Tuesday, May 04, 2010

The suspect in the failed Times Square bombing was arrested late Monday night by Customs and
Border Patrol agents at JFK International Airport as he tried to board a flight to Dubai,
administration officials said. He was identified as Faisal Shahzad, a 30-year-old U.S. citizen
from Pakistan.

Underemployment Falls to 18.9% in April - Gallup Daily tracking data suggest that more than 2
million Americans became fully employed in April. The underemployment rate fell to 18.9%
from 20.3% in March -- due to a decline in the percentage of both the unemployed (9.7%) and
part-time workers wanting full-time work (9.2%).

Car sales were a touch weaker than expected in April at an 11.2m annual rate, down from
March’s 11.7m annual rate and a shade less than the 11.4m expected rate of sales. The miss was
in imported sales. Domestic car sales of 8.8m units at an annual rate were exactly as expected.

Total US Auto Sales (Annualized Seasonally Adjusted)

Cash for Clunkers

Re Greece – 1) Bloomberg story that Greece has hired Lazard to explore a possible debt
restructuring 2) WSJ article says that Greece’s costs may exceed the amount of aid it will be
given from the EU/IMF with the discrepancy based on the assumption that Greece will be able to
borrow from private capital markets by the end of ’11 which may prove too optimistic a timeline.
3) Protests in Greece escalated over the new austerity measures with the ADEDY union
federation (represents >500K civil servants) set to hold a rally today. 4) Both Germany’s Merkel
and the parliamentary head of the German CDU spoke to a possible “orderly insolvency” of
European states

How big is Greece? In economic terms, it generates annual output just about equal to the state
of Nebraska and considerably less than Mississippi. (in case you were wondering, Nebraska
ranks 36th in terms of GDP size)

2008 GDP (in billions $)
94
Billions

92

90

88

86

84

82

80

78
Mississippi Greece Nebraska

Clearly the recent concerns are not at all about Greece per se, but the larger implications for
what Greece represents. The vast majority of developed country sovereign balance sheets are
stretched. Greece might be a little more stretched than others, but for the most part, we’re
roughly on that path. Investors are viewing Greece as merely a precedent for what is
increasingly likely to happen elsewhere.

Turning to equities, we see they have been largely insulated from sovereign issues with the S&P
down a mere 2% from its highs and European equities off ~4.5%. This is probably because
equities belong to the corporate sector, whose balance sheets are largely healthy. Obviously,
sovereign debt is linked to governments whose balance sheets are increasingly questionable
(particularly in the longer term). Investing was all about corporate balance sheets in 2007 and
2008, while 2009 was all about earnings and growth. Now we’re back to balance sheets again,
but this time in reference to governments. If any sector looks vulnerable it is probably financials
(particularly European) as that sector is down roughly double the index (consider that banks
tend to hold a lot of sovereign debt on their balance sheets).