"Kee" Points with Jim Kee, Ph.D.

Europe:  When you hear "European headline risk will be with investors for some time, perhaps several years," this is what it means, i.e., volatile markets! Spain and Greece are both in need of funds, with Spain reputedly close to requesting a formal bailout. Spanish 10-year bond yields are at 7.5%, so European Union leaders need to act in order to provide a backstop or bail-out plan, which would reduce default risk, lower rates and improve Spain’s solvency. A bailout, in turn, requires austerity measures in the form of spending cuts, labor market liberalization, and tax hikes (i.e. deficit reduction), all of which tend to produce protests and perhaps even riots. The "troika" – International Monetary Fund, European Central Bank, and European Commission – need to act in order to stem bank runs in Spain and bring rates down. I suspect that they will, but it will certainly be a bumpy ride (big market swings up and down) over the next couple of months and even quarters. Oddly, this paragraph could almost be summarized as "nothing new in Europe, really."Since the onset of the Euro crisis at the beginning of 2010 the market has increased at a compound average annual growth rate (CAGR) of about 7 percent per year, just below long-term averages.

The U.S.:  The big event this week is Friday’s advance estimate for second quarter GDP, which is expected to be around 1.5%. That’s down from the first quarter’s 1.9% rate, and I suspect that the actual number will turn out to be a little higher than consensus, but either way it's slow growth. Investment and hiring are in a holding pattern right now, and at the risk of sounding redundant, the only thing that keeps this from being a recession is the fact that the cyclical drivers of the economy, specifically housing and autos, are already at bottom. As for earnings, second quarter results have thus far been a mixed bag but okay. According to Zacks, of some 120 (out of the S&P 500) that have reported so far, about 67% have beat analyst earnings estimates (that is, profits or "bottom line" results) while only around 51% have beat revenue estimates (sales or "topline" results). That’s probably better than many feared, but management guidance going forward is not very upbeat (nor is it catastrophic, for that matter).

Fall elections:  Can anyone forecast political outcomes? I don’t think so. I worked for a firm that, during the 1980s, used betting odds calculated from London betting houses Ladbrokes and William Hill. I feel that it was better than watching analysts on the news, but not perfect. That was a precursor to today’s "prediction markets," the most popular probably being Dublin based Intrade, which offers bets on current events. Right now Intrade's odds are that President Obama has a 57.6 % chance of winning the Fall Presidential election, with Mitt Romney at 40.2%. I mention this because I see Intrade cited a lot, and I bet a lot of Kee Points readers do too. What I know about prediction markets is that they are probably most accurate during the week of the election, so I wouldn’t put too much weight on what you see for a couple of months. Interestingly, Intrade put the odds at 80% for the Affordable Care Act ("Obamacare") to be struck down by the Supreme Court, so that wasa miss. Another political model that I follow is PollyVote (pollyvote.com), which was co-founded by Wharton’s Jon Scott Armstrong, the guru of rigorous, scientific forecasting in general. Right now Pollyvote shows a 51.3% chance for Obama (Republicans will narrowly control the House and the Senate). That’s pretty consistent with the other models I know of, that is, the race is within two percentage points right now.

I encourage you all to view the Second Quarter Webcast if you have not already. You may do so by clicking here:  Click here to view webcast. As always, your comments are very much appreciated.