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The markets had a lot of data to tread in this week, with readings of the labour market that paint two largely different pictures. Uncertainty in Europe continues to rattle investors and the coming Greek and French elections are on everyone’s mind.With all that to digest, markets largely sold off.
This week, analysts offered some progressive ideas regarding the next big bubble, the fiscal cliff, weakness in Europe, emerging markets, and employment in the U.S.
'Art Cashin is out with his final note of the week and he has two key things on his mind: a grim stat and a scary anniversary. From his Cashin's Comments: Domestic Terrorism - George Friedman at Stratfor touches on a possible re-emergence of domestic terrorism. Here's how the essay began: Five men were arrested April 30 in connection with a plot to destroy a bridge outside of Cleveland, Ohio. The men were charged with conspiracy and attempted use of explosive material to damage physical property affecting interstate commerce. The suspects are anarchists who were noticed and approached by an FBI informant during an Occupy protest in Cleveland on Oct. 21, 2011.'
Mayo gave three reasons why he downgraded the stock: 1. The state of the American economy may continue to get worse rather than better ... 2. The slowing economy, further proved by the disappointing jobs numbers today, may also mean lack of loan growth for JPM ... 3. The state of the Eurozone continues to be unpredictable.'
'Here are the catalysts Tilson identifies that could get shares going:
- Continued earnings growth of operating businesses, especially as $1+ billion of pre-tax earnings from Lubrizol are incorporated
- New equity investments
- Additional cash build
- Meaningful share repurchases
- Eventually, Berkshire could win back a AAA rating (not likely in the near term)
- Potential for more meaningful acquisitions and investments'
'Political risk strategist Ian Bremmer tells Business Insider that the most likely outcome of a period without political leadership is a world fractured along regional lines. His new book, Every Nation for Itself: Winners and Losers in A G-Zero World, describes a current global paradigm in which American influence is fading without a new power stepping in to fill the void. He calls this world 'G-Zero'--a troubling but unsustainable period of tense geo-political relationships and uncertain investments.'
Bianco takes the opposite view. 'S&P 500 margins are much more sustainable than not,' he writes in his report.
About half of the net margin expansion at the S&P 500 since the mid 1990s is from a lower effective tax rate. The remainder is mostly from lower interest expense and more profitable foreign operations. Most of the margin expansion occurred at Technology.
All of this supports his finding: 'For the past 50 years margins have been very cyclical, but not mean reverting.'
'When equity market capitalizations fell around the world in late 2008, it was hard to blame anyone in particular. But something different has happened since then. The US, UK, and Japanese firms have more or less bounced back to 2007 valuations. European firms are still almost 40% below. One can debate how inflation is measured. But the verdict of investors is clear. Something is uniquely wrong with Europe.'
'I believe that stocks are depressed because there is a pervasive feeling that something awful is going to happen. What is this enormous tail-risk? It's the intersection of reckless fiscal policy with Jelly doughnut monetary policy ... I believe that removing the tail risk that Chairman Bernanke will feed us a coma inducing dose of Jelly doughnuts would go a long way toward restoring the relationship between P/E multiples and long-term interest rates to the benefit of stocks, at the expense of bonds. If the Fed were to stop trying so hard to prop-up the stock market, the reduction in tail risk would probably fuel the market going up on its own. I think we've reached the point where even Homer can see that the last thing he needs is another Jelly doughnut, but the Fed Chairman is oblivious. We can all say 'D'oh!''
ALBERT EDWARDS: This Is The Biggest Bubble In Recent History, And It's Heading For The Mother Of All Hard Landings
'Says Edwards: Our own more Minskyan interpretation of events is that the lack of volatility in the Australian economic cycle and the absence of any recession since 1991 has led Australians to have an excessive appetite for debt in the belief the future will reflect the past. But for us, suppressed volatility is merely storing up an even bigger crash further down the road.'
'In our view, that suggests a degree of liberty they do not have; we think there is little, if any, appetite at the Fund or at the EC to renegotiate the agreement. Rather, the new government's task will be daunting: €3bn of spending cuts to implement immediately and an additional €12bn to be detailed for 2013-14. Risks have risen around Greece's ability to implement austerity measures, against a backdrop of increasingly frustrated and impatient official sector lenders.'
'Lee, who is widely recognised as one of the more bullish strategists on the street, isn't letting the upcoming so-called 'fiscal cliff' to change his bullish view. While it is a considerable risk, Lee argued that the downside to fiscal cliff related issues are much less significant and less complicated than the debt downgrade the U.S. economy faced last year. And things ultimately turned out OK for stocks last year. The fiscal cliff is the worry that expiring tax cuts and stimulus programs could shave around 3 per cent to 5 per cent from GDP next year.'
Jim O'Neill Explains Why One Of The Most Violent Countries In The World May Also Be The Most Attractive Growth Market
'Business Insider recently sat down with Jim O'Neill, Chairman of Goldman Sachs Asset Management. In one word, he described growth market Mexico as 'attractive.' This raised our eyebrows considering all of the drug-related violence that crosses the headlines. O'Neill, an expert on growth markets and the inventor of 'BRICs,' told us how we should think about drug violence.'
'One questioner asked him whether Europe was repeating the mistake that Britain did, when, at the recommendation of The Treasury, went on the gold standard.Krugman's answer: 'All around Europe's periphery they're doing it as we speak, er, type. The euro has served as the functional equivalent of the gold standard. The difference for, say, Spain is that since they don't have their own currency, it's much harder to change course than it would have been for Britain under gold. But if you look at, say, Latvia, they're doing the full Churchill -- and being hailed as a role model even as they enforce a devastating slump on themselves.' '
'Unfortunately, Europe has misdiagnosed its problems and set the wrong strategic course. Outside Greece, which represents only 2 per cent of the eurozone, profligacy is not the root cause of problems. Spain and Ireland stood out for their low ratios of debt to gross domestic product five years ago with ratios well below Germany. Italy had a high debt ratio but a very favourable deficit position. Europe's problem countries are in trouble because the financial crisis under way since 2008 has damaged their financial systems and led to a collapse in growth. High deficits are much more a symptom than a cause of their problems.'
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