Archive for July, 2009


July 27, 2009
Market Statistics                   52 week
            Low High
Dow Jones +349.30   points +3.99% to 9093.24   6,547.05 13,058.20                                             
Nasdaq +79.35     points +4.21% to 1965.96   1,268.64 2,549.94
S&P 500 +38.88     points +4.13% to   979.26      676.53 1,426.63
Crude Oil +$3.47/barrel +5.37% to $68.05   $33.87 $145.29
Gold +$15.60/oz +1.66% to $952.80   $704.90 $1,001.80
10 Year Tsy +0.020% to 3.671%   2.04% 4.32%


















We could almost replicate our blog of last week.  It was another strong performance, in terms of how the markets reacted to continued “good news” on the earnings front. Even when there was disappointing earnings news, as with Microsoft and Amazon, the markets stayed remarkably resilient. Let’s remember however that earnings expectations were set  low to start with and so any improvement was likely to result in cash sitting on the sidelines being deployed into the equities markets.


 CIT obtained $3 billion  financing from it’s bondholders, giving it breathing space, rather than any long term security and  justified the Administrations strategy not  have it come under the “too big to fail category” with the resultant taxpayer rescue package.


In keeping with our “let’s not pop the champagne just yet” mentality, the economy at large, as well as the States  and the financial institutions , remain of great concern to us ,despite all the euphoria in the press this past week. We have spoken at length in previous blogs about the continued weakness of the consumer and the negative drag to any future growth, so we won’t repeat that here( we listed seven areas of concern only last week about the economy at large).


 Fed Chairman Bernanke’s testimony before the Senate Banking Committee this past week rightly addressed the concern of rising unemployment, which if not addressed, would inhibit any recovery, which, by general consensus was likely  to be modest, at best. One of the companies we feel  indicates which way the economy is going, is UPS. This past week, it’s CFO gave a sobering  indication of where the company was and is likely to go. In a conference call Kurt Kuehn stated that there was no material uptick in growth in July and questioned when business activity was likely to strengthen. He indicated that “The business environment in the third quarter should be similar to the second quarter”.


State tax collections, according to the Rockerfeller Institute of Government, fell 11.7% in the first quarter, compared to the same period last year, the sharpest decline since records began 46 years ago. Revenues declined in 47 of 50 states and an early look at the second quarter indicates a drop near 20%. This has significant implications for states in terms of cutting back on spending and/or raising local taxes.


From the Banking perspective ,we continue to be concerned, particularly with respect to the deteriorating quality in the  residential and commercial loan portfolios. We question whether the latter has been effectively addressed by the sector, in terms of adequate loan loss allowances to cover non performing loans.



Another 2009 milestone was reached this past week, as the Dow crossed the 9000 mark and more importantly, held there. With the huge gains of the past two weeks all of the major indexes are in positive territory for the year, with the tech laden Nasdaq the most impressive performer up 24.7% .Even with this, it is still 20.5% below it’s 52 week high. The Dow and S&P have even more ground to make up.

Goldman Sachs added to the positive mood in the markets, by raising it’s S&P forecast from 940 to 1060,based on earnings improvement driving a second half rally (the Index having passed the initial forecast anyway). We should also note an unusually large bearish options position was placed this past week, by one trader (believed to be $10 mill) fearing the S&P benchmark ETF could suffer significant losses between now and December.



As in the previous week, the commodity markets were beneficiaries, along with the stock market, of funds moving out of risk averse assets into these higher risk ones. Crude oil is now up 52.58% for the year while gold a much more modest 7.83%.




The market held up quite well this past week as money poured into equities and commodities. This coming week, however, will be a big test for the credit market ,with a record amount of new debt being offered ,amounting to $200 billion. If the increase in  risk appetite carries over from the past two weeks ,then we are going to see higher yields by week’s end.


John Jacobs.




July 20, 2009





Market Statistics                   52 week
            Low High
Dow Jones +597.42  points +7.33% to 8743.94   6,547.05 13,058.20                                             
Nasdaq +130.58  points +7.44% to 1886.61   1,268.64 2,549.94
S&P 500 +61.25  points +6.97% to   940.38      676.53 1,426.63
Crude Oil +$3.67/barrel +6.13% to $63.56   $33.87 $145.29
Gold +$25.00/oz +2.74% to $937.20   $704.90 $1,001.80
10 Year Tsy +0.354% to 3.651%   2.04% 4.32%



















Take a deep breath and hold onto that smile after the sizeable gains in all the “at risk’’ investments this past week, but keep the indigestion tablets nearby.

We said last week that eyes would be on second quarter earnings reports and the “big names” did not disappoint a market looking for good news. Goldman Sachs in the financials and Intel/IBM in the technicals reported strong results and positive guidance. The credit card issuers reported lower delinquencies in June, leading to a big rise in shares of American Express and others for the week.

Those investors moving back and forward between risk aversion and increased risk appetite threw caution to the wind and bought up equities and commodities and moved out of Treasuries.

 We really aren’t gloom and doom (you might think otherwise after our previous blogs), but we continue to be concerned about the dark clouds out there. While it is perhaps no longer the “Day After Tomorrow” scenario, it’s also not clear blue skies and calm sailing, just because of the past week. We have talked about the following issues and they still loom large over the economy:

  • Serious damage to consumer equity which will take time to repair.
  • Unemployment which will continue to rise.
  • Toxic assets on Bank’s balance sheets which have not been effectively addressed.
  • Deterioration in the Commercial mortgage sector.
  • Stress on States with large Budget Deficits.
  • Rising National Budget Deficit due to the Stimulus Package, funding for Afghanistan and Iraq and declining tax revenues tied to the recession.
  • Economic impact of proposed legislation on Health Care and Climate Control .


We believe there is still a disconnect between market optimism and reality of the  economic fundamentals.



The numbers speak for themselves in the strength across the board , the best since March. The unknown last week was whether CIT, a key lender to small and medium size businesses was going to be able to avoid bankruptcy, as it did not appear to fall in to the Government’s “too big to fail” category with respect to systemic risk. While it may not fall within the definition, the financial impact on the business sector which is the driver for economic recovery will be significant.

Where are the markets after such a huge week? They are still in negative territory for the year albeit in single digits. The momentum of last week is likely to carry through for part of this week, but we cannot see any significant forward movement .



As the good news poured in last week, the commodity sector shared in the appetite for more risk .But just as the stock market rose in the face of concerns we have raised above, so have the commodity markets, particularly in the light of likely continued  weak demand .How long does the momentum last ?We haven’t a clue ! We do know that as is typical in these  markets, the pros will be out just as the smaller players buy in.



Treasury prices  fell (yields rose)  as investors moved away from  risk averse assets into equities and commodities, reversing the trends of the past month. With no major auctions this week, any movements will be reflective of the equities and commodities.


John Jacobs





July 13, 2009





Market Statistics                   52 week
            Low High
Dow Jones (134.22points) (1.62%) to 8146.52   6,547.05 13,058.20                                             
Nasdaq (40.49 points) (2.25%) to 1756.03   1,268.64 2,549.94
S&P 500 (17.29points) (1.93%) to   879.13      676.53 1,426.63
Crude Oil ($6.84/barrel) (10.25%) to $59.89   $33.87 $145.29
Gold ($18.50/oz) (1.99%) to $912.20   $704.90 $1,001.80
10 Year Tsy (0.250%) to 3.297%   2.04% 4.32%

















There was a recurring theme last week in the continued decline in the stock market which really was a continuation of the previous week in that there will not be a sustained recovery anytime soon ,if there is one by strict economic definitions it will be a ‘jobless” one where unemployment will remain at or close to double digits into 2010 and that we are in for a long haul with lackluster economic growth. Sounds like a broken record doesn’t it?

That is because as we have said time and again, the consumer will not lead us out of the recession until house prices recover, jobs are created and consumers feel confident enough to spend rather than save. Banks need to lend to small and medium size businesses which are the backbone of the economy and the economy must have resources  focused in the short term more on growth not entitlement programs, however socially desirable they are.

 The key questions floated this week are:

  • Do we need a second stimulus package since the first has not worked to date?

The prevailing sentiment is a no for two different reasons. One, that the first stimulus funds would not be felt until 2010,so give it a chance. Two, since the first will not work anyway as it is not focused on job creation, why increase the deficit even more ?

  • Is the Obama Administration taking on too much too soon?

Between the Stimulus, Healthcare and Climate Control, is the Government not focusing sufficiently on ensuring economic recovery before it addresses the other issues? We are on the side of a more limited program where the economic and political capital required is much more concentrated  on the economic recovery.  We understand the argument that they are all critical ,but you cannot have success in the latter two without achievement in the first.


We have talked ad nauseam about our concerns regarding the Banking sector and particularly the huge amounts of toxic assets on bank’s balance sheets (estimated at between $2-$4 trillion).Earlier this year the Government announced a plan called ‘PPIP’(Public-Private Investment Program) designed to take up to $1 trillion of toxic assets of banks balance sheets. The Program was unveiled this past week with the amount now down to $40 billion! Both it’s  reduced size and  expected reluctance of banks to participate (what’s their incentive with suspended mark to market rules?) renders any attempt to address the toxic securities, too little too late.



All of the above led the broad averages down heavily for a second consecutive week as  the major indexes stayed below their 50 day moving averages. Eyes were mostly focused on the coming week’s second quarter earnings reports as an indicator of performance in this difficult economy. What is of greater significance for the market is not what has happened but where companies will guide in terms of future performance over the subsequent quarters. That’s where investors will focus.



All commodities were under selling pressure this past week as risk aversion was the underlying tone in the financial markets, which shows up in selling equities and commodities; buying the US$ and Treasuries. Oil was particularly affected by the Commodity Futures Trading Commission (Commodity Regulator) focus on the speculative impact on the huge run up in oil prices this year (34.3%) and it’s recommendation for proposed limits on such speculative trading.



 Strong demand in the auctions (safe haven effect) pushed 10 year Treasury yields down for the week. The Wednesday 10 year auction saw the biggest demand since 1995.As recently as one month ago the yield went over 4% and so if there is any positive news it is that a likely continued lower yield would help mortgages and help with home refinancings.





July 6, 2009





Market Statistics


                 52 week
            Low High
Dow Jones (157.65points) (1.87%) to 8280.74   6,547.05 13,058.20                                             
Nasdaq (41.70 points) (2.27%) to 1796.52   1,268.64 2,549.94
S&P 500 (22.48points) (2.45%) to   896.42      676.53 1,426.63
Crude Oil ($2.43/barrel) (3.51%) to $66.73   $33.87 $145.29
Gold ($10.00/oz) (1.06%) to $930.70   $704.90 $1,001.80
10 Year Tsy +0.042% to 3.547%   2.04% 4.32%















Markets were closed Friday in celebration of July 4 and that was a welcome pause. There was only one significant driver of the markets last week, which was the darkening news   on unemployment. The  rate went from 9.4% in May to 9.5% in June, which in itself is bad enough, at the highest level since August 1983, but what a number of analysts commented on was a far more serious picture than just this percentage. They focused on what are called the “Underemployed” or “Underutilized” workers-those who have not just lost their jobs ,but also workers who have had their hours cut and are now part time, as well as those who have become discouraged and have stopped looking. While there are differing numbers in the press this week, by adding in those we arrive at a rate of between 16.5%-19.5% of workers in this “Underemployed” or “Underutilized” category ! To further illustrate the seriousness of the problem, since the recession began in December 2007,the economy has lost a net 6.5 million jobs and the average work week has fallen to 33 hours, the lowest on records dating to 1964.

Why have we focused so much on this? Because it has already led to talk that the $787 billion Stimulus plan has been ineffective and that a second stimulus will be needed to revive the economy. Joe Biden was quoted in the Wall St Journal of July 6 as saying that the Obama Administration “misread how bad the economy was” and didn’t foresee unemployment levels nearing double digits. We cannot see the Administration agreeing to this additional Stimulus anytime soon, since they have publicly stated that only about 10% has been spent to date and that the effects will be positively felt as the money filters into the economy over the next 12-18 months .We also do not believe politically they can wait that long, however, since not enough of the Stimulus plan will help job creation as opposed to supporting entitlements as unemployment will continue to rise.

We do not want to be pessimistic about sustained economic revival, but there is not much to be optimistic about. As we have said before we do not believe the Banking sector problems have been adequately addressed in terms of the non performing assets (a nicer way of saying toxic assets) being disposed of; the consumer contribution to economic growth is going to be virtually non existent in the near term and taxes (however they are described) are going to rise. Much has been talked about at the national level and of course California’s problems have been covered, but of the 10 States in 2010 with the biggest budget gaps,6 are some of the most  populous  ie California; Florida; llinois, New Jersey and New York. At local levels it is not just service cuts that are being discussed but local tax increases. Florida for instance raised the State cigarette tax $1 effective July 1,after a 62cent increase at the Federal level 3 months before.



As we have stated, unemployment news drove the markets down this past week. The S&P which we like to use as a broader market indicator, is back to where it closed on May 12 and appears to be stuck in trading ranges reflecting the uncertainty of general market direction. It would be technically significant, but highly unlikely that it can break through its 956 resistance level near term. Volume was sluggish in pre holiday trading, which if we could find any positive news last week, that was it.



There was continued civil unrest in Nigeria which limited about 25% of the nations daily  oil production capacity, but that was overshadowed by the mid year International Energy Agency Report which detailed falling demand for oil .

In the general commodity sector this past week, the uncertainty about an economic recovery anytime soon and the market sense that commodity prices had built a recovery and ensuing inflation into them, have now seen a retracement and are likely to remain soft.



With stocks and commodities being sold last week ,there was a flight to Treasuries as a ‘safe haven’ which kept yields down in the shorter end Treasuries. There is a large supply coming to market this week  ($136 billion), but with the economy not poised for a quick recovery, yields are unlikely to rise much in the weeks to come.


We hope our Weekly Review can be more upbeat next time around!