WEEK ENDED JULY 6 2012 Thoughts from JoeSteppin’ OutLIE-BOR: The Rate You Thought You KnewIf you have a floating rate loan, you probably think that your interest accrual will rise “when rates go up”and fall “when rates go down.”This would be true if all rates moved together, but the ongoing “LIBOR scandal” as it’s being calleddemonstrates otherwise.Specifically, LIBOR is calculated by survey where bankers submit rates every morning that supposedlyindicate the bank’s funding costs. But they don’t have to prove they actually borrowed at that rate – it’ssimply a guesstimate.So to be clear, if you have a LIBOR-based loan your interest accrual will only rise when the survey ofbanker’s cost of funding rises. During the funding crisis in 2008, these bankers were more concernedabout their reputation than their profits so they may have under-estimated funding costs for thepurposes of calculating LIBOR. (and maybe at the urging of government officials!)If your rate reset during this period, you may have received a windfall while the banks in question heldonto their reputation of being able to fund at lower rates, even if this wasn’t the case.Was this a bad thing?Lying is never good, however I wonder if we’d all be happier had true funding costs been reported thatled to a system-wide bank run?Ok, probably not.Top Eight 1. UK lawmakers set up inquiry on LIBOR issue. Early next week, a showdown between a Bank of England and a Barclays official will ensue. The question on hand is: Did the Bank of England encourage Barclays to submit artificially low rates in the LIBOR rate-setting process? Recall during the height of the crisis how worried everyone was about the banking industry? This does not seem so implausible. 2. The “Facebook effect” halts IPOs in the second quarter. Just 11 venture-backed IPOs came in the second quarter with only two coming out after Facebook’s May 17 offering. The IPO market is also being affected by the JOBS act which was signed into law just before Facebook. To learn more, see SVB’s recent webinar.
3. Actions by three central banks fail to instill confidence. China and Europe lowered rates, while Britain extended their QE actions, but stock markets barely reacted and Spanish yields ended the week higher. It’s not about rates, it’s about confidence. 4. Unemployment in the eurozone hit a new high of 11.1 percent in May. There remain tremendous disparities across the zone with the rate ranging from 5.6 percent in Germany to 24.6 percent in Spain. In the U.S., when the disparity is this large, people move. Detroit’s population is down 25 percent in the last ten years! 5. The U.S. job market disappoints in June. The economy added just 80,000 jobs and the unemployment rate remained steady at 8.2 percent during the month. Due to population adjustments, we need to add between 120,000 and 150,000 jobs each month just to keep even. In addition, hours and wages are rising which indicates companies are still squeezing efficiencies out of existing workforces. Companies are not yet ready to make the long-term commitment of hiring new workers. 6. Are you worried about deflation? Gas prices drop for 13th week in a row. Gas prices are 20 cents below one year ago and 23.4 percent from the record high set July 14, 2008. We are starting summer and there is no upward pressure here. The consumer is very sick. 7. California cities may attempt to take mortgages from investors. They may use eminent domain to force mortgage-owners to sell to cities at “market value” in order to allow for restructuring of the loans. There are many problems with this plan including: The owners may not reside in the city, state, or even the country where the homes stand, and investors will carve out these districts when purchasing future mortgages making credit less available. A better tactic would be to work with the lenders who will surely only want to maximize the value of their failed investment. 8. Airbus to build first U.S.-based assembly plant in Alabama. The company plans to spend $600 million and employ 1,000 people by 2017. Who says manufacturing is dead in the U.S.? As developing markets develop, U.S. competitiveness increases.Key Indices Return 7/6/2012 1 week YTD Treasury 7/6/2012 6/29/2012 ChangeDow 12,772 1.4% 4.5% 30yr 2.67% 2.75% -0.08%S&P 500 1,355 1.9% 7.7% 10yr 1.55% 1.65% -0.10%Nasdaq 2,937 3.1% 12.8% 5yr 0.65% 0.72% -0.07%Euro Stoxx 2,236 -1.3% -3.5% 2yr 0.27% 0.30% -0.03%Nikkei 9,021 0.2% 6.7% 1yr 0.19% 0.21% -0.02%Hang Seng 19,801 4.1% 7.4% 3mo 0.07% 0.08% -0.01%