Real Tough Guys

Spare us the oohing and aahing over the “severity” of the sanctions against Pennsylvania State University football in the wake of an investigation that found the sainted Joe Paterno guilty of covering up for a child rapist.  If we were Southern Methodist University, we would secede from the National Collegiate Athletic Association, hire a lawyer and sue for the revenue it lost when its football program was kicked to the curb.

All SMU got from the NCAA was the death penalty in the early 1980s for the good old-fashioned all-American way of gaining an edge  –  paying its scholars to block and tackle.  But Penn State?  It still gets to play, pack its stadium with 100,000-plus fans for each home game this season, and still be on television.  Great.  If you’re so inclined you’ll be able to watch and listen to the blow-dried bloviators speak of the indomitable Penn State community and the “healing” virtues of intercollegiate competition.

This is what passes for disapproval.  Oh well.  We’ll get over it, though we won’t be as big a college football fan as we used to be.  We’re free of that now.  Of course, Western Civilization will fall if Oklahoma falls to Texas this October, but we can take it.

What we can’t take is the sense that the NCAA is somehow trampling out the vintage where the grapes of wrath are stored.  Self-righteous to a fault, the NCAA proved to be as gutless as the Penn State administration and its hypocritical head coach.  We don’t have the numbers, but $60 million is probably what parking tickets are to Federal Express   –   just the cost of doing business

No, the NCAA flubbed it.  To sleep at night it chose to tell itself a story, the one about what a tough guy it was for making the Lions cut back on the number of linebacking studs it could stuff into Theory of Volleyball 101.

In our ideal world, every male freshman would receive a flyer (or a text message nowadays) informing him of football tryouts the Saturday before Labor Day, leather helmets would be optional, the coach would be a professor wanting to make some extra dough.

But, alas, it isn’t so and never was.  The men who ran Penn State and its football “program” thought it more important than little boys and sought to protect it rather than them.  By not pulling the plug, so did the NCAA.

Rescue Me

Lumberjacks yelled TIMBERRR!  Golfers bellowed FORE! Markets wailed LEMMEE OUTA HERE!  Yep, last week’s reports from the Institute for Supply Management and the Bureau of Labor Statistics provided scary bookends for the mounting body of evidence the U.S. economy is rolling over.  But are equity prices anticipating rescue?

Though the major stock indices went south Friday, they remain higher than the close on June 1, when the May payrolls report ushered in the specter of recession.  The S&P 500 closed Friday at 1,354.68, down 124 points on the day and off 0.8% for the week, but up 6.0% since June 1. Similarly, the Dow Jones Industrial Average, also down 0.8% on the week, is up 5.4% since June 1.  And the NASDAQ Composite, which managed a gain of 0.1% for the week, is up 6.9% since June 1.  The market’s performance leads us to believe sentiment still clings to the expectation that policy levers will be used to keep the motor running. 

Pessimists sing along with Diana Ross and the Supremes that  “… there ain’t nothin’ I can do about it.”  Fiscal policy is all but sidelined by Washington gridlock in this election year, and some central bankers are dogged by the uneasy sense that more action is futile in an economy caught in a liquidity trap.

But Federal Reserve Chairman Ben Bernanke has rejected the notion the Fed has no arrows left in its quiver and has pledged the Fed is ready to act if necessary.  The upshot, we believe, is that QE 3 is inevitable.  We think another round of quantitative easing, that is, printing money by purchasing financial assets from commercial banks, will be launched at the Federal Open Market Committee’s next meeting in August.  The minutes from the June FOMC meeting will be parsed when they are released on Wednesday.  The policy makers extended “Operation Twist” at that meeting.

The argument for further Fed action got support last week from news that the ISM’s diffusion index of manufacturing activity in the U.S. slumped into contraction territory for the first time in three years, falling to 49.7% in June from 53.5% in May.  The production and employment sub-indexes were up, but a steep drop in new orders was the canary in the coal mine.

And the notion of an incipient downturn grew stronger with Friday’s news that nonfarm payrolls grew a paltry 80,000 in June, below expectations that were raised when ADP said Thursday that its survey of private sector employment showed a gain of 176,000.  The unemployment rate was unchanged at 8.2%.

Abroad, the misery continued as Eurostat reported the unemployment rate in the 17-nation euro zone rose to a record 11.1% in May from 11% the previous month.  Spain's unemployment rate was the highest in the euro zone at 24.6%, while Austria had the lowest jobless rate at 4.1%.

Next week, the producer price index and the University of Michigan consumer sentiment survey will be released Friday.  For now, though, it’s up to earnings season to set the tone.

The Week That Was and the One to Come

Oh what a week it was for relationship building.  Chief Justice Roberts and enough Supremes stopped in the name of love from jilting Obamacare, the European Union got less unperfect and Miss Data wasn’t all that into us but friendly enough.  Mr. Market responded to it all with outsized gains on the last trading day of the quarter.

Ahead, of course, is the June jobs report to be released at the end of a four-day work week.  The May report showed a disappointing 69,000 additions to nonfarm payrolls, so the June statistics will be looked at for trend confirmation or reversal and the impact on monetary policy makers.    

But let’s look at what last week told us.

SCOTUS STOCKS

Shares of hospital companies predictably shot higher because the Supreme Court’s 5-4 decision to preserve the Affordable Care Act largely intact means care providers will have more paying customers.  Insurers sagged because the Act imposes restrictions that could hurt profits. 
Despite the predictable Tea Party exasperation, we suspect corporate America was relieved that one cloud of uncertainty was gone.

A MORE PERFECT (EUROPEAN) UNION

The stock market took great pleasure in the outcome of the EU summit in Brussels.  What that outcome will lead to, however, is harder to figure out.  No matter.  Mr. Market has a story and he’s sticking to it – for now. 

As best we can tell, the EU decided to decide about recapitalizing banks and creating a pan Eurozone banking regulator, taking the first step toward a real fiscal union that would issue Eurobonds backed by everybody, including that old killjoy Germany and the prodigal sons of the south.

THE WEEKLY DATA DATE

We think the most worrisome indicators were two releases from Chicago, the city that works, the poet said.

The little noticed Chicago Fed’s national activity index reached the lowest level in a year, dropping to a three-month average of -0.34 in May from -0.13 in April. The one-month index dropped to -0.45 in May from +0.08 in April. The Chicago Fed asserts that below -0.7 on the three-month average indicates a recession has likely begun.

The much more noticed Chicago Purchasing Managers Index stayed in expansion territory at 52.9% in May vs. 52.7% in April.  But here’s what caught our attention:  New orders and order backlogs were a negative and inventories rose.  That’s not a recipe for growth.

Meanwhile, from Washington we learned that personal income increased 0.2% in May, largely on investment gains.  Personal consumption expenditures, however, were flat vs. the prior month.
Paradoxically, the brightest star in the sky continues to be housing, the keystone of sustained expansion.  The Case-Shiller price index rose 1.3% in May.

THE WEEK TO COME

As noted, the big dog will be the June employment report on Friday.  Economists are looking for about a 100,000 gain in payrolls and unchanged unemployment rate of 8.2%.  ADP will preview the Labor Department’s number with the release of its private sector payroll tally on Thursday.

If the jobs numbers come in as weak as May’s, expect talk of another round of quantitative easing by the Fed.  Ben Bernanke said the Fed was ready to act if the economy required it.
Also on tap are the ISM Purchasing Managers’ Index for manufacturing for June and construction spending for May on Monday.  Factory orders for May is out Tuesday.

The U.S. shuts down Wednesday to celebrate its independence.   Happy Fourth.