WEEK ENDED MAY 25 2012

Thoughts

from Joe

TFJ will be taking a break next week as I perform a personal human solar experiment in the land of

zacahuil, the home of the volcano rabbit, and the birthplace of Anthony Quinn.

Steppin’ Out

Falling Off the Fiscal Cliff

The “fiscal cliff” is a term being used to describe dramatic changes in the country’s fiscal policies

beginning January 1, 2013 – assuming no changes are enacted. The linked report from the CBO says it

all in its first sentence: “If the fiscal policies currently in place are continued in coming years, the

revenues collected by the federal government will fall far short of federal spending.”

Some lowlights:

• Tax policy changes:

o AMT changes will increase taxes by $221 billion

o Payroll taxes will reset upwards by 2 percent or $95 billion

o Various other provisions will expire increasing taxes by $65 billion

o Affordable Care Act taxes will begin at $18 billion

• Federal outlays will be reduced by:

o Automatic reductions in spending due to failure of the “Super Committee” last year will

reduce outlays by $65 billion in both discretionary and mandatory spending

o Expiration of extended unemployment benefits will lower spending by $26 billion

o Lower Medicare payment rates for physicians will save $11 billion

The CBO estimates that these scheduled changes in outlays and revenues will weaken the economy to

the degree that overall government fiscal health will deteriorate.

In the end, it’s likely a “kick the can” strategy will be executed in Washington. The only question is, will

it happen before or after the election?

Top Eight

1. Another European summit ends in disappointment. The Brussels summit ended early, urging

Greece to elect a “pro-austerity” government on June 17th. It’s possible the radical left will lose

– even after gaining the most votes in the prior election – but only if Greeks fear the left’s

destructive agenda enough to band together.

2. Since 2009, government student loan debt outstanding has risen more than 4x. The increase

has more than offset deleveraging in the consumer sector for the nonrevolving category as

student loans have grown $350 billion while other debt has dropped just over $200 billion. The

unemployment rate for college educated residents is just 4 percent, however many of today’s

educational institutions are loading students up on debt and leaving them without the skills

necessary to enter the workforce. This will likely affect the above employment stat dramatically.

3. The ECB is reportedly lending Greece up to €100 billion in previously unreported emergency

aid. The linked article refers to the debt as “secret” however the loans were perfectly legal and,

in fact, the unreported nature is a necessary part of the emergency program. Of course, it’s only

secret if it stays out of the news.

4. Spanish Banks feel the heat as Bankia becomes the country’s largest bailed out bank in

history. News of the bailout arrived after S&P cut the ratings of five Spanish banks and revised

downward its assessment of economic risk in the country. SSDD.

5. Ford gets its logo back. The logo was pledged in a bailout loan prior to the liquidity crisis and

Moody’s upgrade of the company to investment grade (low BBB) releases the logo from

hock. The creativity of lenders never ceases to amaze me.

6. Zero interest on German debt? Now that’s “flight to quality!” The 2-year notes will be priced

at a slight discount, but demand for the issuance came from investors who are afraid of a future

flight to quality that will drive yields negative. One more brick in the firewall that is being built

around “healthy” Europe for the upcoming Grexit.

7. Money fund reform to affect some $2.6 trillion in cash assets. The linked article does a good

job of recapping where authorities stand on possible upcoming money fund reform. Regardless

of the authors’ contention, I would bet no reform will occur this year.

8. A growing percentage of CFOs world-wide are willing to pay bribes to win or retain

business. The linked E&Y survey has 15 percent of CFOs ready to pay up versus just 9

percent last year. Also, 4 percent of CFOs said they were willing to misstate financial

performance. Just keep in mind, this is a global survey, but it still highlights the “agency

problem” in the corporate world is alive and well.

Key Indices

Return

5/25/2012 1 week YTD Treasury 5/25/2012 5/18/2012 Change

Dow

12,455 0.7% 1.9% 30yr 2.80% 2.80% 0.00%

S&P 500

1,318 1.7% 4.8% 10yr 1.71% 1.71% 0.00%

Nasdaq

2,838 2.1% 8.9% 5yr 0.74% 0.74% 0.00%

Euro Stoxx

2,162 0.8% -6.7% 2yr 0.29% 0.29% 0.00%

Nikkei

8,580 -0.4% 1.5% 1yr 0.19% 0.19% 0.00%

Hang Seng

18,713 -1.3% 1.5% 3mo 0.14% 0.14% 0.00%

Source: Bloomberg

Looking Ahead

• The end of next week will be data

• Earnings reports and the IPO calendar are sparse next week due to

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The end of next week will be data-packed with GDP and employment figures headlining.

and the IPO calendar are sparse next week due to the holiday.

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he information is accurate or complete. The information should not be

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packed with GDP and employment figures headlining.

the holiday.

on Valley Bank is a member of FDIC and Federal Reserve

System. SVB>, SVB>Find a way, SVB Financial Group, and Silicon Valley Bank are registered trademarks. SVB Asset

nk and member of SVB

Financial Group. Products offered by SVB Asset Management are not FDIC insured, are not deposits or other

obligations of Silicon Valley Bank, and may lose value. This material, including without limitation to the statistical

n herein, is provided for informational purposes only. The material is based in part on information from

party sources that we believe to be reliable, but which have not been independently verified by us and for

he information is accurate or complete. The information should not be

viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decision.

aking any investment decision. Nothing

a solicitation, offer or recommendation to acquire or dispose of any

sources we believe to be