Browsing articles in "Weekly Market Update"

3rd Quarter Comes to an End

Oct 3, 2011   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

The markets regained about half of last week’s losses as institutional investors, mutual funds and hedge funds put in their quarter-end trades.  To be clear, this quarter was all about domestic and international headline news.  Europe played a big role in driving markets lower by creating uncertainty regarding the viability of the European Union (EU).  To a lesser extent, the S&P downgrade of U.S. debt also played a part in creating investor anxiety.  However, lost in all the media punditry is the more basic question of how companies are faring in these difficult economic times.  In just a few weeks we’ll have an answer to this question.  Until then, we bid farewell and good riddance to the third quarter.

Not to belabor the point, but Greece is still driving the bus and Italy has joined for the ride.  This week Germany, despite some opposition from various factions within the German government, voted favorably on the creation of the European Financial Stability Fund (EFSF).  This fund is akin to our controversial TARP program from 2008 which bailed out our investment banks.  As part of a $1 trillion rescue package, the EFSF is authorized to issue bonds of up to $536 billion in order to provide lending to European countries “in difficulty.”  While this represents a positive development, some believe the fund is insufficient and requires more like $2 trillion.  Ultimately, this is yet another step towards a more unified Europe with hopes of a final plan being presented in early November.

There was more company news this week than is usual.

  • Chevron – They are making a major investment in natural gas with a $29 billion Australian natural gas project.  They believe this will help position the firm to capitalize on growth in Asia.
  • Coca Cola – The Company announced they are spending $3 billion to aggressively build their presence in Russia which is one of the fastest growing soft drink markets.
  • Apple – Finally announced the much anticipated iPhone-related event for next Tuesday (Oct 4) at 1pm EST.  We will finally learn what Apple has up their sleeve for the new iPhone 4S/5.  However, it now looks like an iPad refresh is now mostly likely pushed back to 2012.
  • McCormick & Co. – Released fiscal Q3 earnings which beat analysts’ expectations.  Yet, their margins are being pressured by higher commodity costs (+20% y/y).  We will be paying close attention to see if this theme repeats in the weeks ahead as companies report earnings.

The economic picture remains in the doldrums.  September Consumer Confidence came in below expectations.  Consumers expressed greater concern about their expected earnings, a sign that does not bode well for spending.  In addition, durable goods orders also came in at -0.1% which was also below expectations.  On the other hand, Initial Jobless Claims fell back below 400,000 this week which provided some temporary relief (although this number is known to fluctuate from week to week).  And perhaps most uplifting was the announcement that Q2 GDP was revised slightly upward instead of downward which has been the trend of late.

The story of the week is not for the faint of heart or those afraid of flying.  You probably heard all the hoopla over ANA airlines (Nippon) taking possession of the first Boeing 787 “Dreamliner.”  However, you might not have heard about a mishap by the very same airline earlier this month.  The co-pilot of an ANA flight, with 117 passengers aboard, accidentally almost made a Boeing 737-700 fly upside down.  Mind you this is not a stunt plane.  We’re talking about a full size 737.  Apparently, he mistook the rudder trim knob for the cockpit door lock switch.  When he “opened the door” for his captain, he actually caused the jet to roll and drop over 6,000 feet in 30 seconds at a downward angle of 35 degrees.  Fortunately, no one was injured.  And interestingly enough, officials say that because it was dark outside, many of the 117 passengers did not realize what had happened.  In his defense, it seems the knobs are roughly 10cm apart and turn in the same direction.  Let’s hope the new “Dreamliner” was thought out a little better.  Now you know.

September 30, 2011: 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.

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