Browsing articles in "Weekly Market Update"

July 1, 2011: Market Update

Jul 1, 2011   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Happy Fourth of July!

What a way to end the quarter!  Stocks surged again today to complete their best week since July 2009, buoyed by another indication of strong gains in manufacturing.  Energy, technology and consumer discretionary stocks led the week, with financials finally joining in.  There was a lot of news this week and it was mostly good for a change.

The issues in Greece are slowly moving toward a short-term resolution.  Building on the success of the confidence vote last week, the Greek parliament voted on major austerity measures thereby paving the way for the second bailout from the IMF.  This helped release some of the recent anxiety over the interconnectedness of European banks to the Greek budget crisis.  While this won’t be the last time we hear about Greece, they appear to have kicked the can down the road for at least another six to twelve months.

Company news was abundant this week too.  Here are some of the stories on stocks we either own or follow:

  • Merck gives a lift to drug stocks after winning approval to sell its blockbuster cancer vaccine Gardasil in Japan. The approval opens a key sales market for the drug as it nears global saturation.
  • Google is in early talks to buy video site Hulu, the L.A. Times reports – a move that would go a long way toward solving Google’s internal dilemma about how to add more professional content to its user-submitted empire on YouTube.
  • Duke Energy asks for a 15% rate hike in North Carolina as it spends more on equipment and plants to meet stricter environmental regs.
  • Nortel Networks is selling its massive patent portfolio for $4.5B, to a consortium of tech companies that includes Apple, Microsoft, and Research in Motion.

In economic news we unfortunately had more mixed data.  Sending the market higher today, the June ISM Manufacturing Index came in much better than analysts had expected.  Same was true for the Chicago PMI.  However, there were regional misses in both Texas and New York which point to continued weakness in certain parts of the country.  Home prices continued to fall with the Case-Shiller Home Price Index dropping another 4 percent year-over-year, the biggest drop since November 2009.  June Consumer Confidence also fell below estimates which indicate that people are still disappointed with the economy.  Who can blame them?

In politics we had two big events this week.  President Obama threw down the gauntlet at Republican lawmakers over deficit spending and raising the debt ceiling.  The rhetoric is beginning to heat up which suggests that both sides are very entrenched.  The deadline for raising the debt ceiling is officially August 2nd, but keep in mind that Congress actually needs to both craft legislation and pass a bill before the debt ceiling increase is put into law.  In other news, we learned (through the grapevine) that Timothy Geithner appears to be ready to resign from his position as Secretary of the Treasury.  If we are to believe what we read, he is only waiting for the increase in the debt ceiling before he bails.  An early frontrunner to replace him is Sheryl Sandberg who is an insider of Silicon Valley having held positions at both Facebook and Google.

And lastly, for the story of the week we turn to Minnesota.  Did you know that the Minnesota state government actually shut down today after the Governor and legislature failed to agree on a budget deal to resolve a $5 billion deficit?  For some reason, this story did not make headline news today.  Two-thirds of state employees will be furloughed and state parks and campgrounds shut ahead of their busiest stretch of the year.  Now you know.

June 24, 2011: Market Update

Jun 24, 2011   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Can Icarus Fly Again?

The market looks to finish the week only slightly lower than where it started.  For an unusually volatile week filled with market moving stories, this is a reasonably good outcome.  The three big events that occurred this week were the vote of confidence for Greece’s Prime Minister, the Federal Open Market Committee (FOMC) meeting minutes and the surprise plan by the International Energy Agency (IEA), of which the United States is a founding member, to release additional oil from strategic reserves.

Following days of anxiety due to concerns over a possible Greek default, investors have been calmed for the time being by the confidence vote early Wednesday in Greek Prime Minister George Papandreou’s government.  Investors are hoping this paves the way to the passage of another batch of austerity measures in a vote next Tuesday. Greece’s partners in Europe and the IMF have made the $17 billion bailout (#2) contingent on a positive Parliamentary vote on the austerity package.

So why is Greece important?  The Washington Post laid out a very plausible scenario describing how a Greek default could ripple across the financial world.  According to them, this is how the dominoes might fall:

  • Without an emergency loan from the IMF and European countries, Greece may default on $18 billion in debt it owes between July 15 and August 20.
  • Greek banks hold nearly $200 billion of Greek debt, and a default could cause a collapse of the Greek banking system.  Germany, France and Britain own another $265 billion and would suffer significant losses as well.
  • Because of the Federal Reserve’s zero-interest rate policy, many U.S. money market funds lend money to European banks at favorable rates.  The top ten U.S. money market funds collectively have approximately $380 billion in short-term investments with European Banks.  If European banks suddenly suffer huge losses due to Greece, U.S. money market funds would shy away from Europe and cause a liquidity crisis much like what happened in the days following the collapse of Lehman Brothers in the United States.
  • Lastly, remember AIG?  They sold insurance called “credit default swaps” on debt holdings.  They went bankrupt when they couldn’t pay out on the claims.  There are over $5 billion in credit default swaps on Greek debt.  However, since the industry remains unregulated no one knows who holds the contracts or what impact a default might have on their financial health.

The Federal Reserve, the International Monetary Fund and the European Union are all acutely aware of the potential ramifications.  Because of recent history, we are confident that Greece will not be allowed to default (at least not in the near term).   The stakes are too high.

In other news, the Federal Reserve released the minutes from their latest meeting.  It turns out the economy is weaker than they had anticipated with Chairman Bernanke admitting, “We don’t have a precise read on why this slower pace of growth is persisting.”  The minutes of the FOMC meeting assigned blame outside of the U.S., pointing at Japan along with rising food and oil prices.  With the end of QE 2 next week, we anticipate the Fed will stay on the sidelines for the next couple of months while determining the size and scope of the current slowdown.  The earliest we might hear new policy coming from the Fed would be at the Jackson Hole Summit in late August (the event during which QE 2 was announced last year).

For the story of the week we turn to the U.S. Postal Service (USPS).  On the same day that FedEx announced a 33% jump in profits, the USPS declared an emergency end to its contributions to the federal pension fund for its workers.  This move by USPS, effective today, will save it $800 million by the end of the fiscal year on September 30.  The Postal Service reported a loss of $8.5 billion in its 2010 fiscal year.  It also reported a widening second-quarter loss, to $2.6 billion, on declining volumes.  Here’s the part you probably didn’t hear.  The Postal Service claims they overpaid the employee retirement account by some $6.9 billion and has asked Congress to pass legislation to return the money.  With several bills in Congress, it is unclear what potential remedies lie ahead.  “Right now we don’t believe this decision will have any impact on current employees and it will not have any impact on current retirees” said the USPS this week.  The real question is what impact this will have on taxpayers in the years ahead.  Now you know.

June 17, 2011: Market Update

Jun 17, 2011   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Sunscreen Guidance Half-Baked?

If the market holds up into the close today, we look to finish the week higher for the first time in seven weeks.  Despite continued weak economic data, two major uncertainties are closer to being resolved.  Negotiations between Congress and the White House regarding the national debt ceiling picked up pace this week and progress is slowly being made in the Greek debt crisis.  Investors drew a huge sigh of relief and the market  move higher.

Vice President Biden and a group of six bipartisan congressional leaders meet at the Capitol on Tuesday for their sixth round of negotiations on a comprehensive deficit-reduction plan.  The task ahead for negotiators remains a tall one as Congress faces an August 2nd deadline to raise the $14.3 trillion federal debt ceiling.  There are a range of options for a budget deal, including:

  • An agreement to raise the debt ceiling for nine months in exchange for $1 trillion in budget savings
  • An 18-month extension of the debt limit, along with $2 trillion in savings
  • A longer-term agreement to cut the deficit by $4 trillion — a deal favored by Obama’s deficit commission and some congressional Republicans.

Boehner has said the length of a debt ceiling extension would hinge on the amount agreed to in spending cuts.

As for Greece, progress is being made there as well.  Despite riots over further austerity measures (i.e. spending cuts), it looks like Germany is backing off its hard line.  To date, Germany has demanded that any Greek rescue come with the participation of private bondholders, who would have to take “haircuts” on their investment, as opposed to the French position of paying creditors 100 cents on the dollar.  French President Nicolas Sarkozy hinted that a deal to resolve the Greek debt crisis may be near.  “We want to go as quickly as possible without fixing a date,” Sarkozy said after meeting with German Chancellor Angela Merkel, adding that the pair had the same position on Greece.  This is encouraging news and bodes well for a resolution to this ongoing predicament.

From a technical perspective, the market is beginning to look a bit oversold.  We hit a high of 1,363 on the S&P 500 on April 29th.  Since then, the market has been in decline due to all the reasons we’ve talked about these past seven weeks.  However, baring a major setback, it looks like there should be support for the S&P 500 around its 200-day moving average.  In addition, the relative strength index (RSI) is at 36 signaling that perhaps the market is approaching oversold territory.  While we don’t solely base investment decisions on technical indicators, it is nice when they begin to indicate that we may be nearing the bottom of this short-term decline.  We are encouraged that the support levels will hold and that the market will reverse course in the third and fourth quarter.

For the story of the week we turn to the FDA.  The Food and Drug Administration announced new regulations this week designed to enhance the effectiveness of sunscreens.  Under the old regulations, the FDA only required testing for ultraviolet B (UVB) rays that cause sunburn.  That’s what the familiar SPF measure is based on.  The new regulations require testing for the more dangerous ultraviolet A (UVA) rays, which are most commonly linked to premature aging and skin cancer.  Turns out they’ve been thinking about this for some time now.  The FDA announced its intent to draft sunscreen rules in 1978 and published them in 1999.  The agency then put the plan on indefinite hold until it could address issues concerning both UVA and UVB protection.  Despite the 30 year delay, we suppose it’s better late than never.

June 10, 2011 – Market Update

Jun 10, 2011   //   by Marc Henn   //   Weekly Market Update  //  No Comments

A Crack In The Cartel?

The summer doldrums seem to have set in.  Markets ended another week down as concerns over a slowing economy weighed on the major averages.  We continue to see corporations sitting in very good positions with revenue, profitability and cash on hand.  However, they continue to be stubborn about hiring as they appear to be waiting until the very last moment before bringing on new employees.  We may see this start to change as we move later into the year as productivity increases appear to be topping out.  Basically, if a company cannot squeeze any more productivity out of machinery or employees, it will have to spend money to get these – either one being good for the economy.

The Fed Beige Book report this week indicated that “economic activity generally continued to expand since the last report.”  The translation:  The economy is growing but at a slow pace.  We are seeing the economy and the market take a breather currently but we believe there is a possibility that better economic numbers are in store for later this year that could lead to a recovering market as well.  Could this be a repeat of last summer?  I will cover more on this in my quarterly newsletter coming out in early July.

The biggest story of the week happened with OPEC.  As most of you have probably heard by now, Saudi Arabia wants to increase oil production because they have excess reserves they can put on the open market.  However, in a contentiously divided meeting, the other ministers were flat against it – predominantly because they cannot increase production.  Their concern is over the price of oil going down and their inability to make up for that loss with increased production.  It was announced today that Saudi Arabia will go ahead and increase production anyway in defiance of the wishes of the other OPEC countries.  This is a bold step that could impact the cartel and the price of oil.

In news you may not have heard this week, the government ran a much lower budget deficit than expected in May.  The primary reason is because the Treasury Department gave lower estimates for TARP costs.  The Treasury Department says it now expects the bank bailout to cost $48 billion – down from earlier estimates of $341 billion.  Don’t get too excited yet.  For the first 8 months of the fiscal year the deficit totaled $927 billion – $8 billion more than at the same point last year.  Now you know.

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