July 26, 2013 Update

DJIA:15,556 S&P 500:1,690 NASDAQ:3,605 Gold:$1,335 Oil:$104.70 EURO:$1.33 YEN:99.95

Anger as a Proxy for Change: The 2008 Bailouts

The infamous narrative politicians have created about the financial industry will hang over the business for decades to come.  The well known tale of Wall Street vs. Main Street focuses on the unavoidable greed that drives capitalism, and how it nearly caused a collapse of the global financial system. Politicians have commented relentlessly on how stricter regulation is needed in order to prevent additional hiccups in the system. Many seem determined to transform the institutions that were deemed “too big to fail” into small regional establishments throughout the country that could, indeed, fail. Whether or not this makes economical sense is unknown and hardly the point. Rather, the attitudes toward the magnitude of tax payer money that went to bailout these “evil and greedy” firms is where the problem rests. The four largest full-service investment banks in the world are Goldman Sachs, Morgan Stanley, JP Morgan, and Bank of American Merrill Lynch, respectively; which are all based within the US. According to the Treasury’s Bank Bailout Report, these four major investment banks received a total of $60B on October 28, 2008. Of the $60B awarded to the institutions, all four of these investment banks have repaid the full principle of the loan plus interest to the federal government. On the other hand, the four largest motor vehicle manufacturing companies by volume are Toyota, GM, Volkswagen, and Hyundai, respectively; and only one of these companies are American. Yet, the federal government awarded the Big Three with $17.4B to avoid bankruptcy, which clearly failed as both Chrysler and GM filled chapter 11 in Q2 FY09. The Big Three still operate with high debt levels, lofty leverage, and low cash on hand. The companies have not yet repaid their federal debt obligations. And judging by the health of their financials, tax payers could be waiting a long while to see this day. The US remains dominate in the banking industry, in which it has the most competitive global presence. Our banking sector is far superior to our automobile industry since we, as a country, are clearly better at managing money than we are at manufacturing. Although, this is not how it use to be. I think the anger most Americans have toward the financial industry is symbolic of a cultural and economic shift. With the rise of technology, the US has shied away from domestic manufacturing (which is reflected by the increase of college enrollment and the growth of businesses). At one point, Detroit served as a proxy for the health of the US economy because it represented the growth of automobile industry. As US companies cut costs and outsource classic American manufacturing jobs, automobile manufacturing is no longer a main driver of the US economy. Detroit has failed. As a result of a decline in manufactured domestic output, the middle class is not as strong as it use to be. People are always looking for an outlet for their anger since accepting reality is not easy. Americans have been protesting the banks, even though the institutions have repaid taxpayers in the full amount plus interest. Funding a change that people have, for so long, been trying to fight and ignore is the reason this spiteful narrative will continue to creep its way into modern history and hurt the reputation of one of America's most successful industry.

Domestic News

• Market Update Futures are trading down ahead of consumer sentiment data and a fresh round of corporate earnings. 
• The Reuter’s/University of Michigan’s consumer sentiment stat will be released at 9:55, and is expected to increase to 84.0 for August vs. July’s 83.9 and June’s 84.1. Consumers may be feeling more optimistic with the increase in home values and other asset prices.  
• Municipal bond funds saw outflows of $1.2B in the week through Thursday as investors react from the systemic risk of Detroit’s chapter 9. 

International Updates

Asia

• Market Update Market traded down, with Japanese equities getting hurt the worst as investors walk away from the market’s the five-week winning streak.
• Core inflation in Japan hit 0.4%, the highest figure in five years, driven by the increased costs of imported materials.  

Europe

• Market Update Markets are mixed as support from yesterday’s US markets clash with  downward pressures from Japan and increase M&A activity with Vivendi’s.

Corporate

• Global smartphone shipments grew 47% to a record 230mm units in Q2. Samsung (SSNLF.PK) held position as sector leader as shipments grew 56% to 76mm units with a 33.1% market share, and Apple (AAPL) sales rose 20% to 31.2mm with a market share of 13.6%