Introduction to Economy and Financial Markets Overview from New Era Solutions

 

                          New Era Solutions Consulting – Review of the  Economy & Financial Markets For Week Ended

                           April 24 2009

 

 

Market Statistics:                                                                      52 week

                                                                                                Low          High

Dow Jones  (55.04  points)  ( 0.68 %) to 8076.29         6,547.05       13,058.20

Nasdaq       +21.22  points + 1.27% to    1694.29         1,268.64        2,549.94                 

S& P 500     (3.37 points)   ( 0.39% )to     866.23            676.53        1426.63            

Crude Oil    ($ 0.92/barr)  ( 1.75%) to    $51.55             $33.87        $145.29

Gold            +$46.20/oz      +5.33%  to    $913.60           $704.90      $1001.80

10 Year Tsy (0.064%)                       to    2.996%             2.038%    4.324%   

                                                                       

                                                                                               *Wall St Journal

                                                                                                

Overview

 The single most important question being asked this week in the financial press was whether the rise in stock market over the past six weeks  is sustainable and reflects improving economic conditions? The single most common answer has been…..hopefully. That typifies the “fingers crossed”, but not convincing response, from the so called experts.

It is understandable, given the rise in the market, which has not been based on anything other than the fact that the decline in economic indicators has slowed. Good quarterly earnings were tempered by more sobering assessments of future quarterly performance for the rest of the year by the likes of Bank of America/Caterpillar. We are big believers in trends and guidance .Clearly one quarter results should not lead to any meaningful conclusions. Each company does  need to be analyzed carefully to determine whether such guidance is  setting the bar so low, that any improvement leads to an increase in stock price when results are announced.

There are many negatives still out there:

  • Industrial production remains weak
  • House prices continue to fall
  • Foreclosures continue to rise
  • Unemployment remains high (increased in 46 states in March compared to February)
  • Interest rates on credit cards have increased at the same time as lines have been cancelled/frozen, putting further pressure on consumers.
  • Disguised tax increases at the local level in the form of commuter fare increases/local utility rate increases continue as State & Local Governments face large budget deficits.
  • Credit Markets remain largely frozen –bank lending keeps dropping.
  • US Auto manufacturers Bankruptcy risk .

 

Who would lead the recovery? The Industrial or Consumer Sectors? Well, both are being hurt by the above negatives and not enough of them are not in our view going to improve materially, for certainly the remainder of 2009 and likely well into 2010. The rest of the world is not going to recover enough either to help.

What type of economic recovery can we expect? V ,U,L shaped? V has largely been discounted (sharp recovery following the sharp decline) and again there is no common consensus on the other two. Since nothing has been conventional about the current economic crisis , there may be no conventional recovery in sight.

 

Stock Market:

 

Where do we go from here? Are we likely to see a sustained 1000 or a  600 S&P?; a 10,000 or a 6500 Dow for the rest of 2009? As mentioned at the outset, the so called experts seem to be divided. We believe the lower levels are more likely to be sustained than the higher in  2009  ,as risks of  further deterioration in the above negatives, together with uncertainties in the commercial real estate market, credit card defaults and general reluctance at the consumer level to spend, all prevail .

There can be no short term view of this market unless you are an experienced day trader and individuals have little discretionary money, nor appetite,  to put back in the market having seen their portfolios decline so substantially.

To put the steep drop in perspective, it would take a 62% rise in the Dow to reach the peak hit in Oct 2007.Further,the Dow is down 22% from where it was 10 years ago.

Everyone is awaiting during the week ending May 1, for the results of  the Government’s stress test of 19 large financial institutions, which will determine the degree of additional capital required  to maintain the health of the banking system.

 

Credit Markets:

Banks insist they are lending to consumers and businesses, despite criticism that they are not, having received Government(taxpayer) bail out funding. It was recently reported in the Wall St Journal however that “the biggest recipients of taxpayer aid made or refinanced 23% less in new loans in February ,the latest available data, than in October, the month the Treasury kicked off the Troubled Asset Relief Program (TARP)” .

Here at New Era we talk to lending officers at a variety of financial  institutions, on a regular basis to determine their risk appetite for lending to  small and mid size business. There are banks out there funding, we know who they are and they include  institutions who were not active players in the derivatives markets and  did not receive TARP funding. Clearly underwriting standards have tightened across the board. We can discuss this in more detail with our clients and introduce them to the appropriate institution which may fit their needs.

 

 

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