The proximate cause for this week's equity weakness was the European weekend voting results, but one could make the case that Hollande's victory (which was predicted by Ladbrokes; he was 1:9 odds for the last two weeks) is a net positive as we will end up with a more activist ECB concentrating less on austerity and more on pro-growth fiscal policies.
As to Greece, who cares? As Miller Tabak's Peter Boockvar remarked today, Greek bondholders have already been body slammed -- their debt is trading at around 20% of face value. How many times is the market going to discount Greece's demise? Meanwhile, Greece is going to have a new election in June, and the odds favor a pro-troika result.
Steve Weiss argued that the economy is weaker, citing structural unemployment, moderating profit growth and poor earnings guidance.
Again, notwithstanding the structural disequilibrium in the jobs market (something I have written about over the past five years), I disagreed.
- Economic growth: Most observers are more cautious regarding domestic growth today, even though the recovery's breadth is better -- employment has improved, and there is a nascent recovery in the residential real estate markets.
- Profits: Corporate profit momentum has turned positive -- the first-quarter beat was by over 500 basis points.
- Housing: The outlook for housing is markedly improved. Household formations are recovering from the depths of the recession, the NAHB index and buyer traffic are at five-year highs while inventories of unsold homes are at five-year lows.
- Household health: Consumer deleveraging is advanced -- household debt/GDP is back to trend line levels.
- Employment: Indicators are improved relative to a year ago. Claims are lower -- ISM employment components are consistent with monthly private payroll gains of about 200,000; take out 20,000 government job losses, and you come out with monthly jobs growth of approximately 175,000 to 180,0000.
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