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fiso11 on WikiLeaks Creates Paradigm Shift in Geopolitics & Threatens Stocks The third round of Wiki leaks publications has ...
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WikiLeaks Creates Paradigm Shift in Geopolitics & Threatens Stocks
The information made public in many cases was already generally known, and not just in the common subconscious, but in plain sight of the stock market for years. Yet, perhaps due to its duration overhanging global order, the potential Iranian event has become something we have grown too accustomed to. The documents show intense Middle Eastern pressure on both the Bush and Obama Administrations to wage war on Iran. Meanwhile, those same Islamic nations have held subdued stances publicly, even perhaps appearing to Iran as allies. As a result, depending on how Iran interprets the leaked information, world order looks to have been reshuffled overnight. Thus, Iran, Israel and the US start the new week with completely different perspectives and images, and that is a frightening consideration for investors to ponder.
WikiLeaks was smart in its distribution methodology, releasing to several select major media organizations, so as to prevent the knock-down of its website today. This information is public and going to stay that way, like it or not. So the US is now engaged in damage control, with some analysts calling the damage catastrophic. The US is concerned that its allies may temper future candor in their communications with US representatives now, given this lesson served.
The WikiLeaks information itself is vast, and so I cannot cover it completely, but I can cover some of the key points of impact to US diplomacy and Iranian perspective (see www.wikileaks.org for details). Europe is flustered this morning, given revealed American intelligence indicating a potential sharing of missile technology between North Korea and Iran, passed down from Russia initially. The info expands Iran's missile strike range to 2K miles, from 1,200. That puts Berlin within range with about half of Europe. Iran could already touch all of the Middle East.
Information has been released showing Israeli interest in aiding the Palestinian Authority to wage a war against Hamas for Gaza. There are also indications that Iran provided secret aid to Hezbollah in its war with Israel. Clearly, with all the cards turned up, the game has changed globally.
What Iran should find most troubling is the allegations that its Islamic neighbors have been some of the harshest critics of it behind the scenes. Reports indicate that Saudi Arabia has been aggressively lobbying the US to use its military might against Iran before long. Reportedly, Saudi Arabia is even engaged in the weaning of the Chinese off their dependence of Iranian oil, committing to provide a new source flow in exchange for China's support against Iran in the UN.
Now, given the changed Iranian lens of perspective of the situation, and the realization of this by Israel and the US and its allies, you might have expected stocks to reflect a sort of wake-up call sounded in the investment community Monday (we did). After all, war could now be days away originated by any party, given the bluff is up. However, in early trading through 2:00 AM ET, Asian shares did not reflect such concern, outside of South Korea. However, these markets often simply follow the lead of US shares. European stocks better reflected a paradigm shift in geopolitical factors today. American shares have definitely done so, with the broad indices down more than 1%. As the WikiLeaks information is sifted through and understood more perfectly, most equities are at significantly greater risk, along with global order.
This article should interest investors in the shares of Barclay's (NYSE: BCS), Lloyds Banking Group (NYSE: LYG), Allied Irish Bank (NYSE: AIB), British Airways (NYSE: BAY), BP (NYSE: BP), British Sky Broadcasting (NYSE: BSY), Currency Shares British Pound (NYSE: FXB), DFA United Kingdom Small Company Fund (Nasdaq: DFUKX), iShares MSCI UK (NYSE: EWU), NYSE: BAC, NYSE: JPM, NYSE: GS, NYSE: MS, NYSE: C, NYSE: DB, NYSE: CS, NYSE: UBS, NYSE: STD, NYSE: WFC, NYSE: NBG, NYSE: AIG, Korea Fund (NYSE: KF), Korea Electric Power (NYSE: KEP), Korea Equity Fund (NYSE: KEF), The Korea Fund (Nasdaq: XKFDX), iShares MSCI South Korea Index (NYSE: EWY), Samsung (Korea: 005930.KS), Posco (NYSE: PKX), Hyundai Motor (OTC: HYMTF.PK), Shinhan Financial (NYSE: SHG), Lg Chem (OTC: LGCEY.PK), LG Electronics (OTC: LGERF.PK), Hynix Semiconductor (Korea: 000660.KS), Northrop Grumman (NYSE: NOC), Raytheon (NYSE: RTN), Alliant Techsystems (NYSE: ATK), Lockheed Martin (NYSE: LMT), Boeing (NYSE: BA), NYSE: IWM, NYSE: TWM, NYSE: IWD, Honeywell (NYSE: HON), General Dynamics (NYSE: GD), Rockwell Collins (NYSE: COL), Goodrich (NYSE: GR), L-3 Communications (NYSE: LLL), SAIC (NYSE: SAI), FLIR Systems (Nasdaq: FLIR), EMBRAER (NYSE: ERJ), Spirit Aerosystems (NYSE: SPR), BE Aerospace (Nasdaq: BEAV), TransDigm Group (NYSE: TDG), CAE (NYSE: CAE), Hexcel (NYSE: HXL), Esterline Technologies (NYSE: ESL), Teledyne Technologies (NYSE: TDY), Curtiss-Wright (NYSE: CW), HEICO (NYSE: HEI), Triumph Group (NYSE: TGI), Orbital Sciences (NYSE: ORB), AAR Corp. (NYSE: AIR), Kaman Corp. (Nasdaq: KAMN), AeroVironment (Nasdaq: AVAV), Smith & Wesson (Nasdaq: SWHC), DigitalGlobe (NYSE: DGI), GenCorp (NYSE: GY), Hawk (AMEX: HWK), LMI Aerospace (Nasdaq: LMIA).
Disclosure: No Positions
GDP Growth Drivers Should Dissipate in Q3, Q4
The first news of second quarter GDP arrived in the "Advance Report" last week. This highly anticipated proof-to-the-pudding type of release produced the anticipated decline in the pace of economic expansion, to +2.4%. However, that slower pace came against a revised higher first quarter growth rate of +3.7% (revised a point higher after two previous revisions lower to 2.7%). This looks about as shady as it possibly could, but it's misleading in its graying.
A change to first quarter economic activity was not so much to blame as were benchmark revisions to 2007, 2008 and 2009 economic activity. The percent change from the preceding year in real GDP was revised down for all 3 years: from 2.1 percent to 1.9 percent for 2007, from an increase of 0.4 percent to 0.0 percent for 2008, and from a decrease of 2.4 percent to a decrease of 2.6 percent for 2009. The initial legs of economic recover were tempered significantly, bringing down levels of activity to an even more concerning point. Because of these revisions, Q1 only seems stronger than when it was initially reported. Q2 looks about in line, versus the Q1 level of activity.
What troubled investors was that last year's final two quarters, now old news and long forgotten (perhaps the gov't thinks so), have been revised to lower levels that reflect more moderate growth. Likewise, the first quarter of 2009's economic contraction was revised to a more moderate mark.
The "benchmark revisions" are what drove Q1 to look stronger than it initially did. Q1 was hardly changed in fact, but is now being compared to a significantly lower fourth quarter of 2009.
Q2 GDP Detail
The details of the report and anecdotal evidence reinforce our concerns about the second half of 2010. Q2 GDP growth was impacted by factors we see disappearing in the quarters ahead. Firstly, Q2 received a +0.59 percentage point benefit from residential housing, greatly due to the closings of First-Time Homebuyer Tax Credit assisted purchases. The impact of residential fixed investment on the first quarter was -0.32 percentage points. We expect this housing factor will at least offer a net zero impact to Q3, if not negative.
Government spending added 0.88 of a percentage point to Q2 GDP. Political pressure is building against the Administration with regard to its fiscal imprudence. Future spending must be funded by law now. Stimulus is running out, and is being allowed to expire instead of renewed. States are already cash-strapped, as evidenced by highly public troubles in California and New Jersey. Government help is going away, so this positive driver should see further limitation in the quarters ahead.
One positive of the GDP report was apparent business investment, especially in the IT sector. Equipment & Software spending by non-residential investors contributed 1.36 percentage points to quarterly GDP in Q2. This followed a 1.24 point impact in Q1. We continue to view pent-up demand as the key catalyst here; more so than organic growth on economic revival. Therefore, it cannot last for long without economic revival. However, we suspect it can last a bit longer and may still provide support to Q3, though perhaps less of it.
The impact of the change in nonfarm private inventories contributed +0.97 points to Q2, after a 2.57 point contribution to Q1. Inventory restocking looks to therefore be complete, and this driver should be a less significant factor in Q3 (nearing zero perhaps).
The important driver of the economy is Personal Consumption Expenditures, as this is the natural driver behind all things. Without it, we feel comfortable saying, little or nothing else could occur. PCE added 1.15 points to Q2, after a 1.33 contribution to Q1, +0.69 to Q4 09, +1.41 to Q3 09 and -1.12 to Q2 09. Spending is slowing folks, and as long as businesses are not hiring full timers, banks are not lending, and the global market place offers little outside support, this factor looks to moderate further.
Now, exports jumped in Q2, contributing 1.22 to GDP. This follows +1.3 and +2.56 contributions to the preceding two quarters. So, even while Europe struggles, Asian and other demand is holding up. We expect exports to continue to contribute, but we see a real tug of war between European weakness and Asian strength continuing.
Over the last few months, individual data points in key economic segments have offered this columnist enough anecdotal reason to raise alarm, and we continue to see the economic fundamentals pointing toward a double-dip, or at least stagnant state of economic development through the second half of the year. The greatest factor weighing against the prospect of double dip recession (and it's significant), especially now that the aggregate level of activity has been adjusted lower, is mathematics. Each quarter is compared against the previous, and so we would need to drop pretty hard to get back to those panic level lows of activity. That said, anchored unemployment, still conservative corporate spending (for the most part), and a highly uncertain geopolitical and political atmosphere offer a confusing environment for a confounded consumer. Look for the pace of GDP through the second half to at least moderate toward a stagnant state, and renewed recession is certainly possible under these conditions.
The worst case scenario remains highly possible as well. War with Iran could drive oil prices and the cost of energy into noose-tightening heights. Potential terrorism threats would also result here at home and in Europe, perhaps burrowing the consumer deeper into his hole. There is certainly enough reason to give weight to caution in investment decision making.
Disclosure: No Positions
Consumer Worries Due to Economic Muddle & Political Ploy
The Conference Board published its Consumer Confidence Index for the month of July this week. The Board's latest measurement of the consumer mood showed even further deterioration in July sentiment, to a level of 50.4, from June's revised mark of 54.3 (from 52.9). The Conference Board's late June report produced a near 10 point decline in the index from a May mark of 62.7. That type of a dramatic drop in the index usually coincides with a shock to the market and economy, but not this time. Take note, because this is extremely troubling.
Given that the index saw no rebound off a drastic drop, investors received an important signal Tuesday. Consumers drive the American economy, which has evolved to become services oriented and consumption based. The warning siren on the consumer mood has been wearing out our ears here at Wall Street Greek for some time now, and the batteries must be running low on that horn by now. We first noticed red flags on this metric when the Board's Expectations Index showed its initial cracks. However, we were looking toward those cracks when investors were sure the economic foundation was sound and strengthening; many on the street were instead intoxicated by profit calculations on rising stocks.
We reiterate: President Obama must key on the employment situation and seek to spur business and job growth to lead the USA out of economic trough and anchored unemployment. His plans for an alternative energy manufacturing base must move forward, as this stratagem offers a path to a new industrial revolution. This potential revolution can bring jobs back to the US, and make the country a viable exporter and supplier to a new and important global marketplace.
Consumer Confidence Report Details
Consumers are sour on both the current reality of the economy and future prospects. The Present Situation Index slipped further in July, to a level of 26.1, from 26.8 in June. It looks as if consumers see the current situation as about as bad as can be, and for good reason. Consumer opinions about the state of employment have softened as job seekers lose hope. Consumers claiming that jobs are hard to get increased in July, to 45.8% of those surveyed, from 43.5% in June. Those saying that general conditions are bad also increased to 43.6%, from 41.0% in June.
"The outlook is hopeless, as per the opinion of the most important segment of Americans."
The outlook is hopeless, as per the opinion of the most important segment of Americans. The Expectations Index dropped to 66.6 in July, from 72.7 last month. The percentage of consumers that see an improvement coming over the next six months fell as well, to 15.9%, from 17.1% last month. Those who see things getting worse increased in number, rising to 15.7% of those surveyed, from 13.9% in June. Again the key to concern remains the job situation, with almost 10% of the labor force still unemployed and near 17% working less hours than satisfactory. And the average workweek is decreasing, based on the latest data. Soon, manufacturers may need to again cut workforce, as shifts bleed away. The Conference Board asked consumers about their outlook for the job market, and the unfortunate news is that those who see job opportunities increasing over the next six months fell in number to 14.3%, from 16.2% in June. Those anticipating fewer jobs increased a full percentage point, to 21.1%.
Retail Trouble Ahead
The back to school shopping season is an important catalyst for the retail sector, and a somewhat reliable driver of sales traffic. However, given the high and increasing number of long-term unemployed, spending is under threat to decrease this season. It's sad that the best argument against that statement is that last year's sales were pretty darn bad. That means retailers may have to dig deeper into margins to inspire shoppers to buy goods at their location versus the one down the street. And now that unemployment benefit extensions seem like a less reliable source of income for many Americans who are surviving on them, consumers are very likely to tighten their wallets again this year.
The latest Weekly Same-Store Sales data reported by the International Council of Shopping Centers (ICSC) this morning, is still showing growth. Sales rose 0.6% on a week-over-week basis for the period ending July 24. When compared to last year's soft activity, sales stood 3.8% higher. We have often noted here that as last year's comparables get harder to beat, we'll see this comparison soften dramatically. We're still matching against some of the weakest absolute sales numbers (per person) seen in modern US history.
This means that competition will tighten further for the big box department stores like Macy's (NYSE: M), J.C. Penney (NYSE: JCP), Kohl's (NYSE: KSS) and others, and cost management will remain in focus. Specialists like Aeropostale (NYSE: ARO), Chicos (NYSE: CHS), Ann Taylor (NYSE: ANN), The Gap (NYSE: GPS), Wet Seal (Nasdaq: WTSLA), Hott Topic (Nasdaq: HOTT), The Limited (NYSE: LTD), Children's Place (Nasdaq: PLCE) and others will need to excel in buying and fashion sense to differentiate their wears. And the discounters will continue to steal market share, so good news for Wal-Mart (NYSE: WMT), Target (NYSE: TGT), Costco (Nasdaq: COST), Family Dollar (NYSE: FDO), Dollar Tree (Nasdaq: DLTR), Dollar General (NYSE: DG) and Sears' (Nasdaq: SHLD) K-Mart stores.
Conclusion
In summary, seeing Consumer Confidence wane further in July, after a precipitous drop in June, should be of highest concern to the Administration, Congress, investors and all Americans. Our national economic driver, consumer spending - or rather the consumer, is losing confidence in economic recovery and in government supports. We must continue to prioritize stimulus over budgetary controls, as this economic trough will be impossible to climb out of otherwise. The budget is a long-term issue that is worthy of concern, but we cannot let political purposes now clutter sound decision making. We need to restore business and job growth to renew consumer spending. We can address the budget in due time, or now (somewhat), but in a manner that does not threaten economic recovery nor confidence.
Disclosure: No Positions