Archive for August, 2009


August 17, 2009







Market Statistics                  52 week
            Low High
Dow Jones (48.67 points) (0.52%) to 9,321.40   6,547.05 13,058.20                                             
Nasdaq (7.91   points) (0.49%) to 1,611.58   1,268.64 2,549.94
S&P 500 (6.39   points) (0.63%) to  1,004.09      676.53 1,426.63
Crude Oil ($3.42/barrel) (4.82 %) to  $67.51   $33.87 $145.29
Gold ($10.30/oz) (0.80%) to  $947.00   $704.90 $1,001.80
10 Year Tsy (0.294%) to 3.558%   2.04% 4.32%














We heard the same rhetoric this week  that we have been hearing for some while now, that the economy is no longer in a tailspin, that it appears to be leveling out rather than declining at a slower rate and that we appear to be moving into the recovery stage, albeit at a slow rate with continued high unemployment.

Our previous weekly blogs have been emphasizing our belief that without effectively addressing some fundamental issues, far from seeing an economic recovery, however tepid, we can see the economy falling back into a recession sooner rather than later.

Weakness in the banking sector, (another of our concerns ),particularly at the regional level , was highlighted last Friday with the closure by the FDIC of Colonial BancGroup, AL, the sixth largest bank failure in US history and by far the largest this year. With $25 billion in assets ,the closure is estimated to cost the FDIC trust fund $2.8 billion.

We do not envy the Administrations task, because there is a fine line between managing a sustainable recovery without overshooting and creating high inflation and taking action to stop another freefall into a recession.

Why do we continue to be the ‘downers’ in what has been a clear recovery away from the near collapse of the financial system last year? It is because, it is not enough to have enacted a stimulus plan (which in any event, we consider too slow to trickle down to spur growth and have too little emphasis on job creation at the expense of entitlements) without addressing the core issues we keep listing in our weekly blog.

Bill Clinton’s famous phrase that was effectively used in the  1992 Presidential campaign against George H.W. Bush  “It’s the Economy, Stupid”, may come  back to haunt the Democrats in the 2010 mid term elections where there are 36 of 100 Senate seats being contested, as well as the next Presidential election in 2012.

At the moment we can say “It’s the Consumer, Stupid” and there will be no recovery without the consumer feeling better about daily issues such as housing, employment ,taxes, stock market stability which need to improve and be sustainable for consumer spending to recover.



 The declines, albeit modest in all the major indexes, reflected the concern we referred to above, namely about consumers. The latest index of consumer sentiment, from Reuters/University of Michigan last Friday showed a drop from 66 in July to 63.2 in August (consensus was 68.5). This followed weaker than expected retail sales for July (down 0.1%) after rising 0.8% in June (consensus was 0.7% gain).



 As confidence in any meaningful economic recovery waned this past week, so did investor appetite for commodities, which typically they have been turning to as a hedge against inflation and as their appetite for more riskier assets increased. With nothing to change this past weeks scenario, at least in the short term, we should expect to see further declines in prices of oil/gold as investors move back to less riskier assets such as Treasuries.



 As the markets absorbed the auctions this past week, prices rose modestly (yields inversely declining ). To the extent we continue to see a weaker economic picture continuing ,with equities and commodities declining, we should see continued movement into the ‘safe haven’ assets with the US Dollar rising; Bond demand rising and it’s  yields continuing to fall.


John Jacobs 




August 10, 2009





Market Statistics                  52 week
            Low High
Dow Jones +198.46 points +2.16% to 9,370.07   6,547.05 13,058.20                                             
Nasdaq +16.13   points +1.01% to 1,619.49   1,268.64 2,549.94
S&P 500 +23.00   points +2.33% to  1,010.48      676.53 1,426.63
Crude Oil +$1.48/barrel +2.13 % to  $70.93   $33.87 $145.29
Gold +$3.60/oz +0.38% to  $957.30   $704.90 $1,001.80
10 Year Tsy +0.10% to 3.852%   2.04% 4.32%












 What  an amazing ride this has been these past weeks! Despite our continued skepticism in our previous blogs about what we see as weak market fundamentals

not justifying the surge in prices ,the markets continue to defy what we thought was a logical analysis of the economy. In our June 5 blog we opened with a quote attributed to John Maynard Keynes which deserves repeating here:

“The market can stay irrational longer than you can stay solvent”.

Like everyone else, we too have read all the prognostications from respected market observers effectively signaling the end of the recession by years end, pointing to all the economic data as justification. We produced a list of issues we have been greatly concerned about and despite the big market moves,none of them have been effectively addressed. At the risk of repetition they are from our July 17 blog:

  • 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’ll keep pointing them out, even as the market continues to rise!



A myriad of positive news propelled the broad based market increases this past week, whether it was the success of the ‘Cash for Clunkers Program’, better than expected factory orders, fewer jobs cuts in July than June, drop in new claims for jobless benefits etc, etc. Goldman Sachs, on top of all the news, declared U.S stocks as having entered a new bull market with the S&P in a range of 1,050-1,100 toward year end. We have no idea how high this new up phase in the markets will go, we do believe that, while it is on the upward part of an apparent ‘V’ shape, there will be a significant retreat below that which would represent even the downward leg of the ‘W’.

We are now still in the “relief rally” and far from any positive growth/earnings news as opposed to “less bad”, we still have the issues bullet pointed above that are going to hit and create a return to reality, perhaps not challenging the  52 week lows ,but nevertheless a significant retracement.



Just as the confidence levels have returned to the stock market, so the move away from risk averse assets such as Treasuries  into commodities has accelerated. Whenever economic optimism grows, so do prices ,particularly of industrial metals such as Copper, Palladium, Platinum and Silver. Gold continued to increase although oil fell of it’s six week highs.



We have talked in the past about the importance of the 10 year Treasury on mortgage rates. The rise in this rate over the past weeks has been because of the brightening economic outlook as well as the increased supply of debt coming to market. It could well test the 4% level soon and have a significant impact on any housing market recovery due to rising mortgage costs.

John Jacobs