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US Equities Stalled, European Shares Brighter

US markets absorbed more negative data on Friday and the DOW JONES recorded a second consecutive week of losses as European markets trembled but looked for a brighter future. European shares slid for the second straight day but investors continued to take money for US markets and invest in European markets. Flows into European equities from US funds reached a two-month high in the week ending August 14, 2013. Trading has been light for most of August.

Federal Reserve policy is dictating market stability and speculation that tapering will commence next month weighs heavily on investors. Markets anxiously await the Federal Reserve policy meeting on September 17-18. US equities still show significant gains for the year but European markets are mounting a rally while th FTSEurofirst 300 and Euro STOXX 50 have gained about 8 percent year-to-date and posted gains for the second consecutive day.

By noon, the DOW was down 32.33 points, off 0.21 percent to 15,079.86. The S&P 500 Index was off 5.61 points or 0.34 percent at 1,655.71. The Nasdaq showed a gain of 1.67 points to 3,609.79, a 0.05 percent gain. The FTSAE Eurofirst 300 index jumped 0.03 percent. On Thursday, equities suffered the largest one-day drop since late June. On Friday, the MSCI’s road emerging equities lost 0.5 percent.

Friday’s economic data from the US was less than  encouraging.

On Thursday, a report indicated rising confidence among American single family property owners. The confidence level struck an eight-year high. However, the rapidly rising long-term interest rates has taken a tool on the resale marketplace.

New start for single family homes dipped 2.2 percent in July. However, starts for two-family home spiked 26 percent, completely reversing a downturn in June. July permits for multi-family homes increased by 12. 6 percent while approvals for single family construction slumped 1.9 percent. Overall, July permits climbed to 943,000 units, slightly below projections of 945,000. Housing starts reached an adjusted rate of 896,000 units.

The residential marketplace and new construction is one large factor in projections by JPMorgan and others that growth in the third quarter will reach 2.7 percent.

The overall consumer index reading from the Thomson/Reuters/University of Michigan survey slipped to 80.0, slight underneath July’s six-year high of 85.1. The August reading was the lowest in four months.

Currency Markets

US Treasuries have been volatile. Sparked by surges in British sterling and in the German bund, US notes have been erratic. The benchmark 10-year bond has risen by 1.6 percent since May. On Friday, the 10-year Tresaury was down 25/32 with a yield of 2.8564 per.

The climb in yields drove the dollar up against major currencies. Emerging currencies continued to slide. India’s rupee touched a record low a 62 per dollar. Year-to-date losses are 11 percent. The dollar rose to 97.62 yen. The euro slipped 0.1 percent to $1.3328.      

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Fed Governor Hawkish Talk Spills Equities

Comments by a hawkish Federal Reserve Governor tamed US equity markets and pushed the dollar higher on Friday, wrapping up a week of high volatility and leaving some investors cautious about the future. The comments also give insight into the tension from his peers that Chairman Ben Bernanke may be feeling. Bernanke is set to retire in the early part of 2014.

However, equity investors have enjoyed a remarkable run in 2013. The S&P 500 ended Friday on a  down note but still managed to record the strongest six months of any year since 1998. The S&P 500 fell 6.92 points after three days of gains. The Dow Jones fell 114.89 while the Nasdaq gained 1.38 points, closing at 3,403.25. The S&P 500 closed at 1,606.28, down for the month of June but still recording the first second quarter gain in four years.

Equity markets around the world have been volatile since May 22nd when Chairman Bernanke hinted that the Fed’s bond buying spree might be tapering down. His confirmation of that in June sent markets into a three day tailspin that has been marked by volatile shifts ever since.

Fed Governor Speaks Out  

Federal Reserve Governor Jeremy Stein and Richmond Federal Reserve President Jeffrey Lacker said on Thursday that the Federal Reserve’s historic accommodation policy could be reduced significantly sooner rather than later. Stein indicated that September may well be the month when Bernanke’s tapering begins.

The speeches unnerved equity investors. Steven Baffico, the CEO of New York’s Four Wood Capital Partners, explained the reaction; “The mixed signals from both the economic data and the Fed’s direction have caused a lot of anxiety and some opportunistic buying and selling, and it’s just created a much less predictive environment going forward.”

Friday volume was the second highest day of the year. 10 billion shares changes hands across the three major US exchanges. For the month, The Dow lost 1.4 percent. The S&P 500 shed 1.5 percent. Nasdaq also lost 1.5 percent.

Consumer Sentiment Running High

Defying the volatility, consumer sentiment improved in late June after Bernanke’s comments. Sentiment was extremely strong among high income earners but weaker in low income families. The Thomson Reuters/University of Michigan consumer confidence index registered 84.1, slightly below May’s 84.5 mark but higher than expectations.

The survey’s director said; “Consumers believe the (economic) recovery has achieved an upward momentum that will not be easily reversed. To be sure, few high or low income consumers expect the economy to post robust gains or think the unemployment rate will drastically shrink during the year ahead.”

Consumer sentiment is a key indicator because consumer spending accounts for 70 percent of the nation’s GDP. However, despite the optimistic view, household expenditures only grew 2.6 percent in the first quarter, well below government estimates of 3.4 percent.

The Institute of Supply Management – Chicago reported that Midwest business activity dropped to 51.6, a dangerous figure. 50 points indicates a contraction. These contradictory indicators typify the economy and add to the sluggishness of the recovery.

The Dollar Post Gains  

Equity market volatility is translating to solid gains for the USD. The dollar continued its upward march against the yen and the euro. The dollar befitted from Governor Stein’s comments.

Michael Feroli of JP Morgan said; “Stein’s remarks cannot be lightly dismissed and raise risks that some on the Committee may have already essentially decided on September. More generally, compared to remarks from Fed officials earlier this week, Stein’s speech was less geared toward calming market perceptions of Fed policy and did less to question market pricing of the first rate hike.”

The euro hit a session low of $1.2990 before closing at $1.3015. Against the yen the dollar rose again closing at 99.2, a gain of 0.9 percent. Dollar/yen activity surged to $4.0 billion. Euro/dollar trade reached $4.3 billion.

Markets are anxiously awaiting this week’s policy release from the European Central Bank. ECB president Draghi is expected to be more dovish than in the past.

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British Sterling In Jeopardy

US Equities looked to be turning down for the first time in over a week after European equities closed with modest gains. The euro shed 0.6 percent settling at 1.3035 as the dollar gave ground to the yen falling 0.27 percent to 96.01. Earlier in the session, the dollar had climbed to its highest rate against the yen since August 2009.

Oil continued to climb rising to $111 a barrel. US oil rose to $92.97 per barrel as crude rose by 5 cents to $110.27.

By noon EST, the Dow Jones Industrials Average was trending lower. The S&P 500 was off 4.13 points at 1,553.09. The Nasdaq was down 15.00 points to 3,237.87.

British Sterling Falls Further

The news from the UK was discouraging and plummeted the pound to 20 month lows with little hope of an immediate lifeline. Sterling fell to a 20-month low against the dollar to $1.4832.

The most damaging data came from the UK’s January manufacturing output. The decline marked the fasted downward spike since June 2012. Analysts expect the downward slide to continue as there is not economic data to suggest any strength.

Of late, sterling has suffered due to the nation’s credit downgrade and very low levels of economic growth. The UK is locked in many positions contrary to the members of the European Union and the natives are restless. The Bank of England has discussed the need for more quantitative easing which could sink the currency further.

The euro continued to rally against the pound reaching a two-week high at 88.77 pence, closing in on the 16-month high of 88.15 met on February 25. The BoE reported that losses against the dollar and the euro forced the sterling’s trade-weighted index to 77.9, a 20-month low.

Chief FX options strategist at Barclays Capital explained the dilemma facing the BoE. “If economic data continues to remain weak, like we saw today, it could make it easier for the BoE to loosen policy. Although our base case is for no more quantitative easing from the BoE just yet, it is a very finely balanced call.”

A serious problem for the Brits is that the spreads between the two-year US bond yields and the British two-year bonds are leaning toward the US, which, in turn, keeps demand for the dollar restrained. Market analysts observe that investors are selling sterling in favor of the dollar, not the euro. The US economic outlook is more stable that the euro.

2013 Performance Weak

The British pound has fallen 8.3 percent against the dollar and 7 percent against the euro. Sterling is the worst performing of the established currencies this year.

Minutes from BoE meetings indicate there is little reason to be optimistic about the economic trend of the UK. The most common opinion is that Chancellor George Osborne will give the BoE more latitude with inflation constraints, paving the way a period of quantitative easing and asset purchases.

The fear is that the Fitch ratings agency will follow Moody’s lead and also reduce the country’s credit rating. Neil Mellor, the Bank of New York’s currency strategist, said; “There are concerns on just about every front for the UK, political concerns, whether there will be another downgrade, the budget and whether or not we will see more monetary stimulus, everywhere you look there is a negative for sterling.” Expect more decline as the euro and dollar continue to stabilize.

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US Equities Resist Good Jobs Numbers

The upward spike of US equities appears to have slowed despite good news from the employment sector. Beginning last Friday, the Dow Jones Industrial Index has flirted above the 14,000 threshold several times. Each climb above the benchmark has been met with disappointing resistance.

In January the DJ gained six percent. The Nasdaq and the S&P 500 also enjoyed substantial gains. However, the February marketplace is struggling to stabilize and has been marked by volatile swings.

Equity market analysts suggest that the volatility is an indication that stocks have peaked. Equity insiders, those investors holding stock inside the company to which they are employed, are reportedly selling shares. This indicates the belief by insiders that the value of their company’s stock are not sustainable.

While the bull market investors dominated January, the bears have gained a foothold in February. The Thursday morning jobless report posted good news for the economy that should have been welcomed by equity investors.

Initial claims for state unemployment benefits fell by 5,000. This amounts to a seasonally adjusted new claims application figure of 366,000. The volume of new applicants hit a five-year low.

However, analysts had expected even a bigger reduction in initial filings. An economist at Ameriprise, Russell Price, may have summarized the markets view of the figure; “The labor market is improving, but certainly not at a robust rate by any means.”

The employment report shows that the number of persons receiving unemployment benefits after week one climbed 8,000 for the week ending January 26, 2013. The four-week moving average for new claims dropped to 2,250 to 350,00, the lowest level since March 2008. Perhaps the biggest news is that several key, proposed layoffs were forestalled. This would indicate that the recovery, though paper thin, is progressing. A Labor Department spokesperson suggested that the volatility in January was subsiding.

Non-Farm Productivity

A non-farm productivity report covering the 4th quarter 2013 shows that non-farm productivity droppe3d to the lowest level in two years. This data comes on the heels of positive non-farm employment news during the quarter.

Analysts suggest the turbulent weather may be the cause of the low output. Non-farm productivity fell by 2 percent in the 4th quarter. Output rose by 0.1 percent. Hours worked increased by 2.2 percent.

This downturn could be attributed to the implementation of reduced spending by the Defense Department. The overall economy gave back 0.1 percent in the last three months of 2012. On the right side, hourly compensation rates increased by 2.4 percent in the quarter.


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US Equities Surge, Euro Gains

Fueled by encouraging news from the Department of Labor and the Commerce Department and the University of Michigan, the Dow Jones moved quickly above the 14,000 mark before retreating just below the benchmark. The S&P 500 gained 12.09 points and the Nasdaq Composite jumped 24.44 points in early morning trading.

The Labor Department produced its January Non-Farm Payroll report indicating that the US added 157,000 jobs in January. For December and November, 127,000 more jobs were created than initially reported. The unemployment rate rose to 7.9 percent, but the market responded positively to the December and November adjustments.

Sectors With Job Growth

  • Construction jobs +28,000
  • Retail +22,000
  • Healthcare +23,000
  • Manufacturing unchanged
  • Government -9,000

The average work week was stable at 34.4 hours per week. Personal income rose by $0.4 in January

The improved construction industry is keenly watched by analysts. Health care added 320,000 jobs in 2012. Manufacturing showed no new jobs in January. More than 2,170,000 jobs were created in 2012. In calendar year 2012, job growth averaged 181,000 per month.

The Institute For Supply Management (ISM) report was also encouraging. The ISM reports that PMI registered 53.1 percent, a significant jump from the 50.2 registered in December’s report. Manufacturing increased for the second consecutive month. New orders increased to 53.3 percent, an unexpected jump of 3.6 percent.

The ISM reports that 13 of the 18 manufacturing industries posted increases in January. The report may identify the surprising dip in GDP in the fourth quarter. Weather disasters, the fiscal cliff and uncertainty in the euro zone have weighed heavily on the economy. However a paring in defense spending may well be the major factor in lowering the GDP.

Housing prices are making some headway but, on the whole, the industry is mired in a deep slump and it is clear that young Americans are not determined to purchases homes.

The Euro Continues Gains

The euro continued its impressive rally rising to 1.3674USD, a level not visited since November 2011. The new close represents a 0.6 percent one-day gain.

Driving the euro was a better than expected Purchasing Managers’ Index. The January report showed more demand than at any time in 2012. Output in Germany was particularly strong.

The euro is still riding a high from the early three-year loan repayments. Despite down days in Spain, Greece and Italy, there is a new confidence in the euro zone. All major indices in the region were up except for the three laggards who registered another day of hard hits

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Republicans Give Obama The Artful Dodge

In his previous life, John Boehner must have been an elusive running back. He has mastered the art of showing a little skin and pulling it away as quickly as possible. Republicans are moving ever so slowly away from their total resistance to tax rate hikes for the wealthy and the President appeared to give a little before Boehner once again threw a wrench in the formula. The latest wrench is called plan B.

Under Plan B, there would be no new budget cuts and would only include a raise in tax rates for persons earning $1 million or more per year. This just is not a big enough deal and in fact is a deal breaker. On his part, Obama agreed to settle on cuts for persons earning $400,000.

In Obama’s recent counter offer, he would permit the withholding tax holiday to expire. At the same time, private enterprises have entered the fray supporters of the Camp-Baucus proposal countered by supporters of Fix the Debt. Some multinational corporations have supported the Camp-Baucus initiative that would net these businesses an additional $1.34 billion per year in tax relief. There is a noticeable effort for multinationals to reduce their tax on foreign investment to near zero. Corporate taxes have gradually become a non-factor in the US economy. Corporate tax levels are less than 3 percent in 2012 and contribute 6 percent less to the GDP than in 1950. Is there such a thing as corporate loyalty?

The stock market reacted to Boehner’s artful dodge with a “business as usual” attitude. The market was up while gold and bond process sank substantially. The Dow Jones Industrials were up 115 points. The Homebuilders Association said new construction starts were at a two year high. There is an inkling of a stronger recovery but Washington may be the GDP down by rattling consumers during the peak buying season.

Meanwhile, Greek bonds received a revival notice from credit agencies and improved by about six notches. The euro gained strength against the dollar climbing above $1.32. This is a sad commentary on what is happening in Washington.

US debt has its own credit rating challenges. After Republicans caused the nation’s first downgrade in 2011, Republicans may well cause a further downgrade. Credit rating agencies have clearly stated that they expect a grand deal of no less than $4 trillion in deficit reduction initiatives. Under the current Republican plan, we will fall far short of that target.

In the afternoon, Boehner said he intended to bring Plan B, the tax rate increase for earners making $1 million or more per year. This may pass the House but should fail in the Senate. In any case, the President would probably veto such a bill. Remarkably, the Republicans appear to have abandoned their pledge to trim the budget, probably hoping to deploy bullying tactics when the debt ceiling needs to be raised.




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US and Euro Unemployment Hit Markets Hard

The one-two punch of dismal euro zone unemployment figures released on Thursday followed by a disappointing US non-farm payroll report on Friday sent global equity markets, commodity markets and the euro into a downward spiral with momentum. Combining the slow job growth with equally disappointing manufacturing data pressured markets as the UK and China announced another round of quantitative easing.

Only 80 thousand jobs were created in June and May’s new jobs were trimmed to 77,000. While it is not believed that the Federal Reserve will acquiesce to a 3rd round of quantitative easing, there exists more than enough data to prove the economy is at a standstill.  At the root of the slowdown, is the debt crisis in the euro zone where there are no significant initiatives to stabilize the region.

After Friday’s Labor Department non-farm payroll report, the Dow Jones, Nasdaq and the S&P all lost ground.  The DJIA shed 124.2 points or 0.96 percent settling At 12, 772.47. Nasdaq lost 38.79 (1.30 percent) to 2,937.33. The S&P fell 0.94 percent to 1,354.68.

As the payroll report rippled through Europe, equities turned sharply down. The FTSEurofirst 300 index fell 1 percent to 1,033.77 in the worst day of trading in two weeks. The ripple effect sent Spain’s borrowing costs above the unsustainable 7 percent level. US 10-year treasuries rose to 1.541 percent, the lowest rate since early June. The two-year German bond settled in the negative for the first time in the country’s history.

Commodity markets also turned down as the need for raw materials slowed. Oil prices dipped 3 percent as copper fell 2 percent and gold dipped 1 percent.

Following the ECB’s lowering of interest rates on Thursday, the euro slumped to $1.2296 USD, a two-year low.

Despite the overall weakness in job growth, there were some positives in the payroll report.

  • Temporary jobs increased more than in the previous three months.
  •  Average hourly wages increases six cents.
  •  Number of hours worked rose to its highest level since November 2008.
  •  Household labor increased to its highest level in 2012.

Upon a close look, the payroll report showed a consistent trend. Private employers added 84,000 jobs but the public sector lost 4,000 jobs. The public sector is trimming budgets and jobs. As the attached chart reflects, since January 2010 government has shed 536,000 jobs. During that time, the private sector has created 4.3 million jobs. In most cases, private sector jobs do not provide the benefits that the private sector offers. In the tiresome political theater that is holding the economy and entrepreneurs hostage, the federal government has shrunk by 612,000 persons since President Obama took office. That shakes out to be a savings of $30 billion per year.

The Obama administration has proposed much-needed infrastructure sending to boost employment. This would raise private sector employment.  However, if the public sector slows job trimming, government will no longer negate the payroll report.

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Central Bankers – Read Between The Lines

Central bankers around the world are short on firepower and long on rhetoric.  With limited options and the wafer thin economy in Europe, marketplaces are looking for relief that cannot appear without possibly exhausting a failsafe position.  As they say at the racetrack, “this one is gonna’ be a close one.”

The stakes are high; the remedies few and far between.  And, investors are exhausted trying to interpret what the meaning of a torrential downpour of messages and releases relayed through media really mean.  What has been increasingly apparent is that central bankers try to buoy confidence through scripted conveyances that carry no weight.

This media push began with Greece and has heightened ever since.  Now, the practice has spread to the US where the slippery slopes of a ginger recovery could very easily take a downward turn in a heartbeat.  While Fed Chair Bernanke has hung tough in perilous timed, the options are running out and the Chairman knows it.

The world has poured money into the US equity markets and has sustained a nice comeback.  However, the fragility of the recovery is highlighted by the belated reaction to disappointing March employment numbers. 

Bernanke has played it close to the vest about the possibility of a third stimulus infusion, commonly called Quantitative Easing 3 (QE3).  Investors are betting on this easing but in minutes of the last Fed meeting, 10 of the 12 board members shied away from another stimulus package.  Today, the Dow Jones Industrials (DJI) opened off 143.43.  What is difficult to ascertain is if the pessimism is a result of the employment report or the release of the Fed minutes.

The S&P index opened down 17.03 and the robust Nasdaq shed more than 42 points.  During the day, SONY surprised marketplaces with an announcement that 10,000 workers would receive pink slips.  With the emergence of Samsung, SONY has been unprofitable for four consecutive years.

All this amidst the rising price of oil has world markets reeling.  In the first quarter, the cost of oil has increased $20 per gallon. The response to the US unemployment figures can best be measured by the rise in gold prices.  The price of the precious metal was on the rise by mid-afternoon.

In China, a weekend report indicated that inflation is settling in.  The projected inflation rate rose to 3.5 percent. China will release the newest trade figures on Tuesday and projected GDP growth on Wednesday. China has set a projected growth in GDP of 7.5 percent this year.

In then US, the focus is on jobs more than oil.  The nation’s unemployed find themselves in the precarious position of being unproven in the newest technologies.  Meanwhile, there exists a strong college educated labor force looking for first jobs.  Forty percent f the country unemployed workers have been out of work for more than six months.

Bernanke appears to be offering continued low interest rates as an incentive for employers.  The issue here is how these rates will impact the inflation rate.  Without a decline in oil, the Fed will be forced to raise interest rates to counter inflation. And, there is a strong possibility that the Obama Administration will be forced to dip into the nation’s oil reserves.

The 2012 presidential race and the 2012 congressional races will be decided by which candidate and which party offers tangible relief for the diminishing middle class.  In the mix will be jobs, oil and energy programs, tax reform, healthcare and the cost of education.  The candidates who provide hard solutions will most likely be in office by this time next year.

Americans are tired of talking about failed programs and assigning blame. Give us answers.

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Ben Bernanke Speaks

Today, the euro moved above the $1.32 mark reaching a six-month high against the dollar.  Over the past week, the euro has trended north against the dollar.  In the middle of a strong U.S. equity rally that has the Dow Jones approaching 2008 levels, one can only ask how the euro valuation is gaining value against the dollar.  Granted the European Central Bank is pouring funds into euro zone bond offerings but something seems awry. 

The trajectory of the euro and its relationship to the dollar is indeed a puzzling concern.  What these valuations reflect the world’s central bank’s ability to unleash a bevy of remedies for troubled economies.  The problem in Greece is that there are 17 nations in peril and several, including Greece, in need of resuscitators.

As the streets of Athens fall prey to yet one more countrywide labor strike, the Greek parliament deliberates the austerity cuts that will tighten Greece’s belt even further.  And, why not?  Greece only gained admittance to the euro zone due to fabricated bookkeeping. The Greeks are used to retiring with full pensions at age 59. The people who may or may not come to their rescue are unhappy to retire at age 70.  The socio-political divide between Greece, the euro zone and other global economies is so vast that a working relationship seems impossible.

Yet, even though Greece fails against every reasonable economic standard and all 17 members of the euro zone and most of the 27 European Union (EU) are mired in unsustainable debt amidst a prolonged recession, the euro is rising.  How then is the American dollar devaluing as the euro is rising?

The answer is Central Bank intervention; the same action that prevented the U.S. banking sector from destroying the national and international markets.  However, the ECB does not have the ability to execute quantitative easing.  This has left the ECB, the EFSF and the IMF all groping for some sort of coordinated counter attack.  The institutions have generated big initiatives but when one parliament fails to support these initiatives, they become meaningless proposals.

If there has been one consistent theme of the Republican Presidential Debates, the role of the Federal Reserve and the role played by Federal Reserve Chairman Ben Bernanke should change.  Some candidates have suggested that the Federal Reserve has no constitutional basis and should be disbanded. 

But, let’s be clear.  Had Ben Bernanke and Timothy Geithner, the Secretary of the Treasury, not worked decisively, creatively and rapidly, the entire global economy would have crumbled.  This event would have made the Great Depression look like a hiccup.  You may not like a certain lack of transparency and you may disagree with the power vested in the Fed, but when George Bush’s recession took hold, it was Bernanke’s and Geithner’s decisive action that saved the U.S.   

If there is anything to be learned about the euro crisis, it is the importance of a strong central bank that has the ability to make adjustments in response to economic emergencies.  For the past two days, Chairman Bernanke has been explaining his vision and his policies in regards to the U.S. economy, the struggling euro zone and the possibility of another round of economic stimulus.

In an interesting exchange, Bernanke informed Congress that he was determined to prevent the treacherous euro zone waters to destruct the economic progress the U.S. has made.  Bernanke was cautious in describing the newest employment data and he was equally cautious about the state of the recovery.

To describe the upbeat employment news, Bernanke said, ”We still have a long way to go before the labor market can be said to be operating normally.”

Regarding the euro zone debt crisis, Bernanke offered, “We are infrequent contact with European authorities and we will continue to monitor the situation closely and take every available step to protect the U.S. financial system and the economy.”

In alarmingly light activity, the Dow closed higher once again, but there is an underlying uneasiness in the marketplace as investors try to escape the Greece problem and as the euro zone tries to contain the damage.  That seems an unlikely outcome.  While other euro countries may be willing to accept austerity cuts that Greece is being forced to accept, the biggest fear is the fear of contagion.  There are very few reasons to believe that euro zone members and EU members will make the dramatic contributions that could calm market jitters.

The private and public investors charged with reaching an organized default mechanism with Greece are failing under the weight of political and economic conflicts. 

Bernanke and the Bush Tax Cuts

The Bush Tax Cuts expire on January 1, 2013.  Most observers have assumed these cuts would become the big political topic after a new administration is elected.  In a rare opinion, Bernanke informed Congress that the Bush Tax Cuts would influence household and corporate spending and could well stabilize the deepening national debt.

“I don’t know exactly when the uncertainty would become a factor, but surely as we get closer to January 1, and Congress has not given a clear road map for how it plans to proceed, that would certainly affect business decisions, household decisions, as they look ahead to next year.”

The steady recovery has prompted prominent financial institutions BNP Paribas and Deutsche Bank to increase estimates of U.S. first quarter GDP growth from 2.0 percent to 2.5 percent.  Thus far, the Fed has lowered interest rates to near zero and has vowed to keep the rates there for a longer term.  To boost the economy, the Fed has invested $2.3 trillion in bonds.

The Republicans and Democrats are in a stalemate on every issue.  Only by giving one party decisive control of both houses will the tax issues, jobs programs and the fate of the Fed be decided.  In this politically charged environment wrought with deep potential potholes, Congress is unable to put aside political rhetoric and act on anything. 

The two biggest challenges facing Washington is a comprehensive jobs program and dealing with the national debt.  The cessation of the Bush Tax Cuts would be a huge step in narrowing the debt.  However, Republicans are only willing to discuss spending cuts.  The fundamental difference between Republicans and Democrats is the use of a balanced approach of income and spending to reduce the debt or spending only process to trim the debt.

Regarding the Bush Tax Cuts, Bernanke made it clear that inaction was not an option,” Just simply promising future action risks at least an adverse market reaction, an adverse reaction in terms of confidence and son on.”

About The Federal Reserve

Because the Federal Reserve promises to be a hot political topic and is already controversial, we should know what duties fall under the auspice of the Fed.  The Federal Reserve is the central bank of the United States.  In this role, the Fed is the “gatekeeper” of the U.S. economy. 

The Fed has the ability to issue quantitative easing, buy bonds and otherwise stabilize the economy.  The Fed is committed to regulate financial institutions, take actions to help the economy and to maintain sound financial institutions.

There are 12 Federal Reserve Banks in the nation.  These entities are offshoots of the Federal Reserve. These Fed banks assure the fluid nature of the country’s payment system. 

The Federal Reserve also acts as the Government’s Bank.  The Fed’s biggest customer is the world’s biggest spender, the U.S. government.  The Federal Reserve receives tax revenue and issues payments in cooperation with the policies of the U.S. Treasury.  In this capacity, the Fed purchases and sells U.S. bonds.  The Fed also prints money and creates coins.

The far-reaching Fed also supervises and regulates banks.  In this capacity, the Fed monitors banking activity and investments.  This particular responsibility angers most Republicans who believe market conditions should dictate banking policy.  Historically and recently, that model has failed.

The Fed is also charged to assure that banks are acting in the best interests of the public.  This accounts for new revisions in Truth in Lending and Equal Credit Opportunity Act, the Home Mortgage Disclosure Act and the Truth in Savings Act.

The Federal Reserve also determines margin requirements for investors.  This requirement tells investors how much money they can spend on investments.

Perhaps all these responsibilities are overshadowed by the Fed’s responsibility to act as the money manager for the biggest economy in the world.  The multi-tiered responsibility is all encompassing.  However, there is an excellent chance that every transaction and every credit action by consumers and lenders has the handprint of the Fed upon it.

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Euro On Rise?

Despite the Obama Administration’s resistance to contributing funds to the IMF in support of the euro zone, the euro has gained some traction.  The currency has climbed well above the $1.26 trough and is flirting to move past the current the $1.2867 level.  Traders suggested that the euro remains volatile and the currency may not have bottomed yet.

In October, the euro rose to $1.3145 against the dollar.  Analysts believe that until the currency crosses that threshold the bottom has not been found. 

The Thursday bond sales in France and Spain will serve as a good barometer for how much the S&P downgrades have hurt the euro zone.  Investors are cautiously optimistic in the wake of a bond sale in Portugal that sold 2.5 billion euros in debt and was fully subscribed.  Germany’s Wednesday auction also had more demand than anticipated.

Since last Friday, the dollar index has fallen from 81.784 to a two-week low of 80.473.  The Australian dollar gained strength climbing to an 11-week high of $1.0419. The Australian dollar is holding well above its 200-day moving average.  Australia is believed to have added 10,000 in December.

The Dow Jones equities continue to holdover 12,500.  Much of that support is the result of better banking news than expected.  The major financials appear to have fared better in the 4th quarter and will not require additional capital.

The positive euro zone activity seems foolhardy.  Greece is meting with private investors on Thursday in a last gasp effort to gain approval for their debt swap program, which is little more than a restructured default.

The structured default must occur by week’s end to avoid a breech in the 13.4 billion euro call in March.  Another major problem looms.  There is doubt that investors and hedge funds burned by Greece will stay out of the European bond sale market.  U.S. equities are strong and the dividends are especially appealing.

Treasury Secretary, Tim Geithner, informed the IMF that Europe would have to solve their own problems. U.S. taxpayers cannot come to the aid of countries like Greece, Italy and Spain.  The people lack the will and are clearly supportive of more aggressive jobs legislation.  The political fallout from a bailout of Europe would be devastating to President Obama. 

On the other hand, the European banking sector fell 32 percent in 2011.  Even with a temporary rescue plan, Greece will continue to need funding and Euro Zone members will face this same crisis sooner rather than later.  It is time for private investors to take what little money they can and let Greece go its own way. The negotiations with private investors are tense and it is difficult to see why hedge funds and other investors would throw good money after bad.  That is a business model that is fine with Greece but has no appeal to larger markets.

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