Weekly Commentary

June 25, 2012


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


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


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


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


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

Weekly Commentary: Facebook: a savior or a pariah [piranha]?

May 21, 2012


The overall stock market continued its retreat last week, with the S&P falling by 4.3% while the Nasdaq was down by 7.2%.  Both domestic and international concerns weighed on our equity markets.

Internationally, Greece returned to center stage, with bank depositors fleeing and debt yields spiking.  It is becoming clear that they do not have the discipline to remain in the Eurozone.  The only question is whether their exit is orderly or otherwise.  The drachma, which was retired in 2002 [at a rate of 340.75 drachma to the euro], will be reintroduced in the not-to-distant future.  Let’s hope that it is done in a way that does not disturb the other European dominos.

Domestically, both earnings and economic reports were mixed. Housing is bottoming and manufacturing is strong, with industrial production increasing by 1.1%, twice what had been expected.  Initial jobless claims are still high [370,000 in the latest week] while the leading indicators index actually fell 0.1% [+0.2% expected]. The dollar strengthened last week, mostly against the euro, as the flight to safety trade dominated.

The Facebook IPO dominated domestic financial headlines late last week, but aggressive sizing [$16B raised instead of ~$10B] and pricing [$38/share instead of ~$32] produced disappointing aftermarket price action.  In addition, the Nasdaq experienced technical/communication difficulties during early trading last Friday.  As a result, the underwriting syndicate was tested by repeated bounces off of the $38 offering price Friday afternoon [and subsequent breaking of the syndicate the following Monday [with a $34.03 close!].  Perhaps now we can turn our attention back to seasoned issues.

“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency”
– Lord John Maynard Keynes [1883 – 1946]


May 15, 2012


We came across a recent piece which first discussed the importance of exports from individual states to China and then followed that up with projections of what exports from the major countries will be by 2050.  As for individual states, our exports to China from Massachusetts have reached $2.1 billion in 2011.  From 2000 to 2011 their exports to China have grown 316%!  Another example is Alabama which has grown 1342% in that time.  Pennsylvania’s exports to China have Grown 1177% to $3.5 billion with chemicals being the largest contributor.  As you might have guessed, California is the largest exporter at $14 billion.

The other aspect of world trade changes is the shifting of much of the activity to the east.  Projections were made to 2050.  By then India will have moved up from below the radar to second in the world at 9%. China will have moved into the number one spot at 17.4% while we will slip from first to third in the world.  Interesting entries into the top ten exporters by then will include Singapore, Hong Kong, Indonesia and Korea.

Two lessons emerge-competitiveness among our states on economic policies has important effects.  Second, smaller nations in the Far East will have growing importance to us and trade relations with them must be cultivated.  And of course trade relations with China will remain critical.

“It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.”
– Charles Darwin

Weekly Commentary: Sell in May?

May 8, 2012


For the second month in a row the U.S. jobs report was disappointing. In April only 115,000 new jobs were created versus expectations for 170,000 new jobs. The unemployment rate dropped slightly to 8.1% from 8.2%, but this was more a function of people dropping out of the labor force as 342,000 people left. Further evidence that the U.S. economy is slowing.

In addition, election results over the weekend in France and Greece indicate that electorates are unhappy with continuing austerity measures, which calls into question the seriousness of Europe’s efforts to address the debt crisis. Many of the nations in the Eurozone are now in recession.

As a result U.S. stocks fell last week with the S&P 500 dropping 2.4% for the week. The biggest weekly decline since December. On the positive side however, oil prices fell 6% which will be a boon to consumers and interest rates declined with the 10 year Treasury ending the week with a yield of 1.88% (chart below, courtesy of stockcharts.com, shows the change in yield for the past 6 months).

“Politics is the art of looking for trouble, finding it, misdiagnosing it, and then misapplying the wrong remedies.”
-Groucho Marx

Weekly Commentary: Apple to the Rescue

April 30, 2012


Markets finished decently higher last week on news of another blow-out quarter from Apple.  Other excellent earnings reports came from Amazon, SunTrust, Boeing, AT&T and others.  S&P 500 companies are continuing to report strong earnings as approximately 72% of the companies reporting have beaten estimates.

Comments from Fed Chairman Ben Bernanke were well received as the Fed continued to support the markets with their comments and hints of further stimulus (if needed). Economic news for the week was mixed as durable goods orders and 1st quarter GDP growth were less-than-stellar while housing data were better-than-expected.  Europe continues to be a wildcard as Spain suffered an expected ratings downgrade from Standard & Poor’s (downgraded two notches to BBB+ from A).  GDP reports from the UK pointed to an official recession – again, no surprise.

A plethora of earnings reports due out this week along with key manufacturing reports will likely set the tone for the week ahead.  We suspect that earnings will continue to be strong while manufacturing reports could point to a temporary slowdown in US and worldwide activity.  China’s PMI manufacturing report, due out Monday evening, could add to market volatility.  What, me worry?

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

Dow Jones 30             13,228             1.5%
S&P 500                      1,403             1.8%
Nasdaq                        3,069             2.3%
MSCI EAFE                   1,521             0.9%

“If a business does well, the stock eventually follows.”
Warren Buffett

Weekly Commentary: Tug-of-war

April 24, 2012


Last week was a bit more of a bumpy ride in the equity markets than we’ve grown accustomed to for the last several months. Intra week price swings oscillated between concerns over Europe (selloffs) and better-than-expected corporate earnings (rallies). At the end of the week, the tug-of-war was mostly in favor of US stocks. The major indices like the Dow Jones Industrial Average and the S&P 500 posted gains while the tech heavy Nasdaq slightly declined (mostly attributable to Apple). Will earnings hold the tug-of-war match this week or will Europe make it on the board?

Last week’s economic data was a mixed bag which is no surprise to ND&S as we believe we are in an economic environment of fits and starts.  Retail sales were healthy last week with a gain of 0.8% which should positively impact this Friday’s GDP report. Manufacturing data from New York and the Philly Fed indicated growth but less so than March. And housing continues its long bottoming process with existing home sales softening to a 4.48 million unit pace down from 4.6 million in February.

This week we’ll see home price updates from Case-Shiller and FHFA which combined will most likely be negative but less so.
Friday will cap the week with 1st quarter GDP which is expected to come in at + 2.5%.

It’s easy to see, hard to foresee.
-Benjamin Franklin