Bailout Talks Raise Fear of ‘Eurogeddon’

The Dow Jones Industrial Average (Dow) fell 0.01%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 0.26%, the Standard & Poor's 500® Index (S&P 500) dipped 0.24% and the NASDAQ Composite Index (NASDAQ) finished off 0.13%. Sector breadth was mixed as 5 S&P sector groups...

March 25, 2013

Performance for Week Ending 3/22/13:

The Dow Jones Industrial Average (Dow) fell 0.01%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 0.26%, the Standard & Poor’s 500® Index (S&P 500) dipped 0.24% and the NASDAQ Composite Index (NASDAQ) finished off 0.13%. Sector breadth was mixed as 5 S&P sector groups finishing higher while 5 finished lower. The Consumer Staples sector (+2.08%) was the best performer, while the Materials sector (-1.95%) was the worst.

Index* Closing Price 3/22/2013 Percentage Change for Week Ending 3/22/2013 Year-to-Date Percentage Change Through 3/22/2013





Wilshire 5000




S&P 500








*See below for Index Definitions

MARKET OBSERVATIONS: 3/18/13 -3/22/13

The major market indices finished the week lower as uncertainty in the Eurozone offset a batch of solid U.S. economic data.

Cyprus – Little Island, Big Headache
Much of the focus last week was on the tiny island of Cyprus. The island has a population of fewer than 1 million citizens and its GDP accounts for a miniscule portion of the overall Eurozone economy. While the country has been struggling for many months, it all came to a head last week when the Cypriot government was forced to ask for bailout funding resulting from its failing banking system. The problems in the banking sector, among other things, reflect deteriorating balance sheets stemming from their large exposure to Greek debt.  Banks were forced to write down the value of their Greek debt as part of a deal in late-2011, resulting in significant losses. In an effort to curb the damage, the Cypriot government nationalized Popular Bank and provided financial assistance to The Bank of Cyprus (the two largest banking institutions).

Due to the rising risks, credit rating agencies also downgraded the credit rating on Cyprus, which in turn caused interest rates to spike. This has led to higher financing and debt servicing costs for the island. Realizing the island is on the brink of disaster, government officials approached the “Troika” (a committee made up of the European Central Bank, the European Commission and the International Monetary Fund) asking for bailout assistance. Catching everyone off guard, the Europeans agreed to provide EUR 10 billion of funding, with the caveat that the additional funds needed (EUR 5.8 billion) be generated by initiating a “one-off”  across the board tax on bank deposits. The plan was viewed as draconian by the Cypriot government and when put to a vote, was rejected.  The options for Cyprus seem to be very limited with the worst-case-scenario, although one of a low probability, being an exit from the Eurozone. As of this writing a solution has not been reached.

Coat Tail Risk?
The turmoil in Cyprus and the harsh means that they are expected to raise capital was not really the issue, per se, that spooked the global markets. Cyprus’ economy is very small and the bailout numbers are a “rounding error” compared to other bailouts. What was more worrisome is the precedent that such a taxing scheme sets. In other words, if the Troika can demand such actions on Cyprus what would stop them from imposing similar measures to other Eurozone nations? This coupled with the initial requirement that the levy was also being applied to “insured” deposits created worries that even cash can no longer be considered a safe-haven asset.

Despite the Euro-mess, the U.S. markets held up remarkably well this week, suggesting the U.S. is being viewed as a “safe-haven.” This safe haven status should remain in place as long as the U.S. economy remains resilient. In addition, the negative news flow coming out of the Eurozone may also be prompting investment flows toward the U.S. from global investors as they look to eschew the overseas turmoil. The renewed problems in Europe also seem to underscore that European Central Bank President Draghi’s pledge to do “whatever it takes” may put a “safety-net” under the Eurozone, but ultimately won’t clean up the festering problems in the monetary bloc.

FED Meeting
At the conclusion of last week’s Federal Open Market Committee (FOMC), the FOMC reiterated their commitment to continue their bond buying program in an effort to boost economic growth. In its policy statement, the Federal Reserve (FED) said the U.S. economy has returned to a moderate growth environment “following a pause late last year.” The committee stated that labor market conditions have “shown signs of improvement in recent months” but they balanced this by saying the “unemployment rate remains elevated.”  The latter suggests the FOMC is willing to keep the current accommodative policy environment in place despite the recent improvement in payroll employment. The FOMC addressed the fiscal situation by saying that “fiscal policy has become somewhat more restrictive.”  Committee members seemed to reflect this development in the summary of economic projections, where the central tendency for real GDP growth was revised to 2.3% to 2.8% for 2013, down from 2.3% to 3.0% in December. Growth in 2014 was also revised lower by one-tenth to a range of 2.9-3.4%.

During the after meeting press conference FED Chairman Bernanke stressed that while the economy has improved, the FED won't ease its aggressive stimulus policies until it's convinced the economic gains can be sustained. An unemployment rate of 6.5% is a "threshold, not a trigger for any rate increase”, he said.  When asked whether the flare-up in Cyprus signals that the U.S. financial system might be more vulnerable than bank "stress tests" have shown, Bernanke replied that the dangers posed by the tiny Mediterranean nation "at this point," pose no major risks to the U.S. financial system or economy.

Economic Roundup
Last week’s block of economic data continued to suggest the U.S. economy remains on firm footing. On the manufacturing front, the Philadelphia Federal Index (Philly FED) reported that manufacturing activity in the greater Philadelphia area surged back into expansion territory. The Philly FED Index came in at 2.0 (readings above zero indicate expansion), the first gain in three months. The improvement was broad based, as the new orders, shipments, and inventories all posted gains. The housing sector also continues its gradual march higher. The Commerce Department reported that housing starts during the month of February rose by a better than expected 0.8% to an annual rate of 917K units. January starts were also revised higher to 910K from the initial estimate of 890K.  Building Permits—which tend to be a leading indicator of future construction—came in at 946K units, solidly ahead of the 925K expected by economists.  Permits now stand at the highest level in almost 5 years. According to ISI Research, housing starts are positioned to reach 1.3 million annualized units by year-end.  Elsewhere, existing home sales rose 0.8% month-to-month in February and the January reading was also revised modestly higher. On the labor front, the Labor Department reported that initial jobless claims during the week ended March 16 rose by 2K to 336K. Results were modestly better than the 340K expected by economists. The 4-week moving average—which helps smooth the week to week volatility—fell to 347.3K – the lowest since March 2008.

The Week Ahead:
The economic calendar will be the focal point of the holiday shortened week. As a reminder, the markets will be closed on Friday (March 29), in observance of Good Friday. Economic reports of interest include durable goods orders, new home sales, the Conference Board’s consumer confidence survey and the January Case-Shiller housing price data. In addition, the final revisions to the fourth-quarter GDP will be released on Thursday. The earnings calendar will remain relatively quiet with just 9 members of the S&P 500 slated to report quarterly results.  FED Heads will be out and about this week with five speeches scheduled including an appearance by FED Chairman Bernanke on Monday.


The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

The S&P/TSX Composite Index is a capitalization-weighted index designed to measure market activity of stocks listed on the Toronto Stock Exchange (TSX). The index was developed with a base level of 1000 as of 1975.

Philadelphia Federal Index is a regional federal-reserve-bank index measuring changes in business growth. The index is constructed from a survey of participants who voluntarily answer questions regarding the direction of change in their overall business activities. The survey is a measure of regional manufacturing growth. When the index is above 0 it indicates factory-sector growth, and when below 0 indicates contraction. Also known as the "Business Outlook Survey".

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