Memorial Day

Morris Segall     

As we conclude the celebration of Memorial Day and the end of the month of May we look back at a month that in our opinion signaled a “Sea Change” in the international capital markets cycle of 2009-10 and a refocusing on the crisis of international sovereign debt. As we wrote in our blog entries of May 6th, “From Optimism to Panic: A Greek Tragedy” and May 10th, “From Panic to Relief…”, the swift and severe collapses in equity and commodity prices signalled to us something more than a correction in overbought markets. The events since then have confirmed that despite substanial moves on the part of  worlwide international banking authorities to support the Eurozone and the euro currency. As we forecast, international monetary support has also been joined by austerity fiscal programs forced into enactment by the large debtor nations of Europe. Very good economic news around the world, particularly in the U.S., has largely been wasted by eroding asset prices and declining investor confidence. Unfortunately, the European efforts to “turn” the crisis are shorter term palliative measures and do not address the longer term concerns of successful debt reduction and economic vitality. We mentioned in our previous posts that the sovereign debt issues in Europe and the U.S. are longer term problems that will not go away with monetary bailout and fiscal austerity programs. The capital and commodity markets are signalling that. We will publish shortly our analysis of sovereign debt problems on our website, www.spgtrend.com. Suffice it that we are pessimistic because of retarded economic growth and strained liquidity in Europe and our belief lower debt/GDP targets in Europe over the next 2-3 years will not be met. We believe this will continue to overshadow the equity markets. 

As a result, we have dramatically shifted our capital markets strategy after our May 10th posting. While near term rallies from oversold conditions are likely, we are not expecting the capital markets to resume their sustained “uptrends” and reach new highs in this cycle. We have been counseling our clients and our audiences of our concerns and the need to become more defensive, reduce volatility and protect principal. We will delineate our new Capital Markets strategy in a new website article also forthcoming.  Readers should contact us for details.

The ongoing oil spill in the Gulf of Mexico is a long term ecological disaster and will have more serious economic consequences the longer it continues. The governmental and public response will parallel the reaction to the Nuclear power accident at Three Mile Island in 1979. America’s nuclear power program has been stunted ever since. We believe one of the beneficiaries of the Gulf oil spill will be a revisiting of the nuclear option as an answer to America’s power generating problems.

Lastly, some good news in May. On Friday, the Commerce Dept. announced  increases in personal income in March and April that would signal improvement in consumer disposable incomes. Just what is needed to support a continuation in consumer spending that increased in the first quarter. While consumer incomes increased in April, consumer spending did not and we now have to worry whether the stock market decline in May will show up in restrained consumer spending in June and beyond. With the stimulus to housing expiring, elevated consumer spending will become more important to overall U.S. GDP growth going forward into next year. Readings on consumer income and spending will become amongst the most watched economic statistics as we go forward. We will certainly be among the spectators.

Morris R. Segall, CFA, CIC