News Analysis for the Investor on April 27, 2012

Economy grew less than anticipated in First Quarter

The U.S. economy grew less than anticipated in the first quarter as a smaller contribution from inventories overshadowed gains in consumer spending.  Bloomberg reports that gross domestic product, the value of all goods and services produced in the U.S., rose at a 2.2 percent annual rate.  Expectations were that the increase would be 2.5 percent. The GDP growth rate was impacted by a drop in government spending and slower growth in business investment in equipment and inventories.  The Commerce Department indicated that household purchases increased 2.9 percent and homebuilding grew at the fastest in almost two years.

Spain’s credit rating tumbles

Standard and Poor’s downgraded Spain’s credit rating two notches on Thursday from A to BBB-plus with a negative outlook.  According to the Wall Street Journal, Spain, along with many other countries, had a AAA rating at the beginning of the economic crisis.  Outsiders are uncertain whether Spain will be able to enforce the austerity measures recently outlined.  Unemployment in Spain is at its highest level in two decades. The Dow was up 113 points on Thursday ending at 13,204.  Asian markets were mostly negative on Friday and European markets are up.

Money market funds work together to derail SEC

The largest providers of money market funds are working closely together to derail potential regulations from the SEC regarding their very structure.  According to the Wall Street Journal, T. Rowe Price, JP Morgan, Fidelity, Vanguard and Federated Investors have all spent significant amounts of time meeting with 15 member of Congress from both parties to explain why the SEC regulations are inappropriate.  A letter has been written to the SEC Chairman, Mary Schapiro, by Finance Committee members Rep. Spencer Bachus (R. Ala)and Rep. Jeb Hensarling (R. Texas) urging her to gain a better understanding of money funds before proposing further regulations.  One money fund failed during the financial crisis literally  “breaking the buck” but shareholders received 99 cents on the dollar.  Schapiro would like to force money funds to pay out only 97 to 98 cents on a dollar when a fund holder makes a change and then pay the remainder 30 days later.  These funds are used by many large investors to safehouse overnight deposits and are always valued at a dollar per share.  The changes proposed by Schapiro would be disruptive to the entire industry.

High levels of consumer debt limit spending

USA Today is reporting that high levels of consumer debt are keeping individuals from spending.  Total mortgage and other consumer liabilities have fallen from a record 123 percent of disposable income in late 2007 to 105 percent in the fourth quarter of 2012.  Yet student loan debt and fear of falling behind on mortgages has kept individuals from spending freely.  More than 80 percent of 18 to 34 year olds who took out a student loan still have a balance and more than a third owe more than $20,000.  While credit card spending picked up late last year, consumer spending is predicted to remain tepid although the Commerce Department’s reports earlier today indicate that it continues to increase.

Tourism to be challenged in Amsterdam?

A Dutch judge has upheld a law allowing the government to introduce a “weed pass” to prevent foreigners from buying marijuana in coffee shops in the Netherlands.  Coffee shops in Amsterdam strongly oppose the plan, according to the Associated Press.    The weed pass will turn coffee shops into private clubs that are not open to foreigners.  The coffee shops believe this law violates the rights of foreigners.  But the government wants to crack down on “drug tourists”.  It would prefer tourists come to enjoy the canals and the tulips.