Asia/Pacific – China’s real estate bubble may be starting to deflate as residential prices have begun to decline in some major cities. Though this could temper undesired real estate speculation, it may also mean that the economy will slow more than desired with a meaningful effect on world growth. The country was further rocked by a wave of violent unrest in urban areas. The ruling party deployed massive security forces in order to contain public anger over various economic and political grievances.
Europe-Signs of continuing social discord in the peripheral Euro nations continued as Portugal’s opposition Social Democrats won a conclusive victory in the troubled country’s general election winning 39% of the vote versus the ruling Socialists’ 28%. Meanwhile, Greece kicks off its newest austerity drive this week in the midst of street demonstrations protesting current and proposed measures. However, it is far from clear that Greece will be able to meet any of the terms of a new bailout package and the European Central Bank remains vehemently opposed to any debt restructuring. Germany’s parliament voted in favor of further aid for Greece but repeated its desire to see large private sector participation in another Greek bailout package.
United States-The Wall Street Journal reports that nearly 40% of homeowners who took out home equity loans owe more than their homes are worth. This is more than twice the rate of those who did not take out second mortgages. However, U.S. households did see their net worth increase 1.2% in the first quarter from a year ago as positive stock market performance, increased savings, and debt reduction outpaced declining real estate values. Americans have made considerable progress in cutting back on their debt burdens. By restricting use of credit cards and other credit facilities and walking away from mortgages, Americans were able to reduce their total debt to 18.4% of assets in the first quarter of 2011. This is down from 21.7% two year ago, but higher than the 14.4% average during the 1990’s.
The Federal Reserve’s Beige book was released last week. The Beige book is a compendium of economic reports from the twelve Federal Reserve districts and is central to the Fed’s economic outlook and subsequent policy. This most recent report was prepared before May 27th and will be used at the Fed’s next policy meeting June 21-22. Overall, the tone was relatively upbeat in contrast with some recent economic reports and indicated that the economy expanded the last two months with most of the districts reporting growth in manufacturing and an improving labor environment. Only four districts reported a slower pace of growth during the survey period. Separately, Fed Chairman Bernanke said Tuesday that the economy is growing more slowly than the Fed had anticipated, but predicted that growth would pick up later this year. Bernanke said the economic recovery is “continuing at a moderate pace, albeit at a rate that is both frustratingly slow from the perspective of millions of unemployed and underemployed workers.” He further pointed out that the economy continues to recover from the worst financial crisis since the Great Depression and faces headwinds from the effects of the Japanese disaster to global pressures in commodity markets. In this environment he reiterated that “monetary policy cannot be a panacea.”
Financial Markets-The Standard & Poor’s 500 lost 2.2% last week and the MSCI EAFE index of international markets declined 2.4% in U.S. dollar terms. The dollar rose versus the Euro and Pound, but declined versus the Yen. The ten year treasury yield fell to 2.97% while the two year yield declined to 0.40%. Gold declined 0.7% and oil declined 0.9%.
Other Economic News Last Week
-Consumer credit grew more than expected.
- The trade deficit shrank.
-Jobless claims were higher than expected.
The following is not intended to reflect any specific investment portfolio managed by WheelerFrost Associates, Inc. or to provide investment advice. Investment recommendations made by WheelerFrost Associates, Inc. are given only on a client by client basis in conjunction with a specific investment plan.
Current Outlook
- We have a less constructive view of stocks, but still favor them over bonds.
- Developed countries appear attractive versus the U.S. on valuation criteria.
- Emerging countries appear attractive versus the U.S. on growth criteria.
- Favor commodity exposure as a hedge against commodity induced inflationary pressures.
- Corporate and mortgage-backed bonds are favored over treasuries.
- Municipal bonds are attractive relative to treasuries on a yield basis as investors remain unduly nervous regarding the states’ credit quality.
- Favor State General Obligation municipal debt as well as essential services issues.
Risks
- Higher oil prices due to Middle East turmoil and emerging country demand.
- Potentially over-stimulative Fed policies and rising commodity prices are inflationary threats.
- Debt levels and budget deficits in developed countries pose threats to sovereign debt.
- Credit conditions remain challenging for individuals and small business.
- Inflation concerns in emerging countries are forcing monetary tightening that could lead to slower global growth.
This review is compiled from various research sources and nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based on any information provided herein. While WheelerFrost Associates, Inc. has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability or completeness of third party information presented herein. Information provided reflects WheelerFrost Associates, Inc. views as of a particular time. Such views are subject to change at any point and WheelerFrost Associates Inc. shall not be obligated to provide notice of any change.