Browsing articles in "Weekly Market Update"

The Fed Calls for a Time-Out

Apr 6, 2012   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

There’s a balancing act going on at the moment as we watch the markets move higher then edge a little lower before moving higher again.  Think of the current market environment as a teeter totter.  Some weeks, the ongoing issues regarding Greece (and more recently Portugal and Spain) weigh the markets down.  Yet other weeks, good economic data on the U.S. economy, i.e. manufacturing or job data help push the markets higher.  Unfortunately, this week an unusually big fellow, aka The Federal Reserve, sat on one end of the teeter totter pushing the markets lower.

The Federal Reserve this week released the minutes from its most recent meeting.  It turns out that despite hopes for further quantitative easing, it will likely hold steady and not introduce further monetary easing in the near future.  The markets had factored in another liquidity injection and when it appeared those hopes had been dashed, investors headed for the sidelines for the remainder of the week.  That’s not to say that further action isn’t forthcoming, but that it was not readily apparent in the last meeting of the Federal Reserve.

In company news, Qualcomm and TJX Companies raised their quarterly dividends 16% and 21% respectively.  IBM announced new versions of its database software with the goal of stealing market share from Oracle.  Coca Cola announced a new multi-year marketing deal to convert Dunkin Donuts and Baskin-Robbins restaurants to Coke products.  And Starbucks was added at Goldman Sachs to its Conviction Buy list, perhaps once again late to the game.

In closing, the markets are closed today in honor of Good Friday.  However, pay attention to the nonfarm payroll report that was released today.  The unemployment rate dropped from 8.3% to 8.2% but only 120,000 jobs were created in March.  These numbers could have an impact on the markets when they reopen on Monday.

April 6, 2012

Beetle Juice

Mar 30, 2012   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

The story this week can be filed under the heading “further accommodation necessary.”  Federal Reserve Chairman Bernanke took the stand and hinted at further quantitative easing in the months ahead.  What on the surface seems like a piece of negative news was embraced by investors.  The price of gasoline, economic indicators and a deteriorating Portugal and Spain all took a backseat this week.  One could almost feel the anticipatory excitement as the markets hope for another round of loose money.

So why is further accommodation necessary you may be wondering?  By all accounts, the unemployment rate is coming down and the various economic indicators continue to show slow but steady improvements from month to month.  Bernanke framed the discussion in terms of Okun’s Law.  In a nutshell, the improvements we’re seeing are a reversion to the mean.  In other words, recent improvements in the labor market could just be a reversal of the large layoffs during the recession.  For continued gains, he says, faster economic growth is required.  However, “continued accommodative policies” might not mean additional stimulus, but instead an extension of “Operation Twist” which is the buying of mortgage-backed securities.  Time will tell exactly what Mr. Bernanke has up his sleeve, but in the mean time, investors looked to get out ahead of the Fed this week.

While the economy does appear to be steaming ahead, there is the risk that rising gas prices could slow things down, some say considerably.  Gas prices now average $3.91 per gallon, more than $0.20 greater than just one month ago.  In the most populous states, prices are much higher: $4.33 in California, $4.25 in Illinois and $4.05 in New York.  It was reported (and confirmed) that France, the U.K. and the U.S. are in talks about a possible release of strategic oil reserves “in a matter of weeks” in order to push fuel prices down.  However, Secretary of State Clinton is in Riyadh this weekend seeking assurances from Saudi Arabia that it will not cut production and neutralize the impact on oil prices if reserves are released.  It seems last year when reserves were tapped to fill the gap left by Libya’s civil war, Saudi output was reduced.

There were a few pieces of company news that we thought worth reporting.  Occidental Petroleum reported this week it plans to increase capital spending by 10% in FY2012 to $8.3 billion, and up its rig count to 27.  This company continues to look for opportunities that position it for both this year and the years ahead.  In other news, Express Scripts tipped off a filing with the SEC that it expects to close its hotly contested deal to merge with Medco Health as early as the first week in April.  Both Medco and Express Scripts saw their stock prices jump.  And lastly, Coca Cola hit a 13-year high this week after the company announced it will open its third bottling plant in China.  It is expected to reach an annual production capacity of more than 5 billion servings of various beverages.

While we’re on the subject of company news, let’s talk about Starbucks.  If you enjoy a Strawberry Frapuccinno every now and again, you’ll be interested in this story.  Starbucks announced a program earlier this year to get artificial ingredients out of its food and drinks.  However, they have the vegan community seeing red over what it recently began using to color its Strawberry Frappucinnos: beetles.  Gross as that may sound, it’s a common, government-approved food coloring used widely throughout the food industry.  It’s in everything from Yoplait yogurts to three Kellogg’s Pop-Tarts flavors.  Of course we have to ask the obvious question… What’s wrong with coloring Strawberry Frappucinnos with red beets, black carrots, purple sweet potatoes, or dare I say, actual strawberries?  Now you know.

March 30, 2012

The Vicar Takes Credit

Mar 23, 2012   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

It was a lackluster week with little news to drive markets higher or lower.  Investors took a breather after the quick rise we’ve experienced in the first part of 2012.  In fact, the average daily price change for the S&P 500 this year is just 0.46%, the smallest amount since 1934 and way under 2011’s 1.04%.  With the average price-to-earnings ratio of just 14.5, down from 24.2 in December 2009, it remains possible that the market has room to run.

I know some of you are tired of hearing about Apple, but it does remain a newsworthy story and one that keeps the markets moving.  It was announced this week that Apple will start paying a quarterly dividend of $2.65 per share beginning in July, as well as a stock repurchase program of $10 billion.  The dividend results in an annual yield of 1.8% with a rather conservative payout ratio of just 25%.  With over $100 billion in cash ($70 billion of which remains overseas), they had come under increasing pressure to return some of that cash to investors.

In other news, it was reported this week that student loan debt has topped $1 trillion for the first time ever.  Some economists warn that this meteoric rise in student debt is in essence a bubble and one that will adversely affect the economy in the years ahead.  People in their 20’s are carrying an average debt load of $45K, according to a recent survey, with education loans topping the list.  Not to put too fine a point on this issue, servicing much of this debt is about to get harder as the interest charged on government-subsidized Stafford loans is scheduled to jump on July 1 to 6.8% from 3.4%.  We expect to hear more about this growing concern in the months and years ahead.

With all quiet on the western front, we turn to corporate news.  Qualcomm had a good week when it was discovered, as we had expected, that their chips are found in Apple’s new iPad3.  Rumor has it that Qualcomm’s 4G chipset is in testing for Apple’s upcoming iPhone release which is expected to work on next generation 4G networks.  In other news, despite Caterpillar’s CEO Douglas Oberhelman’s prediction that 2012 will be another record year for the company, investors took some gains in the stock on news that China’s growth slowed more than expected in the most recent period.  And finally, Starbucks had several announcements this week that should bode well for the stock.  They announced they are entering the $8 billion energy drink market, expect to have more than 1,500 stores in China by 2015 and will open its 1,000th store in Japan next year.  This is in addition to continued efforts into the k-cup market with single serve coffee.  They are scheduled to release a single-serve espresso machine later this year.

In closing we turn to Sweden.  It seems that Sweden is moving toward a cashless economy.  Sweden was the first European country to introduce bank notes in 1661.  Now it’s come farther than most on the path toward getting rid of them.  The Swedish Banker’s Association says the shrinkage of the cash economy is already making an impact on crime statistics.  The number of bank robberies has plunged from 110 in 2008 to 16 in 2011 – the lowest level since it started keeping record 30 years ago.  “Less cash in circulation makes things safer, both for the staff that handles cash, but also of course for the public,” says Par Karlsson.  Another unintended consequence is that if people use more credit cards, they are less involved in shadow economic activities, aka the black market or under-the-table payments.  However not all are happy with the idea.  One vicar recently had to install a card reader in his house of worship, to provide a means for parishioners to make offerings.  Now you know.

March 23, 2012

People Are Not Muppets

Mar 16, 2012   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

The S&P 500 is on track for the best week in three months.  However, let’s be honest, the past three months have been pretty good too.  With momentum on our side, two slightly softer economic reports were unable to shake the optimism over the economy that has helped drive stocks to near four-year highs.

Investors parsed the FOMC statement this week, looking for any shift in the Federal Reserve’s economic outlook and how that might impact future plans for further quantitative easing.  As expected, the Fed acknowledges an improvement in the jobless rate but recognizes the “significant downside risks” with gas prices pushing up inflation “temporarily”.  And they remain committed to a near-zero interest rate policy through 2014.  Yet, some analysts believe higher inflation is right around the corner, as evidenced by higher gasoline prices.  If their hunch is right, the Fed could raise rates ahead of schedule.

While we’re on the subject of inflation, it would be hard to miss the sudden and dramatic increase in the price of gasoline.  In light of this, it might come as a surprise that the February Consumer Price Index (CPI) was a bit lower than economists had expected.  In fact, Core CPI was a paltry +0.1%.  While this number doesn’t include energy and food, if we add these items back in, inflation rose a modest 0.4% which was still below expectations.

The other important report released this week had to do with the Federal Reserve Bank stress test.  The Fed tested nineteen bank holding companies using a “doomsday” scenario of 13% unemployment, a 50% drop in stocks, and a 21% tumble in housing prices.  Much to our relief, fifteen of the nineteen largest banks passed the test.  The four remaining (MetLife, Citigroup, Ally Bank and SunTrust) were so close to the minimum requirements that the markets didn’t seem to care much that they hadn’t passed.  Banks, in general, have come a long way from the depths of the 2008/2009 financial crisis.  Now if they’d only use their piles of cash to start lending again.  Talking about piles of cash, Moody’s reported this week that U.S. companies are sitting on a massive $1.2 trillion.  With payout ratios hovering around 30% versus a historical 52%, it would seem that companies have room to hike their dividends.  This could be the fuel that helps sustain the current stock market rally.

In closing, I’d like to address the resignation heard around the world.  Greg Smith, the executive director and head of Goldman Sachs’s United States equity derivatives business in Europe, the Middle East and Africa, not only decided to quit Goldman, he decided to do it using the New York Times.  The essence of his resignation letter is one we’ve heard before; Goldman routinely puts its own interests ahead of its clients’.  He cites many references but the recurring theme is one of uncaring disregard for their clients.  He says, “It makes me ill how callously people talk about ripping off their clients.  Over the last twelve months I have seen five different managing directors refer to their own clients as ‘Muppets’.”  This attitude has no place in the financial services industry, yet presents a rare glimpse into our competition.  We want you to know that Harvest Financial Advisors acts as a fiduciary, which means we place your interests first.  It is how we prefer to do business.  We appreciate each and every one of you and with common goals, will prosper together.  Thank you for the trust you place in us and our abilities.  We take our responsibilities very seriously.

March 16, 2012

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