Weekly Commentary: Muddle Through

July 30, 2012

07.30.12

Muddle through – to achieve a certain degree of success but without much skill, polish, experience, or direction. (www.dictionary.com)

Last week featured some tame economic and earnings news as the economy has hit a soft patch. However, investors have shifted their attention on the increasing possibility of additional monetary policy action, both at home and abroad. For the week the Dow was up 2.0 percent; the S&P 500, up 1.7 percent; the Nasdaq, up 1.1 percent; the Russell 2000, up 0.6 percent.

The recovery lost steam in the second quarter.  GDP growth decelerated to 1.5% annualized from 2.0% in the first quarter.  This Friday is an update on the US employment situation. Current consensus has the US economy adding 100,000 jobs.

Progress continues in the housing sector as home prices have experienced 4 months in a row of gains.  The FHFA home price index in May increased 0.8 percent, following a 0.7 percent boost in April.  The year-on-year rate is up 3.7 percent. Tuesday we’ll get more housing data from the S&P/Case-Shiller home price index.

The muddle through continues…

“When everything seems to be going against you, remember that the airplane takes off against the wind, not with it.”
– Henry Ford

Weekly Commentary: The Pain in Spain (and elsewhere)

July 23, 2012

07.23.12

Market average moved higher last week on reasonable earnings reports and hopes of an eventual Fed intervention (stimulus).  Europe, however, brought everybody back to reality.

Sovereign yields in Europe are soaring on renewed fears that Spain may need a formal bailout from the European Central Bank.  The 10-year Spanish bond yield rose to 7.5% … a very costly level to fund debt (compared to U.S. 10-year yields of 1.42%).  Of course, the fear is that Italy and France may be next (never-mind Greece and Portugal).

Debate in Europe is raging over the creation of a central banking union as well as other mechanisms (deposit insurance chief among them) to strengthen the monetary union.   Reform packages in Europe are getting harder and harder to implement with interest and unemployment moving quickly higher.  European leaders continue to drag their feet, and the rest of the world is suffering as a result.

Meanwhile, back in the United States, second quarter earnings have been reasonable.  Earnings have been mostly in-line with expectations, but top-line growth has been difficult to achieve.  Perhaps U.S. companies have extracted as much as they can from operations … we expect to see profit margins narrowing as worldwide economic growth moderates.  Fortunately, valuations, strong balance sheets, low interest rates and improving housing will likely keep U.S. markets range-bound.  In the end, however, the U.S. cannot decouple from the rest of the world.

Investors should not be surprised by increased volatility.

“It is not the ship so much as the skillful sailing that assures the prosperous voyage.”
– George William Curtis

Weekly Commentary: Keep moving

July 16, 2012

07.16.12

Last week the DJIA ended with a small gain thanks to a 204 point rally on Friday due to better than expected earnings from J P Morgan. This week look for a flood of earnings reports from major corporations such as Coca Cola, JNJ, IBM, GE, Microsoft and more as well as economic reports on CPI, industrial production and housing starts.

Retail sales were reported for June this morning and fell 0.5%.
This is the third straight month that retail sales have declined. The last time this occurred was in the second half of 2008. The decline was short of analysts’ expectations which were for an increase of 0.2%. April sales were revised to down 0.5% and May sales were minus 0.2%. Since retail sales account for two-thirds of the nation’s economic growth, unless the jobs picture and consumer sentiment improves it seems likely that the economy will continue to struggle.

“Life is like riding a bicycle. To keep your balance, you must keep moving.”
– Albert Einstein

Weekly Commentary: Pick a Number, Positive or Negative

July 9, 2012

07.09.12

Rarely have we seen economic numbers that so confound the optimists and the pessimists on the US economy. First, the negative. The ISM manufacturing number broke under 50 for the first time in many months and the ISM Services dropped to 52.1 as well.  The new jobs created was just 80,000 for the month, well below what we need to reduce unemployment.  Also consumer confidence data has been slipping for several months.  But don’t be so glum-construction spending was up nicely(0.9%), factory orders were up 0.7%, new unemployment claims decreased to 374,000 and the average work week hours went up smartly to 34.5 hours, not bad at all.

Of course we don’t exist in a vacuum-many global forces influence our economy- slowdowns in Europe and China are of most immediate concern along with instability in the Middle East.

We are entering the typical time when corporations report their quarterly revenues and earnings.  Wall Street analysts have been reducing their estimates and companies have cut their guidance.

Yet through all this uncertainty, year to date performance of US markets (S&P 500 up over 8%) is good.  Equities do appear attractive relative to money markets and Treasury securities, particularly when investing in higher dividend payers. We are reminded of the need for patience and perspective in handling this daily barrage of data we face.

 “He that can have Patience, can have what he will
– Ben Franklin

Weekly Commentary: Happy Independence Day!

July 2, 2012

07.02.12

Stocks bounced back last week as news from Europe spurred an S&P 500 rise of 2.5%, producing a rewarding 9.49% first half total return! Investors around the world seemed to gain confidence from Europe’s announced “growth package”, which was valued at 120 billion euros and is aimed at stabilizing European financial conditions [by increasing lending capacity]. In response, the Euro rallied at the dollar’s expense.

This week the unemployment rate will be announced Friday.
However, few other significant indicators will be released this week—a holiday shortened week marked by the New York Stock exchange closing early on Tuesday, not to be reopen until Thursday July 5th.

Happy Independence Day!
“Where liberty dwells, there is my country.”
-Ben Franklin

“Everything that is really great and inspiring is created by the individual who can labor in freedom.
-Albert Einstein

“I believe in America because we have great dreams – and because we have the opportunity to make those dreams come true.”
–Wendell L. Wilkie

“There, I guess King George will be able to read that.”
-John Hancock
On signing the American Declaration of Independence.

Weekly Commentary

June 25, 2012

06.25.12

U.S. stocks were mixed last week with the S&P 500 slightly negative and the Nasdaq Composite mildly positive.  Economic data was light although a notable positive was in the housing sector with housing permits up 7.9%. However, the markets were focused on the conclusion of the FOMC meeting on Wednesday.  The U.S. economy has entered another soft patch and investors were hoping for more policy easing to stimulate the economy.

This week we’ll get more housing data with the S&P/Case-Shiller home price index on Tuesday. The chart below shows the seasonally adjusted change in house prices. The last two months have been positive, first back-to-back gains since the spring of 2010.

Friday we’ll get an update on Personal Income & Spending which provides good insight into the health of the consumer. Keep in mind that 70% of our economy is derived from personal consumption so it is important to understand the state of the consumer. Below is a chart of U.S. gas prices over the last 18 months. Falling energy prices are giving consumers a much welcome break from earlier this year.


“Concentrate all your thoughts upon the work at hand. The sun’s rays do not burn until brought to a focus.”
Alexander Graham Bell

Weekly Commentary: GREECE WINS!

June 18, 2012

06.18.12

In this uncertain world we live in we do find certain result in sport. Fact: this weekend Greece defeated Russia in soccer at the EuroCup.  Now for the more uncertain world-what to make of Sunday’s elections in Greece. In its simplest perspective the winners were the pro-austerity, pro-Euro forces.  With 30% of the vote the New Democracy party had the most votes and the right to form a coalition government.  It is felt that the Euro Countries will push back a deadline for austerity goals and provide funds to Greece this summer.  The New Democracy Party will form a Coalition Government with the much smaller party, Pasok.

Complications could arise when the austerity measures become more painful.   More rioting and protests can be expected and the opposition led by the Syriza party could push for another election. (Keep in mind that the country has now been in recession for five years).

One encouraging note is the vast majority of Greeks want to stay on the Euro.  Many voters voted with the New Democracy party just to support unity with Europe.  Many seem willing to undertake some sacrifices to stay part of the Euro.

We would conclude this is good news, but hardly a long term cure. Global economic strength would help greatly.

“Change is not always growth just as movement is not always progress”

Weekly Commentary: Lower Oil Prices

June 11, 2012

06.11.12

Last week the stock markets had their largest weekly gain of the year with the DJIA gaining 3.59% mostly as the result of a 287 point rally last Wednesday. The rally was fueled by investors’ hopes for more central bank stimulus as economic news continues to provide further evidence of a global economic slowdown.

On the positive side, oil prices are closing in on eight month lows (chart below) as crude prices dropped to near $84/barrel on Friday as inventories continue to be elevated.

OPEC meets this week and is expected to maintain production at 3 year highs even though they have admitted that it is more than the markets currently need. Lower oil prices will be a boost for consumer spending and will help to keep inflation numbers in check. The May CPI report is due on Thursday this week and the consensus estimates call for a decline of 0.2%. With economic growth slowing in the U.S., Europe and China inflation should not be an issue for the near term.

“In any contest between power and patience, bet on patience.”
– W.B. Prescott

Weekly Commentary: The European Funk & Other Maladies…

June 5, 2012

06.05.12

Markets had their second-worst weekly performance for 2012 as ongoing concerns regarding Europe and China weighed on investors’ confidence.  Adding to the gloomy mood was an ugly U.S. jobs report on Friday.  Markets are likely oversold at these levels, but history has shown that they could stay at these levels for a while.

European leaders continue to drag their feet as the banking and liquidity concerns in Europe fester.  China reported tepid manufacturing data as they continue to grapple with slowing growth.  U.S. non-farm payrolls came in at their weakest level since May 2011 as payrolls grew by just 69,000 last month … less than half of what was expected.  No doubt, slowing global growth is beginning to impact growth in the United States.

The good news is that the markets have corrected over 10% and that much of the bad news is reflected in today’s prices.  Low interest rates, low inflation and declining oil/gas prices should help businesses and consumers to weather the economic storm.


Source: Standard & Poor’s, FactSet, J.P. Morgan Asset Management

Where are our world leaders?  Policy makers need to step-up and provide investors and tax-payers with a bit of certainty.  Until then, markets will likely remain in a funk.

Here are the closing index levels and weekly returns from last week:

Dow Jones 30               12,119              – 2.7%
S&P 500                         1,278              – 3.0%
Nasdaq                           2,747              – 3.2%
MSCI EAFE                   1,333              – 1.3%

10-year Treasury           1.47% (ugh!)

“You cannot escape the responsibility of tomorrow by evading it today.”
-Abraham Lincoln

Weekly Commentary: Fiscal Cliff

May 29, 2012

05.29.12

Last week U.S. equity markets posted modest gains with the Dow Jones up 0.7% and the S&P 500 up 1.7%. U.S. economic data was mixed. Positive – continued improvement in new and existing home sales and a 1.8% jump in FHFA home price index. Negative – April durable orders exhibited weakness pointing to softness in manufacturing.

This week we’ll see more housing data with the S&P/Case-Shiller 20-city home price index and pending home sales. Later we’ll get an update on the U.S. employment situation. Current consensus is for a nonfarm payroll increase of 150,000 jobs and the unemployment rate staying at 8.1%.

What is the U.S. “Fiscal Cliff?” In the first half of 2013 there are several tax policies set to expire such as the Bush-era tax cuts, payroll tax holiday, extended unemployment benefits, and the automatic spending and budget cuts mandated by Congress if lawmakers fail to reach deficit reduction goals.
Below is a chart from Goldman Sachs demonstrating the effects of fiscal policy on GDP Growth and 3 outcomes for 2013: 1. Extend all tax policies 2. Compromise 3. Fiscal Cliff which could result in a 4% reduction in gross domestic product.
We believe a compromise will be achieved.

“Politics is the art of postponing decisions until they are no longer relevant.”
– Henri Queuille