Friday, April 27, 2012 - Falling Down: US GDP, Spain, & Romania

DOW + 23 = 13,228
SPX + 3 = 1403
NAS + 18 = 3069
10 Yr yld -.03 = 1.93%
OIL +.26 = 104.81
GOLD  + 5.70 = 1663.80
SILV + .18 = 31.37
PLAT + 4.00 = 1579.00

This week was the best week in about one month for the major stock averages. Amazon climbed 15.7 percent to $226.85 and contributed half of Nasdaq's gain for the day. The S&P retail index rose 3.5 percent and hit an all-time high. Shares of Expedia, the Web-based travel provider, surged 23.5 percent to close at $40.31, after hitting a new high at $43 on record volume.

Growth in S&P 500 earnings rose to 7.2 percent this week from 3.2 percent at the start of the month. About 73 percent of the companies that have reported so far have beaten expectations. Earlier this week, a blowout quarter from Apple Inc gave the Nasdaq its best day of the year .  The S&P 500 is up 11.6 percent for the year. 

Pay no attention to the Commerce Department report behind the curtain of the Wall Street indices.  The report says the U.S. economy expanded at a 2.2 percent annual rate in the first quarter, far below expectations for growth of 2.5 percent. Growth of 2.2% is mediocre, but it’s worse than that once you peel away a few layers — about a fourth of the growth in gross domestic product was accounted for by a buildup in inventories, and half of it came from the building and selling of motor vehicles.

Strip away the inventory growth, and final sales in the economy increased 1.6%, the fourth quarter in the past five that was below 2%. Although all the headlines report on the GDP numbers, the number to watch is final sales, because that gauges demand for our products, not merely how much we made.

Consumers continue to outperform. Consumer spending rose at a 2.9% annual pace, the best in more than a year. Yet disposable incomes increased just 0.4%, the seventh quarter in a row in which spending growth outpaced income growth.

Business investment spending dropped 2.1%, the first decline since 2009. Spending by governments (federal, state and local) fell 3%, the sixth quarterly decline in a row. This austerity move just is not helping. Let’s not get carried away too much by the gloom and doom. The economy IS growing, even if it’s not as fast as we’d like. The economy has grown by nearly 7% since depths of the recession in 2009. Things are getting better, very, very, very slowly.

The largest US banks are accusing the Federal Reserve of attempting to misuse its new regulatory powers to shrink financial giants under the misguided belief that "big is bad."

Lobbying groups representing the big banks are pushing back against a set of proposed rules the Fed issued in December to more closely scrutinize the firms and rein in their risk taking after the 2007-2009 financial crisis.

In a letter sent Friday, the groups said the Fed is going too far and is proposing a set of policies on credit exposure and capital standards that go against the intent of the 2010 Dodd-Frank financial oversight law.

"We submit that an approach grounded in a 'too big' or 'big is bad' concept is not only contrary to Congress' intent but is misguided and detrimental to a sound, strong banking system and a strong economy," the groups wrote.

I remind you that the Volker Rule won’t go into effect until 2014, and most of Dodd-Frank has not been approved and likely won’t be. The Federal Reserve Bank of Dallas recently released a paper on Too Big To Fail. They concluded: “The too-big-to-fail institutions that amplified and prolonged the recent financial crisis remain a hindrance to full economic recovery and to the very ideal of American capitalism. It is imperative that we end TBTF. If allowed to remain unchecked, these entities will continue posing a clear and present danger to the U.S. economy.”

The Dallas Fed paper talks about the problems of Too-Big-To-Fail and says, “When competition declines, incentives often turn perverse, and self-interest can turn malevolent. That’s what happened in the years before the financial crisis.”

We are now assured that there will be no more bailouts. I’m not sure I believe it. I’m not sure the market believes it. I can assure you the banks do NOT believe it.

"The figures are terrible for everyone and terrible for the government ... Spain is in a crisis of huge proportions,", so says Spain’s Foreign Minister Jose Manuel Garcia-Margallo.

Standard and Poor's downgraded the government's debt by two notches. Unemployment shot up to 24 percent in the first quarter, one of the worst jobless figures in the developed world. Retail sales slumped for the twenty-first consecutive month as a recession cuts into consumer spending.

The downgrade spooked financial markets, raising the interest rate fellow euro zone struggler Italy was forced to pay to sell 10-year bonds at auction; 5.84% on the 10 year Italian notes. The yield was its highest since January as investors worried about the economic outlook in the bloc's indebted states. Italy's main banking association said the economy may contract by 1.4 percent this year, more than the government's 1.2 percent forecast. Spain's country risk, as measured by the spread on yields between Spanish and German benchmark government bonds, spiked before leveling off to around 420 basis points.

Romania's left-leaning opposition will try to form a new government after torpedoing the centre-right cabinet in a confidence vote today, the latest collapse of an austerity-minded ruling coalition in Europe. The defeat came hours before a confidence vote for another budget-cutting EU government, in the Czech Republic. Although the Czech Prime Minister survived, his unpopular cabinet will find it increasingly difficult to move forward.

The Dutch and the Romanian governments fall this week. The Czech almost fall. That’s just this week.