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April 29, 2011 : Market Update

Apr 29, 2011   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Harvard vs. McDonald’s

This week marked the second full week of earnings announcements and with it some mixed news. While the pundits don’t seem to be talking a whole lot about it, my own anecdotal evidence is that we’re seeing more “misses” than in past quarters and more CEOs concerned with rising inflation. Coupled with the fact that the Q1 GDP first estimate came in around 1.8% (down from 3.1% prior), it is clear that earnings and economic statistics aren’t exactly what is driving this market higher. To the contrary, from the looks of things, it appears that all ears are on the Federal Reserve these days.

The Fed Open Market Committee (FOMC) released their latest report which is essentially unchanged from prior reports. They repeated language about near-zero rates for an “extended period” and talk about longer-term inflation expectations being “stable”. And despite the deficit hawks on the committee who have been quite vocal recently about their concerns regarding inflation; it comes as a surprise that the vote on continuing QE2 through June was unanimous. As a result the dollar weakened further, commodity prices hit new highs and the stock market inched higher.

To highlight the doublespeak coming out of the Treasury Department and the Federal Reserve we just need to look at recent comments. Treasury Secretary Geithner said this week, “Our policy has been and will always be, as long as I’m in this job, a strong dollar is in our interest as a country. We will never embrace a strategy of trying to weaken our currency to try to gain economic advantage.” Chairman Bernanke said on Wednesday, “The Federal Reserve believes that a strong and stable dollar is both in American interests and in the interest of the global economy.” And yet, the one-year chart of the U.S. Dollar Index below demonstrates the irony of their statements.

There is a fine line the Federal Reserve and Treasury Department are trying to walk between supporting the fragile economic recovery and having the economy fall back into recession. They’re using their best judgment, but only time will tell whether they made the right policy decisions.

And the story of the week has to go to McDonald’s. A few weeks back they announced they were planning on hiring 50,000 new employees on April 19th. As it turns out, they hired 64,000 minimum-wage employees from an applicant pool of more than 1 million people. Someone did the math and discovered that their acceptance rate of 6.2% is lower than the 7% of applicants accepted into Harvard each year. Now you know.

April 21, 2011 : Market Update

Apr 21, 2011   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Positive Thinking

Investors once again demonstrated the power of positive thinking this week.  Despite a dire warning issued by Standard & Poor’s regarding the U.S. credit rating, the market shook off the news and headed higher.  Much of the movement was driven by strong earnings announcements from companies such as DuPont, Qualcomm, Apple and IBM among others.  That helped refocus investors away from worries about the U.S. debt burden.

On the other hand, there is no shortage of fear.  This week we saw gold break through $1,500/oz. for the first time ever.  And silver has reach highs not seen since the Hunt brothers tried to corner the market back in January 1980.

Yet, investors have grown increasingly confident in the global economic recovery.  For the moment, good earnings seem to be winning the day.  Earnings announcements will continue through the rest of next week before tapering off.  At that point the focus will undoubtedly return to raising the debt ceiling, the end of QE 2 and the epic battle over the federal budget.

The stock market will be closed tomorrow for Good Friday.  For this reason we decided to send our weekly email a day early.  For those who have tomorrow off we wish you a happy three day weekend.  For everyone else, it’s just one more day until the weekend.

April 15, 2011 : Market Update

Apr 15, 2011   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

My Little Slice of the Pie

Earnings announcements kicked off this week to much trepidation.   In fact, the volatility index dropped to its lowest point since July 2007 as investors eagerly await the first quarter reports.  As is always the case, Alcoa is the first to announce and set the tone for earnings season.  Unfortunately, management wasn’t upbeat enough for investors despite good earnings and the stock quickly sold off.  Over the next couple of weeks it is likely that we will see this type of behavior repeat.  Despite these short-term swings, we still believe the economy is recovering and will continue to do so barring any unforeseen events.

The big news is that the democrats and republicans have averted a government shutdown after reaching agreement on a 2011 budget.  This week both the House and Senate passed the bill and will likely be signed into law this weekend.  The irony is that the drama over whether to cut $30 billion or $60 billion out of the budget is really a drop in the bucket as demonstrated by the chart below.

The real work starts now.  Last week Senator Paul Ryan proposed sweeping changes to Medicare, Medicaid and discretionary spending with the aim of reducing the federal deficit by a whopping $4.7 trillion over the next ten years.  President Obama announced his plan this week with the same deficit reduction goals in mind albeit using a very different approach.  Clearly the ideological lines have been drawn and the debate is about to begin.  While the president is looking to push the issue for a quick resolution, it is very likely that this will be one of, if not THE theme, in the 2012 presidential election.

In other news, we learned that Bill Gross hasn’t just dumped his U.S Treasury holdings, he’s now short the Treasury market: 3% of Pimco’s $236 billion flagship Total Return Fund is bet against Treasurys.  The fund also increased cash and equivalents to 31% from 23%, making it the largest component for the first time in four years.  On the other side of the argument is Jeffrey Gundlach, a very well respected bond fund manager and a Bond King of his own.  He believes that QE2 is inflationary, which is bad for bonds, therefore the end of QE has to be deflationary, which is good for bonds.  It’s an interesting argument.  If you’re curious about this theory, you can watch the interview on CNBC here http://video.cnbc.com/gallery/?video=3000016107

In closing I’d like to make an observation.  As already mentioned, the president chose this week to give his own plan on reducing the national budget deficit.  The location of said speech was George Washington University (GW).  As it turns out, GW was recently crowned by U.S. News & World Report as the most expensive school to attend in the country, costing $56,000 a year.  Seems like a strange location to give a speech about belt-tightening.  Is it just me?

April 8, 2011 : Market Update

Apr 8, 2011   //   by Marc Henn   //   Weekly Market Update  //  No Comments

Employment Trends Looking Up

It was a somewhat lackluster week in the market with expectations building for earnings season which starts next week.  Analysts expect Standard & Poors 500 firms to post a 12% year over year (Y/Y) increase in 1st quarter earnings amidst new highs in sentiment readings among company CEO’s.  We are hopeful that positive sentiment among CEO’s will lead to faster job creation – and we may be seeing this.  It was reported this week that the March Employment Trends Index was up 8.1% Y/Y to 100.9.  Excluding construction and state/local government, this has been the fastest growing six-month period for employment in the past decade.

The GOP unveiled a plan to slash $4 Trillion from the deficit over the next ten years.  This is more than President Obama’s debt commission had proposed.  The GOP plan includes a statutory cap on actual discretionary spending as a percentage of the economy, changes to Medicare and Medicaid’s status as direct payers of costs, lower taxes and a wider tax base.  In addition, after improving economic data and hawkish comments from some U.S. central bankers, Wall Street is beginning to price in a more aggressive Federal Reserve (Fed) according to the latest CNBC Fed survey.  About a third of economists, fund managers and strategists who responded see the Fed hiking interest rates, which is double the percentage from the March survey.

In company news, TJX Companies and Ingersoll-Rand increased their dividends by 27% and 71% respectively.  In addition, TJX plans to buy back $1.2 billion in stock this year.  The NASDAQ announced it will cut Apple’s weighting on the NASDAQ 100, effective May 2nd, to 12.3% from over 20% in a “special rebalance” to more accurately reflect the number of Apple’s shares.  In addition, an almost-finished version of Google’s internet music storage service was leaked to the public.  This service would rival Amazon’s “Cloud Drive” that was unveiled last week.

For the story you might not have heard this week we return you to the oil disaster in the Gulf of Mexico.  It appears that Transocean, one of the firms involved with the spill, paid out “safety bonuses” after boasting that it was the “best year in safety performance in the company’s history.”  The New Orleans Times-Picayune responded with the comment, “That’s like the owners of the Hindenburg claiming they had an ‘exemplary’ safety record – except for the dramatic explosion of the blimp over New Jersey in 1937.”

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