“It was not their irritating assumption of equality that annoyed Nicholai so much as their cultural confusions. The Americans seemed to confuse standard of living with quality of life, equal opportunity with institutionalized mediocrity, bravery with courage, machismo with manhood, liberty with freedom, wordiness with articulation, fun with pleasure - in short, all of the misconceptions common to those who assume that justice implies equality for all, rather than equality for equals.” –Trevanian, (Shibumi)
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Hindsight
Major market indices finished mixed last week. The DJIA rose 0.19%, and S&P 500 declined 0.19%, and the Nasdaq rose 1.11%. Growth outperformed value and the small cap index gained 1.66%. The 10-Treasury yield dropped 14 basis point on the week, closing at 3.77%.
Bespoke reports that thirty-seven US companies have reported earnings so far this season, and 27 (73%) of them have beaten earnings estimates. So, while earnings have started strong, we still have a long way to go. But, there are other positives to report…
The Fed’s Beige Book numbers show that economic activity is up in all Fed districts but St. Louis, where activity softened a bit. And news last week of a 8.7% jump in same-store sales of an index of 29 retailers tracked by Retail Metrics was 2.6 percentage points above expectations -- a level of new consumption that economist Jeremy Siegel argues shows that the recovery is "on a self-sustaining path."
In a note to clients Tuesday, Siegel also pointed out that even after their 70% one-year rise, U.S. stocks are still only selling for 15.3 times 2010 earnings, which is well below the average of 18.5x that has occurred in the year following the average postwar recession. He concludes that there is still "substantial upside potential" for the market based on this metric alone, which is a fair comment.
Meanwhile, the SEC’s announced fraud suit against Goldman Sachs cold provide (or is intended to be) the catalyst this administration needs to serve as the spear tip for financial services reform. The government's charges against Goldman indicate a more active regulatory environment, but we doubt that it wants to derail the economy by undermining the linchpin of global finance. Yet, sometimes in the short-term the government works at cross-purposes to its long-term interests. Given this news, the market will still go where it's headed, but there will be a lot more volatility en route. And those most vulnerable to these machinations will likely be the financials.
Credit Suisse strategist Andrew Garthwaite, in a research note to clients, listed a number of reasons why his team recommends continued overweight exposure to equities and the avoidance of relatively overpriced corporate bonds.
First, the economic growth/inflation profile continues to improve. The CS team expects global GDP to clock in at 4.5% this year -- a big improvement from the -0.8% suffered last year. The analysts give four reasons: a) Companies are under-invested, with free cash flow as a percentage of the economy at all time highs, leaving plenty of firepower for new hiring and new capital expenditures; b) the U.S. labor market is recovering strongly with temporary employment way up and job cuts way down; c) worries over China look overdone with inflationary pressure moderate and monetary policy still accommodative; and d) only 32% of the U.S. stimulus has been spent.
Second, equities offer superior value compared to other asset classes. Clearly, stocks are due for another late 1990s-style outperformance relative to bonds.
And finally, major institutional buyers are still underweight equities -- which represents a significant source of untapped demand for stocks. Stay tuned…
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Equity Markets Review
* Sales at U.S. retailers climbed in March more than anticipated, signaling consumers will play a bigger role in a broadening economic recovery. Purchases increased 1.6 percent last month, the most in four months, and gains for February and January were revised up, Commerce Department figures showed today in Washington. Another report showed consumer prices rose 0.1 percent last month.
* In February, compared with January, seasonally adjusted industrial production was up by 0.9 percent in the eurozone and rose by 0.7 percent in the European Union, Eurostat announced April 14. In January, production was up by 1.6 percent and 1.7 percent respectively.
* The airline industry reports a downturn in traffic caused by the eruption of Iceland’s Eyjafjallajökull volcano, which continues to spew ash into the earth’s atmosphere, shutting down flight plans across much of Europe.
* International demand for American long-term financial assets was up, with net buying of long-term stocks, notes and bonds increasing from $15 billion in January to $47.1 billion in February, the U.S. Treasury Department announced, Bloomberg reported April 15. The United Kingdom has doubled its holdings since October, and rose 12.2 percent from January to February, bringing its total holdings to $231.7 billion. While China's holdings fell by $11.5 billion from January to February, it remains the largest holder of U.S. Treasuries, with $877.5 billion. Japan increased its holdings by $3.1 billion to $768.5 billion, while Hong Kong increased investment by $5.8 billion to $152.4 billion. The net foreign purchases of Treasury notes and bonds were $48.1 billion in February compared to $61.4 billion in January.
* The number of people filing for unemployment benefits in the United States rose by 24,000 to 484,000 during the week ending April 10, according to statistics released by the U.S. Department of Labor on April 15. The four-week moving average indicated the number of claims rose to 457,750 from 450,250 the prior week. The number of people receiving unemployment benefits increased by 73,000, to 4.64 million, during the week of April 3.
* China's economy increased about 11.9 percent in the first quarter from a year earlier, Reuters reported April 14, citing two market sources. Consumer price inflation in March was approximately 2.4 percent year-on-year, lower than forecasts and a deceleration from February's 2.7 percent rate, one of the sources said.
* Morgan Stanley which once ran the biggest property-investment arm among Wall Street banks, expects to lose $5.4 billion, or 61 percent, of its $8.8 billion global fund from 2007, said a person familiar with the situation. The firm sent a fourth-quarter update to investors in recent weeks showing the fund was likely to recover $3.4 billion of the investment, said the person, who declined to be identified because the information wasn’t public.
* The biggest U.S. commercial banks will take their fight against disclosure of Federal Reserve lending in 2008 to the Supreme Court if necessary, the top lawyer for an industry-owned group said. Continued legal appeals will delay or block the first public look at details of the central bank’s $2 trillion in emergency lending during the 2008 financial crisis.
* JPMorgan Chase & Co. the second- biggest U.S. bank by assets, beat analysts’ estimates as first- quarter earnings rose 55 percent on record fixed-income trading revenue and a reduction in provisions for credit losses.
* Citigroup’s profit more than doubled, beating analysts’ estimates as the global economic rebound trimmed costs for bad loans and boosted revenue from consumer banking. First-quarter net income of $4.43 billion followed a loss of $7.58 billion in the fourth quarter and a profit of $1.59 billion in the first three months of 2009, New York-based Citigroup said today in a statement. Adjusted per-share earnings were 14 cents. Analysts in a Bloomberg survey estimated the company would break even.
* Goldman Sachs & Co. shares dropped after the U.S. government announced that the S.E.C. will sue the firm for fraud based upon the alleged misrepresentation of collateralized debt obligations sold as the U.S. real estate market began to collapse. Goldman denies any wrongdoing, further stating that the firm lost $90 million on the deal. The S.E.C. will also investigate whether other mortgage deals represented by other Wall Street firms may have mislead investors. The U.K. and Germany may consider their own investigations.
* Goldman Sachs' international real estate fund, Whitehall Street International, has lost nearly all its $1.8B in equity on troubled property investments in the U.S., Germany and Japan. According to Whitehall's annual report, the fund was down to just $30M as of the end of 2009.
* Carl Icahn raised his offer price for Lions Gate Entertainment by 17%, to $7/share from $6/share, giving the studio a value of $826M. Icahn is seeking at least 37M shares, which would be enough to give him a majority stake in the company when combined with his existing 19% holding. Icahn is also continuing his campaign against a poison pill that would make a hostile takeover of the company more expensive.
* Google reported better-than-expected earnings, providing further evidence of a rebound in the online advertising market. First-quarter earnings were up 37% and revenue rose 23% as the economy improved and "large advertisers have come back in force."
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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… 1.43%
Materials… (1.94)
Consumer Staples… (0.46)
Utilities… (1.23)
Consumer Discretionary… 1.04
Financials… (1.30)
S&P 500… (0.19)
Industrials… 1.10
Healthcare… (1.43)
Telecommunications…(1.51)
Energy… (0.77)
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Service Center
Looking back on the previous 2001 recession, half of the jobs lost were from the manufacturing sector, while the other half were service related. Interestingly, during the following recovery, most of the jobs created came from the service sector and very few came from the manufacturing sector. As the U.S. economy continues to mature, we believe this trend is likely to continue and that the majority of jobs created in this recovery will likely come from the service sector. (source: JP Morgan Asset Management)
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Sports, Culture & Politics
* Iraqi intelligence announced that Abu Ayyub Al-Masri, head of Al Qaeda in Iraq, has been killed.
* Obama is taking a hands-on approach to financial regulatory reform, and is putting pressure on Republicans to get on board. The White House has been drafting legislative language to pass on to Congress, is pushing for the bill to be brought to the Senate floor ahead of schedule and is expected to have Obama makes a high-stakes appearance on Wall Street, as both Democrats and Republicans try to leverage the Goldman Sachs scandal to their legislative advantage.
* Tehran said the outcome of the nuclear security summit in Washington would have no impact on Iran's atomic programs, Earth Times reported April 13. Even approval of sanctions would have no impact on Iran's will to follow its nuclear rights, Foreign Ministry spokesman Ramin Mehmanparast stated. He doubted that China, which is a strategic ally, would back the U.S. and European drive for renewed U.N. Security Council sanctions against Iran. He said that both China and Russia would attend the two-day international nuclear disarmament conference starting on April 17 in Tehran. will not have the capability to produce nuclear weapons for at least a year, possibly more, U.S. Defense Secretary Robert Gates said on April 13, reported Reuters. When asked about reports that Iran might have nuclear weaponry capability within months, he said he did not believe it.
* A magnitude 9 earthquake struck China’s Qinghai province on the Tibetan Plateau, killing about 400 people and injuring 8,000 in the nation’s deadliest temblor since the May 2008 disaster in neighboring Sichuan, reports Bloomberg.
* China cut its U.S. Treasury bond holdings from $889 billion in January to $877.5 billion in February, a Treasury report said April 15. That number is the lowest since June 2009, when China held $915.8 billion, and marks the fourth consecutive monthly cut in holdings. China still holds the most U.S. government debt.
* Israeli Defense Minister Ehud Barak said there is no reason for a war this summer, but Israel must recognize that the world will not put up with decades more of Israeli rule over the Palestinian people, the Jerusalem Post reported April 19. Barak said "there is no other way" than to let the Palestinians rule themselves under a two-state solution. Barak said the recent U.S. alienation is harmful to Israel and must be stopped by embarking on a peace initiative. He also said nuclear weapons in Teheran are a danger to the region and the world, and Israel should work toward imposing Iranian sanctions.
* The United States has prepared military options to use against the Iranian nuclear program, but diplomatic solutions should be tried first, according to U.S. Chairman of the Joint Chiefs of Staff Adm. Mike Mullen, Reuters reported April 18. Speaking at a forum at Columbia University in New York, Mullen said the military has prepared contingency plans to deal with the Iranian nuclear program, but that a strike could have unintended consequences. He said engagement, diplomacy, and sanctions should be used to encourage Iran to change course.
* Six people were shot to death and five were wounded during a gun battle that took place in broad daylight on the main boulevard in Acapulco's tourist zone, AP reported April 15. Police said the gun battle started when armed men traveling in several vehicles opened fire on another vehicle, killing two men believed to be the targets of the gunmen. The assailants also opened fire on several private vehicles, killing three people, including a child, federal police stated. Police detained a 26-year-old man who reportedly worked for Edgar Valdez Villarreal of the Beltran Leyva Organization (BLO).
* Pelosi’s husband gained financially from winner of Hungarian ambassadorship…
* Why Soaking the Rich Won’t Solve the Deficit…
The weekend’s top-five box office performers as reported by The New York Times were:
1) How To Train Your Dragon, Paramount, $20,000,000
2) Kick-Ass, Lionsgate, $19,750,000
3) Date Night, Twentieth Century Fox, $17,300,000
4) Death at a Funeral, Sony, $17,000,000
5) Clash of the Titans, Warner Bros., $15,770,000