Archive for ND&S Updates

Cyprus, Part 2

March 25, 2013 


European officials have once again come up with a Cyprus bailout plan. This time the plan will protect deposits up to E100,000 but will result in large depositors taking a haircut of 30% to 70% or more. At least one bank [Cyprus Popular] will be liquidated. The Bank of Cyprus will likely survive, but in an altered form. The Cypriot economy [only E17.5B] will experience a significant recession, probably down 25%+ peak to trough.  Finally, the size of Cyprus’ surviving financial system will be much smaller.

However, Monday’s trading day suggested that the painful Cypriot rescue plan will be a template for several other Eurozone economies.  The Cypriot banks will not open Tuesday [Thursday is now the target opening date]. This delay is making things worse, suggesting that restrictions on financial flows to and from Cyprus will be in place for weeks if not months.

It is becoming harder for Europeans to kick the can down the road.  This makes the US dollar a safe haven, and gives our banks, with their fortress-like balance sheets, a golden opportunity to gain share around the world.

“Procrastination is opportunity’s natural assassin.”
-Victor Kiam

Beware of Greeks Bearing Deposits

March 18, 2013 


A better way to put it, beware of Cypriots having their deposits taken by fiat – 6.75% of deposits under  E100,000 and 9.9% on those over E100,000.  This is certainly a most unique way to structure a bailout, one that must have kept the EU, ECB and IMF officials working long hours.  It turns out Cyprus has been a favored spot for agile Russian funds to park.  It’s not surprising then that Putin characterized the plan as “unfair, unprofitable and dangerous.”  The plan requires approval by the Cypriot parliament; we think it probably will not pass in its current format.

A longer term problem is one of perception- the perception that the richer European nations feel comfortable beating up on the poorer and smaller (in this case).  Cyprus has been told to come up with E5.8 billion as their contribution to the bailout plan.  It’s not yet clear how this can be done if the deposit-snatching plan gets hung up.

Meanwhile the U.S. economy and markets have been flourishing- housing has been healthier, industrial production strong, and unemployment claims and new jobs much better.  Negatives have been consumer sentiment and gasoline prices.  On balance the numbers are positive and one Wall Street firm bumped up their 2013 GDP growth estimate to 3.0% from 1.5%.

“Don’t measure yourself by what you have accomplished, but by what you should have accomplished with your ability.”
– John Wooden


March 11, 2013 


Last week the DJIA finished the week at a new record high of 14,397 up 2.2% for the week. The big economic news for the week was the monthly jobs report on Friday which came in much better than expected with 236,000 new jobs and a drop in the unemployment rate to 7.7%. This is in spite of the year starting with higher taxes, rising gasoline prices and budget cuts. In addition the last 4 months have seen the strongest increase in hourly wages since the recovery began.

Earnings for the 4th quarter of 2012 also have come in stronger than predicted. Original estimates were for earnings to increase by 1.9%, but now look like they will be up 6.1%. However, guidance for the current quarter is coming in with negatives outnumbering positives by a 4 to 1 ratio resulting in projections for first quarter earnings growth of only 1.4% for the S&P 500.

This week all eyes will be on the retail sales numbers due out on Wednesday and if they come in below expectations it could be an indication that the tax increases and higher gasoline prices are starting to hit consumers. If retail sales are sufficiently disappointing they could trigger a correction in stock prices.

“Wisdom consists of the anticipation of consequences.”
– Norman Cousins

Slow Grind

March 4, 2013 


Stocks were mostly flat last week with the S&P 500 posting a minor gain and the Russell 2000 posting a minor loss. For the month of February, the S&P 500 was positive by 1.1% bringing the year-to-date gain to 6.5%. However, stocks have been mostly flat to range bound for more than a month as markets digest the strong gains experienced since November. We wouldn’t be surprised to see the markets take a breather given the recent rise in gasoline prices, the expiration of the payroll tax cut, and now the sequester taking effect. Keep in mind that since 1946 the average intra-year stock market correction has been 14%.

This week’s economic calendar is pretty quiet following the slew of data out last week from housing, GDP, and the sequester. Investors will look for continued progress in the slow grind lower in the unemployment rate from the following reports: Wednesday – ADP report, Thursday – initial jobless claims, and Friday – nonfarm payroll report. Economists are currently expecting job creation around 171,000 with the unemployment rate at 7.8%.

“He who knows nothing is closer to the truth than he whose mind is filled with falsehoods and errors”
– Thomas Jefferson