September 7, 2011 - The EU Remains at the Forefront As President Obama's Stimulus Plan is Previewed
1. With the Swiss franc now pegged at 1.2 per euro dollar, the German courts have determined that the country's government must gain legislative approval before committing any more funds to an EU rescue plan. And, the EU collaboration regarding central action with signs of splintering, demonstrated by the Netherlands yesterday negotiating its independent terms regarding participation with the ECB; yesterday, these conditions were a major influence on the global markets decline yesterday.
The spread between the long term U.S. and German bond rate is at parity, with the German economy posed to grow at a 3% rate this year. Clearly a curtailment of German influence in the EU and ECB stabilization will be a negative development. Meanwhile, domestically, views that the U.S. government intends to breakup the four largest banks, and with the announced Justice Department suits against the industry in connection with improper sub-prime loans (proper disclosure to investors and (or not) will be a main theme, as will borrower fitness) could cause further valuation losses.
2. The Obama administration has been releasing components of the President's September 8 address, and yesterday/overnight it became more clear that the centerpieces of the President's proposals will include a) an extension of the current payroll tax cuts, b) direct aid to state and local governments in part to forestall teacher (and perhaps additional sectors) layoffs, c) infrastructure construction (this will be a difficult sell given the lack of stimulus with a similar 2009 plan), d) deferred income tax increases (to repay the government for the costs of a), b), and c). It is not yet known if there will be funding for/investment in private sector jobs creation, and it has not been stated that there will be any extension of current unemployment aid provisions. Based on discussions we are having with clients and relationships, for any positive market reaction to occur, the provisions must be meaningful and specific - and both parties must act to implement on a timely basis.
3. We remind investors the Dow is up 11.5% (rounded) from September 1, 2010 levels. Short term government bonds may be optimal compared to a U.S. Or German 10 year note (yielding 1.9% at September 6); and high quality corporate bonds and preferred stock positions can provide meaningful returns. Internationally, the Stoxx index is at its lowest valuation since December 2008. Emerging and frontier markets deserve analysis. Always invest attendant to a well done asset allocation plan and policy statement. Diversification is paramount.