“An ounce of mother is worth a pound of clergy.” -Spanish Proverb
"Those who spend too much will eventually be owned by those who are thrifty." -Sir John Templeton, 1989
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Hindsight
Major market indices finished lower last week. The DJIA fell 5.71%, and S&P 500 lost 6.39%, and the Nasdaq lost 7.95%. Value stocks outperformed growth stocks. And the small cap index dropped 8.88%. The 10-year Treasury yield gave up 24 basis point on the week, closing at 3.42%.
Markets were wild this week, with the Dow dropping nine percent on Thursday before recovering to close down 3 percent. Our analysis leads us to believe that a volatile situation stemming from the fundamental issues in sovereign debt markets was exacerbated by two technical issues:
1) The decision by high-frequency trading firms, which typically provide liquidity, to halt trading as markets began to drop, as well as
2) Sell programs (algorithms) that kick in when losses hit a pre-determined level (reminiscent of the October 1987 crash)
The fundamental issues stem from problems in European debt markets—specifically Greece, and to a lesser degree, Spain and Portugal. The macro-thinking is that the fiscal imbalances could trigger a cascading effect on other European countries and, possibly, the wider global marketplace.
The struggling economies in the eurozone – Spain, Ireland and Greece among them – carry more than $2 trillion in external debt. Generating the growth needed to get out from under that burden will be challenging, to say the least.
You will recall from our Weekly Markets Review that we had been calling for a correction months ago, when the S&P 500 was at 1120—slightly above current levels. That correction never arrived. Some analysts feel that this week’s events in foreign debt markets provided a readymade excuse to send markets downward.
At any rate, we continue to monitor our positions closely. Our hedges and precious metals positions have fared admirably. We also hold cash. We are specifically keeping a close eye on the 200-day moving average, which you will recall we tend to use as a tea leaf, telling us when to begin more strenuously selling equities. We are not there yet. However, if we hit that mark, the need for more decisive action will be at hand.
We will continue to monitor market volatility and capital flows. As a result, we may sometimes hold higher-than-normal levels of cash. This could prove to be a decisive buying opportunity. One that we anticipated months previous. But, if it does not appear to be so, then we will act in the best interests of clients. Immediately. Stay tuned…
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Equity Markets Review
* Employment in the U.S. increased in April by the most in four years and the unemployment rate unexpectedly rose as thousands of people entered the labor force, indicating the recovery is becoming self-sustaining, reports Bloomberg.
* Greece came to a standstill in the face of nationwide general strikes. Millions of Greek workers are participating in the strike, shutting down or severely limiting services in public offices, hospitals, shops, schools, banks, courts, airports, and rail and ferry operations. Union officials have called on Greek citizens to vigorously resist the "harsh and antisocial measures" of the proposed austerity package, and are scheduling rallies in Athens that they hope will draw more than 100,000 protesters. Even so, the demonstrations and the strikes are unlikely to deter the government from its austerity push, and most Greeks realize the government has little choice but to push ahead with the reforms. Meanwhile, protests turned deadly, as three people were killed after demonstrators threw firebombs at a bank. Prime Minister George Papandreou called the deaths "brutal murder" but stressed that the austerity measures must be enacted "to secure a future which might not exist otherwise.”
* The International Monetary Fund (IMF) approved a 30 billion euro ($40 billion) rescue loan for Greece on May 9 while European finance ministers met to decide on ways to relieve market fears, Reuters reported. After meeting for nearly three hours, the IMF board released a statement that the loan will be for a three-year period. The loan is part of a European-led financing plan for Greece, amounting to 110 billion euros, to prevent the first sovereign debt default in the eurozone.
* The presidents of four regional Federal Reserve banks went to Washington Wednesday to argue against several proposals that may be included in the financial reform legislation. Broadly speaking, the proposals would challenge the Fed's authority and independence, and include such options as stripping the Fed of regulatory oversight of thousands of small banks and making the president of the New York Fed a presidential appointee. While these proposals aren't new, the momentum behind them has been growing in recent days, causing concern among Fed officials.
* The Senate approved two amendments to financial reform legislation that would prevent future taxpayer-funded bailouts for Wall Street firms and create new government tools to deal with failing companies. Lawmakers approved the amendments by overwhelming margins, saying it would help end the notion that some firms are "too big to fail." Though the votes moved the reform legislation one step closer to final passage, several major hurdles remain, including a bipartisan divide over the establishment of a new financial consumer watchdog.
* Several recent data points indicate improvements in the job market. In the April ADP Jobs Report, released Wednesday, employment showed its third (admittedly modest) monthly gain, with jobs rising 32,000 vs. an expected 20,000 gain. March's figure was revised to +19K from -23K. April's Challenger Job-Cut Report, also released yesterday, put planned jobs cuts at 38,326, down substantially from 67,611 prior and the lowest level in nearly four years. Monster's Employment Index, released this morning, rose 8 points to 133, with growth +11% from the previous year and increased job demand in 27 of the 28 major metro markets.
* Google plans to start selling digital books sometime in the next two months through "Google Editions." There are few details available so far, but some analysts are already concerned that Google will have a difficult time gaining traction in a market crowded by heavyweight Amazon, as well as Barnes & Noble, Apple and others.
* Beazer Homes posted a profit for the third consecutive quarter, a positive signal for a housing recovery. Its orders rose 49% and it had a lower cancellation rate, aided by improved home affordability, more stable prices, low interest rates, and improved liquidity.
* Freddie Mac, after a first-quarter loss of $8 billion, asked for $10.6 billion in additional aid. The company, which is now effectively owned by the U.S. government, has so far required $61.3 billion in tax-payer funds to stay afloat.
* Marsh & McLennan, one of the world’s largest insurance brokers, had a 41% increase in first-quarter earnings, largely due to a rebound in its consulting business.
* Credit card-issuer MasterCard beat analysts' expectations in achieving a 24% increase in its first-quarter profit, as higher payment processing reflected increased consumer spending.
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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… (7.62)%
Materials… (8.52)
Consumer Staples… (2.96)
Utilities… (4.49)
Consumer Discretionary… (7.59)
Financials… (6.61)
S&P 500… (6.39)
Industrials… (7.95)
Healthcare… (3.89)
Telecommunications… (3.71)
Energy… (7.86)
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The Mysterious Riddle Wrapped in the Conundrum that is Freddie Mac
Last week, government sponsored enterprise Freddie Mac, which is essentially a wholly owned subsidiary of the U.S. Government, announced that it lost another $ 8 billion in the first quarter, and would require another $10.6 billion in tax-payer funds to stay alive. That brings the total tax funded assistance provided Freddie Mac to $61.3 billion. UGLY. This government sponsored enterprise, which is barely fulfilling its original mandate and seeking handouts like a spoiled teenager, paid its CEO nearly $20 million in 2007. Yet, last week’s senate sub-committee spends two days grilling executives from Goldman Sachs. Goldman may have not exercised absolute prudence in the means used to hedge its risks, but the firm apparently has not broken any laws. And they’ve made their constituents (shareholders) a lot of money. Freddie Mac has assisted many in realizing the dream of home ownership. And many of have lost those homes shortly thereafter. Perhaps it is time to quit ignoring the facts and determine if Fannie and Freddie are fulfilling the initial mandates with which they were tasked. Quit pointing at supposed villains, Senators, and take a long look in the mirror.
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Sports, Culture & Politics
* The Deepwater Horizon oil spill in the Gulf of Mexico continued spreading May 6. By Wednesday, 2.6 million gallons of oil had gushed into the Gulf of Mexico. It created an oil slick some 60 miles wide - an area the size of Delaware.
British Petroleum and U.S. federal agencies are continuing with their emergency response and mitigation efforts. BP said it would attempt a radical method to plug the leak: Lowering a 98-ton, 40-foot high steel containment dome 5,000 feet to cover the break and bring the oil up to the surface. While it could reduce the leak by 80% to 90%, the unprecedented operation has never been attempted in such deep water. While the incident has not significantly interrupted shipping or energy refining and production, it does threaten several economic sectors and is sure to have political implications. However, until the full extent of the damage is assessed, it will be difficult to say whether the spill will result in a policy change regarding offshore drilling.
* Iran's navy commander said it was Tehran's right for its army aircraft to carry out flyovers above a U.S. aircraft carrier, Iran's Fars news agency reported May 4. The commander of the regular army's navy said U.S. warships sail in international waters in the Sea of Oman and Iran has the right to carry out its missions to identify vessels that sail in the area. Iran's F-27 aircraft recorded films and images of the aircraft carrier.
* Pakistan has uncovered possible links between suspect Faisal Shahzad, the Pakistani Taliban and a Kashmiri Islamist group, in the May 1 case of an attempted bomb attack in Times Square, officials and news reports said, Reuters reported May 6. People with links to militant group Jaish-e-Mohammad have been picked up and were in touch with Shahzad during his visits to Pakistan, a Karachi official said, in a reference to Shahzad's friend Mohammad Rehan, who was detained on May 4 after leaving the Batha Mosque in Karachi. However, Tehrik-i-Taliban Pakistan (TTP) said May 6 that the group did not train or recruit Faisal Shahzad.
* Faisal Shahzad contacted the Pakistani Taliban via the Internet, law enforcement and intelligence sources said, ABC News reported May 6. Faisal Shahzad was allegedly trained and sent to the United States once the Taliban recognized he was more valuable there than in Pakistan. The sources said Shahzad has been linked to Muslim cleric Anwar Awlaki, late Pakistani Taliban leader Baitullah Mehsud and Mohammed Rehan, who assisted Shahzad in his travels to Peshawar and Waziristan and introduced him to the Taliban.
* The Pakistani Taliban were behind the attempted bombing in New York's Times Square, U.S. Attorney General Eric Holder said May 9, Reuters reported. Speaking on ABC television's "This Week," Holder said there is evidence of the Pakistani Taliban's involvement but there was nothing to suggest the Pakistani government knew of the attempt. Holder said the administration is satisfied with the amount of cooperation the Pakistani government was giving in the investigation.
The weekend’s top-five box office performers as reported by The New York Times were:
1) Iron Man 2, Paramount, $133,600,000
2) A Nightmare on Elm Street, Warner Bros., $9,170,000
3) How To Train Your Dragon, Paramount, $6,760,000
4) Date Night, Twentieth Century Fox, $5,300,000
5) The Back-Up Plan, CBS Films, $4,345,000