Browsing articles in "Weekly Market Update"

August 19, 2011: Market Update

Aug 22, 2011   //   by Marc Henn   //   Weekly Market Update  //  No Comments

“Merkozy” Unable To Calm Market Jitters

Markets definitely ended the week on a down note.  There was an announcement on Thursday that an unnamed European bank borrowed $500 million from the European Central Bank’s (ECB) short-term borrowing window which sent the markets on a downward trend.  In addition, the lack of a unified direction on dealing with the European situation coming out of the Merkel-Sarkozy meeting earlier this week did nothing to instill confidence in the markets.

Expectations for future economic growth were being cut this week by several firms but with most still expecting weak growth instead of a recession.  At the current level of the market, the Price/Earnings ratio of the S&P 500 Index is sitting around 12 – the lowest since May 1989.  If next year’s earnings hold up, the P/E ratio would drop to 10.6.  I think it is safe to say that the market is pricing in a mild recession already with the wild card being Europe.

We did see some positive company news this week.  TJX Companies’ (TJX) revenue and earnings beat estimates as well as did Wal-Mart’s (WMT).  WMT lifted its Fiscal Year 2011 outlook for earnings.  Caterpillar also reported that global sales of construction machinery increased 35% month over month in July with 52% growth in Latin America.

Looking into next week the market is waiting to see a definitive direction with Europe.  There are multiple lines of defense/action that Europe could take which would ease market concerns including more purchases of Euro bonds by the ECB, increasing the borrowing capabilities of the European Financial Stability Facility and/or issuing Eurobonds jointly guaranteed by all member countries (probably the last resort), to name a few.  Unfortunately, the current “no action” approach from Europe causes uncertainty and will continue to bring volatility to the markets at least in the near term.

For our story of the week we turn back the clock to President Nixon.   While Nixon is best known for the Watergate affair and for being the “only President that could go to China”, it was 40 years ago this week in the midst of a stagnating economy and higher foreign oil prices that Nixon took the United States off of the gold standard.  No longer would dollars be backed by gold but by the full faith and credit of the U.S. Government.  A decision that will probably gain more scrutiny as the years progress.

August 12, 2011: Market Update

Aug 15, 2011   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Bottoming Out

How to make sense of this week?  It was a week which saw volatility increase to 2008 levels, trading volume pick up significantly and market point swings which would make even the most avid roller coaster fan a little queasy.  A combination of investors fleeing to “safety”, high-frequency computer trading and an economic and political environment of uncertainty led to one of the wildest weeks in the stock market since perhaps 2008.

The roller coaster ride started last Friday after the close of the markets when the S&P rating agency followed through on its threat to downgrade the U.S. credit rating from AAA to AA+.  While this surprised some, for many it is an affirmation that the U.S. has to get its financial house in order.  Ironically, despite the downgrade, investor poured into Treasury’s this week pushing rates down to levels we haven’t seen in quite some time.  The 5yr TSY is trading at 0.95% while the 2yr TSY is at 0.18%.  Shorter term treasury rates are even lower at 0.01% on the one and three month Treasury bill.  For those investors that didn’t trust the good faith and credit of the United States there was always gold.  Gold skyrocketed to over $1,800 per ounce before slowly falling to end the week around $1,740.

As if the downgrade wasn’t enough, the bears turned their sights on Europe and pushed hard on French banks.  Last week we talked about how fear over sovereign debt problems had spread from Spain to Italy.  This week the fear continued to move closer to the heart of Europe with the stability of France and its banks.  Societe Generale was rumored to have significant exposure to risky sovereign debt, despite European stress tests stating otherwise.  Some even compared Societe Generale to Lehman Brothers just before its collapse in 2008.  To be honest, the European stress tests were very suspect and that unknown contributed to the short-selling.  Ironically, in the middle of this story, S&P reiterated its AAA credit rating on France making many wonder how France could be seen as less financially risky than the United States.  Your guess is as good as any.

Then there were the statements from the Federal Reserve (FOMC) meeting which did nothing to assuage fears.  The FOMC has further downgraded its outlook on the U.S. economy saying that growth is much slower than expected.  They now believe downside risks have increased due to a further deterioration in the labor markets.  For some this was seen as a message of hope that the Fed will resume further quantitative easing, i.e. QE3, later this year.  The markets shot higher until the bears had a chance to dump a glass of cold water on their optimism by suggesting that the Fed really meant to say that there would be no further easing until after the next presidential election in 2012.  This took the air out of the balloon and the market dropped significantly.

My point in recounting this week isn’t to scare you.  It is to explain why the markets moved so dramatically.  In fact, the market may have just lived through 4 consecutive 90% trading days. That is a session where 90% of the stock trading volume and the number of advancers versus decliners are to one sided.  This is extremely rare with this week being only the second time since 1940 that four consecutive 90% days have been registered.  And most unusual of all, there is no historical precedent where we had four consecutive 90% days that saw each reversed in the next trading session, i.e., Down Up Down Up.  The chart below further demonstrates the percentage move over these four consecutive days.

As we said last week, these are unprecedented times.  The good news is that despite the wild gyrations of the market this week, it looks to end pretty close to where it started.  That may come as a surprise to some but for all the gnashing of teeth, we its only off by about 200 points.  We’re not out of the woods yet, but its weeks like this that help form the bottom that investors are so eagerly awaiting.  While we hope the coming weeks aren’t as volatile as the one that just finished and the news shows some improvement, we believe this process will eventually work itself out and create the much needed footing to head higher.

August 5, 2011: Market Update

Aug 5, 2011   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Looking for Opportunities

Unless you live in a cave, you probably are aware of the large market downturn this week.  We’re not going to sugar coat it.  The resolution of the U.S. debt ceiling did not solve all the world’s problems.  In fact, it may have distracted investors from the larger issues taking place in Europe these past six weeks.  As it turns out, Spain and now Italy are in precarious shape when it comes to their own financial state of affairs.

These are unprecedented times.  The issues we’re facing are global as opposed to domestic.

Analysts are speculating that the European Central Bank (ECB) could need a trillion dollars to stabilize the situation in Italy and Spain.  It’s a bit of a perfect storm that nobody imagined would happen.  The good news is that the ECB has committed today to start buying Spanish and Italian debt.  However, it’s not clear just how much they’re capable of committing at this time.  This uncertainty led to wild speculation and massively erratic markets.  Four and five-hundred point moves were the theme this week.

Earnings season is coming to an end and for the most part, the second quarter was good.  Companies beat to the upside more than the norm and those that did were rewarded.  However, there was a consistent theme amongst CEOs which talked about headwinds in the coming quarters.  Rising costs are pressuring margins and weakness both here and abroad could mean lowered expectations.  Despite the fact that many analysts remain bullish, the market seems to be pricing in a slowdown at these levels.

Truth be told, the market is quite oversold at the moment.  That’s not to suggest that it couldn’t go lower but to say that historically speaking stocks are cheap.  If earnings in the third quarter remain robust, we would expect the market to go higher.  We have positioned portfolios to be well diversified among a broad range of sectors and asset classes.  This diversification should help buffer portfolios in difficult times such as those we’ve recently experienced.  As already mentioned, these are unprecedented times.  We will remain nimble and vigilant as we gauge the markets and look for opportunities as they emerge.  As difficult as it may seem, times such as these are often good times to enter the market.

For the story of the week we turn to the U.S. Mint.  In December 2005, Congress decided to create a new series of $1 coins which honored the former U.S. presidents.  The Presidential $1 Coin Act was intended to create renewed interest in the coin like that seen during the 50 State Quarters program.  However, the $1 coins were awfully unpopular.  The coins began to collect and before long they had over one billion coins stored in warehouses.  To encourage collectors to buy the coins the U.S. Mint offered free shipping for all online purchases.  So what you ask?  Crafty individuals took advantage of the program by buying tens of thousands of dollars of coins online, accumulating frequent flyer miles, and then returning the coins to the bank.  There are stories of people taking first class vacations to Hawaii on nothing more than frequent flyer miles accumulated from this legal, yet dubious practice.  Last week, the U.S. Mint officially put an end to this practice by no longer accepting credit-card payments for coins purchased online.  If only we knew of this loophole a few years ago!  Now you know.

In closing, we want to mention that Marc was quoted and used as a resource for a recent article on Fox News business.  If you’re interested you can read the article by clicking on the following link: Eight Ways to Accelerate Retirement Savings

July 29, 2011: Market Update

Aug 1, 2011   //   by Marc Henn   //   Weekly Market Update  //  No Comments

The Debt Ceiling… Still Waiting

The market had a roller coaster day on Friday to finish out the week lower in the wake of concerns over the U.S. debt situation.  Overshadowed on the day somewhat were reports that the Gross Domestic Product (GDP) of the country grew at a slower than expected pace.  The annualized GDP number came in at 1.3% in the second quarter along with consumer sentiment dropping slightly to its lowest level in over two years.  There was some good news reported as well – both the July ISM New York Business Index and the Chicago PMI numbers showed economic expansion while the July Consumer Confidence level actually surprised to the upside.

With all the talk about the debt situation one could forget that we are smack dab in the middle of earnings season.  Earnings for S&P 500 companies are the highest in four years with expectations of potentially stronger growth in the second half of the year.  While this is good news, most of the growth is coming from overseas operations, which means the stronger earnings may not provide as big of a boost to the U.S. economy as some would like to see.

For the most part, industrial companies have been disappointing with their numbers primarily due to much higher input costs and cooling global demand because of the Japan tragedy.  Outside of this sector we are seeing a nice reporting season.  As a sample for this week, 3M, Occidental Petroleum, Praxair, DuPont and Starbucks all reported earnings that beat estimates.

Big oil firms are expected to report their best 2nd quarter earnings on average since 2008 as rising crude prices should provide a positive lift to earnings.  While this may be true, we also expect to see the large integrated oil firms that have spent heavily on natural gas production over the past 3 to 4 years begin to suffer somewhat as natural gas prices remain low.

In the news you may not have heard, it was reported this week that Apple is now more liquid than Uncle Sam.  Apple now has more cash on their books than the United States has spending room.  While these numbers are not directly comparable and it is unlikely that President Obama will be asking for a loan, it does give a glimpse into how powerful Apple has become.  It currently stands as the second largest company on the planet – behind only Exxon Mobil.

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