July 1, 2013 Update

DJIA:14,910 S&P 500:1,606 NASDAQ:3,403 Gold:$1,242 Oil:$97.04 EURO:$1.30 YEN:99.57

The Full Faith & Credit in Booz Allen Hamilton

U.S. Treasuries have long been considered one of the safest investments because of the fact that the bonds are backed by the full faith and credit of the United States Government. Similarly, the USD is the global economy reserve currency because of its lengthly steady history of fair valuation, even after the end of the gold standard. From a credit perspective, despite America’s mounting deficit, there is no safer borrower than the federal government. According to the 2013 10-K, Booz Allen Hamilton (BAH) generated 99% of its total revenue from the 5,700 contracts and task orders they completed with their biggest client- the U.S. government. Even after an employee stole and leaked top secret information to the press, Washington continues to conduct business as usual with the company. Snowden’s leakage of the highly confidential mass surveillance program may have compromised Booz Allen’s reputation and damaged both the US and British government defense programs, but it is unlikely the event will lead to devastating revenue declines for the company. Even if the government wanted to switch firms, the risks for Washington are too high (and not to mention expensive). The relationship Washington has with Booz Allen is too intertwined and the trust it has placed in the company is too significant for the government to terminate its contract and walk away. Booz Allen is back by the full faith and credit of the United States, and because of this I posit that the recent budget cuts in DoD will be more injurious to the company’s top line than the data leaks. After all, there is no better customer than the government of the United States. 

Domestic News

• Market Update Futures are trading up from strong economic data from overseas.
• The Institute for Supply Management will release its data on manufacturing at 10am, it is expected to reach 50.6% for June vs. May’s 49%. 

International Updates

Asia

• Market Update  Markets are up across the board from an increase in investor confidence from rosy Japanese economic data, despite a fall in Chinese PMI.
• The BoJ’s Tankan survey of manufacturing sentiment was positive for Q2, which is the first time since September 2011.
• Chinese PMI tumbled to 50.1 from 50.8, the lowest level in four months. 

Europe

• Market Update  Stocks advanced on across the board from better-than-expected PMI data.
• Euro zone unemployment has hit a record high in May as unemployment grew to 12.1%, an 80bp increase YoY. Highest unemployment rates in EU remain at 26.9% and 26.8% in Spain and Greece, respectively. Jobless young adults under 25 drove the increase, as youth unemployment hit 23.8% in the euro zone- with Greece top at 59.2%. 
• CDS antitrust probe leads to 13 investment banks named by the EU.
• UK manufacturing PMI rose to 52.5 in June from May’s 51.5, as output growth and new orders gained momentum and price pressure remained stagnant. This is the largest improvement in 25 months.
• Croatia has become the 28th member of the EU! The country is currently in recession as it suffers from high unemployment and large debt levels.

Corporate

• Hennes & Mauritz (HMB) rose 3.6% after Bank of America analysts upgraded it from neutral to buy.

 Commodities and Forex

• Oil prices decline as China activity slows down. 
• Spot gold prices recoup after monthly sharp decline.