Ongoing Wall of Worry

October 9, 2012


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


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


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


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


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


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

Weekly Commentary: Jackson Hole

August 27, 2012


Last week stocks took a step back, the first after several continuous weekly gains. The Dow Jones was down 0.9%; the Nasdaq, down 0.2%; and the Russell 2000, down 1.3%. Economic data has been mixed lately with housing being the bright spot. New home sales improved in July, by 3.6%, to an annual rate of 372,000. July’s existing home sales also posted a 2.3% increase to a 4.47 million annual rate.

Later this week and weekend will be the Jackson Hole Economic Symposium. This is an annual forum for central bankers, policy experts and academics to come together to focus on emerging economic issues and trends faced by the U.S. and world economies. The market is focusing on Ben Bernanke’s upcoming comments around additional forms of quantitative easing. Click here to see a more detailed overview from

 “It’s the price of leadership to do the thing you believe has to be done at the time it must be done.”
-Lyndon B. Johnson

Weekly Commentary: The Pause That Refreshes?

August 20, 2012


The stock market has now rallied off the lows in June by about 11%.  Thus it seems incumbent for the prudent investor to consider the near term market direction.  We would conclude that a correction could occur, but that the overall environment remains healthy.  Sentiment and valuation measures support current levels.  However, the slowing level of economic activity and the historically high margins for most companies reduce our enthusiasm.  In addition, September has the honor of being the worst performing month on average over the last sixty years.

The preponderance of evidence does argue for better days ahead. However, the major longer term issues can weigh on investors.  The Middle East uncertainty, European sovereign debt concerns, and the so-called “fiscal cliff” here at home, cause concern.  Particularly worrisome is the “fiscal cliff”- potential tax increases and spending cuts would produce a serious slowdown in 2013.  Congress and the President must get their acts together by year end.

We continue to prefer an investment strategy that focuses on high-paying dividend companies that grow their dividends yearly.  They continue to look attractive versus the fixed income market.

“We can’t solve problems by using the same kind of thinking we used when we created them.”
“You have to learn the rules of the game. And then you have to play better than anyone else.”

-Albert Einstein

Weekly Commentary: Subpar Growth

August 13, 2012


Equity markets continued their advance again last week with the S&P 500 gaining 1%. This was the fifth consecutive weekly increase. Interest rates, however, moved higher with the 10 year U.S. treasury rate rising to 1.65% from a recent low of 1.40%. Last week saw further evidence of a slowing global economy with reports from China of a drop in their trade surplus for the month of July from $31.7 billion to $25.1 billion.

This week Germany, France, and the Eurozone as a whole, will report GDP figures for the second quarter. These reports should confirm a slowdown/recession in Europe. In the U.S., we will get reports on retail sales on Tuesday and CPI on Wednesday. Retail sales which had declined for the last 3 months are expected to show an increase of 0.3%.

CPI, which was unchanged in June, is anticipated to be up 0.2%. Inflation, which has been relatively tame, may come under some pressure in the near term as gasoline prices have increased sharply. The U.S. economy should continue to struggle with subpar growth.

“If you only do what you can do- you never do very much.”
-Tom Krause

Weekly Commentary: Jobs

August 7, 2012


The market was flat to down for most of the week, but a 1.9% advance Friday enabled the S&P to finish the week up 0.4%. Despite Europe [the ECB’s Mario Draghi is procrastinating], the Middle East [Syria, Egypt, Iran etc.], and the vicious US political campaign, the S&P 500 has advanced by 10.6% so far this year.  The July employment report has been given much of the credit for Friday’s stock market advance, since the 163,000 nonfarm jobs increase, which normally is nothing to write home about, nicely exceeding estimates of ~100,000 and three previous months of sub 100,000 reports.

This BLS report was a big surprise, since other recent economic data have been cautious:  For example, the ISM’s business activity index is below 50 [indicating contraction!] for the second month in a row. However, skeptical analysts point out that the jobs number is inflated by an above average seasonal adjustment of 377,000 jobs [82,000 above the 10 year average. Also, the birth/death model [don’t ask] chipped in 52,000 additions.  Of course, the big picture is that at this point of a normal recovery, payrolls   should be growing by ~200,000/month.

Earnings season is coming to a close. 80%+ of the S&P 500 companies have now reported better than expected quarterly earnings, but more than 55% fell short on their revenue line, and most are issuing cautious guidance.  This week will see the final large week of reports, with over 500 companies checking in.  Stay tuned.

“I can see clearly now, the rain is gone. I can see all obstacles in my way.”
-Johnny Nash