Skittish Excitement
Research for Online Investors

8/17/12

The Michigan Consumer Sentiment Survey came in better than expected, off the lowest yearly reading of the year.  The survey results were released after the market opened this morning.  Hanging on any good news, the market took a bump higher in skittish excitement.  Traders should have looked deeper.

The University of Michigan survey found consumer’s outlook for the economy dropped to their lowest of the year, with the largest three month drop in 11 months.  Expectations for inflation jumped by the most in seventeen months.  So much for good news!

Angela Merkel moved the markets higher yesterday with her comments that were seen backing the European Central Bank.  She reaffirmed Germany’s support for actions to save the euro.

As always, there is more to the story than the headline.  Chancellor Merkel was asked about Mario Draghi’s proposals to support the euro; she said recent ECB decisions “have made it clear that the European Central Bank is counting on political action in the form of conditionality as the precondition for a positive development of the euro.”

Oops!  There is that darn “conditionality” again that Spain, Italy, Greece and even France don’t want.  Investors and traders have displayed irrational exuberance for the last two weeks.  Draghi’s comments before everyone left on “holiday” somehow morphed into a blank check.  I don’t think so.

Citigroup Global Markets analysts sent a note to clients that said “It is becoming clear that the ECB purchases have to be conditional on the implementation of austerity and structural reform measures in that country.”

Finnish Foreign Minister Erkki Tuomioja gave an interview to the U.K. Telegraph.  He told the paper his government is preparing for the currency union’s breakup.  The money quote is “We have to face openly the possibility of a euro breakup…(breakup) could make the EU function better.”  After the story came out Tuomioja told Finnish media he had only stated the obvious.

Finland still has a AAA credit rating and is not keen on borrowing money to loan to other countries that won’t adhere to austerity promises made to receive bailout funds.  Bloomberg has a relevant article on the European Central Bank and Eurozone Credit Mess.

Jon Corzine, former head of Goldman Sachs, governor of New Jersey and most recently head of MF Global is thinking of starting a hedge fund.  This story hit the New York Times yesterday, conveniently in conjunction with the report that he probably will not be prosecuted for $1 billion dollars that was “vaporized” in the MF Global collapse last fall.

Absolutely amazing.  The Feds have decided the losses at MF Global were caused by “recklessness” not criminal activity.  Hmm.  Definitions must change if the amount of money is a billion dollars and completely disrupts a market rather than just a few thousand dollars.

The New York Times reports that Federal authorities ‘are seeking to interview the former chief of the firm, Jon S. Corzine, next month…Authorities hope that Mr. Corzine, who is expected to accept the invitation, will shed light on the actions of other employees at MF Global.’

Let’s get this straight.  The Feds probably won’t file criminal charges against Corzine.  They have spent the last nine months investigating the collapse of MF Global and decided there was not criminal activity…all without interviewing Jon Corzine?  Now they are inviting him to an interview, and hope he accepts!  How about a “Perp walk?”

Mailbag:
Thank you for sending the daily updates.  Sorry to be so ignorant regarding why the Fed is supposedly so interested in keeping stock prices up, but would you please talk about it sometime?---subscriber L.B.

John’s reply:  The "Wealth Effect" from high stock prices pervades through the economy.  When the market is up, people feel better because their 401k statements are comforting.  When it is down, people are fearful they will not have enough money to retire so cut back on spending.

Even people that do not have money in the market take more than a passing interest when they hear TV commentators announce the stock market crashed.  Public companies are more inclined to make investments in new equipment, expand and hire new employees if the company's stock is trading at a good price.  Executives get bonuses and can exercise their stock options.

Oh and last, but certainly not least...politicians can brag that their economic plans carried the day and the stock market rallied.  I hope this helps.

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