David Kotok

Markets reacted to this crazy week of discredited, ADP-based employment forecasts, LIBOR revelations and central bank fizzle.  The result is plain ugly.

In Europe, post-ECB, credit spreads widened.  Good-guy yields declined; bad-guy yields rose.  See our updated EU contagion series at www.cumber.com.  Note how Swiss yields are negative until the 5-year maturity (which is a whopping 7 basis points).  For new readers, see our archives on why the Swiss 10-year government bond is now the de facto benchmark for the eurozone.  The European Central Bank demonstrated too little, too late.  This week’s Draghi Q&A did not help matters.  We continue to underweight Europe.  It is still too soon to bottom fish.

In the US, the employment statistics release shows an ongoing but weakening, very slow recovery.  A plus 80 thousand nonfarm jobs is better than minus 80 thousand.  We see nothing to alter this slow but marginally positive growth outlook.  The Fed’s additional “Twist” is a whimper, not a shout.  In fact, that is probably a good thing, since monetary policy has its limits, and we are near them.  We expect no more from the Fed for the rest of this year unless there is a seriously negative event.  In our US ETF accounts we are still holding a cash reserve.  In managed taxable and tax-free bond accounts we are slowly bringing in duration and using tactical hedging where appropriate.  Our newly launched US high-yield debt strategy is developing well.

LIBOR-gate, as Michael Lewitt titled it, is a mess.  It is potentially huge.  We expect more ugly revelations.  Other institutions may be implicated.  Critics of emerging-market governance standards need to look in the mirror.  The so-called developed markets now exude a rising stench.