Browsing articles in "Weekly Market Update"

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

For Whom The Dell Tolls

May 25, 2012   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

After a tumultuous week last week, investors decided to put a little money back into the market this week suggesting the sell-off might have been overdone.  The Dow Jones Industrial Average (DJIA) has only had three consecutive weeks of losses just nine times in its long history.  We were due for a reversal and saw it this week.

The most uplifting news came late this week as we learned that the May UofM Consumer Sentiment Index hit an unexpected high of 79.3 which was last seen in October 2007 prior to the financial crisis.  The improvement was led by a big rise in the current conditions index which could partly be attributed to the falling price of gas at the pump.  While the economy continues to improve more slowly than most desire, it seems that people have begun to adjust their expectations to what Bill Gross has coined the “new normal.”  The percentage of people over the age of 65 who are working is at a record high, with over 33% of men and 25% of women aged 65-69 holding jobs.

Perhaps more encouraging, some analysts believe that oil could stay below $100 per barrel in 2013 and remain there for much of the year due to increased production out of Saudi Arabia, a resolution to the current Iranian embargo and decreased consumption by India and China.  As an aside, we also learned that Saudi Arabia overtook Russia as the world’s largest producer of oil for the first time in six years.  This may come as a surprise since it is widely believed that Saudi Arabia is the largest producer.  Regardless, lower gas prices mean more disposable income, lower commodity costs and reduced transportation expenses – all good factors for the economy.

News out of Europe continues to be problematic.  The anti-austerity crowd (France, Italy, Greece, Spain) have gained power in recent elections and are trying desperately to change the dialogue in Europe.  Germany continues to hold out believing that a more tightly integrated European Union is not the answer.  However, it’s not just a matter of convincing the German populace that bailing out their southern neighbors is the right thing to do.  The very agreement that the European Union is based upon would have to be re-written requiring a vote of all seventeen member states AND the German Constitution itself would have to be altered to allow for this shared burden.  These are not small tasks and could take some time to accomplish.  With elections in Greece set for June and insolvency looming once again, Greece simply doesn’t have the time required.

In corporate news, Dell reported disappointing earnings this week due mostly to the consumer shift away from PCs to tablets and mobile devices.  This sent many of the computer hardware stocks lower on fears that this trend won’t be reversed anytime soon.  Hewlett Packard announced their plans to lay off 27,000 employees or roughly 8% of their workforce in the coming year.  The landscape is changing rapidly and many mature technology companies are having a hard time adjusting to the quick pace of change.  In other corporate news, half of all S&P500 stocks now yield more than the 10-year Treasury note’s record low 1.74%.  There are 271 stocks in the S&P 500 with a yield greater than the 10-yr Treasury; of the remaining 229 stocks in the index, 126 have a dividend yield less than the 10-yr, while 103 pay no dividend at all.

And lastly, the story of the week is about Ms. Gina Rinehart.  You may not know her, but this week it was announced she is the world’s richest woman.  According to BRW’s 2012 Rich 200 List, Ms. Rinehart’s net worth is now $29.7 billion.  Ms. Rinehart is an Australian mining magnate.  She takes the crown from Wal-Mart heiress Christy Walton, who’s held the title for the past seven years.  In case you were wondering, the world’s richest man is Mexico’s Carlos Slim with a net worth over $69 billion.

May 25, 2012

Act 2: “The Grexit”

May 18, 2012   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

The stories that dominated the news this week were the much anticipated Facebook IPO and the unfolding political deadlock in Greece.  One is a story of triumph while the other is a story of failure.  Unfortunately for the markets, the political uncertainty in Greece won the day.

For two weeks now, President Karolos Papoulias has vigorously tried to form a coalition government.  And for two weeks, he’s been unsuccessful.   Despite his efforts, the hard-left and anti-austerity parties (Syriza) are having none of it.  There’s just no incentive.  As if daring European leaders, the Syriza party leader Tsipras told the Wall Street Journal today he sees little chance Europe will cut off funding to Greece as his country would then be forced to stop paying its creditors (Europe).  It’s a very serious game of chicken that’s being played.  He pointedly observes, “If I owe the bank $1 million it’s my problem, if I owe it $100 million, it’s the bank’s problem.”

What changed this week is that for the first time we’re starting to hear various European officials openly talk about contingency plans for Greece to exit the European Union (EU).  It has been affectionately called “The Grexit.”  The Greek people, afraid of a reintroduction of the Drachma, have started a slow run on Greek banks.  Monday alone saw some $900 million withdrawn from Greek banks.  It seems the citizens of Greece believe an exit from the EU is inevitable.

However, there could be one last ditch effort in the works.  Some analysts suggest that President Obama and Treasury Secretary Timothy Geithner, along with newly elected French President Hollande, will put a full-court press on German Chancellor Angela Merkel at the upcoming G8 meeting.  If the Germans were to soften their position on austerity and The Fed and ECB collaborate on some form of further European quantitative easing, we could see a sharp rally in the near-term.  The outcome will ultimately be determined by who blinks first.

The other news that you couldn’t possibly miss was the initial public offering (IPO) of Facebook today.  It’s been months coming and after much hype it finally starting trading.  As it turns out, it’s the third largest IPO behind Visa (in 2008) and Enel SpA (in 1999).  The stock which was priced at $38 per share immediately traded at $42 at the open only to fall back to $38 before the underwriters stepped in to support the price.  Mark Zuckerberg, the founder of Facebook, became a billionaire sixteen times over in the space of a few minutes and at the age of 28 is among an elite group of entrepreneurs.  However, Facebook is going to face increased scrutiny in the weeks and months ahead.  Among their biggest challenges is to stem four quarters of slowing revenue growth.  A recent study found that 44% of Facebook users “never,” or will ever, click on ads or sponsored posts while using the social media site.  The actual click-through rate is 0.05% or 1 in 2000.  This has caused some advertisers, most notably General Motors to pull out of Facebook.  Some suggest that best way for Facebook to monetize their business is to capitalize on the vast amount of personal information it has on its 900 million users.  This would certainly bring the ire of privacy advocates.  The same study found that 30% of users “strongly distrust” Facebook using their personal data.  While we applaud Facebook for their success, we don’t envy the path they started down today.

I promise that after this week you won’t have to hear more about Facebook from me.  But I did come across this tidbit that caught my attention.  It turns out Bono, the front man for the music group U2, has a private equity firm called Elevation.  Apparently, his firm bought $90 million worth of Facebook shares three years ago.  With Facebook’s IPO today, those shares are now worth $1.5 billion.  Talk about “A Beautiful Day.”  Once the smoke clears, Bono will be the richest musician in the world surpassing even Sir Paul McCartney.  Now you know.

May 18, 2012

The FDA “Self-Diagnosis” Plan

May 11, 2012   //   by Marc Henn   //   Weekly Market Update  //  No Comments

There were a few stories with potentially major implications that broke this week.  France and Greece had their elections over this past weekend which saw citizens of those countries send a clear message – they are tired of the austerity measures being placed on them.  In France, the election of Francois Hollande ushers in the return of the Socialist party to power for the first time in two decades.  The ousting of the current leader, Nicolas Sarkozy, marks the 11th European Union leader to be tossed aside since the debt crisis began.  In Greece, the two pro-bailout parties did not receive enough votes to form a majority government and late on Friday we learned that another round of elections is almost a certainty as no coalition has been able to be formed.

These election results have potentially big implications on the future direction of European austerity and bailout “strategies”.  For instance, Hollande of France has been campaigning on the idea of spending more and bringing more people back to work and bucking the austerity direction.  This prompted an ally of German Chancellor Merkel to say, “Germany is not here to finance French election promises”.  The bigger issue may be Greece as their government is now up in the air.  Investment firms continue to raise their odds that Greece will eventually exit the Eurozone, with this election moving Greece one more mile down that road.

To finish out the week, JP Morgan announced it has a “mark-to-market” loss of about $2 billion from supposed hedging activities that appear to have gone wrong.  The SEC has opened an investigation into these activities to see if there was something more behind this announcement.  With all of these announcements, the market had some volatile days but ended the week only modestly lower.

In company news, McDonalds reported same store sales results that were a little on the light side.  It appears that higher commodity costs were impacting their bottom line.  Intel announced that it is expecting another record year in 2012 and boosted its quarterly dividend by 7%, and P&G is planning to move its global beauty, skin, cosmetics and personal-care unit to Singapore from Cincinnati, according to a Wall Street Journal report.

For the story of the week we turn to the Food and Drug Administration (FDA) and their potential plan to allow Americans to obtain some prescription drugs over the counter that treat conditions such as high blood pressure and diabetes.  The FDA says this would allow patients to get drugs for many common conditions without all of the time and expense of visiting a doctor.  While the debate will rage over whether this is a sound medical practice, this change would remove financial pressures from the Medicare system because Medicare would no longer have to pay for doctor’s visits and prescription drugs included in the plan.  Now you know.

May 11, 2012

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