Merkel Cooking Up Quite A Stew For The Markets

After having reflected upon the theatrics of the Euro crisis over these last 5 years I've concluded Jerry Seinfeld's Soup Nazi is a caricature of German Chancellor Angela Merkel, "No, No Funds For You!". But as we know, he ultimately acquiesced when his most valuable asset his recipes were wrest from his control. Alas, we find Chairman Merkel faced with the same dilemma. The collapse of the Euro would strip Germany of a prized asset, a cheap currency and by extension cheap competitive exports. Germany has finally blinked and is freeing up Messrs. Draghi to utilize the full force and scope of tools available to stabilize the Eurozone. We anticipate further progress towards fiscal responsibility coupled with growth initiatives designed to jump start the hobbled over-indebted membership. This should be the path taken to help stabilize and save the Euro.

Domestically: We saw a surprise snap back on the jobs front with July's non-farm payroll figures adding 163,000 jobs, almost double the prior 3month average. While a relief, we need to see these figures gravitate toward 200,000+ to make a dent in the unemployed and underemployed as reflected in the U-6 statistics.

Housing: Another bright spot housing. I know you needed to do a double take on that one. Housing is solidly rounding out a bottom and turning up. Housing starts and housing permits have shown strength most recently while at the same time home prices actually turned up.


Industrial Production: Industrial production snapped back to show a .06 gain for July. Equally impressive capacity utilization rose .04 to 79.3 healthy but slightly below its long term average of 81. This 1.7% spread represents the spare or excess capacity for expansion in our manufacturing sector providing an buffer against inflationary pressures going forward.

Leading Economic Indicators: LEI rose .04% in July which would suggest continued economic expansion albeit at a moderated pace for the near term or next six months. Strength was lead by housing permits and the drop in initial unemployment claims.


Retail Sales: Resilient doesn't come close to capturing the state of the US consumer. Blind? No. How about simply pent up demand being released and the want/need to feel better. This is partially the tale but the bigger untold story is things continue to get incrementally better. This best explains the insatiable appetite for $500.00 I-phones and $600 I-pads along with auto sales hitting a $14 million+ annual run rate and home sale finding the fabled Unicorn, or bottom.


There is also the drag on the Us economy that comes from abroad which we've spoke of ad infinitum in past tomes. Europe: Europe is a case of Humpty Dumpty having falling off the wall, shattered and ECB's Jean Claude Trichet sensing the opportunity for an omelette. Only then to have Chef Draghi come in behind and attempt to reconstruct this fractured mess. A work in progress surely, however now having many more sous chefs at his disposal lending a helping hand.

Emerging Markets: As Jagger put it, " you can't always get what you want but if you try sometimes you get what you need". China was staring down the barrel of a real estate bubble forming that may have dwarfed our tech bubble. They acted proactively and aggressively to pierce this bulbous deformity before it became too grotesque. They succeeded but have also come perilously close to driving the economy into stall speed. The soft landing they were targeting may come to pass but it just might require a bit of juicing to achieve. Same for India, Australia and Brazil. While the global economy was in a mid round prize fight battling recession these stalwarts were on inflation watch hiking rates. They've since born witness to the effects of their errors and come about 180 degrees and are as Lionel Richie (Commodores) crooned, "we're eeeaasy, easy like Sunday morning" when it comes to monetary policy.

Closing: GSA has mentioned so many times in the past the old mantra of Wall Street, "you never fight the Fed". I believe the new updated mantra should state, " you never fight the Fed, and you Never Ever fight the Fed, Bank of Japan, Bank of England and Peoples Bank of China". There has been a stealth rally going on that most investors, both individual and institutional are missing out on. They remain under-invested and too heavily weighted in cash. The focus of professional investors, individual investors and media alike has been too much on what's wrong or what can go wrong and not enough on what is going right. At some point there will be a capitulation rally at which point we may need to re-balance and lessen our appetite for risk, but for now we'll maintain our aggressive posturing to the markets as I've still got a craving for a heaping bowl of Merkel's borscht.


Thank you again for the opportunity to work with you in these very challenging times.



Yours in pursuit of the KWAN!