weekend, the credit agencies (i.e. S&P and Moody’s) called this act tantamount to a selective default and threw into question the solvency of Greece.  Other than a “who cares what the rating agencies say” attitude in Europe, there was very little talk about the consequences of this action.  However, it did create a roadblock in the near-term.

The last news this week happened to come today in the form of the June jobs report.  It turns out that companies aren’t hiring which shouldn’t be a surprise.  The surprise was the extent to which they’re not hiring.  In June the private sector created only 18,000 net new jobs.  This number should be on the order of 200,000+ in order for the economic recovery to really have any traction.  The unemployment rate rose again from 9.1% to 9.2% and the less reported U-6 figure (which includes unemployed and under-employed workers) rose to a staggering 16.4%.

Earnings season begins this coming Monday with the announcement from Alcoa which is generally considered a good indicator of the overall economy.  While we don’t expect as many surprises to the upside this time around, we don’t expect many misses either.  The more telling news will be how these companies view the second half of the year and specifically their forward earnings guidance.

On a more lighthearted note, we turn to Indonesia.  Award winning photographer David Slater, 46, was visiting a national park in Indonesia to try and capture photos of the rare and endangered black macaque monkey.  He and a guide had befriended the group of monkeys over a period of three days.  The story goes he had his camera set up on a tripod and turned his back for a few minutes.  When he returned he found one monkey playing with his equipment.  Much to his surprise he discovered that the monkey had seen its reflection in the lens of the camera and had accidentally tripped the shutter.  It seems too strange to be true but you have to see it to believe it.  Here’s the story and accompanying pictures.  Click Here.  They’re truly stunning.

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