Archive for November, 2011
Weekly Update – November 18, 2011
It was tough week for markets as European uncertainty weighed heavily on indices both at home and abroad. Though the Dow finished in positive territory on Friday (up 25 points), for the week the index dropped 358 points, or 2.9%.
Last week attention was focused on Italy; this week, Spain, as the country’s government is in line to become the fifth Eurozone government to fall. Spanish residents will head to the polls on Sunday, and by next week a new government will most likely be in power, one that pledges to meet existing budget targets. Will this help calm nerves and market turbulence? Maybe. What will perhaps be of greater importance, however, is the action of the European Central Bank. The ECB is a powerful player in the debt crisis, and if the ECB indeed purchases Italian and Spanish bonds as speculation contends it will, borrowing costs in the region will go down and fear of default may be mitigated.
What seems to have been lost in the European turmoil is that based on recent US economic reports, the US economy is doing better than has been portrayed. This week, retail sales were up, inflation eased, industrial production rose, jobless claims dropped to a 7-month low and building permits rose. However, with all the European uncertainty, equity markets continue to be unpredictable, and we remain cautious of most equities, focusing instead on adding trust preferreds, which continue to yield near 8%. We are holding our European trust preferred exposure steady, and are adding to domestic trust preferreds. Where we do see equities as a fit, we are continuing to focus on the oil and gas sector, which was strong this week, as oil topped $100 a barrel on Wednesday for the first time since early June.
Looking into next week, economic reporting highlights include the release of October home sales data on Monday, the second estimate of third quarter GDP on Tuesday, and October durable goods orders (manufacturing activity) and personal spending readings on Wednesday. Look for existing home sales to increase slightly, the GDP number to hold near the first-reported 2.5%, and for the durable goods and personal spending numbers to tick up slightly, reflecting healthier October economic activity. And not to be forgotten is China (the world’s second largest economy), where on Tuesday the Chinese government will release its November manufacturing report. Manufacturing in China rose in October, but is predicted to fall slightly in November, as a decline in exports figures to lower the reading despite strong domestic demand. China continues to grow at 9% annually.
Have a good weekend,
Enough with the Big-Bank Bashing
Just as you aren’t supposed to kick a man when he is down, let’s not punish banks just as they narrowly avoid a repeat of the Great Depression. The current recession-driven anger at big banks triggered a flood of new regulations. It’s still unclear whether the new regulations made banks safer, but what is clear is that the new rules made them less profitable.
Why are some banks so big? Is there a connection between banks and jobs? Who benefits from banks’ profits? Who owns the banks? And, who are the people running big banks?
Banks are big because big companies need big banks. Companies like Best Buy, Target, Cargill, Medtronic, United Health Group and General Mills have worldwide operations. Plants need to be built, inventory purchased, currencies acquired and hedged, exports financed and employees supported with benefits and paychecks. Banks are the financial side of these activities.
The Twin Cities’ two largest banks, U.S. Bank and Wells Fargo, have the international reach to help local companies grow. Wells Fargo and U.S. Bank both rank among Minnesota’s top 15 private employers; these two banks alone employ approximately 20,000 and 10,000 people in Minnesota, respectively. Big banks help to create those desperately sought-after jobs during a period of 9 percent national unemployment, helping, in my view, to keep Minnesota’s unemployment rate below the national average.
Community banks are essential to small firms but are limited on the size of loans they can provide to any one customer and thus can’t meet the needs of big companies. So, before rushing to join the protest against banks, we should first acknowledge the role banks play and the consequences that would follow should we decide to continue to handicap them with hundreds of new regulations.
Bank of America, which has a small office in Minneapolis, was recently demonized for proposing a $5 monthly fee for debit cards. Last year Congress enacted price control legislation in the Dodd-Frank financial regulator bill that cut the fees for processing debit card transactions by more than half — the now infamous “swipe” fee. This price control is expected to cost Wells Fargo more than $1 billion in annual revenue. Bank of America will also lose an estimated $2.2 billion in annual revenue from lost swipe fees. In total, banks annually will lose in excess of $6.6 billion in forgone revenue because of this price control.
It is no surprise that the banks are trying to replace this lost revenue. Other regulations require banks to increase their capital ratios, the ratio of bank capital to assets (loans and interest-earning investments). This new ratio can be met by raising capital, which reduces banks’ profits, since banks have to pay for new capital. Or, banks can reduce lending.
Most banks will do both. As Washington criticizes banks for not lending, the new capital ratios force banks to restrict lending. Reduced lending and heavy additional regulation translate quickly into fewer jobs. Bank of America announced last month that it was laying off 30,000 people worldwide.
The state and federal government are two of the biggest beneficiaries of bank profits. Corporate taxes primarily come from profits; no profits, no taxes. Banks directly contribute 35 percent of their profits to the government through corporate taxes. Additionally, banks, through their employees and the purchases of goods and services, expand the tax base and increase the overall tax revenue received by the government. Politicians, by punishing the banks’ earnings and limiting the profits they can earn, are in fact, reducing the amount of tax revenue the government will receive.
Banks are owned by holders of common stock. Bank executives own some shares, but normally much less than 5 percent of the total shares. Unfortunately, the negative consequences of going after the banks depress their share prices and reduce their dividend growth. The pension plans of teachers, state employees and retirees are filled with bank stocks. These securities also are a meaningful portion of our state colleges and University of Minnesota endowments, nonprofit endowments like the Minnesota Orchestra, and institutions like the McKnight Foundation.
It may be easy to get caught up in the national hysteria protesting banks, but banks are run by people. James Campbell and Jon Campbell have combined to be the public face of Wells Fargo in Minnesota for more than two decades. Richard Davis, the CEO of U.S. Bank, just completed his term as chairman of the Minnesota Orchestra, being followed in that spot by Jon Campbell. In 2004, James Campbell launched the Itasca Project, which is an initiative that strives to make Minnesota more competitive in a world economy. One couldn’t find three more respectable men committed to this community.
The country has survived the recession. Most banks accepted taxpayer money from the TARP bailout funds in 2008-09 to do so. The 13 biggest banks, which received more than 80 percent of TARP funds, have repaid the money with interest for an overall profit to the taxpayer.
Enough with the bank bashing. It’s time to get on with the recovery.
Written by Jim Ulland for the Star Tribune as featured in the link below
Weekly Update – November 11, 2011
Hope for a European economic recovery and a better-than-expected consumer confidence reading helped spur markets higher on Friday, pushing the Dow up 260 points. Save for Wednesday when the Dow fell 389 points, the Dow finished in positive territory each session, in the process gaining 170 points for the week, or 1.4%.
Europe once again dominated the headlines, especially Greece and Italy, as both countries grappled with transitions of power and continued austerity issues. Overall, markets reacted favorably to the resignations of Greek Prime Minister George Papandreou and Italian President Silvio Berlucsoni, though caution still remains as the respective governments struggle to pass acceptable austerity measures. With Italy having now taking center stage, one interesting development to watch is the yield on Italian bonds (in a matter of speaking, a defacto fear index). Earlier in the week, the yield on 10-year Italian bonds shot past the 7% mark (the level that triggered bailouts in Greece, Ireland and Portugal), unnerving investors and leading to sharp market declines. Bond yields dropped on Thursday and Friday to the 6.5% range, helping to mitigate some of the fears, but if yields climb back to 7%-plus, an Italian default may soon follow.
Also of interest in Europe will be the release of Eurozone GDP figures next Tuesday. France and Germany expect Q3 GDP gains of approximately .3% and .4%, respectively, but contractions in Greece in Portugal stand to offset growth, suggesting a Eurozone expansion of a modest .2% overall. Economic data already points to a contraction in Q4 Eurozone GDP, and the continuation of the debt crisis could lead to a deeper Eurozone recession next year.
Looking outside of Europe, a bright spot stands to be Japan, as Q3 GDP is scheduled to be released next Monday. After three consecutive quarters of contraction, GDP for the third quarter is expected to show an expansion of 1.4%.
Domestically, this week saw a rise in consumer confidence and initial jobless claims below 400,000 (a seven-month low) – both positive developments. Next week, the release of inflation data on Tuesday and Wednesday will highlight the economic calendar. Inflation is expected to remain a non-issue, prompting many to believe the benign readings may bring the Fed closer to taking further policy action/stimulus measures.
Have a good weekend,
Weekly Update – November 4, 2011
Though the month of October produced the third-best monthly percentage gain in history for the Dow, the market rally lost a bit of steam heading into November, as concerns over the Greek sovereign debt crisis led the Dow down 248 points for the week, or 2.0%. It was the Dow’s first weekly loss since September.
News on Monday that Greek Prime Minister George Papandreou planned to put the country’s austerity plan (crucial to implement in order to receive further bailout help from the Eurozone) up for a public vote slammed markets worldwide and sent the Dow down 573 points over the course of Monday and Tuesday. Not helping market matters was additional news on Monday that MF Global, a US trading firm, filed for bankruptcy, citing losses from risky bets on Eurozone bonds. The US’s largest Eurozone debt-related casualty pressured the financial sector as investors worried about further victims.
Concern over Greece carried into Wednesday; however, a more positive than expected statement by the Federal Reserve turned markets back into positive territory. Though the Fed acknowledged there were “significant downside risks to the economic outlook, including strains in global financial markets”, the statement released highlighted stronger growth and improved household spending. Adding to the more upbeat tone was news that the US companies added 110,000 jobs in October, more than analysts had expected. On Thursday, markets continued trending upward, the catalysts being news from Greece that the referendum on the Greek bailout plan had been scrapped and a surprise interest rate cut from the European Central Bank.
On Friday, the much-anticipated unemployment report showed an increase of only 80,000 payroll jobs (estimate was 95,000) in October, compared to 158,000 in September. Though the unemployment rate fell to 9.0% from 9.1% and upward revisions to the August and September payroll numbers added an additional 108,000 jobs, investors, in general, found the numbers disappointing. Also disappointing to many was the lack of news and/or developments related to the Eurozone debt crisis coming from the G-20 economic summit in Cannes, France.
Heading into the weekend, Greece remains at the fore of attention as Prime Minister Papandreou faces a vote of confidence in Parliament, with the possibility of fresh elections and further unrest in the immediate future.
No major economic data is on the docket for next week, though it will be interesting to see if the initial jobless claims number released on Thursday will remain below 400,000 (initial claims released Thursday of this week came in at 397,000).
Have a good weekend,