Hurricane Sandy & Everything Else

November 5, 2012

11.05.12

Our thoughts and prayers go out to everyone impacted by the devastating effects of Hurricane Sandy.  Sandy was yet another reminder that each day is a gift.

Last week was a shortened trading week due to disruptions from Hurricane Sandy.  For the week, markets were basically unchanged with The Dow Jones Industrial Average closing at 13,093 (down 0.11% for the week) and the S&P 500 closing at 1,414 (up 0.16% for the week).  Despite generally good economic news for the week – better-than-expected consumer confidence and payroll data, strong Chinese purchasing managers’ index, and decent retail sales – investors were in no mood to cheer due to Sandy, the uncertainty of the upcoming elections and the looming fiscal cliff.

Good news – The unquenchable human spirit will prevail and people will rebuild and move-on from Sandy, the elections will be over soon (finally … no more political ads), and the fiscal cliff will, hopefully, regain the attention of politicians in Washington.

History is fairly clear in that the markets will likely move higher into year-end once the elections are over.   We plan to stay the course.

“People never lie so much as after a hunt, during a war or before an election.”
Otto von Bismarck

Slow Recovery Continues

October 30, 2012

10.30.12

Last week’s revised  3rd quarter GDP was reported at 2.0% up from the initial report of 1.7% and also up from the 2nd quarter rate of 1.3%.  Growth in the quarter was still too weak to stimulate significant hiring. The improvement in the 3rd quarter has been driven by consumer spending and an improvement in housing which has added to growth for the last six quarters.  Consumer spending rose at an annual rate of 2% up from 1.5% in the 2nd quarter. Also last week the University of Michigan consumer confidence survey increased to its highest level in 5 years.

However, business spending has been weakening as companies worry about the recession in Europe, slow growth in China and India and the “fiscal cliff” in the U.S. and have been reluctant to hire. On Friday the October jobs report is due and estimates look for 120,000 new jobs. This is the last jobs report before the election.

On the good news side, starting in November, since 1950 the DJIA has climbed an average of 7.5% through April 30 compared to an average gain of 0.4% for the 6 months of May through October.

DON’T GIVE UP ON TECH!

October 23, 2012

10.22.12

Surprising to many, the technology sector has been the weakest sector in the S&P for the last six month period – down 2.5%.  It is still up 13.3% for the 52 weeks but still is one of the weaker sectors. There are the general uncertainties that dampen capital spending like the Euro crisis, the state of the Chinese economy and the looming fiscal cliff in the U.S.  Tech investment is close to a 15 year low as a share of total investment.

Because of this weakness, some measure of pent-up demand has been created.  It is most pronounced in communications equipment and the hardware sectors, reflecting the PC slump.  Remember that Tech investment generally lags during the initial phase of an economic expansion, but then outperforms as the expansion matures.

Adding it all up, the soft patch in tech should prove transitory.  Favored groups include software, communications equipment and storage. Participation in the group should broaden as uncertainty recedes.  We believe this is a timely point to be looking closely at technology.

“Once a new technology rolls over you, if you’re not part of the steamroller, you’re part of the road.”
– Stewart Brand

Weekly Commentary: Consumer Expectations

October 15, 2012

10.15.12

Equities were negative last week with the DJIA down 2.1% and the S&P 500 down 2.2% as investors moved to the sidelines ahead of the 3rd quarter earnings season. Note that year-to-date the DJIA is up 9.1% and the S&P 500 is up 13.6%.

The U.S. economy continues to slowly move along. However, the U.S. consumer seems to be gaining confidence. The October consumer sentiment index posted a surprising 4.8 point upward move to 83.1. Much of the gain came from the expectations component which jumped 6 points to 79.5, the best reading of this economic recovery. Expectations are the orange line on the chart below.

Strong expectations exhibit confidence in future income prospects which bodes well for consumer spending. We’ll look to this week’s retail sales release for more data on the consumer.

As discussed in our most recent quarterly newsletter, “Helicopter Ben & The Wall of Worry”, we continue to focus on the upcoming fiscal cliff and its tax implications.

“New taxes should be a last resort, not an option.”
-Christopher Myers

Ongoing Wall of Worry

October 9, 2012

10.09.12

Another week, another market advance.  The S&P and the Dow both advanced ~1.4% while the Nasdaq was up a more modest 0.6%, held back by AAPL’s post iPhone5 correction. In addition to the ongoing wall of worry, economic and political factors noticeably impacted last week’s market action.

Oil ended a volatile week on the downside, falling by 2.5% to $89.87/bbl.  However, during the week oil fluctuated wildly, buffeted by inventory and output data, weak economic reports out of Europe and China, and rising friction between Syria and Turkey. Natural gas was a partial offset, rising 2.4% to 3.40/MBtu.

Employment data got a lot of attention, since the decline in the jobless data from 8.1% to 7.8% provided an unexpectedly positive sound bite. However, private payroll gains were 20% less than expected, part-time workers who can’t find full-time work rose 8%. Finally, there are still 2.5 million people who would like to have a job if only the economy was better.

Finally, the Wednesday night presidential debate produced an unexpected “win” for Governor Romney. This was positive for the overall market, although there are winners and losers. Energy stocks, especially clean coal issues, benefited, while the prospect for repeal and replacement of ObamaCare weighed on hospital stocks.

Investor focus will shift to the micro level this week, as earnings reporting season begins. Alcoa will kick off the action will a post-close report on Tuesday.

“I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.”
– Thomas Jefferson

Down But Up … the Week and the Quarter

October 1, 2012

10.01.12

Markets were down for the final week of the quarter as news out of Europe spooked investors and US economic data were mixed.  For the week, the Dow closed lower by 1% while the S&P 500 declined 1.3%.  Global equities were lower by 2%.

Not surprisingly, US economic data for the week was mixed as the Chicago manufacturing index fell well short of expectations and US Durable Goods Orders fell to their lowest level in 3 years.  Consumer Confidence and US home sales were better-than-expected.

Despite a disappointing week for US and global equities, the 3rd quarter results were just fine thanks to a coordinated easing effort by central banks around the world.  For the quarter, the Dow finished higher by 3.9% while the S&P 500 was up 5.6% … who would’ve thunk it just a few months ago?

The year-to-date rally in the stock seems to be one of the most disrespected rallies that we’ve seen in some time.  Economic news is quite soft, and geopolitical realities are anything but comforting.  Yet the markets continue their march higher …

The old adage – don’t fight the Fed – is certainly holding true.  We suspect that there will be bumps in the road over the next few months, but a massive amount of cash on the sidelines along with unusually low interest rates will likely move the markets higher towards year-end.  Investors should continue to stay well diversified and vigilant.

Be careful of complacency –

But in all my experience, I have never been in any accident … of any sort worth speaking about.  I have seen but one vessel in distress in all my years at sea.  I never saw a wreck and never have been wrecked nor was I ever in a predicament that threatened to end in disaster of any sort.

E.J. Smith, 1907, Captain, RMS Titanic

Weekly Commentary: NOT SO BAD AFTER ALL?

September 24, 2012

09.24.12

We came upon a recent article with the catchy title “U.S. EMBARKING ON A NEW SECULAR BULL MARKET?”. We were taken not so much by the title but by the good developments referenced in our economy.  While a caveat of fears about the fiscal cliff exists, a number of fundamental changes have occurred.  Annualized decreases in Government expenditures have actually occurred in the 2009-12. Household debt has decreased from 98% of GDP to 84%.

Households keep only 27% of their wealth in real estate compared for example to France’s 57%. Housing prices have stabilized as have starts.

Then we have some of the advantages accruing from finding more natural gas here.  Drilling is a nice stimulant in itself, but the effects of $3.00 gas prices are manifold. Electricity costs are much lower in the U.S. which has positive effects on our chemical, metals, machinery and paper industries.  We are now competitive with China for domestic prices of steel.  Finally, there is the advance in technology which helps almost every industry.  You need look no further than the Apple iPhone 5 to see the fruits of technological advance.

In sum we sometimes ignore many of the good changes which can underpin the economy and the markets in the years ahead.  Now if we can just get by this fiscal cliff problem.

“Unless someone like you cares a whole awful lot, Nothing is going to get better. It’s not.”
-Dr. Seuss

Weekly Commentary: QE 3

September 17, 2012

09.17.12

Last Thursday the Fed announced QE 3 saying that it plans to spend $40 billion per month to purchase mortgages and it pledged to keep short term interest rates low until mid-2015. The news started a 2 day stock market rally which put the DJIA at its highest level since 2007.

Retail sales were also reported last week and were up 0.9% for the month of August mostly due to higher gasoline prices and auto sales. Without those items sales were only up 0.1%. Oil prices are back close to $100/barrel and gasoline prices have risen for the last 2 months and may weigh on consumer spending going forward. CPI was also up 0.6% for the month, the highest monthly increase in 3 years, due mostly to higher gasoline prices.

“If the world was perfect, it wouldn’t be.”
– Yogi Berra

Weekly Commentary

September 10, 2012

09.10.12

September, historically the worst month of the year, got off to a roaring start, with the NASDAQ up 2.3% and the DJIA advancing 1.6%. The markets were buffeted by mostly positive political developments offset by mixed economic reports.  This week will be more of the same, leavened by Wednesday’s launch of the new iPhone.

Bernanke started the week on a strong note by reaffirming his commitment to act if economic conditions deteriorate, noting that our labor market is a grave concern. On Wednesday, Bloomberg reported that the ECB would do unlimited [but sterilized] bond buying. Thursday Mario Draghi confirmed that the ECB will buy bonds of countries who ask for aid. All of these items helped support/propel the markets higher.

While the week’s economic data was much less positive, it was mostly interpreted in a positive manner.  Friday’s jobs data was an important reaffirmation of the weakening economic recovery. Nonfarm payrolls added only 97,000 [130,000 expected] and the prior report was reduced by 22,000. Moreover, the widely watched unemployment rate came in at a superficially favorable 8.1% [8.3% expected], but this was achieved by having more people leave the workforce.  The immediate response was to increase hopes for more quantitative easing [the glass is half full!]. The problem is that each additional round of QE has less and less positive impact [similar to an addict getting one more dose of his favorite drug].


AAPL’s products have been a big positive over the last decade, and this year’s goodies will be no exception. New product details have been leaking for weeks [where is Steve when you need him?], and they include a bigger [longer] and thinner screen, smaller connector, LTE/4G [but no NFG!], new mapping etc. Santa will not be wanting for ideas [new iPods too?] this holiday season.

“ Leadership is action, not position. ”
— Donald H. McGannon

Weekly Commentary: Waiting for Godot (and the Fed, China and Europe)

September 4, 2012

09.04.12

Markets were fairly quiet last week in an end-of-summer, low volume, vacation week haze.  The Dow and the S&P 500 were down fractionally by 0.3%.  International stocks were a bit lower on continuing concerns of economic slowing in Europe and China.

The Dow Jones Industrial Average rose 0.6% in August for the third consecutive monthly gain.  The S&P 500 rose 2% for the month to close at 1406.58.  Oil prices (and gas prices) moved higher … potentially putting a cap on consumer spending.

Markets reacted positively to continuing signs of improvement in the US housing market, marginally higher 2nd quarter GDP and positive comments by the Fed.  The June Case-Shiller Home Price Index rose 0.5% versus expectations of a decline of 0.3%.  It was the first year-over-year increase since late 2010.  U.S. GDP for the 2nd quarter came in at 1.7% versus consensus expectations of 1.5%.  Lastly, Ben Bernanke and the Fed came to the rescue of the markets as they indicated a willingness to further stimulate (artificially, of course) the economy if necessary.

Europe and China are another matter.  There are definite signs of slowing in Europe and China.  Investors are anxiously awaiting the ECB’s press conference this Thursday for signs of hope.  Let’s hope that it is not more of the same – rhetoric.

We suspect that the markets will give back August’s gains as investors wake-up to the headwinds in Europe and to the geopolitical challenges in the Middle East.  Let’s not forget that September is historically the worst performing month of the year.  Buckle-up.

“Let us not waste our time in idle discourse! Let us do something, while we have the chance! It is not every day that we are needed. But at this place, at this moment of time, all mankind is us, whether we like it or not. Let us make the most of it, before it is too late!”
– Samuel Beckett, Waiting for Godot