July 18, 2013 Update

DJIA:15,471 S&P 500:1,681 NASDAQ:3,610 Gold:$1,278 Oil:$106.51 EURO:$1.31 YEN:100.13

Credit Contagion

The aftermath of the credit crisis left investors wondering if idiosyncratic risk exists in the financial system after the rise of globalization. Greenspan failed to foresee that a price drop in a single property would affect the whole neighborhood and, eventually, cause the whole system to crash. Victims of the 2008 crisis would like to view this credit catastrophe as a historical event, but I think it may be too early to write off the role idiosyncrasies play in an interconnected system. In April, The National Bureau of Statistics found that 67 of the 70 major Chinese cities experienced increases in property prices- with Shanghai, Guangzhou, and Beijing rising at the fastest rate. The world has watched in disbelief as China has rapidly expanded and modernized their economy and increased their presence in the global markets. Unlike the US government (who measures GDP in terms of what was bought and sold), the Chinese government uses GDP as reflection of what was built throughout the year. I think the differences in calculation serve as a reflection of cultural importance. Measuring trade via GDP portrays America’s capitalistic nature. On the other hand, communism is a historical staple in Chinese identity; which I posit is depicted through their GDP calculation (which takes human labor and government control into account). Communist China employs its people to build an average of 12 to 24 new cities annually. Although the policy might keep unemployment low and GDP high, it is wasting human capital since no one is moving into the units. China is building for the sake of building and has, as such, created ghost towns. I think the state has placed so much pressure to report economic growth that it has overdeveloped its real estate and manipulated the housing market. If there is one lesson to be learned from 2008, it is that no house stands alone even if there is no one occupying the unit next to it. And because one person’s asset is another person’s liability, a default on a collateralized asset will distort the entire marketplace. China has become one of the centers of the tangled web of the global credit cycle, so, as such, a burst of the Chinese housing market would ripple international markets. However, I believe it be unlikely that the Chinese government will allow the fruits of their labor and clever planning to spoil. Unlike America's complicated and interconnected government system, China’s communist culture allows for their government to manipulate situations and control idiosyncrasies so that the system never really fails. Alas, I guess that’s the beauty in not having checks and balances... 

Domestic News

• Market Update Futures remain stagnant ahead of Bernanke’s speech and a fresh round of earnings. 
• Data on the weekly jobless claims will be released at 8:30, and are expected to likely decline to 341,000 for the second week of July. If this were to happen, it would be an indication of a slower rate in job cuts. 
• Bernanke will discuss the outlook and Fed rate-policy at 10:30 with the Senate Banking Committee. 

International Updates

Asia

• Market Update Japanese stocks advanced higher after the yen weakened, Chinese shares traded lower on concern that Beijing will not use stimulus to bolster the slowing economy. 

Europe

• Market Update Equity markets waver ahead of Bernanke, but retails up in London after rising sales figures. 

Corporate

• Philip Morris reported a profit of $2.12B, revenue of $20.48B, and an EPS of $1.30 per share vs last year’s $1.36 vs. the consensus of $1.41.  

Commodities & Forex

• Oil and gold prices ahead slightly higher.
• The USD climbed against most major currencies.