Week in Review, March 5

Beware the Ides of March. I just had to say it. Sorry. Seriously, the rollover of Greek debt maturities will be a March 20 event and the country is still waiting for funds from the IMF and other European nations. The markets seem to have gotten over Greece and European woes. The LTRO from the ECB was a game changer in providing liquidity to the European banking system. This week, banks took down $700 billion of the three year 1% loans from the ECB.

Standard & Poor's, as expected, downgraded the long-term credit rating of Greece to selective default, making it the first country in the eurozone to officially be rated in default. The move came after Greece retroactively included collective-action clauses to its bond contracts. Other rating agencies are expected to follow S&P's lead.

In the U.S., the S&P 500 rose again, up +0.34% for the week and +9.0% over the first two months of the year. EAFE developed country stocks declined -0.66% for the week, but are up +11.4% YTD through February. The emerging markets have gained +18.0% YTD. Bonds tread water last week with the 10 year Treasury yielding just under 2.0%.The Barclays Aggregate bond index has provided a +0.9% return YTD through February.

There was no hint of any further monetary policy accommodation in Fed Chairman Ben Bernanke's biannual testimony before Congress. He said such a decision is "data dependent." Since the data has been solid for several months the markets immediately reduced the odds of QE3. He acknowledged that higher oil prices were "likely to push up inflation temporarily while reducing consumers' purchasing power." But the Fed expects the overall pace of increases in prices and wages to remain "subdued".

Q4 2011 real GDP growth was revised up to +3.0% from an initial estimate of +2.8%. The GDP deflator was also revised up to +0.9% from +0.4%. Nominal GDP is up at a +4.0% clip.

Personal income rose +0.3% and consumer spending rose +0.2%. Both were less than expected. The personal savings rate edged down to 4.6% from 4.7% in the December.

Manufacturing fell in February, according to the Institute for Supply Management. Their Index reading of 52.4 was lower than the consensus forecast of 54.6, following readings of 54.1 and 53.1 in January and December, respectively.

Stone McCarthy notes that the Conference Board Consumer Confidence Index rose 9.3 points to 70.8. The reading is the highest in a year or since last February's 72.0. Consumers are more optimistic to see that job conditions are improving in addition to the stronger performance in the stock market. Sharply higher gasoline prices seem to leave most consumers unfazed for the time being.

Meanwhile, the price of oil soared to its highest level in nine months after Iran said it has stopped exporting to Britain and France in retaliation for planned economic sanctions by the EU.

ISI Strategies notes that one of the major risks to the economic outlook concerns housing prices. If housing prices have found a floor, no matter how shaky, the outlook is much better than if housing prices were going to fall another -10%. The Case-Shiller home prices edged down -0.5% in December, somewhat weaker than expected. This puts the y/y at down -4.0%. Cities in Florida and Arizona posted modest sequential gains.

As always, the first full week of the month will be dominated by the unemployment report out on Friday. Expect job growth of 200,000 and an 8.2% unemployment rate.

The traditional press blackout period in advance of the March 13 FOMC meeting begins this Tuesday so no comments from Fed policymakers for a bit.

Jeff Pantages

Chief Investment Officer