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

Slow news week:  Jobless claims fell (a good thing), retail sales increased, but modestly (perhaps reflecting higher payroll taxes and/or higher gas prices), consumer sentiment (Michigan Survey) rose, and industrial production declined in January (though December’s number was revised upward). The bottom line is that U.S. data was roughly in-line with expectations indicating slow growth. In the U.S., the majority of companies (just above 60 percent) reporting 4th quarter sales and earnings growth beat both topline expectations (sales) and bottom line expectations (earnings or profits). Europe remains troubled as GDP contracted for the fifth consecutive quarter, though first quarter 2013 data is looking somewhat promising (Wells Fargo Securities). Growth for Europe in 2013 will certainly be influenced by how strongly debt concerns resurface. What makes that difficult to gauge is the ongoing implementation of the European Stability Mechanism (ESM) and the European Central Bank’s Outright Monetary Transactions program. These are fairly new programs, and past debt flare-ups occurred prior to their creation and implementation.

 

The market continues its surge, up almost five percent year-to-date (nine percent from the December 28th low). Best candidates for causing a pull-back would be, in order, the Italian elections at the end of February, particularly if there is a Berlusconi party surge (UBS), and debates over U.S. spending cuts (slated to occur in March). A third factor would be a continuation of the recent divergence between the price of Brent crude (which has increased lately) and West Texas intermediate (which has not), if Brent is being driven more by fears of turmoil in the Middle East than by rebounding global growth. That’s something I’m watching.

 

Other items from last week that I found interesting were:

 

Europe – no exit! Europeans see leaving the Euro as jumping “from the frying pan into the fire” (Wall Street Journal). In each troubled European country (Spain, Portugal, Greece, Ireland, Italy), over 70 percent of respondents polled did not want to leave the Euro or Euro Zone.

 

Year-to-date, foreign purchases of U.S. debt have been strong. The largest foreign holder of U.S debt is China at $1.2 trillion, followed by Japan with $1.12 trillion. Both of these countries hold over five times as much as the next four largest holders, which are the U.K., OPEC, Taiwan and the Caribbean with about $200 billion each (U.S. Treasury Department, CNBC).

 

States most vulnerable to federal spending cuts (“sequestration”): The top ten states where defense spending is highest relative to state GDP (in order) are Hawaii, Alaska, District of Columbia, Maryland, Virginia, Kentucky, Alabama, Missouri, Connecticut, and Arizona.  The top ten states with respect to exposure to non-defense spending cuts are District of Columbia, Maryland, Virginia, New Mexico, Idaho, West Virginia, Tennessee, Alaska, Montana, and South Carolina (Wells).