What a strange week:

  • North Korea’s new leader, Kim Jong Un, tried to emulate his ancestors by firing off a rocket but it disintegrated minutes after take off. Following that Un-success the young Mr. Kim threatened to conduct a nuclear test so that his country could end “the days of enemies threatening and blackmailing us with nuclear weapons”.  The days of North Korea scaring the bejabbers out of the rest of the world with their ineptitude will apparently continue Un-unimpeded.
  • The Justice Department used anti-trust laws to sue Apple and some book publishers for allegedly colluding to raise the price of e-books. Curiously, the Justice Department chose to ignore Amazon, the company with over 50% of the book selling market. Apparently, the anti-trust division has decided the only way to justify their existence is to assist companies in attaining monopoly status.
  • Facebook agreed to pay $1 billion to take over a company with no business model, no profits and no revenue. This is the future of American business?
  • The advance Secret Service team for the Summit of the Americas in Colombia got sent home for acting out the plot to The Hangover. There are all kinds of puns I could make regarding the stiffing of hospitality vendors, but I’ll refrain.
  • A rumor that China would release much better than anticipated GDP growth caused the market to rally. Of course, the growth numbers were actually less than expected. Is there a rule against hastening the parting of fools with their money? Or is it a public service?
  • Janet Yellen led a parade of 13 Federal Reserve speeches on the week by ignoring the inflation figures and hinting that she wouldn’t be opposed to even more “stimulus”. William Dudley may have set a Fed record by giving three speeches in a 24 hour period. Maybe controlling the inflation of Fed official appearances should be made part of their mandate.
  • In a related story, the President of Brazil complained to President Obama that US monetary policy was causing problems in emerging markets. The Fed had no comment.
  • President Obama and Vice President Joe Biden both released their tax returns. The President paid a lower tax rate than his secretary proving that the Buffet tax is desperately needed to make sure somebody other than politicians pay their fair share. Biden reported $379,035 in income for 2011 proving that you can get something for nothing. Mitt Romney requested an extension to file his taxes which his campaign assured everyone he would do just as soon as the blister heals from counting all his cash.
  • Google announced earnings and a stock split that wasn’t really a stock split at all but actually a dividend that wasn’t a dividend. Apparently doing no evil can only be accomplished by ensuring that shareholders don’t have much say in how the company is run.
  • It emerged that a JP Morgan trader, nicknamed either The Whale or Voldemort, has taken such a large position in credit derivatives that the market has become distorted. The trader has taken positions that pay off if certain companies don’t default. Jamie Dimon emphatically denied this was proprietary trading and was just needed to offset the company’s risks. Since when did a company not defaulting become a risk that needed hedging? Chris Dodd and Barney Frank had no comment.
  • Best Buy’s 51 year old married CEO was dismissed for allegedly using company assets to woo a 29 year old female subordinate. The woman said it was “something small that people blew out of proportion.” Again, I’ll refrain from the obvious puns. The Justice Department’s anti-trust division was busy suing Apple and could not be reached for comment on any role Amazon may have played in the destruction of Best Buy’s business model and the CEO’s desire to find a new job.
  • The tax filing deadline this year is April 17th. The normal deadline of April 15th falls on a Sunday this year and you would think that would move the deadline to April 16th but that day is, ironically, Emancipation Day in Washington, D.C. so the deadline was moved to April 17th. Even more ironic: according to the Tax Foundation, April 17th also happens to be Tax Freedom Day, the day when the average American will have worked enough to pay their tax liability for the year. Happy Emancipation Day, indeed.


It was a bit of a strange week in the markets as well with stocks posting a second consecutive down week for the first time this year. Stocks are now down all of 3.5% from their recent peak but that was enough to completely flip the AAII sentiment survey. Just a couple of weeks ago, it seemed like everyone was bullish except us and now we suddenly find ourselves in the majority. Bullish sentiment dropped from 38% to 28% in just one week while the bear camp expanded from 28% to 41.5%. This is evidence, if any more was needed, of the attention investors now pay to short term moves in the market. We’re all traders now and that is not good news for the market or the economy.

It is tempting to believe that the sudden flip in sentiment means this correction won’t carry much further, but the worries that caused last week’s drop are not over and I don’t think the correction is either. China’s GDP growth, as I said above, was quite a bit less than expected at +8.1% and while that sounds good compared to our puny growth rate, it is a lot less than the world – especially the emerging world – has become accustomed to. There are signs that China’s loose monetary policy is having an effect on lending but higher than expected inflation will probably delay further easing. Slower growth in China will have global growth effects.

The European debt crisis appears to be entering a new phase as well with Spain now the main attraction. The new government there is trying everything they can to show the rest of Europe they are doing what’s necessary to meet their fiscal targets but I see no way for them to close the gap between fiscal reality and a bond market moving in the wrong direction. Spanish bond yields are rising and the only buyers seem to be Spanish banks funded by the ECB. If they decide self preservation is preferable to patriotism, Spain won’t be able to refinance their existing debt much less fund their current deficit. The ECB will eventually be the buyer of last resort in one fashion or another because with elections in Greece and France in the next 2 months, getting any other type of bailout deal done will be next to impossible.

In the US, the economic stats continued to disappoint last week with small business sentiment, consumer sentiment, wholesale inventories, various inflation measures and jobless claims all printing worse than expected. Even the one so called bright spot – the trade balance – shows an economy slowing. The improvement in the trade deficit was primarily a result of weaker than expected imports of consumer goods which doesn’t exactly point to a robust economy.

For markets pining for more QE, the inflation reports were a dose of reality. Import price increases have moderated recently but are still 3.4% higher than last year while export prices are up just 0.9%. Prices for imported industrial supplies were up 3% in what cannot be good news for manufacturing margins. Producer prices were flat at the headline level but core prices are 2.9% higher year over year. Consumer prices also came in higher than the Fed wants with headline up 2.6% and core up 2.3% year over year. The year over year core rate actually rose slightly from last month’s 2.2%. Could some Keynesian please tell me how this is possible with all that spare capacity around? Output Gap: The difference between the predictions of Keynesian economic models and observed economic reality.

The jobs market got some more bad news last week with new jobless claims coming in at 380,000, up 13k from last week’s revised – higher – number. All the revisions recently have been higher and I am very worried that we are seeing a trend change. I would remind readers that jobless claims and the stock market are highly correlated. For now, at least we can still say claims are under 400k but the current level is not indicative of a growing job market.

We remain very conservatively invested with a large allocation to cash. US stocks are not cheap based on normalized earnings and while bonds are not attractive long term investments, they may be the only game in town if the economic data continues to disappoint. We’ve sold our high yield position and would favor Treasuries or Munis over corporates until the growth scare – or whatever this is – passes. I still don’t expect to get a full blow recession soon but rather a continuation of the slow growth we’ve seen since the recovery started. After the market adjusts to that reality, prices should be more attractive. In the meantime, at least the world is providing us with entertaining news.

For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, Joe Calhoun can be reached at: jyc3@4kb.d43.myftpupload.com or 786-249-3773.

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