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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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