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.

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REVIEW OF ECONOMY AND FINANCIAL MARKETS FOR WEEK ENDED MAY 22 2009

May 25, 2009

Market Statistics 52 week

Low

High
Dow Jones +8.68 points

+0.10%

to

8277.32

6,547.05 13,058.20
Nasdaq +11.87points

+0.71%

to

1692.01

1,268.64 2,549.94
S&P 500 +4.12 points

+0.47%

to

887.00

676.53 1,426.63
Crude Oil +$5.33/barrel

+9.46%

to

$61.67

$33.87 $145.29
Gold +$27.60/oz

+2.96%

to

$958.50

$704.90 $1,001.8
10 Year Tsy +0.33% to

3.455%

2.04% 4.32%

WALL ST JOURNAL

OVERVIEW:

The modest market gains from the previous week masked the trend of a good start on Monday, followed by four days of losses in the Dow and S&P and three in the Nasdaq.

Whatever positive news is announced, the market cannot ignore fundamentals which are not improving. Job loss remains high and the housing market remains weak. On top of this, while the big Bank Stress Tests have, for now, allayed fears about their survival, there are still concerns about the large number of small and mid size banks and their exposure to commercial real estate loans, which was brought into focus this past week with the failure of Bank United, Florida ,the 34th (and biggest) bank failure this year.

The stock markets experienced their steepest losses for the week on Thursday as concerns focused on the US as a debtor nation with S&P credit warning on the United Kingdom that predicts it’s borrowing would reach 100% of GDP over the next few years. It downgraded the country from “stable” to “negative”. Any borrowing reaching 80% would result in a downgrade in credit rating from the prized AAA, resulting in higher borrowing costs. Investors saw parallels to the US economy with it’s large deficits to fund bailouts, stimulus spending and social programs. Any direct comparisons to the UK economy are misleading, however, due to the sheer comparative size of the US economy .Nevertheless a warning was clearly sent that the AAA rating is not a given when related to the US economy. We have been put on notice.

STOCK MARKET:

We continue to maintain that the economic fundamentals do not warrant a sustained upturn, for reasons described above. It is no longer going to rise just on  relief that the economy is not in a deep downward spiral, there will have to be consistently improving economic data.  We do not see it happening this year and into early 2010.There is increasing regulation of businesses and it is difficult to see when, if at all  the government spending will take effect,  as we are concerned that much of the spending we have seen, appears to be less focused on economic growth through job creation via infrastructure spending as it is on entitlements.

COMMODITY MARKET:

Oil had a strong week despite the global recession continuing, which reflected a combination  of factors, including the effect of  OPEC production cuts over the past few months, attacks on foreign oil company pipelines in Nigeria, (Africa’s largest producer )and continued market speculation.

The strength in gold this week reflected it’s “safe haven” status as the US Dollar fell to its lowest level against the Euro this year and the 10 Year Treasury rose to a six month high. The negative economic news of the week led to gold in positive territory each of the last four trading sessions , inversely related to the broader stock market.

CREDIT MARKET:

We have talked in previous blogs  about the importance of the 10 Year yield, which is used to set some mortgage rates and corporate bond yields. There  is a continuing need for the Government to offset the Treasury auctions to finance new debt  by purchasing Treasuries, to ensure yields do not rise to a point where they negatively effect the economy by increasing mortgage rates ,further depressing the housing sector, for example. It is generally thought that a 10 Year yield of 3.50% would cause 30 year fixed mortgage rates to rise above 5%,a level the Government ,it is believed wants to keep. The rise this week up to the 3.455% level was seen as a reaction by the market to concerns about the rise in debt as  % of GDP in the context of the S&P downgrade of the UK. The market  needs to see a more aggressive buying program to lower yields in the weeks to come in the face of mounting Treasury supplies.

REVIEW OF ECONOMY AND FINANCIAL MARKETS FOR WEEK ENDED MAY 15 2009

May 19, 2009

Market Statistics

52 week

Low

High

Dow Jones (306.01points)

(3.57%)

to

8268.64

6,547.05 13,058.20
Nasdaq (58.86  points)

(3.38%)

to

1680.14

1,268.64 2,549.94
S&P 500 (46.35 points)

(4.99%)

to

882.88

676.53 1,426.63
Crude Oil ($2.29/barrel)

(3.91%)

to

$56.34

$33.87 $145.29
Gold +$16.50/oz

+1.80%

to

$930.90

$704.90 $1,001.80
10 Year Tsy (0.168%) to

3.125%

2.04% 4.32%

.

WALL ST JOURNAL

OVERVIEW

The previous week’s market optimism disappeared as reality took hold. We have referred in our previous blogs that the stock  market recovery from the March low’s has been a relief response to the Obama Administration actions to stabilize the financial system.

We also stated that while the relief response could continue, our concern is that in order for the markets to have sustained rallies, we need to see trends suggesting that the consumer has enough disposable income to feel comfortable spending again and that credit markets have loosened up enough for banks to be lending to corporations. We are nowhere near either of these scenarios, yet. As the drop in retail sales in April against an expected flat number shows, the consumer is still cautious, with good reason and since  consumer spending makes up around 70% of GNP, we do not see any contribution to economic growth other than from the $787 billion Economic Stimulus Plan unveiled by the Government. As some observers have noted, the Plan contains only about $200 billion in actual economic stimulus, too little to produce any meaningful growth. Further, Banks remained saddled with the toxic assets on their books which have yet to be effectively addressed.

So, where does that leave us? Economists cannot decide which letter type recovery we face. Is it a V/W or even as one has suggested a Square Root sign ?We will add another letter to the myriad of suggestions ,a long, flat U shape!( We are somewhere close to the bottom left hand corner of the U.)We believe that the Government has succeeded in fighting off financial catastrophe, but has been ineffective in implementing an economic plan for restoring economic growth (the upside of the U).So we can expect a  long flat line well into 2010 as long as consumers and corporations remain under pressure and the Government continues to play the dominant role in the economy,including the private sector.

STOCK MARKET:

The market gave back most of its gains from the previous week. As we have said above, there is nothing in the fundamentals to push the markets higher on a sustained basis, so that further increases will likely be a continuation of the relief rally with investors (largely institutional ) engaging in short term profit taking to keep the markets in trading ranges.

COMMODITY MARKET:

Oil prices have risen substantially this year (up 26%) due to a combination of OPEC attempts to cut output, the US and global economy being seen as stabilizing and of late, optimism in the US for the upcoming summer driving season To the extent the US economy expands, then oil, along with other commodities will continue to rise .We do not expect this to happen, for reasons given in the overview above.

Gold, is seen as a “safe haven” against financial risk as well as an inflation hedge and rises and falls based on these perceptions. It rose again this week as the stock markets fell and the continued belief  that dominant Government involvement in the  economy to offset deflation, by in effect printing money (termed quantitative easing),will have inflationary consequences down the road .

CREDIT MARKET:

The continued Government action in purchasing 10 year Treasury Bonds in the absence of any large scale sales until after Memorial Day, as well as a drop in the stock market, caused a rally in Treasuries this past week ,resulting in  the yield dropping to 3.125%. As we have pointed out, the 10 Year Bond is used to set some mortgage rates and corporate bond yields and the Government is interested to ensure yields do note rise to the point 30 year fixed rate mortgages reach and stay above 5%, so that the weak housing market deteriorates further. This would likely happen if the 10 year rose above 3.5%.

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 resulting in toxic assets affecting their balance sheet in a material way,  did not receive TARP funding and were not subject to the  Stress Tests. We can discuss this in more detail with our clients and introduce them to the appropriate institutions which may fit their needs.

New Era Solutions – REVIEW OF ECONOMY AND FINANCIAL MARKETS FOR WEEK ENDED MAY 1 2009

May 4, 2009

OVERVIEW:

Which glass are you holding, the “half empty” or “half full”? There was plenty of economic news to support both this past week:

“Half Empty”:

  • 6.1% drop in first quarter GDP.
  • Fear of a global swine flu pandemic .
  • Chrysler bankruptcy.
  • Uncertainty about the results of the Government Bank Stress tests.
  • Personal bankruptcies in Q1 are up 19% from a year ago and the highest since records began in 1960.

 

“Half Full”:

  • Federal Open Market Committee stated that the “economic outlook has improved modestly since the March meeting” and saw “some easing” of the tough financial market conditions.
  • Stronger than expected data on consumer confidence.
  • Better than expected first quarter corporate earnings.
  • Steeper than expected drawdown in inventories.
  • Fall in initial jobless claims.
  • Stock Markets continued to improve.

 

How do you explain the above? Only by believing that despite the weak economic fundamentals, that the pace of decline has slowed and that the bottom may be in sight. Were the expectations set so low, that any improvement was seen as a positive sign? If so, then we are, as we believe, in a shorter term psychological/relief rally  rather than a more sustainable one built on any fundamentals / technicals.

The so called experts are divided on the year end markets. Goldman Sachs for instance predicts a 1000 S&P index by years end (13.95% increase from current levels and a 47.8% increase from March lows).These so called experts must be read with the understanding that they all failed to predict anything close to the financial meltdown of 2008 (Goldman predicted a year end 2008 for the S&P of 1675 and the general professionals range was 1520-1680.It ended 2008 at 903.75)

 

STOCK MARKET:

It was a positive week across the board for all the Indexes as the “half full” position was in the ascendancy. How long it will last and how high  the markets will  go, is anyone’s guess at this point. The consumer needs some relief as they try to build up their equity positions after 2008 financial meltdown and none is yet in sight. Unemployment is likely to continue to rise, home prices are likely to continue to fall and consumers are adopting a pay as you go approach, relying less on credit than in recent years, due to depleted net worth, but also limits placed on them by credit card companies. Visa reported total dollar volume of purchases made using branded debit cards surpassed credit card purchases for the first time during last 3 months of 2008.

 

CREDIT MARKETS:

Credit may have loosened somewhat in terms of availability, but that is offset, at least at present, by more restrictive terms. Revolving lines of credit that used to be three years for corporate borrowers are being reduced to one, making forward planning more difficult.

Treasury yields have risen as the Government has been selling, rather than buying of late which was the Treasury plan for the 10 year Treasury in order to keep mortgage rates low

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. We can discuss this in more detail with our clients and introduce them to the appropriate institution which may fit their needs.

Market Statistics:                                                                      52 week

                                                                                                Low          High

Dow Jones  +136.42 points  +1.69% to     8212.41           6,547.05       13,058.20

Nasdaq        +  24.91  points + 1.47% to   1719.20           1,268.64         2,549.94                 

S& P 500     +11.29  points   +1.30% to     877.52               676.53         1,426.63            

Crude Oil    +$ 1.65/barrel   +3.20% to    $53.20             $  33.87        $145.29

Gold              ($26.00)/oz        (2.85%)  to    $887.60         $704.90        $1001.80

10 Year Tsy +0.178%                       to        3.174%             2.038%    4.324%   

                                                                       

                                                                                               *Wall St Journal

Introduction to Economy and Financial Markets Overview from New Era Solutions

April 27, 2009

 

                          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.