"The question isn’t who is going to let me; it’s who is going to stop me." –Ayn Rand
Major market indices finished lower last week, with the DJIA, S&P 500 and Nasdaq each losing 4.12%, 3.90% and 3.61%, respectively. Value outperformed growth. Small caps lost 3.27%. Overseas equities provided no shelter. The 10-year treasury yield lost 7 basis points. All sectors within the S&P 500 had negative returns on the week.
Retail foods (Kroger), regional banks (Fifth-Third) and the airlines were up on the week. Materials and financials were hammered.
Major concerns centered on the Chinese government’s attempts to slow economic growth, weak U.S. housing and jobs. Still, the leading economic indicators continued to improve.
On the anniversary of his inauguration, President Obama had to contend with Republican Scott Brown having won the special election run-off in Massachusetts. After having been held by Democrats for nearly five decades, Brown won the seat to become the Senate’s forty-first Republican. What are the ramifications of this “Shot Heard Around The World?” Possibly some of the less foreseen consequences are the following… 1) The healthcare debate becomes more bipartisan; 2) Bernanke and the Fed lose a bit of the power they currently wield over fiscal and monetary policy; 3) There will be no further stimulus bills in 2010—the public has no stomach for it; 4) Tim Geithner will likely be replaced as Treasury Secretary; 5) Too Big To Fail, and the Bailout mentality took a shot across the bow. if I sat on the boards of BOA, C or GS, I am leery about what lay ahead from a reform and regulatory standpoint; 6) Finally, social security, Fannie Mae and Freddie Mac will all be pushed to the back burner, as nobody in D.C. will currently have the stomach to stare into the abyss of those three issues.
Indeed. Bespoke Investment Group reports that it took all of one week for the S&P 500 to go from two standard deviations above its 50-day moving average to one standard deviation beneath… so, after last weeks’ poor returns, the market now appears oversold. Stay tuned…
Equity Markets Review
* ABC's Consumer Comfort Index slipped 2 points to -49, entering "full retreat" mode this month after posting gains in December. Ratings of the national economy held steady at 9% positive, but those who think it's a good time to buy things slipped a point to 23%, and those rating their personal finances positively slipped a point to 45%.
* The Treasury released data on November's International Capital Flow yesterday, showing that net foreign purchases of long-term securities reached $126.8B vs. $25B expected and $20.7B in October. Private foreign investors bought $96B and official institutions bought another $33.3B, while U.S. residents purchased $2.5B of long-term foreign securities.
* While a slower recovery may come the first half of the year, compared to previous months, the eurozone should not face a fresh downturn, European Central Bank Executive Board member Juergen Stark said Jan. 20, MNI reported. Stark expects deterioration in credit quality, possibly pointing to a new wave of write downs. He warned that the crisis is not over yet.
* Iran parliament speaker Ali Larijani said Jan. 20 that extremism is hurting the government's ability to create a viable economic plan, Iranian Labor News Agency reported. Larijani called for an atmosphere of calm to facilitate investment in Iran and said the government's handling of the economic crisis thus far has been weak and poorly planned.
* China’s growth rate accelerated to the fastest pace since 2007, Bloomberg reported Jan. 21. A statistics bureau report showed that gross domestic product rose 10.7 percent from the previous year.
* IBM reported better than expected quarterly earnings (see details below), with Q4 profit rising nearly 9% on the back of cost-cutting and growth in IBM's services division. The company booked a record $18.8B in new services contracts, reflecting both IBM's heavy push in that direction and improved corporate and governmental demand.
* Respiratory and monitoring solutions company Covidien PLC reported positive fiscal 1Q results on sales gains and the success of ongoing strategic initiatives. The company continues to project positive expectations for 2010.
* Warren Buffett came out staunchly against Kraft's $19.6B acquisition of Cadbury, calling it a "bad deal" and raising questions about how Kraft CEO Irene Rosenfeld planned to pay for it. Buffett plans to maintain Berkshire Hathaway's 9.4% stake in Kraft, but said Kraft's recent moves have left him feeling "poorer."
* Apple is reportedly in talks with Microsoft to replace Google as the default search engine on the iPhone. Sources say the two firms have been negotiating for weeks, a reflection of the growing rivalry between Apple and Google.
* Activist investor Carl Icahn made the winning bid to purchase the bankrupt and unfinished Fontainebleau Las Vegas Resort. Icahn offered $156.5M, betting that the Las Vegas Strip will eventually experience a turnaround.
* Google posted better-than-expected quarterly results, mostly because of an improvement in internet advertising as the economy recovers and as advertisers shift from print media to the internet. The improved outlook has prompted Google to start spending more money, and CEO Eric Schmidt said that the company will likely make at least one acquisition per month, "some big, more small."
* Wal-Mart plans to cut around 11,200 jobs at its Sam's Club warehouses, roughly 10% of its workforce, as it outsources certain in-store marketing positions. Wal-Mart also plans to close 10 underperforming warehouses.
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… (4.76)%
Consumer Staples… (2.18)
Consumer Discretionary… (3.13)
S&P 500… (3.90)
Global Food Shortages?
In a recent interview with CNBC, legendary investor Jim Rogers said, “Sometime in the next few years, we’re going to have very serious shortages of food everywhere in the world, and prices are going to go through the roof.”
Rogers also indicated that food inventories are now the lowest they’ve been in decades and that “many farmers can’t get loans to buy fertilizer now, even though we have big shortages developing.”
While we certainly hope no food shortages are on the horizon, government intervention in the marketplace the world over has set the stage for just these types of events. Furthermore, we certainly agree with Rogers’ assessment that agriculture prices are going to go through the roof.
Significant technological advancements in agriculture, including genetic engineering, fertilizer, and mechanization, have greatly increased output and generally kept food prices down in modern times. However, in recent years an uptrend in food prices has materialized due to a combination of growing demand from developing countries, decreasing arable land per capita, demand for biofuels, and, especially, rising energy prices. Agriculture’s close ties to energy are due to the fact that farming is a gas guzzler. Oil and natural gas are needed to make the fertilizer that feeds the crops, and diesel is needed to run the machinery that plants, tends, and harvests those same crops – then delivers them to market.
The Fed’s Difficult Choices
With all the focus on politics, it’s worth remembering that the Federal Reserve also faces some very difficult decisions at is FOMC meeting this week. The economic recovery remains tentative with no jobs added as of yet. Concerns about a lack of credit have been exacerbated by a proposed tax on bank profits and restrictions on bank activities. At the same time, market fears of monetary or fiscal recklessness seem to be adding to the inflation expectations. We expect the Fed to hold the Fed Funds rate in a range of 0% - 1% throughout 2010, but there is a risk not only that they will tighten more aggressively but also too soon for a still fragile banking system and economic recovery. (source: JPMorgan Asset Management)
Sports, Culture & Politics
* Alleged Tehrik-i-Taliban Pakistan (TTP) leader Hakeemullah Mehsud was injured in a Jan. 15 U.S. drone attack in South Waziristan, Pakistan, the Times of India reported, citing TTP sources. Mehsud was at a meeting of foreign militants in a house in Shaktoi village when the drone struck. Mehsud received a head injury and is being treated at an undisclosed location, the TTP sources said. However, Pakistani Interior Minister Rehman Malik said Jan. 15 it is still unclear whether Mehsud was killed in the attack.
* U.S. Joint Chiefs of Staff Chairman Adm. Mike Mullen said Jan. 15 that the United States is sending more helicopters and a hospital ship to Haiti and that there will be 9,000 to 10,000 U.S. troops either on the ground in Haiti or off its coast by Jan. 18, the BBC reported.
* Healthcare discourse from the floor of the legislature… Link to http://www.youtube.com/watch_popup?v=G44NCvNDLfc
* Haiti's main port of Port-au-Prince should be open in two or three days to receive emergency relief supply shipments, a U.S. military official said Jan. 18, Reuters reported. The earthquake damage has made the port inoperable, and so the airport in Port-au-Prince has been the main location for international relief operations, which reportedly is congested and has caused delays in the arrival of food and medical supplies.
* China lowered its holdings of U.S. Treasury bonds in November 2009 to $789.6 billion from $798.9 billion in October 2009, AFP reported Jan. 19, citing data from the Treasury Department.
* China’s state-run propaganda department has ordered the removal of Avatar from cinema’s, fearing that viewers may draw links between the brutal treatment of Avatar’s Na’vi people, and the means by which developers have been known to forcefully evict people from their properties in the name of Chinese progress. Click the following to view graphic photos depicting the effects of China’s non-eco friendly development procedures… Link to http://www.chinahush.com/2009/10/21/amazing-pictures-pollution-in-china/
* U.S. President Barack Obama is "troubled" by cyberattacks on Google in China and he is looking for "some answers" from China as to the "cyber security breach," White House deputy spokesman Bill Burton said Jan. 22, AFP reported.
* Al Qaeda leader Osama bin Laden claimed responsibility for the attempted attack on a U.S. airliner bound for Detroit on Dec. 25, AFP reported Jan. 24, citing an audio recording alleged to bin Laden's voice that was broadcast on Al Jazeera. The voice on the recording said that the message the attempted bomber, Umar Farouk Abdulmutallab, was sent to send was the same one that the Sept. 11 hijackers sent, and that the United States will have no security until "we enjoy it as a reality in Palestine."
* Wall Street leaders are heading to the World Economic Forum in Davos with plans to lobby for softer bank reforms than the ones Obama proposed. They also plan to oppose the break-up of large financial firms, insisting the problem of too-big-to-fail can be addressed through other regulatory means. However, bankers arriving at Davos have far less clout than they used to, raising questions about just how much their lobbying efforts will achieve.
* In Sunday’s NFL Conference Championships, the Colts beat the Jets, and the Saints survived the Vikings, pitting the Colts against the Saints in February 6th’s Super Bowl in Miami.
The weekend’s top-five box office performers as reported by The New York Times were:
1) Avatar, Twentieth Century Fox, $41,300,000
2) Legion, Sony Pictures, $18,200,000
3) The Book of Eli, Warner Bros., $17,000,000
4) Tooth Fairy, Twentieth Century Fox, $14,500,000
5) The Lovely Bones, Paramount, $8,800,000