Asia/Pacific – Japanese Prime Minister Kan survived a no-confidence vote, but pledged to resign after the majority of earthquake recovery was finished.
Toyota saw vehicle production decline 75% in April but expects output to reach 90% of normal by July and equal last year’s output for the full year. Honda indicated its North American production should reach 100% by August.
Europe-The IMF and EU were close to finalizing a new bailout package for Greece. If approved, Greece would receive an aid package worth 12 billion Euro in exchange for new spending cuts, tax increases, and pledges to accelerate privatization of government assets. The aid package would allow Greece to roll-over, or refinance, 13.7 billion Euros of short-term debt obligations. Argus Research estimates that by year-end the combination of new debts and budget deficits will drive total Greek sovereign debt close to 175% of gross domestic product. With borrowing costs at elevated levels, Greece may not be able to afford to refinance its debt at market rates. Though it may be able to put it off for another year, it seems inevitable that there will have to be some form of debt restructuring for the country. The latest Greek negotiations came as European Central Bank President suggested the creation of a euro-zone finance ministry to monitor budgetary and economic policies of the individual nations.
Germany said that it will close all of its 17 nuclear reactors by 2022 in the wake of the Japanese nuclear disaster. The announcement sparked the inevitable backlash from the country’s biggest utility companies and will undoubtedly result in ongoing heated debate about energy resources.
United States-The trend of positive employment numbers stalled in May as the economy added only 54,000 workers during the month. This was down from 232,000 in April and is the first reading in three months to be below 150,000. The economy gained an average of 210,000 jobs in March and April and averaged 148,000 over the last six months. The unemployment rate edged up to 9.1%. While we have long thought that there are structural issues that will result in an elevated unemployment level for some time, we also feel that this most recent weakness may be exaggerated because of, hopefully, temporary factors. Goldman Sachs attributes about two-thirds of the spike in jobless claims to three factors that may be temporary. The first is Japanese-related supply disruptions, which affected not only automobiles but other manufacturing areas as well. Second is the weather, with floods and tornadoes devastating much of the central U.S. The third factor which may or may not be temporary is high gas prices. Four dollar gasoline has historically been a level that causes consumers to pull back on spending. However, pump prices have fallen about 25% since their peak in early May. Prices typically rise through June and July for the summer driving season and then decline in late summer.
Company earnings continue to be strong despite the challenging economic environment. By the end of May, 98% of Standard and Poor’s 500 companies had reported earnings for the first quarter and 68% of them beat estimates. Consensus estimates compiled by First Call indicate earnings should rise 14.5% for the second quarter versus a year ago. At the beginning of the year the estimate was for a 10.6% increase.
Moody’s Investor Services announced that they might review the Aaa debt rating for possible downgrade as early as next month. They indicated that credible progress toward a deal in Washington to cut deficits and increase the debt ceiling might forestall a downgrade. Moody’s also announced that with the implementation of the Dodd-Frank law, they felt the U.S. government will no longer go to extraordinary lengths to backstop major banks. As a result, they said they may downgrade the debt ratings of Bank of America, Citigroup, and Wells Fargo.
Financial Markets-The Standard & Poor’s 500 lost 2.3% last week and the MSCI EAFE index of international markets declined 0.1% in U.S. dollar terms. The dollar declined versus the Euro and Yen but increased versus the Pound. The ten year treasury yield fell to 3.00% while the two year yield declined to 0.43%. Gold gained 0.5% and oil declined 0.4%.
Other Economic News Last Week
-Factory orders fell.
- Consumer confidence weakened.
-New auto sales declined in May.
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 and Emerging countries appear attractive versus the U.S.
- 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.