Investment Markets Overview – w/e 16 March 2012

Goldman Sachs, perhaps the most revered and hated bank on the planet, was back in the news this week, not that they will have enjoyed what was said. Former executive, Greg Smith, resigned this week with an op-ed in the New York Times, lambasting his former employer for a catalogue of alleged bad, if not criminal, practices, suggesting that the firm was “toxic and destructive.” The problem for Goldman is its unparalleled success during the long bull market from the early 80’s until the late 1990s, including its “incestuous relationship” with government, which moved up a gear when Robert Rubin became the first GS CEO to assume the role of US Treasury secretary. Former Goldman people are in almost every major government in Europe as well. In a secular bear market, Wall St recrimination reigns and GS was always going to be a magnet for blame surrounding the activities leading up to the 2007 financial crisis.

US economic statistics announced during this week included February advance retail sales, which grew at the forecast 1.1%. March Empire manufacturing came in at 20.2 versus the 17.5 expected and the Fed left interest rates on hold as the provisional consumer confidence reading for March disappointed. February CPI was as forecast at 2.9% annualised with many policy makers “scratching their heads,” as to why it’s not higher, considering the huge stimulus efforts of late. A clue to this is in the “velocity of money”, as can be seen in the chart below. You can create as much credit as you like, but if fewer people wish to borrow or lend, it’s de-flationary. The Dow and the S&P 500 gained 2.4% each, whilst the NASDAQ rose by 2.2%.

Euro-Zone CPI rose by 0.5% in February and by 2.7% year on year, as forecast, whilst the ZEW economic sentiment reading for March came in at 11 versus February’s -8.1.Outside of the EU Norway’s central bank cut interest rates by 0.25% to 1.5%, following December’s 0.5% reduction in a futile attempt to curb the relentless appreciation of the Krona. One only has to take a look at the relationship of Crude Oil prices (red line) and the $US/NK inverted (black line) to realise what drives the Krona. The UK trade deficit widened to -£7.5BN in January whilst 3 month unemployment to January remained steady at 8.4%. The FTSE 100 ended higher by 1.3%, whilst the French CAC and the German DAX gained 3.1% by 4% respectively.

Out East, Japan’s February consumer confidence reading was below expectations, whilst the countries massive debt load, at nearly 200% of GDP and funded mainly domestically by an aging population, needs $566BN of new debt to fund a record 49% of the upcoming fiscal year’s budget,.equivalent to 10% of GDP. Between March and May it faces $1.5Trillion in debt redemptions, roughly equivalent to the GDP of Canada. Elsewhere, China had a trade deficit of $31.5BN in February, the largest since 1989. The Nikkei gained 2% whilst the Hang Seng ended low higher by 1.1%.

The $US index slipped by 0.3% at 79.8 this week, with other losers including the Yen, lower by 1.2%. Gainers included the British pound, higher by 1.1%. Sovereign debt yields were mixed but with a higher bias, with the UK gilt yield surging by 29bps to 2.44%, as Fitch threatened the coveted AAA status. Japan’s JGB yield rose by 6bps to 1.04% whilst the German 10 year jumped by 26bps to 2.05%. Meanwhile, Portugal’s 10 year yield slipped by 7bps to 13.27%, whilst Irish yields fell by 6bps at 6.68%. Spanish yields rose by 20bps at 5.18% whilst Italian yields ended the week higher by 3bps at 4.85%.  The New Greek 10 year yield note fell by 137bps to 17.78%. US Treasury 5 and 10 year yields soared, with the 5 year higher by 23% at 1.12% and the 10 year  by 12.8%, ending the week at 2.3%.

Within the commodities complex, the $crude oil price eased by 0.25%, ending the week at $107 a barrel, whilst the precious metals had another volatile week, with $Gold losing 3%, at $1713oz, whilst $Silver gave up 5.1% to $32.65oz.

Next week’s economic data due for release includes housing starts and home sales for the US and the latest consumer confidence and PMI data for the Euro-Zone. Out East, the February trade numbers and store sales are due out for Japan, whilst for the UK we get to see the latest CPI, consumer confidence and retail sales numbers.

Returning to Goldman Sachs, its name appeared within another online article last week by Andrew Ross for the NYT. It’s about conflicts of interest within the financial industry, including the role of legal teams. It increasingly seems that the lawyers aid and abet the bad behaviour of the nation’s corporations, providing them with the cover of legal advice – sometimes knowingly, sometimes not. “I never thought to ask whether the lead banker owned shares in the other company,” Victor I. Lewkow, a long-time lawyer and partner at Cleary Gottlieb Steen & Hamilton, allegedly acknowledged to a packed room matter-of-factly, demonstrating the utter lack of checkpoints put in place during a typical merger negotiation by an often seven-figure legal team. His somewhat shocking acknowledgment came amid a discussion about a top Goldman Sachs banker who was advising the target of a takeover, the El Paso Corporation. The banker owned about $340,000 worth of stock in the buyer, Kinder Morgan – an absolute no-no to anyone with a modicum of thought. It is also a violation of Goldman’s own rules, which the firm acknowledged.

Rather than the increasingly heavy handed regulation, which penalises the honest majority, unethical practices need to be exposed within the mainstream media. Reputations matter and repetitive questionable practices will eventually hurt the perpetrator’s bottom line. The charts will continue to tell us of GS’s fortunes or otherwise.

 “The accomplice to corruption is often our own indifference.” 

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