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.

Weekly Commentary

April 4, 2011

The 1st quarter ended on a positive note with continued improvement in economic data, most notably with the unemployment rate dipping to 8.8%.  Despite all the headline risk, the S&P 500 posted its best first quarter since 1998, with a gain of 5.4%.
This week’s calendar is pretty quiet with few corporate earnings and little economic updates. “M&A Monday” continues to pick up steam as corporations are becoming more comfortable with the economic landscape. Tuesday we expect to see continued improvement in the ISM-Non Manufacturing report:
The balance of the week consists of the release of the FOMC minutes, which is the summary of the discussions during the previous Federal Reserve meeting. We will also get an update on the state of the consumer with Thursday’s Consumer Credit report.

The Week Ahead

March 28, 2011

The markets continue to climb a wall of worry.  Despite unrest in the Middle East and North Africa and the day-to-day challenges with the recovery effort in Japan and the constant fear of a nuclear catastrophe the markets found a way to move higher last week.  For the week, the S&P 500 was ahead by 2.7% while international markets (EAFE) moved ahead by 3.4%.   Oh, and don’t forget the sovereign debt crisis in Europe…
Earnings and economic news should remain fairly positive.  The week ahead includes US consumer spending, disposable income and pending home sales being reported on Monday.  We expect reasonable consumer spending numbers (increase @ 0.7%) along with moderate disposable income (increase @ 0.3%).  Housing remains a wildcard as weather hampered sales in many parts of the country.  Friday brings the US labor market report along with the ISM manufacturing report … these reports will likely set the market tone until earnings in a few weeks.  Both numbers could be a tad weak following February’s lack of employment growth.

The Week Ahead

March 21, 2011

It is an unusual time for sports fans when world affairs are more spellbinding than NCAA basketball.  The past few days have found us more concerned with Libya and Qaddafi and Japan and their nuclear reactor dangers.  However with Monday’s arrival we now see increasing hope that radiation may be contained in the reactors and that a limited involvement via the no-fly zone can be effective in protecting rebel strongholds in Libya.  A protracted ground war involving U.S. troops seems most unlikely.
With more time we can refocus our thoughts on the U.S. economy.  Unemployment data has been improving slowly and in general the consumer seems a bit more confident.  This Friday we will see the Michigan consumer confidence report.  In general the manufacturing side of the economy has provided a lift and we continue to favor a number of equities in that sector.