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April 15, 2011 : Market Update

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

My Little Slice of the Pie

Earnings announcements kicked off this week to much trepidation.   In fact, the volatility index dropped to its lowest point since July 2007 as investors eagerly await the first quarter reports.  As is always the case, Alcoa is the first to announce and set the tone for earnings season.  Unfortunately, management wasn’t upbeat enough for investors despite good earnings and the stock quickly sold off.  Over the next couple of weeks it is likely that we will see this type of behavior repeat.  Despite these short-term swings, we still believe the economy is recovering and will continue to do so barring any unforeseen events.

The big news is that the democrats and republicans have averted a government shutdown after reaching agreement on a 2011 budget.  This week both the House and Senate passed the bill and will likely be signed into law this weekend.  The irony is that the drama over whether to cut $30 billion or $60 billion out of the budget is really a drop in the bucket as demonstrated by the chart below.

The real work starts now.  Last week Senator Paul Ryan proposed sweeping changes to Medicare, Medicaid and discretionary spending with the aim of reducing the federal deficit by a whopping $4.7 trillion over the next ten years.  President Obama announced his plan this week with the same deficit reduction goals in mind albeit using a very different approach.  Clearly the ideological lines have been drawn and the debate is about to begin.  While the president is looking to push the issue for a quick resolution, it is very likely that this will be one of, if not THE theme, in the 2012 presidential election.

In other news, we learned that Bill Gross hasn’t just dumped his U.S Treasury holdings, he’s now short the Treasury market: 3% of Pimco’s $236 billion flagship Total Return Fund is bet against Treasurys.  The fund also increased cash and equivalents to 31% from 23%, making it the largest component for the first time in four years.  On the other side of the argument is Jeffrey Gundlach, a very well respected bond fund manager and a Bond King of his own.  He believes that QE2 is inflationary, which is bad for bonds, therefore the end of QE has to be deflationary, which is good for bonds.  It’s an interesting argument.  If you’re curious about this theory, you can watch the interview on CNBC here

In closing I’d like to make an observation.  As already mentioned, the president chose this week to give his own plan on reducing the national budget deficit.  The location of said speech was George Washington University (GW).  As it turns out, GW was recently crowned by U.S. News & World Report as the most expensive school to attend in the country, costing $56,000 a year.  Seems like a strange location to give a speech about belt-tightening.  Is it just me?

April 8, 2011 : Market Update

Apr 8, 2011   //   by Marc Henn   //   Weekly Market Update  //  No Comments

Employment Trends Looking Up

It was a somewhat lackluster week in the market with expectations building for earnings season which starts next week.  Analysts expect Standard & Poors 500 firms to post a 12% year over year (Y/Y) increase in 1st quarter earnings amidst new highs in sentiment readings among company CEO’s.  We are hopeful that positive sentiment among CEO’s will lead to faster job creation – and we may be seeing this.  It was reported this week that the March Employment Trends Index was up 8.1% Y/Y to 100.9.  Excluding construction and state/local government, this has been the fastest growing six-month period for employment in the past decade.

The GOP unveiled a plan to slash $4 Trillion from the deficit over the next ten years.  This is more than President Obama’s debt commission had proposed.  The GOP plan includes a statutory cap on actual discretionary spending as a percentage of the economy, changes to Medicare and Medicaid’s status as direct payers of costs, lower taxes and a wider tax base.  In addition, after improving economic data and hawkish comments from some U.S. central bankers, Wall Street is beginning to price in a more aggressive Federal Reserve (Fed) according to the latest CNBC Fed survey.  About a third of economists, fund managers and strategists who responded see the Fed hiking interest rates, which is double the percentage from the March survey.

In company news, TJX Companies and Ingersoll-Rand increased their dividends by 27% and 71% respectively.  In addition, TJX plans to buy back $1.2 billion in stock this year.  The NASDAQ announced it will cut Apple’s weighting on the NASDAQ 100, effective May 2nd, to 12.3% from over 20% in a “special rebalance” to more accurately reflect the number of Apple’s shares.  In addition, an almost-finished version of Google’s internet music storage service was leaked to the public.  This service would rival Amazon’s “Cloud Drive” that was unveiled last week.

For the story you might not have heard this week we return you to the oil disaster in the Gulf of Mexico.  It appears that Transocean, one of the firms involved with the spill, paid out “safety bonuses” after boasting that it was the “best year in safety performance in the company’s history.”  The New Orleans Times-Picayune responded with the comment, “That’s like the owners of the Hindenburg claiming they had an ‘exemplary’ safety record – except for the dramatic explosion of the blimp over New Jersey in 1937.”

April 1, 2011 : Market Update

Apr 1, 2011   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

From Libya with Love

After touching an intra-day low of 11,555 just two weeks ago, the Dow Jones Industrial Average has regained a whopping 765 points to close the quarter at 12,319.  Yet, investors remain cautious as demonstrated by the relatively low trading volume these past couple weeks and a surprisingly low volatility index in light of the various global crises.  Most investors seem to be taking a wait-and-see approach for the moment.

So what could drive the market higher?  Perhaps earnings announcements will come in higher than expected when companies release first quarter earnings in a couple of weeks.  Perhaps there will be a resolution to the fighting in Libya and an overall quieting of the unrest in the Middle East.  Perhaps the economic data will continue to trend positively and jobs numbers will show further improvement.  There are many events that could support a continued move higher in the months ahead.  However, the astute among you could just as easily name any number of events that could push the market lower.  Therein lies the dilemma.  The uncertainty is prevalent and will remain with us in the months ahead.

There was relatively little company news this week.  Schlumberger, an oil-services company, announced that the impact from production disruptions in the Middle East should be minimal.  In fact, later in the week the stock jumped higher when news broke that Saudi Arabia has signaled an increase in development activity.  In other news, an executive at Wal-Mart suggested that they’re already seeing cost increases starting to come through at a pretty rapid rate.  His fear is that “inflation is going to be serious.”  If Wal-Mart is seeing it you can bet that most other companies are facing the same picture.  And lastly, we learned that David Sokol has resigned from Berkshire Hathaway due to certain alleged improprieties he committed while on the job.  It was rumored that he would have been next in line to replace Warren Buffett.

The economic indicators remain positive (with the exception of the housing data).  Personal spending in February was in-line with economists’ expectations.  Consumer confidence in March was a little lower than expected mostly driven by consumers’ inflation concerns.  The Fed’s Kansas City Manufacturing report showed production surging to a record 39 from 23 (percent of firms reporting production gains).  Confirming what Wal-Mart said earlier in the week, firms indicated that they will pass along cost increases from historically high raw material prices.  Closing out this week’s indicators, the March Nonfarm payrolls added a net 216,000 jobs ahead of estimates and the unemployment rate dropped slightly to 8.8%.

And for the story you might not have heard this week, we return you to 2008.  The Federal Reserve was forced by the Supreme Court this week to release information on which banks received bailout money during the height of the financial crisis.  It turns out that the biggest borrowers from Fed’s discount window were foreign banks, accounting for at least 70% of the $110.7 billion borrowed during the week in October 2008 when the use of the program surged to a record.  But even more disturbing was the fact that a bank, majority-owned by Libya’s Central Bank, borrowed no less than $5 billion from the Federal Reserve.  It turns out that the Fed dispersed funds to the Libya-owned bank on well over 30 occasions.  It’s still a question just how they managed to get past domestic anti-money laundering provisions.  Now you know.

March 25, 2011 : Market Update

Mar 25, 2011   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Locked Out and Cold

What a difference a week makes. The markets reversed their downward trend this week despite continued global uncertainties. In fact, no matter what news broke from day to day, the markets headed higher. Some of that could be attributed to the quickly approaching end of the quarter but more than a little is simply news fatigue. Regardless of the circumstances, we’re happy to see the trend broken and the market heading higher.

If you turned the TV off this week, good for you. If not, this is what you would have heard. The crisis in Japan, while somewhat stable, remains unresolved. It has already led to some parts shortages in the auto industry and work stoppages at some U.S. assembly lines. This week we also saw oil move above $106 per barrel due to the situation unfolding in Libya. Without the help of the United States and NATO allies it seems the rebel forces would have been crushed. Yet, the aid we provided has emboldened Ghadafi and possibly created a standoff between his government forces and the rebels. And to round out the trifecta of unpleasant news, the chances of Portugal defaulting on its debt rose significantly. We hope for better news next week.

The bulk of the economic releases this week were regarding home sales in one form or another. In a nutshell, they were also unpleasant. Existing home sales fell 9.6% in February with median prices falling further. Even starker is that new home sales fell 16.9%. With interest rates inching higher and an unemployment rate just below 9%, there is simply no market for housing.

On the other hand, company news remained bright. We learned that AT&T will buy T-Mobile for $39 billion (pending regulatory approval). And Caterpillar hits another 52-week high after saying it will invest $5 billion in expansion of its production capacity, centering on a near-tripling of machinery production in Asia. Oracle announced its fiscal third-quarter earnings yesterday and blew past analysts’ estimates. This goes to show that companies with strong balance sheets are able to take advantage of the current economic climate to make strategic purchases or invest in capacity. The best companies are expanding and positioning themselves for the future. We own many of these companies and continue to look for opportunities.

And to leave you on a somewhat humorous note, it appears that even the President of the United States is not immune to being locked out of his own home. President Barack Obama had to try a couple of doors at the White House before finally gaining access to the Oval Office on Wednesday after returning from his five-day trip to Latin America. Before his arrival, White House staff were apparently not informed that the President was coming back to work. I would have loved to see the look on his face.

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