by Shawn Narancich, CFA
Vice President of Research

A Game of Chicken
It appears to have come down to this. As markets convulsed again with the results of European elections, investors are wondering whether Greece will adhere to its committed austerity or call the northern tier’s bluff and reject the planned spending cuts and tax increases to which Greece already agreed. If we are to believe the young new leader of Greece’s ascendant left wing party Syriza, it will be the latter. The fact that stocks sold off over 4 percent this week while Treasury yields plumbed record lows is the best evidence yet that Greece’s turn to the left could metastasize into something more problematic than elections in an otherwise irrelevant country. In addition to the potential rise of Spanish and Italian bond yields to unsustainable levels, investors fear a Greek exit from the euro would dent the continent’s banking industry through full write-off of recently restructured debt. More importantly, there is potential for a run on the banks as investors flee countries whose legacy currency would devalue their deposits. Evidence of the latter emerged this week in Greece, and rumors of it are surfacing in Spain amid further credit downgrades of 16 Spanish banks by rating agency Moody’s. Who will blink first?  Investors may get more clues this weekend at the G-8 meetings being hosted in Washington D.C.

Thumbs Up, Sort Of
The most eagerly anticipated IPO of the year occurred Friday, much to the delight of new shareholders who enjoyed as much as an 11 percent first day pop in the stock before seeing it close nearly unchanged in a poor market. IPO pricing at $38 was good enough for many of Facebook’s institutional investors, who decided to offer substantially more of their stock at the upwardly revised offering price. A key question is whether the smart money got out ahead of what could be a reality that undershoots the company’s euphoric valuation. The fact that GM, a key member of the automotive industry (advertising’s biggest client), decided to opt out of Facebook’s paid-in model is a data point not easily ignored.

Investors Shop the Retail Aisle
Juxtaposed against the hoopla of Facebook’s IPO, retailers struggled to draw attention to their week in the spotlight, as many of the largest came to the earnings confessional to report what were largely a decent set of results. A standout exception was JC Penney. It missed same store sales estimates (down a staggering 19 percent), margin expectations, and well … pretty much all that mattered. The stock was crushed, leading investors to surmise that key competitors like Macy’s and even beleaguered Sears are taking advantage of new management’s overhaul of the retailer’s business model. Penney is experiencing turbulence as former Apple executive Ron Johnson struggles to transition shoppers away from couponing to an everyday low price strategy; clearly, selling nifty technology in a modern, clean cut store to customers who really want it is much different than persuading customers to walk down to the end of the mall and buy differentiation-challenged apparel. Also of note is a subtle shift that seems to be occurring in higher-end retailing, as Nordstrom missed earnings estimates and Saks reduced its same-store sales outlook. Only time will tell if the greater investments being made at Nordstrom and dampened sales outlook at Saks are emblematic of past turns in luxury retailing that coincided with a weaker stock market.

Our Takeaways from the Week

  • Europe’s sovereign debt crisis continues to hang over the equity markets like a dark cloud
  • As the demand for Facebook shares showed, there is plenty of capital to be deployed seeking growth in an economic environment where it is scarce