Weekly Commentary

June 13, 2011

With the U.S. stock market now down for the sixth week in a row, investors are searching for glimmers of something positive on which to hang their investment hats.  We think the current level of investor sentiment provides such a foundation.  One of the measures of sentiment frequently referred to is the AAII report (American Association of Individual Investors).   When Investors become extremely bearish, it is usually a sign that a rally should occur soon.  The latest numbers are:
24% Bullish vs. Long Term Average, 39%
28% Neutral vs. Long Term Average, 31%
48% Bearish vs. Long Term Average, 30%

A second measure frequently referred to is the put-call ratio which reflects the ratio of bearish options to bullish options written.  Here again we are reaching bearish extremes often associated with market turns.  No guarantees but clearly positive data.

There are plenty of reports this week to measure how the U.S. economy is performing.  The CPI, retail sales, housing starts, leading economic indicators industrial production, and a consumer confidence index will have Wall Streeters busy.  While growth has clearly slowed, we’re hoping the data will at least show slow growth this month.  Stay tuned.

“Be fearful when others are greedy, and be greedy when others are fearful.”
– Warren Buffett

Weekly Commentary

June 6, 2011

U.S. equities posted another week of losses, bringing the recent selloff’s duration to 5 weeks. Despite the correction, major indexes are up year-to-date as follows: DJIA, up 5.0 percent; the S&P 500, up 3.4 percent; the Nasdaq, up 3.0 percent; and the Russell 2000, up 3.1 percent.

The economy appears to be in a soft patch:

  • Manufacturing has slowed due in part to supply disruptions post-Japan earthquake
  • Employment gains were less than expected, + 54k vs. + 190k net jobs created.
  • Housing prices are hitting new post bubble lows

However, the service sector of the economy is showing signs of strength with the most recent ISM non-manufacturing report improving 1.8 points to 54.6 (above 50 means expansion).

(Click chart for more information)

We are aware of the current economic weakness but we continue to believe that sell-offs will be bought, and that the markets will finish the year higher from today’s levels.

“Stock market corrections, although painful at the time, are actually a very healthy part of the whole mechanism, because there are always speculative excesses that develop, particularly during the long bull market.”

– Ron Chernow

Weekly Commentary

May 31, 2011

Despite Friday’s gain in the DJIA, the week ended down for the fourth consecutive week. After a strong showing in April with a 4% gain for the DJIA, May is likely to end with a loss for the month.

The recent weakness in the stock market probably reflects changing forecasts for the strength of the U.S. economic recovery. Last week first quarter GDP growth was confirmed at 1.8% and most economists are revising their estimates for the second quarter from plus 3% growth to 2-3%. Manufacturing has been slowing, the housing market is struggling and consumer spending has been hurt by higher gas prices.

The major economic news this week should be the May jobs report on Friday. Expectations are for 190,000 new jobs and an unemployment rate of 8.9%. The job picture continues to be the key to this recovery.

“Three Rules of Work: Out of clutter find simplicity; From discord find harmony; In the middle of difficulty lies opportunity.”

– Albert Einstein

Weekly Commentary

May 24, 2011

LinkedIn [LNKD +109%] euphoria produced a Tuesday-Wednesday rally, but was unable to sustain the market for the entire week.  The declines ranged from 0.3% by the S&P to 0.9% by the NASDAQ.  The YTD figures are still positive, ranging from +5.7% by the NASDAQ to 8.1% by the DJIA.

Some economic reports were positive, including the unemployment numbers:
Initial claims fell by 29,000 to 409,000 and continuing claims fell by 81,000 to 3.711M.  Overseas, Greece was downgraded by Fitch, S&P warned about Italian debt, unemployment protests rocked Madrid and Iceland is experiencing another volcanic eruption.

The US economy is transitioning from recovery to expansion, but at a below average rate.  The following chart compares this recovery to the previous six, showing how anemic this recovers is.

Corporate earnings reports evidenced continued profit growth, but management’s outlook for the next quarter[s] was for the most part underwhelming.  Real Estate indigestion continues as expected.  Commodity prices are declining, which will give consumers a break, especially in the gas tank.  The current equity softness should be temporary, since modest valuation and continued expansion will prevail.

“Real charity doesn’t mean giving away someone else’s money.”

– Doug Bandow, 1996

Weekly Commentary

May 16, 2011

Last week volatility remained elevated however the equity markets posted fairly narrow results:

  • The DJIA (Dow Jones Industrial Average) was down 0.3 percent; S&P 500 was down 0.2 percent; the Nasdaq was unchanged; and the Russell 2000 was up 0.3 percent.
  • Headline consumer prices and producer prices jumped in the latest CPI and PPI readings. Excluding food and energy; inflation is well within the Fed’s mandate.
  • WTI crude closed the week mostly flat but below $100 per barrel. Remember crude oil prices dropped ~ 17% the week before last.
  • Despite the recent economic headwinds, US consumer sentiment continues to improve…keep in mind that 70% of the US economy still depends on the American consumer.


This week’s economic data mostly consists of housing and manufacturing. We expect housing data to remain depressed until the market clears the excess inventory. Manufacturing has been a leader in the recovery but we expect this sector to moderate as our economy moves from recovery to expansion. We would not be surprised to see the stock markets trade down over the next few months but we still expect the markets to finish the year higher from today’s levels.

“The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance.”

– Cicero – 55 BC

Weekly Commentary

May 9, 2011

Last week stocks were lower amongst multiple challenges:

  • The European Central Bank maintained their interest rates and the markets anticipated a rate increase. This pause caused the US dollar to jump relative to the Euro
  • The jump in the US dollar may have been the ignition to start a steep, aggressive selloff in the frothy precious metals and commodities markets. For example – silver was down ~ 30% last week and WTI crude oil dropped $17
  • U.S. weekly jobless claims also spiked – reminder this is a volatile employment snapshot especially after seeing Friday’s stronger than expected jobs report
  • U.S. Treasury bonds continue to rise in price (lower yield), which may also be signaling slower growth ahead.

US Dollar and Commodities

We still believe the US economy is growing but the path will be choppy.  First quarter earnings season was very strong as a majority of corporations beat their earnings and revenue expectations.  This week we’ll get updated CPI and PPI figures which will provide us with new data on inflation. The question remains, how much of the rise in commodity prices will prove to be “transitory?”

“Inflation is the one form of taxation that can be imposed without legislation.”
– Milton Friedman

Weekly Commentary

May 2, 2011

Despite a plethora of headwinds, markets continued their move higher in April with the S&P 500 moving higher by 3.3%.  Year-to-date the S&P 500 is up 8.4%.  International stocks are beginning to perk-up as well with the EAFE index up 8.4% for the year-to-date period through April.  Bond prices have risen 1.7% year-to-date … we expect bond prices to turn lower soon.
Earnings season is in full swing, and we witnessed a number of very strong reports over the past few weeks.  Adding fuel to the fire, Federal Reserve Chairman Ben Bernanke reiterated the Fed’s stance that rates will stay low for a while.  Sooner or later, higher oil prices will impact consumer spending and confidence.  So far, the markets seem to be dismissing the substantial drag that higher oil prices will have on the economy.  Let’s hope that the issues are just “transitory” as Mr. Bernanke described them recently.

Source: Strategas Research Partners, LLC

“A nickel ain’t worth a dime anymore.”

~Yogi Berra

Weekly Commentary

April 25, 2011

Over the years we have paid close attention to The Conference Board’s monthly publication of its U.S. Business Cycle Indicators.  The most widely referenced indicator is the Leading Economic Index, but they also publish Coincident and Lagging Economic indices which are useful.  The Leading Index (LEI) continues to reveal a healthy U.S. economy for the balance of the year.  The Index was up 0.4% on top of a revised 1.0% increase for February.

Six of the ten components of the LEI were up led by the interest rate spread.  The most negative component was consumer expectations, which have been greatly affected by energy and food prices.  One source says that consumers now anticipate a 6.7% inflation rate and flat personal income.  Mr. Bernanke believes these two inflation pressures will subside later in the year. Let’s hope he is right.

In the meantime we are encouraged by all three Conference Board measures and believe they provide a sound basis for the healthy stock market we have seen in recent months.

“I, however, place economy among the first and most important republican virtues, and public debt as the greatest of the dangers to be feared.”

– Thomas Jefferson

Weekly Commentary

April 18, 2011

Last Friday CPI was reported as up 0.5% due to higher energy and food prices although core inflation, 0.1%, continues to be within Federal Reserve guidelines. This week look for several reports on the housing market starting with building permits and housing starts on Tuesday and existing home sales on Wednesday. The housing sector continues to be sluggish with continued downward pressure on prices.

Historically, residential investment has accounted for 19% of GDP growth in the early quarters of an economic recovery. GDP growth estimates for the first quarter of 2011 are being revised downward by some economists to 2% largely as a result of the slow housing recovery.

Stocks and bond markets will be closed on Friday due to the Good Friday holiday.

Weekly Commentary

April 11, 2011

Earnings season will begin in earnest this week, with Alcoa kicking off the festivities Monday evening.  Other noteworthy reports include JPM Wednesday morning, GOOG Thursday afternoon and BAC Friday morning.  Locally, HAS reports Thursday morning.
“The Ben Bernanke” has been striving to gin up inflation, and he has succeeded.  The PPI and CPI to be reported Thursday and Friday will come closer to confirming this reality.
As a result, commodities, including grains, gold and oil are rising [gasoline is up ~30% ytd] while the dollar is falling.

One consolation is the fact that equities have been [and will continue to be] a pretty good hedge against inflation.

Stay tuned.