Economic Headlines for the Week Ending October 14, 2011 …and What it Really Means.

 Jobless Claims Hover Over 400k…Jobless Claims were reported at 404,000 for the previous week, remaining at an elevated level since April.

 What it means…Over the past four weeks we’ve seen a number of surprises in Jobless Claims. There were weeks above 420,000, and then the surprise drop down below 400,000.  Now we are back in the middle of the range. When the average is taken, the reality is clear – not much has changed. Unemployment is high, there are no clear “job engines” in the economy.

S&P Downgraded Just About Everybody…At least in European terms. From countries likeSpain to 10 different banks, S&P slashed ratings, citing sluggish GDP growth across the euro zone and the continued sovereign debt crisis.

What it means…Lower ratings mean higher borrowing costs, which cuts into the profits of banks and can even cause their spread to go negative, where their cost of borrowing exceeds what they can earn on lending. This becomes very important in an environment where central banks are doing their best to force down long term interest rates. With short term borrowing already difficult in Europe because of a lack of trust of bank balance sheets, these downgrades will not help.

 Germany and France Announce a Plan to Make a Plan, and the Markets Fly…Angela Merkel, the leader of Germany, and Nicolas Sarkozy, the leader of France, announced that they would announce a “big” plan for fixing the European debt and banking crisis. The announcement will be near the end of October because the plan isn’t finished. European andU.S. equity markets soared on the news.

What it means…The two leaders, now known as the combined name Merkozy (like Brad Pitt and Angelina Jolie who became Brangelina), are in both a tough spot and a good spot.  It is tough because the European debt crisis is not going to be eliminated through miracle growth in GDP or a simple return of confidence that over-spending countries will right their ships. It is a good spot because the longer it goes on, the more flexible the participants become.  Remember Summer ’11 when European banks had to agree to a 21% haircut to get the new round of bailout for Greece? Well, now the number for a haircut (or write down) for Greek debt is between 50% and 60%. This is much closer to reality, but it takes time to get people to agree. Now what happens to banks that take such a loss? They look to taxpayers to make up the difference, of course. It’s a bad time to be French or German, unless you really wanted to pay taxes to support banks that bought Greek bonds.

Earnings Season Kicked Off…Alcoa started the season, missing earnings and disappointing. JP Morgan followed suit, but then Google blew the doors off.

What it means…The divergence should continue. The industries (finance and commodities, for starters) that have to do with the basic functioning of the economy will show weakness, while gadget-oriented consumer fluff should soar. It makes us feel better, and might even extend the rally in stocks for a while, but it’s no way to either put people back to work or grow our underlying economy. One final note on JP Morgan, they used a nifty accounting trick to record $1.9 billion in earnings. This accounting trick says that if your own debt outstanding, meaning bonds or other things you have issued, go down in value, that you as a company can record a “profit” because if you bought back the bonds at a discount then there would be a gain. So, no money changes hands, and the debt of the company is worth less because the company is seen in less favorable light, but the company gets to record a gain. Amazing! This little accounting move was worth $0.29/share of earnings, when the company’s total earnings were $1.02. So this move was almost 30% of the quarter’s earnings, even thought it was nothing but air.

 Retail Sales Up in September… Retail sales were reported up 1.1% when they were expected up 0.8%, and excluding car sales the number was up 0.6% on expectations of 0.4%.

What it means…The US is not falling off a cliff. While these numbers are not huge increases, they are positive and they are more than expected. This gives credence to the notion that the US is not falling into another recession, at least not right now.

 (source: HS Dent Publishing)

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