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September 2nd Working Capital Newsletter

Date Published Sep 12, 2011
By Hadaf Zubi

The Working Capital Newsletter©

LCC Weekly Economic Update – Week ending September 9^th, 2011

ECB Dissent and the Euro’s Descent

Much of the media focus this week went to President Obama’s proposed $447 billion “American Jobs Act”. The plan is composed of $245 billion in short-term payroll and investment spending tax cuts, $105 billion in infrastructure spending, $35 billion in aid to municipal governments, and $62 billion proposed for extending unemployment insurance benefits further. Whether or not this bill passes, it has created a great deal of debate and will continue to do so. The market’s reaction to the bill was negative, as indicated by today’s price action on the major American equity indices.

The credit situation in Europe continues to worsen. Today was the last day for creditors to decide whether or not they wanted to accept a Greek bond restructuring that would take bonds maturing by 2020 and roll them forward or swap them outright. Financial shenanigans like this resulted in German ECB Executive Board member Juergen Stark resigning his post earlier today due to a perceived lack of coherent financial policy in the Eurozone. Adding to pressure on the Euro, on Wednesday the German Constitutional Court decided that the German Government cannot sign a blank check over to the ECB without approval of the Parliamentary Budget Committee and further controls over the end-uses of the money. The cessation of sovereignty clause is not likely to sit well with the PIIGS, so the future of the Euro is looking shaky. All of this has combined to cause the Euro to breakdown below the $1.40 support level set last March. Now that technical support has been removed, further downside for the Euro looks more likely than a re-test of the $1.50 ceiling.

In interest rate news, last week the Bank of Canada and Bank of England both decided to keep their overnight rates unchanged. The Canadian rate of 1.0% and the British rate of 0.5% are both meant to stimulate growth, and will likely be in place for the near future. Based on the evidence so far, low interest rates are not an effective solution for low growth. Japan has tried this solution for over a decade without much success. In the United States low interest rates (0.25%) are meant to encourage increased refinancing activity, which is not really happening. Bank lending has declined because bank profit margins are too skinny to take on high and moderate-risk loans. With Banks shrinking their balance sheets in order to de-leverage, it seems the main beneficiaries of low interest rates are the Governments who can issue low-cost debt, and alternative lenders like us who step-in to fill the capital void. The credit crunch that we have been seeing since 2008 is likely to intensify as the European credit markets continue to be extremely volatile. Factors are going to be in an excellent position to extend commercial finance, so now would be an excellent time to reconnect with all your banker referral sources and create new ones. Banks are shifting their loan portfolios away from small and mid-sized businesses, and there are more and more factoring opportunities springing-up every day.

This week by the numbers (all numbers collected at 4pm EST, Sept. 9):

The ¥ moved-up to 77.50. With pressure on the €, this violation of the mean-reversion downwards is indicative of a general flight-to-safety to the US dollar and it is very probable that the ¥ will appreciate further. The € finally broke-through the $1.40 level and closed the week at about $1.366 to the US dollar. The tight $1.40-$1.50 range from March until now was largely unsustainable and it would not be surprising if the € continued to depreciate. The Canadian dollar closed the week barely above par at $1.0048. With the Bank of Canada freezing interest rates due to economic output declining in Q2, it is likely that the global commodity currencies (CAD, AUD) will be trading below par in the near future. The big currency news recently was the Swiss National Bank’s decision to peg the rapidly-appreciating Franc to the €, placing a peg of 1.2 CHF to € as the maximum value of the Franc. The Franc, which closed last week at 1.12, immediately dropped to 1.20 on Tuesday morning after the announcement. The SNB’s decision to peg their currency is perhaps only the first round in a series of blatant pegs meant to regulate the exchange value of currency. So far central bank interventions have not been as targeted as the SNB action. The US Dollar Index closed the week at 77.19, which is bearish for equities and the €. The Index struggled mightily to breach 75, so the longer it stays above that resistance level the larger the risks of continued market instability are.
The sizeable gap between recent closes and the 50- and 200-day moving averages continues to drive the S&P 500 down, and it closed the week at 1,154.23 after rallying to a mid-week high of 1,200. The index made a test of 1,150 at 3pm today, and closed 4 points higher.

West Texas Intermediate futures are at $87.17, up about $0.67 from last week. Natural gas is up a nickel from last week at $3.91. With copper at $4.00 and nickel deteriorating a quarter to $9.49 the base metals complex looks less confident than the energy complex. If copper posts three weekly closes sub-$4, look for broad-based selling across all asset classes as copper tends to be a leading indicator. After breaching $1,900, gold closed-out the week at $1,857. Silver has not been able to keep its head above $43, and closed the week at $41.47.
Initial jobless claims came in at a print of 414,000 and Continuing Claims printed at 3,717,000. As has been suggested, initial and continuing claims are coming in light and being bumped-up in revisions. Last week’s prints of 409k and 3,735k were upped to 412k and 3,747k respectively.

The Bank of Canada reports that there was no new job growth in the month of August. However, the unemployment rate has come down to 7.3% from 7.7% in Q1. The Output Gap, the BoC’s measure of potential vs. real production, is up slightly in Q2 to -0.7 from -0.6 in Q1. Average hourly earnings increased at a 1.4% yearly rate in August, compared to 2.6% in Q1 and 2.2% in Q2.

The LCC Working Capital Newsletter© is meant as a source of financial
opinion only. It in no way reflects the opinions of Liquid Capital Corp.
Nothing in this document is to be construed an offer to buy or sell
securities.

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