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Mike's Whiteboard Wisdom Michael J. Schmitz Vice President - Investments Chief Operating Officer Portfolio Manager [email protected] ECONOMIC EVALUATION & INTELLIGENT MARKET INSIGHTS VOLUME II, ISSUE 5 | MAY 2012 Mike’s Whiteboard Wisdom MAYDAY...MAYDAY...MAYDAY According to Wikipedia, Mayday is an emergency procedure word used internationally as a distress signal in voice procedure radio communications. It derives from the French venez m'aider, meaning "come help me". I struggled to find a more appropriate term to describe the current situation in Europe...and specifically Greece’s current cry for help. Greece is known for both corruption and tax evasion. Labor productivity is low and the government engaged in wild deficit spending (not unlike the U.S.). Greece needs serious IN THIS ISSUE help, and their “mayday” is being felt all over the globe. However, despite the obvious HIGHLIGHTS: self-inflicted problems, their cry for help at this juncture is probably warranted since aus- terity alone isn’t likely to “fix” their problems. • Mayday, Mayday, Mayday - Greece needs help... ► 1 Greece’s troubles can also be blamed, in part, on wealthier Eurozone countries, who con- vinced the world that a single currency could work without a single, centralized govern- • May in review... ► 4 ment. Eurozone policymakers have compounded the problem by insisting that irrespon- sible behavior was the sole cause of Greece’s current travails. Attempting to force strict • “Playing hooky” for 27 weeks austerity measures on the Greek people (clearly as both punishment and the preferred or more... ► 6 solution) may actually exacerbate the problems in the short-term, cause more anger and misery for the Greek people, and do little to solve the important underlying issues. • U.S. production slowing... ► 7 After successfully arranging a massive debt restructure, Greece now faces a political • Breaking up with commodities challenge. No party won an absolute majority of seats in the May 6 election, which re- after a “spring fling”…. ► 11 sulted in a formal decree to dissolve the newly elected parliament and call for new elec- tions on June 17. Meanwhile, the public hostility toward austerity measures as stipulated • Mid-year reality check... ► 13 by the terms of Greece’s bailout arrangements with the EU and IMF has elevated con- cerns that the country may be headed for an exit from the euro. QUICK LOOK INSIDE: Despite all the talk about the Eurozone’s efforts to try and stop the contagion, much of the world seems to be infected with this “Euro-virus”. Fear often spreads like disease Greece Needs More Help 1 and there were certainly no “May Flowers” for the global capital markets this month. Market Snapshot 2 The Euro-virus brought many of the global financial markets to their knees. For many global indices, equity market returns for the first 4 months of 2012 evaporated as con- Summary Table 3 cerns about Spain’s banking sector intensified, there was a change of government lead- ership in France, and elevated worries over Greece’s continued political turmoil in- Month in Review 4 creased the debates over how to handle the Eurozone’s debt and fiscal problems. To compound the problems overseas, lackluster economic data in the U.S. and a slowdown Housing 5 in China also dampened the global growth outlook. Labor Market 6 We continue to monitor developments in the Eurozone closely and our outlook remains cautious. As we look into the future, unfortunately without the aid of any crystal ball, we Consumer/Retail 7 will be monitoring Greece’s political situation closely since it just might dictate austerity Inflation/Interest Rates 8 policies and, potentially, their continued participation in the euro. The Eurozone growth outlook is pretty grim, the need to recapitalize the Spanish banking system is the newest Manufacturing 9 threat, fiscal deficits remain a problem, continued austerity debates are tiring politicians and voting citizens, and the shake-up in France’s government may bring fresh issues to Emerging Markets 10 the table as French President François Hollande begins negotiations with German Chan- Commodities/U.S. Indices 11 cellor Angela Merkel. Economic Indicators 12 Items of Interest 13 Conclusion 14 SCP Snapshot 15 Important Disclosures 16 DISCOVER | DEFINE | DEVELOP | DESIGN | CONSTRUCT | MONITOR | EVALUATE 655 Redwood Highway, Suite 109 Mill Valley, CA 94941 (415) 381-9076 D (415) 381-2917 F schmitzcapital.com Page 1 May 2012 | Mike’s Whiteboard Wisdom MARKET SNAPSHOT Key Rates Current Year Federal Funds Rate Unemployment Rate Monthly Data Monthly Data Data To Date 8.00 11.00 30 - Year Bond 2.89% 0.0% 10.00 6.00 9.00 8.00 10 - Year Note 1.88% 0.0% 7.00 4.00 6.00 2 - Year Note 0.24% 0.0% 5.00 2.00 4.00 Fed Funds Rate 0-0.25% 0.0% 3.00 0.00 2.00 Prime 3.25% 0.0% LIBOR- 3 Mos. 0.55% (0.0%) 15 Year Mortgage- Fixed 3.15% (0.3%) Source: Bureau of Labor Statistics Source: Bureau of Labor Statistics Monthly Change In US Non-Farm Payrolls Consumer Sentiment 30 Year Mortgage- Fixed 3.84% (0.2%) Seasonally A djusted Not Seasonally A djusted 500,000 120.00 Jumbo Mortgages ($417,000+) 4.40% (0.4%) 400,000 300,000 110.00 5/1 ARM (Adjustable Rate) 2.95% (0.1%) 200,000 100.00 100,000 90.00 0 80.00 New Car Loan (48 Month) 4.35% 0.5% -100,000 70.00 -200,000 Home Equity Loan ($30,000) 4.69% (0.1%) -300,000 60.00 -400,000 50.00 -500,000 40.00 Currencies End of Wk. Year -600,000 5/31/2012 To Date -700,000 -800,000 Euro (€) vs. Dollar ($) $1.24 (4.3%) Source: Bureau of Labor Statistics Source: University of Michigan Pound (₤) vs. Dollar ($) $1.54 (0.1%) Consumer Price Index (12 Month % Change) Producer Price Index (12 Month % Change) Not Seasonally A djusted Not Seasonally Adjusted Dollar ($) vs. Yuan (Y) 6.37 0.3% 6.0 10.0 Dollar ($) vs. Yen (¥) 78.32 0.7% 5.0 8.0 6.0 4.0 Indices / Benchmarks End of Wk. Year 4.0 3.0 2.0 5/31/2012 To Date 2.0 0.0 Dow Jones 12,393 1.4% 1.0 -2.0 0.0 -4.0 S&P 500 1,310 4.1% -1.0 -6.0 -2.0 -8.0 NASDAQ 2,827 8.5% -3.0 -10.0 Russell 2000 762 2.8% Source: Bureau of Labor Statistics Source: Bureau of Labor Statistics MSCI Emerging Markets 906 (1.1%) Industrial Production Capacity Utilization Seasonally A djusted Seasonally A djusted Inflation Current Year 105.00 85.00 Data To Date 100.00 80.00 GDP Growth (Last reported Q) 1.9% 95.00 75.00 Consumer Price Index (CPI) (0.3%) 90.00 70.00 85.00 Producer Price Index (PPI) (0.1%) 80.00 65.00 Oil Price ($ per barrel) $86.53 (12.4%) Natural Gas Price ($/MMBtu) $2.39 (32.3%) Gold Price ($/troy oz.) $1,560.43 (0.2%) Source: Federal Reserve Source: Federal Reserve Unemployment Insurance (Initial Weekly Jobless Claims) Investor Sentiment Current Prior Seasonally A djusted 700,000 Data Month 600,000 Consumer Sentiment 79.3 76.4 500,000 400,000 Consumer Confidence 64.9 69.2 300,000 Total Put - to - Call 1.08 200,000 100,000 Volatility Index (VIX) 24.06 0 Source: Federal Reserve Real GDP (Quarterly Percent Change) S easonally A justed A nnual R ate 8.0 6.0 4.0 2.0 0.0 Sources: amgdata.com, bloomberg.com, hoovers.com, onada.com, Bankrate.com, WSJ, ‐2.0 Yahoo Finance, Federal Housing and Finance Board, B ureau of Labor St at ist ics and various ‐4.0 online data retrieval websites ‐6.0 VIX values > 30 = more volatility as a result of investor fear or uncertainty, ‐8.0 VIX values < 20 = less stressful, even complacent, times in the markets Indexes cannot be invest ed in direct ly, are unmanaged and do not incur management f ees, cost s and expenses. Past perf ormance is not a guarant ee of f ut ure result s. Source: Bureau of Economic Analysis DISCOVER | DEFINE | DEVELOP | DESIGN | CONSTRUCT | MONITOR | EVALUATE 655 Redwood Highway, Suite 109 Mill Valley, CA 94941 (415) 381-9076 D (415) 381-2917 F schmitzcapital.com Page 2 May 2012 | Mike’s Whiteboard Wisdom SUMMARY The table below is meant to be a quick illustration which confirms some of our thoughts on the broader economy and current outlook. Emerging Markets Despite the longer-term demographics and fundamentals, EMs will likely remain volatile due to problems in the U.S. (growth), China (inflation) and sovereign debt crises in Europe. Central banks in many EM’s have eased monetary policy, reversing inflation-fighting/tightening policies which even- tually curbed growth. We still believe in this sector’s long-term strength due to demographics (large emerging consumer bases), stronger govern- Positive ance and “relatively” solid balance sheets. U.S. Inflation Inflationary pressures moderated significantly in Q1 2012 and remain in the Fed’s “comfort zone”. Our near-term inflation expectations are very low. Interest Rates Borrowing costs remain at historically low levels and, due to economic con- ditions, the Fed has indicated it is highly unlikely to tighten until late 2014. The yield curve should steepen as the economy grows. U.S. Corporate Earn- Cash balances are at historic levels ($2 trillion-plus) and balance sheets re- ings main very strong. The corporate sector is as strong as it has been in over 10 years, but earnings should moderate and top-line growth will be king.
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