Browsing articles in "Weekly Market Update"

Starbucks or Dunkin’ Donuts?

Jun 22, 2012   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

It was an extraordinarily busy week with news coming from every front.  Despite the generally negative tone of the headline news, the market held up fairly well, all things considered.  Generally speaking, the market is waiting for further action on the part of the Federal Reserve to “fix” the ailing economy.  However, the Fed made clear this week things will have to deteriorate further before they act.  It’s now a waiting game until QE3 is announced.

On Monday, the G-20 met in Mexico to discuss what to do with Europe.  The G-20 represents 85% of the global economies and is comprised of finance ministers from the world’s largest countries.  Not surprisingly, the meeting ended without a consensus other than to watch Europe closely and offer guidance if necessary.  It is becoming clear that the rest of the world, the United States included, doesn’t want to get too involved for fear of getting sucked into Europe’s problems.

Tuesday and Wednesday the Federal Open Market Committee (FOMC) met to discuss possible actions to help accelerate growth in our economy.   Despite more dovish talk from Federal Reserve presidents in recent weeks, they decided to hold off for the time being.  At this point, many believe there is little the Fed can do since lower interest rates aren’t sparking the desired growth in economic activity.  However, investors are banking on more monetary policy and to a large extent, this is why the markets held up as well as they did this week.

The European Union finance ministers met on Thursday with little news being reported.  There is still considerable speculation whether Germany will allow the European Central Bank (ECB) to buy sovereign debt directly.  This goes against both the ECB charter and the German constitution.  However, if we believe what we’re hearing, there is an increasing likelihood that Germany will eventually give in on this most important issue.  The pressure is building.  Behind closed doors today, the finance ministers of Germany, Spain, Italy and France met to discuss possible solutions to the gridlock between their governments.  An inflection point is coming.

In closing, I wanted to mention an article I came across that piqued my interest.  According to a recent study, it seems Democrats and Republicans don’t only hold different political beliefs but they even have distinct differences in consumer behavior.  From choosing where to get your morning coffee to which car you buy, your political party association may be driving those purchase decisions.   Below is a picture of what this study uncovered:

Of course it’s not as simple as the study suggests, but maybe the companies have us figured out more than we think.  With which group are you more aligned?

June 22, 2012

The Shrinking Nobel Prize

Jun 15, 2012   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Much like last Friday, we go into this weekend with another big event on the horizon that could move markets Monday morning.  You’ll remember we mentioned in last week’s email, the likely bailout of Spanish banks.  This weekend we have the Greek election, with the two opposing parties running neck and neck according to recent polls.  We won’t know who won the election until Sunday night (our time), but rest assured, regardless of the outcome, it won’t be the end of the crisis in Greece.

It was certainly a busy week for macroeconomic news.  Let’s review them in chronological order.  We learned Monday that Spain’s banks will receive $125 billion to “re-capitalize” them.  The terms of the bailout have not been fully disclosed but from what little we know, the loan will be payable over fifteen years and have an interest rate of 3%.  However, this news didn’t cause investors to rush into Spanish bonds.  In fact, just the opposite happened as we watched the yield on 10-yr Spanish notes climb to 7%.  It turns out the bailout funds will supersede the rights of both individual and institutional creditors.  Put another way, everyone with Spanish debt is now subordinate to the European Union.

In other news, the European Union is rumored to be working on a “European redemption pact” which could bring relief to the recent turmoil in Europe.  In a nutshell, it would be a way for countries to offload their debt onto the European Union both severally and jointly.  The goal would be to bring each country’s debt-to-GDP below 60%.  This idea is modeled after Alexander Hamilton’s Sinking Fund in 1790 that cleared up legacy debts after the American revolutionary war.  It would supposedly allow European countries (in the monetary union) to guarantee each other’s debt even though individual countries would be responsible for payment.  As of November, this fund would approach $2.9 trillion with the majority coming from Italy, Germany and France.  Most notably, member countries would have to pledge gold and other forms of collateral equal to 20% of their debt in the fund.  Ideally, the fund would retire the debt over twenty years.

On Wednesday, Jamie Dimon took the stand to testify in front of the Senate Banking Committee regarding JP Morgan’s recent hedging loss.  The crux of the deposition is whether the current rules and regulations are enough to ensure that banks can’t engage in risky activities that would require another taxpayer bailout.  While watching the testimony, Marc couldn’t help but observe that many of the senators (both republicans and democrats alike) were going surprisingly easy on Mr. Dimon.  We later learned that JP Morgan has made campaign contributions totaling $877,000 to the twenty-two Senate members that make up the committee.

In closing, we have a good story for you this week.  Thanks to the sluggish economy and unstable financial markets, the Nobel Foundation is being forced to tighten its belt a bit, announcing it would pare down cash prizes awarded to Nobel Prize winners.  The foundation will slash prize winnings by 20% to around $1.1 million, the first time the organization has done so since 1949.  Prize winnings were the equivalent of about $1.4 million last year.  It seems a committee has been established to identify better investment opportunities.  Perhaps they should tap some of their Nobel Prize winners in economics and finance.  Or better yet, maybe they should just give Harvest Financial Advisors a call.

We hope you enjoy the nice weather on this Father’s Day weekend.  We’ll be watching the headline news on the Greek election and be prepared for the results come Monday morning.

June 15, 2012

Will Germany Blink?

Jun 8, 2012   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Whether a case of bottom fishers buying on cheap valuations or perhaps short-sellers covering their positions, this week we experienced a rather nice rally in the markets.  That’s not to say that things have finally been resolved in Europe.  In fact, things continue to grow worse in Spain, with Spanish banks needing an estimated $50 billion to recapitalize.  Yet investors have come to realize that the worse Spain gets the more likely Germany blinks.

The most recent development in Spain is a twist on an old theme.  Having seen what the European Union imposed on Greece last summer, Spain is adamant that the same thing doesn’t happen to itself this year.  As a condition of taking bailout money, Greece was forced into extreme spending cuts which further weakened its economy and, for all intents and purposes, made their situation worse.  To circumvent such requirements, Spain has insisted that the necessary bailout money be provided directly to their banks thereby circumventing the possibility of austerity measures from being imposed.  There’s once small hitch to their plan… current European Union policy only allows funds to be disbursed directly to governments.  This weekend will be pivotal, as the European Union will be meeting to put together a plan (perhaps another interim step) for bailing out Spain.  It is expected we’ll know what that plan is by Monday morning.

In other news, Federal Reserve Chairman Bernanke testified on Capitol Hill this week.  Investors were listening keenly for news of further quantitative easing.  After all, the economy has weakened since last he testified and there is concern that Europe is having a negative impact on our own economy.  However, he didn’t give investors what they wanted.  While recognizing the dismal jobs number last Friday, he seems inclined to wait and see if the trend continues.  He left open the door for further action but did not indicate that it was imminent.  The next FOMC meeting is scheduled for June 19-20th; however, the Fed is between a rock and a hard place.  Act now on uncertain information, or wait until later this year when the economic situation is more clear but risk political attack for trying to influence the fall presidential election.  It’s a tough line to walk.

In company news we learned that Starbucks is acquiring Bay Bread, owner of the La Boulange bakery chain, with the intention of introducing more pastries and breads into its U.S. coffee shops while also expanding La Boulange’s own U.S retail presence.  In other news, it appears AT&T and Verizon aren’t resting on their laurels.  They’re both working on more complex billing schemes which might include pricing tiers that vary based on download speeds and peak hour use, and perhaps even content-specific pricing.  If you thought your wireless bill was complicated now, just wait.

In closing, we’d like to mention a development in France this week.  Under former President Sarkozy, the French government passed sweeping reforms in 2010 including increasing the retirement age from 60 to 62.  This week we learned that the newly elected French President, Holland, has decided to reinstate the retirement age in France to 60.  In the event you want to retire early, your options now include France and Greece.  In case you were wondering, the official retirement age in both England and Germany is age 67.  Enjoy!

June 8, 2012

National Donut Day?

Jun 1, 2012   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

The week started off to the downside and never looked back.  Europe continues to struggle in its search for a solution to its escalating problems while economic conditions in the United States appear more vulnerable than expected.  With fear on the rise, there was simply no place to hide in the markets this week.  All sectors finished the week lower.

The situation in Europe remains unresolved again this week.  It is however worsening as yields on Spanish and Greek debt move higher.  This makes it increasingly more difficult for Spain and Greece to finance their debt and yields will likely continue higher until some collective European action is taken.  At the moment, there is little confidence that an agreement can be reached in the near-term. With another round of elections in Greece just two weeks away and bailouts of Spanish banks becoming larger and more frequent, it is with good reason that investors are nervous.

As a result, money continues to move into what Bill Gross (PIMCO) calls “the least dirty shirt” investments.  For many, return on investment has become secondary to the return of principal itself.  For this reason, the yield on the 10-year Treasury fell to 1.437% (its lowest rate ever), while the yield on the 10-year German Bund is right around 1.3% and the German 2-year note yield fell below 0%.  Factoring in inflation, these investments have a negative real rate of return.  That is to say, if you own these investments for the long-term, you will by default lose money after taking into account inflation.

Additionally, the effects of Europe on the rest of the world are slowly coming into focus.  Most analysts now agree that the growth rate in China is in fact slowing.  China depends on exports to fuel its internal growth and with a failing Europe and a weakening United States, it is unavoidable that China would also slow.  Here at home, we learned today that the unemployment situation has taken a turn for the worse.  The May Nonfarm Payrolls showed only 69,000 jobs were created as opposed to the 155,000 that had been expected.  The unemployment rate ticked a notch higher to 8.2% and we learned that the few jobs that were created were part-time jobs.

For all the reasons listed above, the markets headed lower this week.  However, valuations are historically inexpensive and all it will take is a hint of a solution coming out of Europe or a rumor of further quantitative easing at home to drive the markets higher.  We can’t time the market, but we know that day is coming.  The pullback over the past month presents a good opening to buy great companies at discount prices.  It is sometimes difficult to take the emotion out of investing, but we ought to put emotion aside and realize that these pullbacks present real opportunities for those with a three to five year time horizon.

And lastly, the story of the week has to do with Mayor Bloomberg and his decision to ban sweetened drinks greater than 16-ounces in New York City.  This would include soft drinks, some Starbucks drinks and even sweetened iced tea.  It would be in effect in convenience stores, fast food restaurants, movie theaters and even sporting venues.  You’ve no doubt seen the news by now since it is incredibly controversial and has drawn the ire of vendors, consumers and producers alike.  Yet there is a tidbit of news you may not have heard and it is rich with irony.  You see, today Mr. Bloomberg announced that he supports June 1st as National Donut Day.  And to those who point out his hypocrisy he says, “You’re ridiculous.”  Now you know.

June 1, 2012

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