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May 20, 2011: Market Update

May 20, 2011   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

LinkedIn… To 1999?

The market is hanging on to recent gains, but just barely.  We look to close the week right about where it started.  Considering the news, a flat close might be the best we could have hoped for.  Perhaps the biggest non-news event occurred on Monday when the U.S. officially broke through the $14.294T debt ceiling.  Lawmakers have eleven weeks to hash out a deal to avoid a default.  Let the countdown begin.

There were a few surprises this week perhaps most notably the arrest of International Monetary Fund (IMF) chief Dominique Strauss-Kahn.  The head of the IMF was removed from a Paris-bound flight in New York minutes before takeoff Saturday afternoon and arrested in connection with a sexual assault on a housekeeper at a Manhattan hotel.  The allegations create immediate uncertainty for the IMF, which has been playing an important role in stabilizing the global economy amid the financial crisis.  Mr. Strauss-Kahn has been instrumental in restructuring Greece’s debt and was widely thought to be considering a challenge to French President Nicolas Sarkozy in next year’s election.

In other news, Iranian President Mahmoud Ahmadinejad shook up his cabinet by replacing three ministers and temporarily taking over the oil ministry just in time for the OPEC conference.  It turns out that Iran holds the organization’s rotating presidency for the year.  This means that Mr. Ahmadinejad will lead next month’s OPEC conference in Vienna as he presses for higher oil prices to aid Iran’s struggling economy.

With the end of QE2 right around the corner, the release of the April Federal Reserve meeting minutes came with renewed interest.  The minutes show a clear division on when to begin tightening monetary policy.  Some officials want to raise interest rates sooner rather than later while others are deeply concerned that such a move would stifle any recovery.  In theory, they agree that raising interest rates is preferable to selling assets when the time comes to tighten policy.  As for weakness in the first quarter, they blame severe weather, increases in energy and other commodity prices, and lower-than-expected defense spending.  They threw around Mr. Bernanke’s catch-word “transitory” and see economic growth picking up later this year.

There was little in the way of company news this week.  Both TJX Companies and Wal-Mart released earnings that were roughly in line with expectations.  McDonald’s announced that they are trying a pilot program in Europe that would replace its cashiers with touch-screen terminals.  This would allow customers to both order and pay for food thereby saving both time and money.  If successful, we expect it could be brought to the United States in the next few years.  And lastly, although not specifically company news, the Senate fell short of the votes necessary to repeal the tax subsidies given to large oil companies.  It was decided that repeal would hurt domestic drilling while failing to lower gas prices.  This remains a $2 billion windfall for the likes of Shell, Exxon, ConocoPhillips, BP and Chevron.

In closing, it looks like the heady days of the dot-com era are back.  This week the market saw the first IPO of a social-networking company.  Many regard LinkedIn (ticker:LNKD) as essentially Facebook for the corporate world.  The stock was priced at $45 a share but quickly hit $122 before settling around the $95 mark.  At this price, the market cap for LinkedIn exceeds $10 billion with a P/E ratio of 1,250.  What you’re seeing here is enthusiasm that goes way beyond what the prospects are for the company itself.  Hold onto your wallets, irrational exuberance is back.  We’re LinkedIn all right… to 1999!

May 13, 2011: Market Update

May 13, 2011   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

The Boehner Ultimatum

For all intents and purposes, it was a pretty dull week for the markets.  There weren’t any big breaking news stories to move things higher or lower.  The minor blips that made headline news were the conviction of Raj Rajaratnam on insider-trading and the unexpectedly higher inventory of both crude oil and gasoline.  However, there is an uneasiness regarding the rapidly approaching debt ceiling and the continuing saga of debt problems in Greece, Portugal, Ireland and Spain.  Despite being just beneath the surface, all of these issues helped contribute to slightly higher anxiety levels this week.

The news that caught my attention this week was what I am calling the “Boehner Ultimatum” (not to be confused with the award winning book by Robert Ludlum).  Having taken a lot of heat from the conservatives in his party over the budget compromise, Mr. Boehner is now taking a very hard stand on the national debt ceiling.  He said this week that if the White House desires to raise the national debt ceiling (again), that they will have to come up with spending cuts that more than offset the rise in the ceiling.  The part that gave me pause was his declaration that the idea of raising taxes is completely off the table.  Leaving politics aside, this is an interesting position to take since the tax cuts in 2006, two unpopular wars and an unfunded Medicare prescription plan are in large part a cause of our current debt problem.  There are arguments to be made for both sides and I’m not suggesting that any one party is to blame.  Regardless of how we got here, the current debt is unsustainable and a quick resolution would be in the best interest of the United States.

In other news, we learned that U.S. consumers are once again taking on more debt, ending a string of nine consecutive declining quarters.  Many consider this a sign that people are feeling better about their economic prospects.  Also we were told that banks are more willing to lend, the first such gain since Q3 2008.  However, home prices continue to decline, showing a 3% drop quarter-over-quarter with approximately 28% of all homeowner underwater on their mortgages.

In closing, I don’t have a quirky story to share with you this week.  However, I do want to let you know about the Academy Award winning documentary “Inside Job”.  I watched it earlier this week and have to say it is riveting.  For those of you who haven’t seen it yet, it is definitely worth watching.  It explores the decisions that created the environment in which the financial crisis was born.  Perhaps the most interesting aspect for me is that many of the people who were instrumental in creating the financial crisis are the same people who are now tasked with fixing the system.  In light of this realization, it should come as no surprise that little has been done to prevent these circumstances from happening again.  What would Adam Smith say if he were alive today?

May 06, 2011: Market Update

May 6, 2011   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Tulip Mania Redux

We were wondering what news would break this week now that earnings season is just about over.  What we hadn’t predicted was that it would start with the death of Osama Bin Laden and finish with the collapse of commodity prices.  These are certainly remarkable times.

One of the biggest surprises came at the end of the week with the latest jobs figure.  Many had believed companies had curbed spending in the face of rising raw-material costs.  Payrolls were expected to rise by 185K but in fact came in much higher at 244K.  Not to let a good moment go to waste, the naysayers quickly pointed out that McDonald’s had hired 64,000 people last week.  In fact, the official unemployment rate actually edged higher to 9.0% due to a large number of previously discouraged workers re-entering the job hunt.

What the strong April jobs number implies is that government stimulus is finally coming to an end.  There is no talk of further stimulus and the inflation hawks are pushing to raise interest rates sooner rather than later.  The improving jobs number is just one more piece of data that will be used against the “loose” money crowd in the weeks and months ahead.

In other news, the meteoric rise of the price of silver came to an abrupt end this week.  In fact, silver dropped over 25% by the time the week had finished.  Some are scratching their heads wondering what happened.  Approximately 350 years ago some wondered the same thing at the peak of the tulip mania, in February 1637, when some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman.  These types of events are driven by speculators and are widely considered bubbles.  The move in silver is just another in a long line of such events.  The interesting point is that many commodities moved in sympathy with silver.  While gold only fell 3.5% this week, oil fell a more significant 13.5%.  Maybe this means we’ll see prices at the pump go down soon?  I know wishful thinking.

The issue of the debt ceiling didn’t make much news this week.  However, we are seeing some of the consequences of a weak dollar and rising national debt in other ways.  Mexico increased its gold reserves nearly 17-fold, buying more than 90 tons of the metal between January and March. The purchases are the equivalent of 3.5% of annual mine output.  And another country seeks to further diversify from the U.S. dollar.  South Korea considers investing a portion of its more than $300B of its foreign currency reserves (7th largest in the world) in Yuan-denominated securities.  U.S. securities currently make up about 64% of South Korea’s holdings.

Lastly, I’d like to end the week on a light note.  It was announced on Wednesday that IBM’s “BlueGene/P” supercomputer cracked the sixty-trillionth binary digit of Pi-squared.  At one quadrillion (that’s one more zero than trillion) calculations per second, it took over three months.  One has to wonder if maybe there is a better use for such a powerful tool.

April 29, 2011 : Market Update

Apr 29, 2011   //   by Bruce Mason   //   Weekly Market Update  //  No Comments

Harvard vs. McDonald’s

This week marked the second full week of earnings announcements and with it some mixed news. While the pundits don’t seem to be talking a whole lot about it, my own anecdotal evidence is that we’re seeing more “misses” than in past quarters and more CEOs concerned with rising inflation. Coupled with the fact that the Q1 GDP first estimate came in around 1.8% (down from 3.1% prior), it is clear that earnings and economic statistics aren’t exactly what is driving this market higher. To the contrary, from the looks of things, it appears that all ears are on the Federal Reserve these days.

The Fed Open Market Committee (FOMC) released their latest report which is essentially unchanged from prior reports. They repeated language about near-zero rates for an “extended period” and talk about longer-term inflation expectations being “stable”. And despite the deficit hawks on the committee who have been quite vocal recently about their concerns regarding inflation; it comes as a surprise that the vote on continuing QE2 through June was unanimous. As a result the dollar weakened further, commodity prices hit new highs and the stock market inched higher.

To highlight the doublespeak coming out of the Treasury Department and the Federal Reserve we just need to look at recent comments. Treasury Secretary Geithner said this week, “Our policy has been and will always be, as long as I’m in this job, a strong dollar is in our interest as a country. We will never embrace a strategy of trying to weaken our currency to try to gain economic advantage.” Chairman Bernanke said on Wednesday, “The Federal Reserve believes that a strong and stable dollar is both in American interests and in the interest of the global economy.” And yet, the one-year chart of the U.S. Dollar Index below demonstrates the irony of their statements.

There is a fine line the Federal Reserve and Treasury Department are trying to walk between supporting the fragile economic recovery and having the economy fall back into recession. They’re using their best judgment, but only time will tell whether they made the right policy decisions.

And the story of the week has to go to McDonald’s. A few weeks back they announced they were planning on hiring 50,000 new employees on April 19th. As it turns out, they hired 64,000 minimum-wage employees from an applicant pool of more than 1 million people. Someone did the math and discovered that their acceptance rate of 6.2% is lower than the 7% of applicants accepted into Harvard each year. Now you know.

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