Goldman Confirms Downtrend
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6/21/12

Purchasing Manager Index (PMI) readings from China and eurozone countries deteriorated in reports overnight.  These indexes gauge the strength of the business going forward as purchasing managers are keeping the pipeline full for future production.  HSBC’s “Flash” PMI for China showed the eighth month of declines for that country.  This is especially troubling as China is seen as the world’s growth economy.  It is explainable as China’s number one customer is the eurozone.

Initial Jobless Claims numbers this morning were up from last week…until they adjusted last week’s number up…so this week’s numbers were actually improvement.  That is the magic of government.  When is a bad report a good report?  When the statisticians have a vested interest in spinning the results.  After all, where will would they ever find a cushy job like working for the Bureau of Labor Statistics if #1 got fired in November?

The market opened surprisingly strong this morning.  I was expecting a weaker open.  If you are wondering why it fell out of bed 30 minutes into the session it is because Existing Home Sales fell again last month.  Traders need a good headline to hang onto, and they can’t get it.

No free money from the Fed yesterday, lower PMIs and lower Home Sales.  We wondered if the Supreme Court might release their decision on Obamacare this morning, but they did not.  We understand decisions are released on Tuesday and Thursday.  The Supreme Court session ends next Friday so we should expect the decision next Tuesday or Thursday.  The Court could extend their session, but is not expected.  We expect a rally if the Supreme Court throws out the law in total.  Striking down the mandate only would be a partial victory for business (and the constitution) but may not inspire a market rally as it leaves a lot of confusion.

Germany has to feel like the loneliest kid on the playground.  Antonis Samaras was sworn in yesterday as the new Prime Minister in Greece.  In forming his cabinet the goals become clear they want to renegotiate the bailout terms of previous commitments, while asking for more.

Greece wants to extend the terms to bring down the budget deficit.  Greece’s budget deficit was 11.1% last year.  Their target is 2.1% of GDP by the end of this year.  Oh, and it would mean another $25 billion dollars in aid to pay bills.

Angela Merkel has signaled a willingness to extend deadlines to replace the time lost while Greece tried to form a new government, but two years might be a stretch!  Zero Hedge coined the phrase “Beggars are Choosers”, as Greece wants an end to public employee layoffs; they don’t want to cut the minimum wage and want to maintain present wages through 2014.

The way out for Greece seems simple to us, cut expenses everywhere, reduce bureaucratic barriers to entrepreneurship and lower taxes.  Of course it will also seem obvious for the U.S. when the bond vigilantes come calling, but not any easier to do than in Greece.

France, Spain and Italy are uniting to cajole Germany into allowing the ESM to buy sovereign debt to reduce borrowing costs for Spain and Italy.  France wants to spend more but can’t unless they get a backstop for profligate spending.  Germany is commonly referred to the “paymaster” for the eurozone.  Everyone wants to get in their pocket.

Whether directly through bailouts or indirectly through ESM buying sovereign dodgy debt at 100% of face value, they don’t care…they just want the money!  Even better would be Eurobonds, this way every country would pay the same interest rate no matter how much they borrowed.  Germany indicated a willingness to go down this road with stipulations.  We covered Germany’s proposal in European Redemption Plan on 5/31.

The European Redemption Plan may come back to life, but Germany pays too close attention to the details and does not leave room for other countries to “game the system.”

The German Parliament is scheduled to vote on the European Stability Mechanism before the end of the month.  This would meet the deadline to have the ESM available in July.  Germany’s Constitutional Court has ruled they need to review the parliament’s action before it can go into effect.

Hold on, the market is sliding today. Goldman Sachs issued a warning this morning, “We are recommending a short position in the S&P 500 index with a target of 1285 and a stop on a close above 1390.”  Guess they are confirming my call from yesterday!  (I am not convicted on 1285).

The mailbag:
You are pretty good at this money stuff, you know!  You called the market disappointment exactly.  Do you work for the Fed?---Long Term Subscriber T.M.

John’s reply:  No, I do not work for the Fed.  Almost an insult.

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