Archive for June, 2009

REVIEW OF ECONOMY AND FINANCIAL MARKETS FOR WEEK ENDED JUNE 26 2009

June 29, 2009

 

 

 

 

Market Statistics

 

                 52 week
            Low High
DowJones (101.34points) (1.19%) to 8438.39   6,547.05 13,058.20                                             
Nasdaq +10.75 points +0.59% to 1838.22   1,268.64 2,549.94
S&P 500 (2.33 points) (0.25%) to   918.90      676.53 1,426.63
Crude Oil ($0.86/barrel) (1.23%) to $69.16   $33.87 $145.29
Gold +$5.10/oz) +0.55% to $940.70   $704.90 $1,001.80
10 Year Tsy (0.287%) to 3.505%   2.04% 4.32%
             
             

 

 

                                                                                                      

 

 

 

 

 

 WALL ST JOURNAL

 

OVERVIEW:

As can be seen from the numbers above, the stock indexes spent the week looking for direction amid contradictory economic news and even more contradictory statements about its direction from the market observers. This largely mirrors ambivalent feelings about the economy at large.

At the opening of the week, the markets dropped across the board as a World Bank Report came across the wires warning the global economy could contract at a rate of 2.9% this year (it’s earlier forecast was for a drop of 1.7%) and could grow at 2% in 2010 versus 2.3% previously. This brought out those fearing deflation and caused stocks and commodities to fall and Treasuries to rise. On Wednesday the Federal Open Market Committee did nothing to change market sentiment by maintaining its existing policy of keeping the target short term federal funds rate low (0%-0.25%) and not boosting Treasury Purchases (up to $300 billion) to keep the long term Treasury rates low . It said the economy “is likely to remain weak for a time”.

There is constant talk about whether there are “green shoots” appearing in the economy and whether we are likely to see a “V”, “U”, “L”, “W” or the latest “WWW” (known as the Internet recession) recovery. The reality is there is no consensus, other than it will not be a “V”. We have talked a lot about the need to see trends to confirm any  meaningful  economic movement one way or the other, but they are just not there. There is too much mixed news at present. If we were to go with our gut feel at the moment, it is on the downside. Why ? Too much consumer pain lingers; hesitance on the corporate side to invest; the banking sector, particularly  regional banks is still in serious financial condition; no effect from the stimulus package on job creation; home prices continue to decline; no global recovery in the works and  proposed legislation whether Cap & Trade or Health Care will likely negatively affect consumers through higher taxes, however they are couched….we could go on.

 

STOCKMARKET:

We talked last week about the importance of the steep drop in the Transportation Average (down 4.21% the previous week ) and this week it rose, but only 1.34%.The KBW Bank Index (which dropped 3.34% in the previous week) dropped a further 2.44% in the past week. This Index is down almost 18% for the year and we will continue to keep a close eye on this barometer of banking health .

We need to keep in mind that when we have seen a major decline across the board, as we saw on Monday when the NASDAQ and the S&P were both down greater than 3%,it has been on declining volume, making the decline less damaging than it might have been. We always want to have consecutive strong up days accompanied by rising volume and consecutive down days  accompanied by falling volume. This tells us how the Institutions look at the market. We have not seen consecutive up days with strong volume to make us optimistic about any sustained market uptrend.

 

COMMODITY MARKET:

Commodities recovered as the week went on as oil initially fell below $67 /barrel for the first time in three weeks based on economic weakness in the US and globally and then rose over $70/barrel based on Nigerian pipeline attacks and a return by investors to more riskier assets (commodities) and away from the safe haven US dollar. We should note that this sentiment in and out of so called safe havens literally changes within a trading week and offers no clear direction for commodities at present-much like the stock market in general.

 

CREDIT MARKET:

This was the one market this past week that established a clearer trend throughout the week. Having rallied early in the week on the World Bank Report and a successful auction of Government debt, Treasury prices continued to rise on a further successful auctions during the week. To quote a market strategist” The Treasury is having relatively few, if any, issues selling it’s debt”. What does that mean? Well,  Treasury prices rise (and yields fall) as demand is strong .There has been a great deal of concern that with so much coming onto the market, the opposite would happen ,that yields would rise, particularly on the barometer 10 Year Treasury (which impacts consumer rates).In fact the yields on the 10 year have fallen to their lowest levels since May.

 

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REVIEW OF ECONOMY AND FINANCIAL MARKETS FOR WEEK ENDED JUNE 19 2009

June 22, 2009

 

 

 

 

Market Statistics

 

                 52 week
           

Low

High
DowJones (259.53 points)

(2.95%)

to

8539.73

  6,547.05 13,058.20                                             
Nasdaq (31.33 points)

(1.69%)

to

1827.47

  1,268.64 2,549.94
S&P 500 (24.98 points)

(2.64%)

to

921.23

  676.53 1,426.63
Crude Oil ($2.49/barrel)

(3.46%)

to

$69.55

  $33.87 $145.29
Gold ($4.50/oz)

(0.48%)

to

$935.60

  $704.90 $1,001.80
10 Year Tsy +0.009% to

3.792%

  2.04% 4.32%
     

 

     
     

 

     

 

 

                                                                                                       

 

 

 

 

 

 WALL ST JOURNAL

 

OVERVIEW:

Little has changed from our previous blogs where we have restated again and again; that the relief rally being over, any further stock market rises cannot be justified by the economic fundamentals in the economy. Besides the continuing discussion in the financial press about what direction is the economy heading-deflation or inflation, there is a debate also continuing, about how effectively have the actions of the Administration dealt with the underlying problems in the financial system? This past week the Administration announced plans for greater regulation of the financial sector. It put greater power in the hands of the Federal Reserve to determine which companies would require more scrutiny if it determines they represented  systemic risk to the economy .The Fed could require greater capital, liquidity and leverage constraints. We hope the outcome  does not mirror such Government sponsored entities as Freddie Mac and Fannie Mae.

We still have billions of dollars of toxic assets on Banks balance sheets, we are skeptical that the stress tests given to banks were conservative enough and we are amazed that one of the causes of the financial collapse, the Rating Agencies, appear to have emerged from the proposed reforms largely intact in terms of how they operate.

The decline in markets this past week reflected investors realization about continued risks in the economy and that any hopes for a quick recovery have largely disappeared. Further large upcoming   Treasury auctions have kept yields high.

STOCKMARKET:

Analysts (who we admit haven’t got much right over the past year or so),have been largely talking about a correction in the markets ,based on the lack of any positive information about economic fundamentals likely to push it higher. We have talked in the past about the need for positive trends in the economic fundamentals, not just one month here and there and we are some way from seeing these trends justify higher sustainable levels. The bearish nature of the markets this past week reflected weakness in two key averages which are not always highlighted, the Transportation Average (down 4.21%) and the KBW Bank Index (down 3.37%).The Transportation (comprising  20 railroad, trucking, ocean and airline corporations) is regarded as a leading economic indicator, while the KBW Index reflects 24 Money Center and Regional banks(Standard& Poors this past week downgraded 18 banks and revised it’s outlook on four others citing increased regulation and likely lower profitability in volatile markets).

The Dow and S&P are back to their May 8 closing levels while the NASDAQ  is up about 5%, reflecting the greater confidence investors appear to have in the technology sector to lead any economic recovery. We see no near term reason for the markets to move higher.

 

COMMODITY MARKET:

Despite continued unrest in Iran and Nigeria, oil ended the weak lower, due to a stronger Dollar and as geo political concerns were outweighed by a continued global recession, weaker energy demand. and a perceived glut in the energy markets. There is a belief that steep  prices of late do not reflect fundamentals, but rather speculation, although the latter is hard to prove. 

 

CREDIT MARKET:

The Treasury is auctioning a further $104 billion in notes this week and it will be interesting to see whether yields by the end of the week, continue to rise on future inflation and rising interest rate fears or fall based on  deflation concerns. Last weeks economic news supports a continued weak economic picture and no  fundamental basis for any rate increases.

 

REVIEW OF ECONOMY AND FINANCIAL MARKETS FOR WEEK ENDED JUNE 12 2009

June 15, 2009

 

 

 

 

Market Statistics                   52 week
           

Low

High
DowJones +36.13points

+0.41%

to

8799.26

  6,547.05 13,058.20                                             
Nasdaq + 9.38 points

+0.51%

to

1858.80

  1,268.64 2,549.94                                               
S&P 500 + 6.12 points

+0.65%

to

946.21

  676.53 1,426.63
Crude Oil +$3.60/barrel

+5.26%

to

$72.04

  $33.87 $145.29
Gold ($21.60/oz)

(2.25%)

to

$940.10

  $704.90 $1,001.80
10 Year Tsy (0.078%) to

3.783%

  2.04% 4.32%
     

 

     
     

 

     

 

                                                                                                       

 

 

 

 

 

 WALL ST JOURNAL

 

 

 

 

 

 

OVERVIEW:

Who do we look to for guidance to navigate through the unpredictable economic signals? Used to be that there were “gurus” out there who, based on “proven” economic models would predict economic performance. Virtually every guru was wrong in the recent economic collapse, as was every economic model and that’s why we seem to be seeing more questions than answers about what the current economic scenario means for the future. All we can do is look at what we know and join the list of prognosticators.

This past week saw the first repayments of the Government TARP (Troubled Asset Relief Program) Funds as 10 lenders won U.S. Treasury approval to repay $68.3 billion, effectively creating winners and losers in the US Banking market. Winners  included J.P. Morgan Chase, Goldman Sachs and Morgan Stanley while the losers included Citigroup and Bank of America.

It was a relatively calm week in the stock markets, despite a continued spike in oil prices and a 10 year Treasury that reached close to 4% during the week.

The Congressional Oversight Panel for the Government’s financial rescue package reported this past week that the Federal Reserve used a “conservative and reasonable” approach during it’s stress testing of the nations 19 largest banks. Of concern was that they added that the Fed’s worst case scenario may not have gone far enough. As an example, stress tests related to unemployment  were based on average 2009 rate of 8.9%.In May it was 9.4% and likely to rise. So the question is, did they overstate the financial health of the banks under this worst case scenario, particularly since the toxic assets are still on their books?

 We are seeing the beginning of a slow, but concerted effort by Developing countries to diversify away from the US Dollar as a reserve currency. The “BRIC” nations, Brazil, Russia, India and China, generally regarded as the fastest growing Developing Countries, are planning to sell $10 billion of US Treasuries and buy IMF securities(denominated in a quasi  currency, Special Drawing Rights).This announcement raised Treasury yields to their highest level of the year.

 

We have reported about the mixed economic data coming out and this past week was no exception. Retail sales rose in May, initial claims for jobless benefits fell, but household wealth declined for the seventh straight quarter to the lowest level since 2004.

So where does all this leave us? We believe that the general market may have got ahead of itself. We are relieved that there has been movement away from financial meltdown ,but no confidence that economy is on a sustained path to recovery. We have talked in previous blogs about our reasons for this, notably the weakness of the consumer, but we are also greatly concerned about the size of the government debt and how this is going to be financed. There is just too much  drag on the economy.

 

STOCK MARKET:

A reason why the market has been doing so well recently, apart from the relief that the financial world did not collapse, is that investors risk appetite has increased away from the near zero returns on CD’s, Money Market Funds etc. Nevertheless this  cannot continue if rates increase, thus choking off any possible recovery in economic activity. Continued rises in commodity prices, particularly oil, will have a similar effect.

 

COMMODITY MARKET:

Oil continued it’s strong run as a hedge against a weakening dollar and inflation fears. It’s up 100% over the past 3 months, putting additional stress on the consumer ,although a stronger dollar at the end of the week caused a drop in gold on Friday. So it is all about the US Dollar. The stronger it gets the weaker commodity prices become and vice versa.

 

CREDIT MARKET:

It seems that not even the Federal Reserve has a clear policy on rising Treasury yields .Do they buy more aggressively to keep rates down or let the market dictate the direction? It seems they are pursuing the latter strategy for now, despite a rise in the 10 year from 3.125% as recently as May 15 to a peak of almost 4% during the week. Why the increase? It’s largely on speculation that the Fed would have to raise interest rates as the economy improves this year. The primary dealers of US Government securities say that the speculators are wrong, that there is still too much weakness in the economy to warrant it. We agree.

 

 

REVIEW OF ECONOMY AND FINANCIAL MARKETS FOR WEEK ENDED JUNE 5 2009

June 8, 2009
Market Statistics                   52 week
           

Low

High
DowJones +262.80points

+3.09%

to

8763.13

  6,547.05 13,058.20                                             
Nasdaq + 75.09 points

+4.23%

to

1849.42

  1,268.64 2,549.94
S&P 500 + 20.95 points

+2.28%

to

940.09

  676.53 1,426.63
Crude Oil +$2.13/barrel

+3.21%

to

$68.44

  $33.87 $145.29
Gold ($17.10/oz)

(1.75%)

to

$961.70

  $704.90 $1,001.80
10 Year Tsy +0.394% to

3.861%

  2.04% 4.32%
     

 

     
     

 

     

 

                                                                                                       

 

 

 

 

 WALL ST JOURNAL

 

 

 

 

OVERVIEW:

 “The market can stay irrational longer than you can stay solvent,” John Maynard Keynes (attributed).

This aptly describes the current environment where, despite as much negative news as positive, the major stock indexes continued their strong run this past week An improvement in consumer sentiment was a key factor in the previous weeks market rise. After all, if the consumer is more confident and this leads to more spending, then the economy will be pulled out of the recession and any deflationary fears will subside, so goes the theory….Not so fast. Improved confidence, as we suggested last week, does not necessarily translate into spending. In fact this past week we saw monthly same store sales in May for 30 retail chains fall worse than expected. What  is happening here? Quite simply households are being prudent, deferring big ticket purchases, conserving, while recovering from depleted personal net worth (IRA’s/401K’s/home prices)  and/or job loss and/or tightening consumer credit. On the job front, employers in May cut 345,000 jobs , the slowest in eight months. However the unemployment rate rose to 9.4%,the highest in 25 years.

Federal Reserve Chairman Bernanke testifying before the House Budget Committee last week painted a picture of an economy whose decline is slowing , with a recovery expected later this year ,but one which will be gradual. He expressed also the need to address the rising debt levels.

The current environment strikes us as the “fingers crossed” economy where everyone wants the Government to succeed , but where we are in such unchartered territory, no one really knows if it will. Hence the dialogue in the press between those so called experts  predicting inflation and those predicting deflation.

 

 

 

STOCK MARKET:

Apart from the raw number gain this week ,an important technical target was reached  in the S&P 500.It closed above it’s 200 day moving average for the first time since December 2007. This moving average is seen as the dividing line between a stock (or index) that is healthy and one that is not .It is regarded as  a good indicator of future  price movements, in  that market gains have largely occurred when the index is above the 200 day moving average.

As we have said before, the markets future progress will now depend on trends of sustained and consistent economic improvement, not a relief things are “less worse” or that there is one piece of positive news followed by one negative. We do not expect this good news trend scenario to unfold in 2009,but rather one with continued mixed signals.

 

COMMODITY MARKET:

Oil continued to rise with Goldman Sachs predicting $85/barrel by the end of 2009.According to the Canadian Asset Management firm, Gluskin Sheff, a rise of 45 cents per gallon in gasoline prices over the past month is the annualized equivalent of a $60 billion pay cut for American consumers. It is little surprise that the consumer is not rushing out to spend .

Gold declined for the week as the US Dollar strengthened and Gold funds sold off in the light of the steep price rises of late.

 

CREDIT MARKET:

The single  most important issue for us this week was the continued rise in  yields in both the 2 and 10 year Treasuries and the apparent reluctance of the Government to  commit to buy more than the announced $300 billion in Bonds in order to dampen any rate increases. Allowing continued higher  interest rate levels at this premature stage in the economic cycle  is likely to choke off any recovery led by consumers and businesses and would be in our view self defeating.

REVIEW OF ECONOMY AND FINANCIAL MARKETS FOR WEEK ENDED MAY 29 2009

June 1, 2009
Market Statistics 52 week

Low

High
Dow Jones +223.01points

+2.69%

to

8500.33

6,547.05 13,058.20
Nasdaq + 82.32 points

+4.87%

to

1774.33

1,268.64 2,549.94
S&P 500 + 32.14 points

+3.62%

to

919.14

676.53 1,426.63
Crude Oil +$4.64/barrel

+7.52%

to

$66.31

$33.87 $145.29
Gold +$19.90/oz

+2.08%

to

$978.80

$704.90 $1,001.80
10 Year Tsy +0.012% to

3.467%

2.04% 4.32%

.

WALL ST JOURNAL

OVERVIEW:

There are contradictory views about when we are likely to come out of the recession, how long the recovery might last and whether we will end up with big inflation problems down the road. These issues played themselves out in the past week (the market was closed for Memorial Day on Monday) as economic data that came out showed mixed results. Consumer sentiment rose; durable goods orders rose; new home sales rose less than expected ;home prices continued to decline more than 10% from a year earlier in 15 of 20 major metropolitan areas ; crude oil rose to its highest level since November and gold approached $1000/oz. Treasuries were particularly volatile during the week causing concerns about steep rises hurting mortgage rates(we shall focus on this more in the Credit  Market section.).

The end of the recession is in sight according to a panel of economists in  the National Association for Business Economics Outlook, expecting economic growth to rebound in the second half of 2009.We believe there is a difference between the consumer ‘s increasing confidence in the economy and this translating into the consumer going out and purchasing in meaningful numbers to move the economy out of the recession anytime soon. We have maintained repeatedly that with the consumer (who represents 70% of GNP) under such stress from depleted investment accounts, job loss, mortgage delinquencies, restricted credit card borrowings, declining home prices etc, the only economic expansion will come this year from Government spending.

Nevertheless, the stock markets this past week reflected the prevailing sentiment that there is light at the end of the tunnel. The major concern, shared by us, is that the light might be a fast moving train in the form of hyperinflation. You cannot pump that amount of money into financial systems globally without high inflation and interest rates, according to a hedge fund that made a lot of money last year betting against the market. The hedge fund, Universa Investments LP, in anticipation of such a scenario, is reported in the Wall St Journal as planning to invest in options tied to commodities and to also bet against Treasury Bonds .The fund is, according to the Journal, known for it’s ties to investor Nassim Nichols Taleb, author of “The Black Swan,” which describes a rare event of large impact, hard to predict and outside of normal expectations.

STOCK MARKET:

After reacting positively to the rise in the Consumer Confidence Index on Tuesday, the market gave back most of the gains the next day as long term Treasury rates rose to levels which led to serious concerns that persistent higher rates would further depress economic activity and drain consumer confidence, just as it started to improve. However the market concerns only lasted a day or so as Treasury prices soared on Friday, as bargain hunters moved in to buy back Treasuries, pushing yields down to about where they were earlier in the week.

May’s gains for the indexes were impressive with the Dow up 4.1% and S&P 5.3%.Why doesn’t it feel better? Well, there are many concerns going forward as we have seen above and as we will see below.

COMMODITY MARKET.

Commodity prices continued to rise  with oil up over 7% for the week and almost 30% for the month. Why ? A belief that the global economy is improving. But this ,if it continues is in effect a tax on all consumers of gasoline and becomes a further drag on the economy. Gold continued it’s strong advance from the previous week and is up 9.9% in May, as investors have moved into it and out of the dollar, as fears of inflation increase in the context of large domestic funding requirements.

CREDIT MARKET.

After such a volatile week, the market is looking to the Government for guidance in terms of  Bond purchases to offset the large supply coming onto the market  to fund the economic stimulus package, social programs and bank bailouts. It will need to be more proactive.Without these  Bond purchases, prices will be depressed and yields rise, affecting mortgages and corporate borrowing rates. So far, this past week the Government has left the market to it’s own devices while the Government studies the reasons for this weeks spike in yields to as high as 3.76% on the 10 year Treasury. This worked so far as yields reversed course ending only marginally higher for the week. The yield curve (charting the difference between 2 year and 10 year Treasury yields) reached a historic high of 2.75% this week.