Browsing articles in "Weekly Market Update"

The Twist: Bernanke Learns to Dance

Sep 23, 2011   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

It was another in a line of volatile weeks with the markets ending quite a bit lower in heavy volatility and trading.  The Federal Open Market Committee (FOMC) had its much anticipated two-day meeting and unfortunately failed to deliver.  Analysts and investors were hoping for a magical elixir that would make everything better and instead found they had drunk syrup of ipecac.  Issues in Greece continue to simmer while the White House’s solution to the weak U.S. economy is to raise taxes on the wealthy.  We’ve had better weeks.

The FOMC released the minutes from its meeting earlier this week and unfortunately did not propose further quantitative easing.  Instead what they proposed was to take the proceeds from maturing securities (already on their balance sheet) and reinvest them in longer term securities.  This move has been done once before in 1961 and was coined “The Twist.”  Some quipped that perhaps Bernanke should have called it the “twist and shout” instead.  The idea is to sell short-term maturities and invest the proceeds on the longer end of the curve.  However, this will not expand the size of their balance sheet and will not stimulate the economy in the same manner that the last two rounds of quantitative easing did.  Instead the aim is to push long term interest rates even lower in order to reduce mortgage rates and provide a disincentive to banks holding on to their capital.  Regardless how you slice it, this plan fell far short of what the markets were looking for and helped precipitate the market sell off this week.

In other news, the issues in Greece, and more broadly Europe, continue to fester.  The opposition to bailing out Greece is growing at the same time spending cuts and tax increases (in Greece) are meeting strong resistance.  The last round of austerity measures were rather tame compared to the ones proposed last week.  In addition, Italy was hit with a credit downgrade by S&P and responded by saying they were just fine and didn’t have a debt problem.  Germany and, to a lesser degree, France appear to be the only adults in the room at the moment.  With potentially $400 billion in bank bailouts on the line, and considerably more if things get worse, we hope the European Central Bank (ECB) and International Monetary Fund (IMF) can navigate through this mess before it spirals out of control.

On the subject of spending cuts and tax increases, this week President Obama announced his proposal to reduce spending by roughly $3 trillion over the next ten years.  He modeled his plan after one proposed by billionaire Warren Buffet who has often lamented how little the rich pay in taxes.  The plan would include raising the top nominal tax bracket for those earning over $1 million a year.  In fairness, this tax increase would be part of a larger plan which would reduce Medicare and Medicaid benefits (while leaving Social Security untouched).  Whether the debt reduction super committee incorporates President Obama’s ideas is yet to be seen. They still have a couple of months before things get interesting again.

This has been a particularly busy week with market volatility and trading.  Unfortunately, because of this I don’t have a story of the week to share with you.  I’ll look for an especially good one for next week.

September 23, 2011: Market Update

September 16, 2011: Market Update

Sep 19, 2011   //   by Marc Henn   //   Weekly Market Update  //  No Comments

Don’t Ignore Me

Concerns about Europe seemed to impact the market only slightly this week as investors shrugged off concerns on Monday and managed to hold a week-long rally into the close on Friday.  It seemed Europe was supplying us with Jekyll and Hyde news all through the week.  Concurrent positive and negative news out of Europe – sometimes within just a few hours of each other – started to be ignored later in the week as a more cohesive European leader front started to advance in addressing the Greece situation.  On Thursday, the Greek, French and German leaders emerged from a conference call saying that they were “convinced that the future of Greece is in the euro-zone”.  Adding to the market confidence was a commitment on Friday by the world’s leading central banks to provide unlimited dollar funding to European banks if needed.  We will be looking for more potential action coming out of a 2-day meeting of European finance ministers being held in Poland.

If European banks were not having enough difficulty already trying to convince investors and the rest of the financial community that their world is stable, along comes trader Kweku Adoboli to throw a wrench into it.  On Thursday UBS, a Swiss bank, announced that a rogue trader allegedly racked up and hid $2 billion in trading losses.  While this will have a huge impact on UBS’s earnings for the third quarter the bigger issue that will need to be addressed is oversight of risk management within these large financial firms.

With economists predicting slower growth in the U.S. and globally, China announced this week that imports into their country surged over 30% in August from a year ago – which followed an almost 23% increase in July.  This data helps alleviate economists’ concerns over a slowdown in Chinese demand.  With this silver lining comes the threat that China will need to raise their interest rates further to help keep inflation in check.

The story of the week comes from the executive branch of our government.  With many still questioning the use of taxpayer money to help bail out “too big to fail” financial institutions, a story emerges that President Obama may have wanted to consider letting it happen in at least one case.  Ron Suskind in his upcoming book on the Obama administration claims that the U.S. Treasury ignored a March 2009 order by President Obama to consider dissolving Citibank.  Of the event, President Obama is quoted with saying that he was trying to be decisive but “the speed with which bureaucracy could exercise my decision was slower than I wanted.”  Regarding his feelings about being ignored, he is quoted with saying, “Agitated may be too strong a word.”

September 9, 2011: Market Update

Sep 9, 2011   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

The Price of Honesty

After going higher much of the week, the markets fell today on speculation surrounding Greece.  When the European Union (EU) was formed in the early 1990’s there was one small oversight.  The framers didn’t think to create a mechanism allowing a country to leave.  Although it would have been pragmatic, in their delight they couldn’t envision a day in which one or more countries could get so far off track as to threaten the very establishment of the union.  Unfortunately, this oversight leaves the EU with some very difficult choices in the months ahead.  We may be witnessing the slow unraveling of decades of unification in Europe.

At issue this week are questions over Greece’s ability to meet the terms of its first rescue package as bondholders weigh whether or not to participate in a debt exchange that is crucial to a second bailout.  German Finance Minister Wolfgang Schaeuble said Greece won’t get its next bailout installment unless it meets goals under the first aid package.  The deadline is today and it does not appear that Greece will meet those goals.  Adding to the anxiety, Jürgen Stark, the only German member of the European Central Bank’s (ECB) executive board, announced plans to step down today.  This was the latest sign of deepening disagreement over how to solve Europe’s economic problems.  And lastly, a memo was leaked which suggests that the German government is putting plans in place to support its banks in the event that Greece does ultimately default.  None of this news was reassuring to a market already on edge.

In other news, President Obama unveiled his much anticipated proposal to generate U.S. jobs.  His ideas included renewal of many aspects of the first stimulus package.  Of the estimated $450 billion, some $240 billion would be allocated to the extension and expansion of the payroll tax break with another $50 billion going to an extension of unemployment benefits.   However, questions remain about how much of the proposal would pass Congress and whether Republicans would require spending cuts elsewhere to offset the new spending.  Ironically, the cost of this plan is roughly half the $1 trillion savings Republicans and Democrats fought so hard over during the debt ceiling debacle last month.  In the end, despite the president’s assurances that the bill will be paid for, there is no guarantee that programs that will clearly increase annual deficits in the near term will be paid for in the long term.

With risks in Europe increasing and a slowing U.S. economy, all eyes are squarely on Ben Bernanke and the Federal Reserve.  He spoke again this week but continues to confound expectations that there will be further easing.  It remains likely that the Fed will do something after its September 20-21 FOMC meeting but Mr. Bernanke seems unwilling to let the cat out of the bag before their meeting.

The story of the week is about a Minnesota boy.  You may have heard the story about the miracle $50,000 hockey shot last month.  Nick’s name was drawn in a fund-raising raffle with a $50,000 prize.  All he had to do was hit a hockey puck 89 feet down the ice and get it through a hole six inches wide.  He hit a once-in-a-lifetime shot and the puck sailed through the hole perfectly.  However, there was one hitch.  It wasn’t Nick who took the shot but instead his twin brother.  By chance, Nick was outside the arena at the time his ticket was drawn and his brother stepped in on his behalf.  This presented a quandary for the father who wanted to teach his children a lesson about honesty.  The father came forward the next day and admitted to event organizers about the twins’ switch.  Last week the company that insured the event said that due to “contractual breaches and legal implications” it was unable to pay the claim.  It turns out honesty does have a price.

September 2, 2011: Market Update

Sep 2, 2011   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

A Reverse Goldilocks Scenario

Considering just how bad the economic data was this week, you may be surprised to know that the markets look to finish only slightly lower.  Some analysts have coined this phenomenon “The reverse Goldilocks.”  You’ll remember that it was the introduction of QE2 last September which marked the start of the large rise in the equity markets and the end of QE2 in June which shortly thereafter marked its top.  So as with Goldilocks, analysts are hoping for an economy that is neither too weak nor too strong but one that is just weak enough to require the Fed to intervene again.  We might be there.

The economic data released this week presented the optimal picture of an economy in retreat.  We won’t call it a recession yet, but it is causing concern amongst economists and investors alike.  The three biggest data points were as follows:

  1. August Consumer Confidence: 44.5 vs. 52 expected, 59.6 in June.  This reading is the lowest level since April 2009 which marked the bottom of the last recession.  It paints a rather dire picture of people’s attitudes toward the economy and their feelings about their personal prospects.
  2. Q2 Productivity and Costs: -0.7% vs. -0.5% expected and -0.3% preliminary.  Decreasing productivity generally suggests that corporate profits could come under pressure.  However, it could also mean that companies have reached the limit on the amount of work they can squeeze out of the existing work force and begin hiring back the millions of workers laid off during the recession.
  3. August Nonfarm Payrolls: Unchanged vs. +75K expected.  Private payrolls +17K vs +156K in June.  Unemployment rate remains unchanged at 9.1%.  Simply put, jobs just aren’t being created.

Despite the Federal Reserve Chairman’s non-committal speech last week in Jackson Hole, the chances of further action at the next FOMC meeting September 21st seem likely.  To highlight this point of view, two deficit hawks that sit on the board of governors have indicated this week that they could be persuaded to consider further intervention.  Chicago Fed’s Charles Evans and Minneapolis Fed’s Narayana Kocherlakota both made statements that “suggest a more aggressive policy may be needed” and “further accommodation might well be appropriate.”  If the deficit hawks are softening then further accommodation can’t be far behind.  President Obama will give a speech in a joint session of Congress on September 8th.  We would not be surprised if he begins to lay the foundation for further stimulus.

And finally we come to the story of the week.  A recently released study found that twenty-five of the hundred highest paid CEOs earned more last year than their companies paid in federal income tax.  In addition, at a time when lawmakers are facing tough choices in a quest to slash the national debt, it found many companies spent more on lobbying then they did on taxes.  Admittedly, this study is controversial since it compares CEO pay to current U.S. taxes paid, excluding foreign and state and local taxes that may have been paid, as well as deferred taxes which may or may not be paid.  Most of the companies cited found issue with the study with a General Electric spokesman saying, “GE pays what it owes.”  Know you know.

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