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September 9, 2011: Market Update

Sep 9, 2011   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

The Price of Honesty

After going higher much of the week, the markets fell today on speculation surrounding Greece.  When the European Union (EU) was formed in the early 1990’s there was one small oversight.  The framers didn’t think to create a mechanism allowing a country to leave.  Although it would have been pragmatic, in their delight they couldn’t envision a day in which one or more countries could get so far off track as to threaten the very establishment of the union.  Unfortunately, this oversight leaves the EU with some very difficult choices in the months ahead.  We may be witnessing the slow unraveling of decades of unification in Europe.

At issue this week are questions over Greece’s ability to meet the terms of its first rescue package as bondholders weigh whether or not to participate in a debt exchange that is crucial to a second bailout.  German Finance Minister Wolfgang Schaeuble said Greece won’t get its next bailout installment unless it meets goals under the first aid package.  The deadline is today and it does not appear that Greece will meet those goals.  Adding to the anxiety, Jürgen Stark, the only German member of the European Central Bank’s (ECB) executive board, announced plans to step down today.  This was the latest sign of deepening disagreement over how to solve Europe’s economic problems.  And lastly, a memo was leaked which suggests that the German government is putting plans in place to support its banks in the event that Greece does ultimately default.  None of this news was reassuring to a market already on edge.

In other news, President Obama unveiled his much anticipated proposal to generate U.S. jobs.  His ideas included renewal of many aspects of the first stimulus package.  Of the estimated $450 billion, some $240 billion would be allocated to the extension and expansion of the payroll tax break with another $50 billion going to an extension of unemployment benefits.   However, questions remain about how much of the proposal would pass Congress and whether Republicans would require spending cuts elsewhere to offset the new spending.  Ironically, the cost of this plan is roughly half the $1 trillion savings Republicans and Democrats fought so hard over during the debt ceiling debacle last month.  In the end, despite the president’s assurances that the bill will be paid for, there is no guarantee that programs that will clearly increase annual deficits in the near term will be paid for in the long term.

With risks in Europe increasing and a slowing U.S. economy, all eyes are squarely on Ben Bernanke and the Federal Reserve.  He spoke again this week but continues to confound expectations that there will be further easing.  It remains likely that the Fed will do something after its September 20-21 FOMC meeting but Mr. Bernanke seems unwilling to let the cat out of the bag before their meeting.

The story of the week is about a Minnesota boy.  You may have heard the story about the miracle $50,000 hockey shot last month.  Nick’s name was drawn in a fund-raising raffle with a $50,000 prize.  All he had to do was hit a hockey puck 89 feet down the ice and get it through a hole six inches wide.  He hit a once-in-a-lifetime shot and the puck sailed through the hole perfectly.  However, there was one hitch.  It wasn’t Nick who took the shot but instead his twin brother.  By chance, Nick was outside the arena at the time his ticket was drawn and his brother stepped in on his behalf.  This presented a quandary for the father who wanted to teach his children a lesson about honesty.  The father came forward the next day and admitted to event organizers about the twins’ switch.  Last week the company that insured the event said that due to “contractual breaches and legal implications” it was unable to pay the claim.  It turns out honesty does have a price.

September 2, 2011: Market Update

Sep 2, 2011   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

A Reverse Goldilocks Scenario

Considering just how bad the economic data was this week, you may be surprised to know that the markets look to finish only slightly lower.  Some analysts have coined this phenomenon “The reverse Goldilocks.”  You’ll remember that it was the introduction of QE2 last September which marked the start of the large rise in the equity markets and the end of QE2 in June which shortly thereafter marked its top.  So as with Goldilocks, analysts are hoping for an economy that is neither too weak nor too strong but one that is just weak enough to require the Fed to intervene again.  We might be there.

The economic data released this week presented the optimal picture of an economy in retreat.  We won’t call it a recession yet, but it is causing concern amongst economists and investors alike.  The three biggest data points were as follows:

  1. August Consumer Confidence: 44.5 vs. 52 expected, 59.6 in June.  This reading is the lowest level since April 2009 which marked the bottom of the last recession.  It paints a rather dire picture of people’s attitudes toward the economy and their feelings about their personal prospects.
  2. Q2 Productivity and Costs: -0.7% vs. -0.5% expected and -0.3% preliminary.  Decreasing productivity generally suggests that corporate profits could come under pressure.  However, it could also mean that companies have reached the limit on the amount of work they can squeeze out of the existing work force and begin hiring back the millions of workers laid off during the recession.
  3. August Nonfarm Payrolls: Unchanged vs. +75K expected.  Private payrolls +17K vs +156K in June.  Unemployment rate remains unchanged at 9.1%.  Simply put, jobs just aren’t being created.

Despite the Federal Reserve Chairman’s non-committal speech last week in Jackson Hole, the chances of further action at the next FOMC meeting September 21st seem likely.  To highlight this point of view, two deficit hawks that sit on the board of governors have indicated this week that they could be persuaded to consider further intervention.  Chicago Fed’s Charles Evans and Minneapolis Fed’s Narayana Kocherlakota both made statements that “suggest a more aggressive policy may be needed” and “further accommodation might well be appropriate.”  If the deficit hawks are softening then further accommodation can’t be far behind.  President Obama will give a speech in a joint session of Congress on September 8th.  We would not be surprised if he begins to lay the foundation for further stimulus.

And finally we come to the story of the week.  A recently released study found that twenty-five of the hundred highest paid CEOs earned more last year than their companies paid in federal income tax.  In addition, at a time when lawmakers are facing tough choices in a quest to slash the national debt, it found many companies spent more on lobbying then they did on taxes.  Admittedly, this study is controversial since it compares CEO pay to current U.S. taxes paid, excluding foreign and state and local taxes that may have been paid, as well as deferred taxes which may or may not be paid.  Most of the companies cited found issue with the study with a General Electric spokesman saying, “GE pays what it owes.”  Know you know.

August 26, 2011: Market Updtae

Aug 26, 2011   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Bernanke in the “Hole”

This summer has been anything but boring and this week was no exception.  There was the resignation of Steve Jobs as CEO of Apple, a 5.9 magnitude earthquake on the East coast, the Jackson Hole summit, a $5 billion surprise investment in Bank of America by Berkshire Hathaway and a host of economic data with varying degrees of “could be better”.  Yet despite all the drama, the market managed to finish the week higher suggesting that it had become oversold over the past couple of weeks.

Where to start?  Perhaps the most important news this week was today at the Jackson Hole summit.  Many people were hoping that Federal Reserve Chairman Bernanke would introduce another round of quantitative easing in the form of QE3.  That didn’t happen.  While he didn’t rule it out, he quite clearly stated that fiscal policy is what needs to take the lead now.  Yet, he did say that the next FOMC meeting in late September was being extended to two days so the board of governors would have more time to hash out potential responses in the event the economy deteriorates further.  Among the many ideas being bandied about are:

  1. Making long-term interest rates lower (even though they’re already quite low), perhaps through some sort of “twist” operation that also removes shorter-term liquidity.
  2. Add liquidity through asset purchases (aka TARP pt. 3) although there is already plenty of liquidity in the system.
  3. “Encourage” banks to lend more money by eliminating interest on excess reserves held at the Fed, even though banks are struggling with insufficient loan demand.

We’ll know in about a month what direction the Fed will take.  For now we’ll have to be patient with the can being kicked down the road.

In company news, we learned that Steve Jobs, the CEO of Apple, has resigned due to his long-term battle with pancreatic cancer.  He will take over the role of chairman of the board but has relieved himself of the day-to-day duties of running Apple.  Investors seem to have taken this in stride given that it was a long time coming.  At the very least, Job’s legacy will continue in the near-term as there is likely a year’s worth of new products and ideas in the pipeline.  In other news, Caterpillar announced it will be opening up a new manufacturing facility in China to more directly compete in their largest market.  And finally, Berkshire Hathaway announced it is making a $5 billion investment in Bank of America (BAC).  BAC will sell 50,000 shares of cumulative perpetual preferred stock with a liquidation value of $100,000 per share carrying a 6% dividend yield.  In the very first day after the deal was announced it had an unrealized gain of $700 million.

I won’t sugarcoat the economic news this week.  It could have been better.  It many ways, it confirmed what the market has been saying for the past few weeks.  Q2 GDP came in at 1% (annualized) which was below the 1.3% estimated last month.  Remember it wasn’t long ago that Q1 GDP was revised down to 0.4%.  But as mentioned above, much of this news was already priced into the market.  Some economists had estimated Q2 GDP would fall to 0.7%.  The fact that it came in at 1% actually sent the market higher confounding common sense.  This is just another example of the market expecting the worst and being pleasantly surprised when the news is only bad.  Clearly there is no disputing that we’re in an economic slowdown.  The million dollar question is whether this turns into another recession or whether it remains a period of slow growth.  We’d prefer slow growth.

Due to the drama in the markets, we didn’t bring you a story of the week these past couple of weeks.  However, we have one for you this week and it is thought provoking.  It turns out that it may not pay to be nice in the workplace.  A recent study discovered that mean people earn more.  It found that men who measured below average on “agreeableness” earned about 18% more – or $10,000 more annually in their sample – than nicer guys.  Ruder women, meanwhile, earned about 5% or $2,000 more than their agreeable counterparts.  The researchers’ analyzed data collected over twenty years with a sample size of 10,000 workers comprising a wide range of professions, salaries and ages.  The researchers speculate that men being agreeable may not conform to expectations of masculine behavior.  In addition, people who are more agreeable were less willing to assert themselves in salary negotiations.  Any thoughts?

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.

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