Weekly Markets Review 01-11-2010

January 11, 2010

"We'll pluck significance from the least consequential happenstance if it suits us and happily ignore the most flagrantly obvious symmetry between separate aspects of our lives if it threatens some cherished prejudice or cozily comforting belief; we are blindest to precisely whatever might be most illuminating.” -Ian Banks, Author
The major indices began the year positively. The DJIA, S&P 500 and Nasdaq rose 1.82%, 2.68% and 2.12%, respectively. The S&P 500 closed higher each day last week. Value stocks outperformed growth stocks. And the yield on the 10-year T-bond closed unchanged for the week. Financials, materials, industrials and energy each gained more than 5% on the week, while utilities and telecom were the big losers. Automobile manufacturers rose 16.9%, led by Ford. Also outperforming was the oil & gas group, and the regional bank group. Economic data was mixed, with unemployment numbers exceeding expectations, but retail and manufacturing data pointing positive.
Jeremy Grantham’s GMO Asset Management came out with its revised 7-Year forecast. Over the next market cycle, Grantham sees the best opportunities in U.S. high quality stocks (9.6%), and emerging market stocks (8.1%). Both of these forecasts assumes positive help from active management. Grantham expects little from small and large cap U.S. stocks, and U.S. government bonds.
Moving forward, the dollar has strengthened since early December, and should it break from its current range, it may portend a move to well above current levels. This would be negative for foreign stocks, so we continued to watch it carefully.
Finally, 4Q earnings kick off today with Alcoa reporting after the bell. It all begins to feel like Groundhog Day. Stay tuned…
Equity Markets Review
* Buoyed by strong post-Christmas bargain hunting, retail store sales rose 1.5% from the previous week and 2.3% Y/Y, according to the ICSC. Redbook reported chain store sales rose 1.6% from the previous year. Unfortunately, while retail sales may have shown some improvement, retailers are still struggling. Vacancies at U.S. strip malls hit an 18-year high in Q4, with a vacancy rate of 10.6%, worse than the vacancy rate of the "commercial real estate depression" of the early 1990s. Unemployment and inconsistent consumer spending are expected to continue weighing on retail properties for at least another 18-24 months. December's same-store sales looked decidedly healthy, with 21 out of 27 stores reporting better than expected numbers. Overall, sales rose 2.9% compared to the previous year, marking the fourth consecutive month of year-on-year gains and the best monthly showing since April 2008.
* The ABC Consumer Comfort Index registered -41, a 16-month high, kicking off 2010 on a less-awful note. A full 51% of those polled now rate their personal finances positively, but just 28% think it's a good time to buy things and only 9% rate the national economy positively.
* As EU officials arrive in Greece for a three-day fact-finding mission, Greece's Finance Minister George Papaconstantinou rejected speculation that the country may need a bailout and said it's "perfectly clear we’re doing what needs to be done to bring the deficit down and control the public debt." His comments follow earlier remarks by ECB Executive Board member Juergen Stark, who said the rest of the EU wouldn't rescue Greece if its fiscal position worsens. Greece has the EU's biggest budget deficit, registering 12.7% of GDP in 2009. Greece has pledged to cut its deficit to 8.7% this year and to bring it below the EU's 3% limit by 2012.
* U.S. auto sales rose around 15% in December, capping off a truly terrible year for the auto industry on a positive note. However, the numbers were likely inflated by holiday season incentives and are expected to come down slightly in early 2010.
* Seasonally adjusted new claims for unemployment stood at 432,000 the week of Dec. 20, down by 22,000 from the previous week's revised figure, the U.S. Labor Department reported Jan. 7. The Labor Department reported a four-week moving average of 460,250, down 5,500 from the previous week.
* Tax collections by U.S. state governments plunged the most in 46 years in the first three quarters of 2009 as the recession shrank revenue from sources including personal income, Bloomberg reported, citing research by the Nelson A. Rockefeller Institute of Government, a public policy research arm of the State University of New York. Revenues dropped $80 billion, or 13.3%, compared with the same nine months of 2008, to $523 billion, the institute said. It was the fourth straight quarterly decline.
* The eurozone's gross domestic product (GDP) increased by 0.4 percent in the third quarter of 2009, compared to -0.1 percent in the previous quarter, Eurostat reported Jan. 8.
* China's exports turned positive in December for the first time in 14 months, rising 17.7% from the previous year, while imports surged 56% on the back of China's demand for raw materials. If the numbers are correct, China's economy is doing much better than expected while consumer spending among China's trading partners, especially the U.S., appears to be on the mend.
* A new wave of money is entering the U.S. commercial real estate sector, coming from diverse sources including U.S. private equity firms, foreign banks and a Chinese sovereign wealth fund. Industry players warn the inflows are "bottom-feeding" by opportunistic investors who will get burned if interest rates rise. Even so, the growing investments are seen as a positive sign of sector stabilization.
* The U.S. Department of Commerce reported that construction spending fell 0.6% in November, a bigger drop than the 0.4% projected by analysts. Total construction spending decreased to an annual rate of $900 billion, the slowest pace in more than six years and 13.2% below the level of activity one year ago. Private residential activity fell 1.6% in November after a 4.8% increase in October, and spending on commercial projects slipped 0.03% for the month.
* As expected, Google Inc. formally unveiled its self-branded smartphone, dubbed Nexus One. Manufactured by Taiwan's HTC Corp., the phone went on sale yesterday (Monday), with two versions: a $529 so-called "unlocked" phone gives users a choice of which wireless provider they want to use, and a $179 version that is subsidized by T-Mobile USA Inc. for consumers who sign a two-year contract. Verizon Communications Inc. and Europe's Vodafone Group PLC will also offer the Nexus One this spring, Google said. The phone uses the latest version of Google's Android operating system, already available on multiple phones made by other manufacturers.
* Even though it has been the recipient of three taxpayer bailouts, GMAC LLC said it expects to post a record fourth-quarter loss of $5 billion. GMAC last week raised $3.8 billion by selling preferred securities to the government, giving taxpayers a 56% stake in GMAC.
* Heineken reached an all-share agreement to acquire Femsa's Cerveza unit, which comprises 100% of Femsa's Mexican beer operations and the 83% of Femsa's Brazilian beer business Heineken doesn't already own. In exchange, Femsa will get a 20% stake in Heineken. All told, the deal is worth around $7.6B, including $2.1B in assumed debt.
* Sears, the largest U.S. department store chain, recorded a fourth-quarter profit forecast of as much as $465 million, exceeding analysts’ estimates. The company cited strong sales in its Kmart division with same-store sales for December increasing 5.3%.
Weekly Sector Review
The sectors of the U.S. economy, as well as the S&P 500, have performed as follows:
Last Week's Returns-
Information Technology… 1.03%
Materials… 5.48
Consumer Staples… 0.21
Utilities… (1.11)
Consumer Discretionary… 1.93
Financials… 5.84
S&P 500… 2.68
Industrials… 5.17
Healthcare… 1.97
Telecommunications… (2.56)
Energy… 5.01
Foreign Ops
With increasing market globalization and rapid economic growth in emerging economies, the benefits of international equities should not be overlooked. U.S.-based investors with international exposure would have reaped better returns in international equities (73%) than domestic equities (65%) since the market lows by taking advantage of both a rebound in global equity prices and a decline in the U.S. dollar. In addition, it appears that the MSCI EAFE (international index) may still have more upside potential compared to the S&P 500. (source: JP Morgan Asset Management)
David Einhorn Comments on Prospective Currency Crisis
“When the government calculates its debt and deficit, it does so on a cash basis. This means that deficit accounting does not take into account the cost of future promises until the money goes out the door. According to shadowstats.com, if the federal government counted the cost of its future promises, the 2008 deficit was over $5 trillion and total obligations are over $60 trillion. And that was before the crisis. Over the last couple of years we have adopted a policy of private profits and socialized risks. We are transferring many private obligations onto the national ledger.
Although our leaders ought to make some serious choices, they appear too trapped in short-termism and special interests to make them. Taking no action is an action. In the nearer term, the deficit on a cash basis is about $1.6 trillion or 11% of GDP. President Obama forecasts $1.4 trillion next year, and with an optimistic economic outlook, $9 trillion over the next decade.
The American Enterprise Institute for Public Policy Research recently published a study that indicated that “by all relevant debt indicators, the U.S. fiscal scenario will soon approximate the economic scenario for countries on the verge of a sovereign debt default.”
Sports, Culture & Politics
* Senator Christopher Dodd (D, CT), chairman of the Senate Banking Committee, plans to announce his decision not to seek re-election this year. Dodd, once closely connected to the insurance and hedge fund industries, has more recently been known for his crusades against big banks and credit card companies. Critics site Dodd’s stepping down as proof of his realization as to the difficulties he faces in wining this year’s election.
* German Defense Minister Karl-Theodor zu Guttenberg said Jan. 6 that his country will announce at the Jan. 28 international conference on Afghanistan if it will send more troops to that nation, The Local reported, citing an interview with Leipziger Volkszeitung. Guttenberg said he will not succumb to U.S. pressure and that the figure of 2,500 extra German troops is not realistic.
* The Iranian government lashed out today against the West's perceived support of anti-government protests by arresting foreign nationals allegedly involved in the Dec. 27 Ashura protests, and publishing a list of 60 organizations waging "soft war" against Tehran. Meanwhile, Shirin Ebadi -- an Iranian lawyer, human rights activist and 2003 Nobel Peace Prize winner -- argued in her interview Monday with CNN that the Iranian government's efforts to suppress demonstrations were failing and would only increase and radicalize the opposition, thus sowing seeds for the government's downfall.
* Attempted-bombing suspect Umar Farouk Abdulmutallab was recruited to al Qaeda in London, said Yemeni Deputy Prime Minister for Defense and Security Rshad al-Alimi, Reuters reported Jan. 7. Abdulmutallab is accused of trying to set off a bomb on a U.S.-bound plane on Christmas Day.
* U.S. senators defended drone aircraft strikes in Pakistan, Reuters reported Jan. 8. U.S. Senator John McCain said drones must be used to defeat a "very determined and terrible enemy." When asked if he worried that civilian casualties would give enemies a propaganda boost and raise the issue of sovereignty, McCain stated that elements operating in Pakistan would go to Afghanistan, destroy the government, kill Americans and re-establish Afghanistan as a base for attacks on the United States and its allies. McCain suggested there were no other options under consideration if the drone strikes failed to deliver enough results.
* Hundreds in Hong Kong ringed the city's legislature as public frustration mounted over government attempts to bulldoze through a high-speed railway, an issue that has also catalyzed a fresh push for full democracy, Reuters reported Jan. 8.
* More Brokers Flee Big Firms, Taking Clients With Them… Link to http://online.wsj.com/article/SB126256739671014281.html
* One day after security forces say gunmen attacked a Nigerian Chevron pipeline, the company was forced to cut production by 20,000 barrels of crude oil per day. Chevron confirms there was a breach on its Makaraba-Utonana pipeline in Delta State, Nigeria on Jan. 8. A spokesman for the Movement for the Emancipation of the Niger Delta said the group supported the attack, but that its fighters were not involved.
* A statement from the Chinese Foreign Ministry urged Washington to cancel plans to sell missile equipment to Taiwan, saying it would violate China's security interests and severely undermine trust between U.S. and Chinese militaries, AFP reported Jan. 9. The statement came hours after China's Defense Ministry warned it reserved the right to take action if the United States did not comply. Foreign Ministry spokeswoman Jiang Yu entreated the United States to recognize the "severe consequences" of arms sales to Taiwan.
* U.S. Central Command chief Gen. David Petraeus said in an interview to be broadcast on CNN Jan. 10 that the United States has prepared detailed contingency plans for dealing with Iran's nuclear program if negotiations between Tehran and the West break down, Ynet News reported. During the interview, Petraeus declined to comment on Israel's capability to attack Iran's nuclear sites, but said the sites could be damaged significantly, depending on who carried out the strike and what ordnance is used. Petraeus also said the contingency plans could be executed at any time, but he believes that the diplomatic process will continue for some time.
* The Ohio State Buckeyes beat the Oregon Ducks to win last week’s Rose Bowl, while Alabama beat Texas to win the national championship last Thursday.
* In NFL news, the Jets, Ravens, Cardinals and Cowboys were winners over the Bengals, Patriots, Packers and Eagles, respectively.
* 21-year old Cuban left-handed pitcher Aroldis Chapman has signed a $30.25 million, six-year contract with the Cincinnati Reds. Chapman, who defected in July, is noted for his 100 mile per hour fastball.
Over the weekend, the top-five box office performers as reported by The New York Times were:
1) Avatar, Twentieth Century Fox, $48,500,000
2) Sherlock Holmes, Warner Bros., $16,610,000
3) Alvin and the Chipmunks, Twentieth Century Fox, $16,300,000
4) Daybreakers, Lionsgate, $15,000,000
5) It’s Complicated, Universal, $11,007,000

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