This is a short week but I did want to mention a few things from last week that more or less sustain our overall outlook. In Europe, today’s headlines read “European leaders choose aid over default” as Greece was awarded $173 billion in aid in exchange for reforms aimed at bringing Greek debt down (and a writing off of $141 billion of Greek debt by private bondholders). This money comes with “unprecedented controls on Athens’ ability to spend the money” (Financial Times). Importantly, most of the funds come from other Eurozone governments, not the International Monetary Fund (IMF). I think the key takeaway here is that the agreement reflects the European community’s continuing preference for integration over dissolution. Also, GDP in the Eurozone  declined .3% in the 4th quarter, which is a bit less than what was expected.  Elsewhere in the world, China cut its required reserve ratio for banks over the weekend, which translates into looser monetary policy and easing liquidity conditions (and a positive for China’s stock market – GaveKal). I think the key takeaway here is the ongoing confirmation that China fears rising unemployment and the social unrest that comes with it, and will do everything in its power to avoid a “hard” (GDP growth less than 5%) landing. Finally, in the U.S., most of the data confirm continued expansion somewhere in the 2%-3% range. Jobless claims continue their “impressive downward trend” (Wells Fargo Securities) and home sales – both existing and new homes – appear to be turning up. Other data, including retail sales and manufacturing, tell the same moderate growth story. So, to summarized, we see continued evidence of 3 themes: moderate expansion in the U.S., continued efforts towards reform and fiscal integration in Europe (with a possible and hopefully mild recession) and continued efforts towards sustaining growth in China.

Last week was a light data week for the U.S., and most of what we did see was positive. Consumer credit increased in December (that’s the latest data), the second strong monthly increase in a row. This reflects growth in borrowing through credit cards, student loans, and car loans (Wells Fargo Securities). And capital spending by S&P 500 companies reached an all-time high in the 4th quarter of 2011. Some of this probably reflects the partial phasing out (to 50%) of the 100% expensing of capital purchases provision in the tax code at the end of 2011, but capital expenditures have been growing at double-digit rates for six quarters now (Empirical Research Partners). Incidentally, the U.S. Treasury Department issued a Fiscal Year 2013 Budget proposal today that would, among other things, extend the 100% expensing of capital purchases through 2012.

The consensus on China continues to be for a soft landing, meaning growth below the 9%-10% range but certainly above 5% (the Financial Times cites “greater than 8% this year”). In fact, a recent report by the global consulting firm McKinsey & Company indicates that their firm expects China to “maintain a rapid rate of growth,” largely through government policies that should spur consumption and investment (McKinsey Quarterly). What’s more, Hong Kong-based GaveKal points out that beginning-of- the-year data from China is distorted by the impact of the Chinese New Year, the biggest holiday in China, in which many businesses shut down for up to two weeks. You have to wait until the end of February to get a good read on how the Chinese economy is doing so far for 2012. We’ll keep that in mind and pay extra attention to the February data.

Europe: Greece’s creditors – the IMF and the European Union – are demanding what Greeks consider to be drastic reductions in living standards in return for a second tranche of bail-out funds. Measures include a 22% reduction in the Greek minimum wage (32% for workers under 25). The economics of this are that the minimum wages might force companies to pay employees more than they are worth to the firm, that is, pay them more than the value they add. Since younger and less experienced workers tend to have the lowest value-adding skills, it makes sense to set a lower minimum wage for them. The politics are such that minimum wage cuts lead to cries of favoring the rich over poor, and those are starting to rise in Greece. But they are little play in the rest of Europe, at least for now. The European Trade Union Confederation (organized labor in Europe) is having little success in mobilizing workers Europe-wide against austerity (Reuters). That’s because sympathy for Greece is lacking from other European countries (the lenders) in general, old and new (Spain, Italy, Germany, Finland, Lithuania, Slovakia). From an investment perspective, my feel is that the stock market’s resiliency to recent Greek headlines reflects the effectiveness of the European Central Bank’s LTRO (Long Term Refinancing Operation) program at reducing fears of a European-driven global liquidity or credit freeze. European region GDP numbers will be released on Wednesday. The expectations are for growth throughout the region to decline by 0.4% to 0.6% in the fourth quarter of 2011. We will discuss the results next week.

Last week was a light data week for the U.S., and most of what we did see was positive. Consumer credit increased in December (that’s the latest data), the second strong monthly increase in a row. This reflects growth in borrowing through credit cards, student loans, and car loans (Wells Fargo Securities). And capital spending by S&P 500 companies reached an all-time high in the 4th quarter of 2011. Some of this probably reflects the partial phasing out (to 50%) of the 100% expensing of capital purchases provision in the tax code at the end of 2011, but capital expenditures have been growing at double-digit rates for six quarters now (Empirical Research Partners). Incidentally, the U.S. Treasury Department issued a Fiscal Year 2013 Budget proposal today that would, among other things, extend the 100% expensing of capital purchases through 2012.

The consensus on China continues to be for a soft landing, meaning growth below the 9%-10% range but certainly above 5% (the Financial Times cites “greater than 8% this year”). In fact, a recent report by the global consulting firm McKinsey & Company indicates that their firm expects China to “maintain a rapid rate of growth,” largely through government policies that should spur consumption and investment (McKinsey Quarterly). What’s more, Hong Kong-based GaveKal points out that beginning-of- the-year data from China is distorted by the impact of the Chinese New Year, the biggest holiday in China, in which many businesses shut down for up to two weeks. You have to wait until the end of February to get a good read on how the Chinese economy is doing so far for 2012. We’ll keep that in mind and pay extra attention to the February data.

Europe: Greece’s creditors – the IMF and the European Union – are demanding what Greeks consider to be drastic reductions in living standards in return for a second tranche of bail-out funds. Measures include a 22% reduction in the Greek minimum wage (32% for workers under 25). The economics of this are that the minimum wages might force companies to pay employees more than they are worth to the firm, that is, pay them more than the value they add. Since younger and less experienced workers tend to have the lowest value-adding skills, it makes sense to set a lower minimum wage for them. The politics are such that minimum wage cuts lead to cries of favoring the rich over poor, and those are starting to rise in Greece. But they are little play in the rest of Europe, at least for now. The European Trade Union Confederation (organized labor in Europe) is having little success in mobilizing workers Europe-wide against austerity (Reuters). That’s because sympathy for Greece is lacking from other European countries (the lenders) in general, old and new (Spain, Italy, Germany, Finland, Lithuania, Slovakia). From an investment perspective, my feel is that the stock market’s resiliency to recent Greek headlines reflects the effectiveness of the European Central Bank’s LTRO (Long Term Refinancing Operation) program at reducing fears of a European-driven global liquidity or credit freeze.  European region GDP numbers will be released on Wednesday.  The expectations are for growth throughout the region to decline by 0.4% to 0.6% in the fourth quarter of 2011.  We will discuss the results next week.

Stocks in general had a stellar January as the S&P 500 gained 4.4%, the strongest January since 1997. A lot of this has been due to (1) improving data in the U.S., (2) lower perceived systemic financial risk from Europe due to the ECB's provision of unlimited three-year funding for banks (as well as better than expected bond auction in Italy and Spain), and (3) growing confidence in continued (3.5%ish) global growth and a mild (versus deep) Europe recession (Deutsche Bank). Some of this confidence in global expansion stems from stimulative monetary and fiscal efforts ("policy easing") in emerging markets.

In Europe, 25 of 27 European Union members signed a fiscal pact that is designed to reduce budget deficits and restore investor confidence there (Britain and the Czech Republic declined). It is a positive step, but it is only a step. For example, French President Nicolas Sarkozy wants to hold off on French ratification of the treaty until after the Spring elections, and his opponent (Francois Hollande) has vowed to renegotiate it if he wins (Wells Fargo Securities). Greece continues to drag its feet on reforms, although today the government agreed to lay off 15,000 public-sector workers by the end of 2012, a concession made to help secure loan funds. Portugal appears to be next on-deck, particularly since Standard & Poor's downgraded it to junk status on January 13th. But Portugal's overall debt load is smaller than Greece's, and it has a lower (but still high) debt-to-GDP ratio of 110% versus 160% for Greece. Other concerns include an increasing number of downward earnings revisions for U.S. companies. It is important to keep in mind, however, that profit margins haven't yet peaked in the U.S., and historically the stock market doesn't peak until about 5 quarters after earnings peak, on average (J.P. Morgan).

In the U.S., last week's positive ISM manufacturing and non-manufacturing reports pointed to expansion. That's consistent with Friday's payroll report (the Bureau of Labor Statistic's monthly Employment Situation Report), which indicated that non-farm employment rose by 243,000 in January – better than expectations. The unemployment rate fell to 8.3% (from 8.5%).  There are some seasonal factors at play here, like unusually warm weather, which reduces construction industry job loss from what normally occurs. But overall, the BLS (Bureau of Labor Statistics) reported that "job growth was widespread in the private sector, with large employment gains in professional and business services, leisure and hospitality, and manufacturing."