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

Weekly Commentary: A correction, finally!

April 16, 2012


Only two short weeks ago the markets were relatively calm. First quarter stock markets posted strong returns and the typical pundits were back on the TV calling for sky high returns for the months and years ahead. The latest peak occurred near the end of the first quarter, and the next emotional extreme will be at the interim low.  This chart pretty much sums it up.
We, at ND&S, still see value in equities today but we would not be surprised to see stock market weakness continue for a bit longer. Below is a chart of the S&P 500 over the past 6 months. The markets have moved strongly off their lows from last fall so a correction will help cleanse the system of excessive optimism. The headlines are back to warnings of the European debt crisis such as rising Spanish bond yields or the increasing probability of a hard landing in China. Until data say otherwise, we’ll call it a correction.

We are not market timers and do not believe in following the herd. We believe that a sound investment plan is necessary to keep investors on track and not fall victim to the classic mistake of buying high and selling low.

“My goal in sailing isn’t to be brilliant or flashy in individual races, just to be consistent over the long run.”
– Dennis Conner

Weekly Commentary: Sound Money Anyone?

April 10, 2012


With good first quarter gains behind it, the market is now assessing the outlook for the rest of the year. This is producing some near-term trepidation.  Friday’s less-than-expected employment gains [120k actual, 200k estimated] capped a week of disconcerting news:  ISM Services [56.0 actual, 56.7 estimated], Spanish debt yields [higher than hoped] and the release of the latest FOMC minutes.

The FOMC March policy meeting minutes talked about forward policy guidance being conditional on economic developments.  This implies that dates for policy change [when will the excess money printing end?] are subject to revision.  Revisions might be in response to faster than expected GDP growth, higher than expected inflation or perhaps exchange-rate market/bond market rebellion.

The Fed is often considered to be the market’s Rosetta Stone, and Tuesday was no exception.  The markets responded immediately by trading the dollar higher [fewer dollars in circulation], dropping commodities [they are priced in dollars] and strengthening treasuries [lower risk of inflation].

Some market observers argued that the Fed’s mindset should not have been a surprise, since the Fed is always updating its forecasts and policy based on the best [and most recent] data.  There are also some who argue that the effectiveness of additional easy money [at least for this economic cycle] is minimal.  It is obvious that the end to limitless easy money was not built into quarter-end prices, and that the transition to sound money is/will be challenging.  Stay tuned.

“Government is a trust, and the officers of the government are trustees; and both the trust and the trustees are created for the benefit of the people”

Henry Clay

Weekly Commentary: Basketball & Stocks

April 3, 2012


The U.S. stock market ended the first quarter of 2012 with its strongest start since 1998*. The DJIA was up 8.1% and the S&P 500 was up 12%. Investors’ concerns eased as European debt issues have been pushed back, at least temporarily, with Greece’s successful debt restructuring. Also the U.S. jobs picture has been gradually improving with new jobs being created at over 200,000 jobs per month for several months (see chart). Look for more of the same this Friday as estimates call for 210,000 new jobs created in March.

Although the unemployment rate has been holding steady above 8% that is more a function of additional people coming back into the workforce as the economy continues to gradually improve.

April is the start of the earnings reporting season for the first quarter of 2012. Look for a substantial slowdown in the rate of earnings growth reported by S&P 500 companies. Current estimates are for only a 0.9% earnings go ahead. Analysts look for earnings growth to pick up as the year goes along but comparisons will be tough as operating margins are already at or near historic highs.


*April 3, 1998 – The Dow Jones Industrial Average climbed above 9,000 for the first time vs. yesterday’s closing price of 13,264
Last night Kentucky won the NCAA Men’s Basketball Championship which they last accomplished in 1998.

“Courage is the discovery that you may not win, and trying when you know you can lose.”
Tom Krause