Weekly Markets Review 08-02-2010

August 2, 2010

“Communism eliminates poverty but generated misery. It’s socialism enforced by terrorism. Capitalism has its own set of problems. Nothing is easy when people are involved… But one of the things I never take for granted is that America is the greatest country in the world. Forty-eight years after I learned the national anthem, I feel 10-foot tall when I sing that song today.”
–Ed Neyra, Cuban Immigrant, Entrepreneur, Author

Major market indices were mixed last week. The DJIA gained 0.40%, the S&P 500 lost 0.10%, and the Nasdaq gave back 0.65%. Value stocks outperformed growth stocks. And the small cap index gained 0.04%. The 10-Treasury yield lost 9 basis points on the week, closing at 2.91%.
Companies are having a “blockbuster earnings season,” Jim Reid, head of fundamental strategy at Deutsche Bank AG in London, recently wrote in a note to investors.
There is plenty of good news to support higher prices over the horizon. Company sales surveys conducted by the ISI Group rose by the largest amount in four months last week. Job gains look set to continue into the second half of the year. Business confidence is up in Germany. Employment is rising at a 3% annual rate in Taiwan. And exports are surging in Japan and South Korea. Another positive is that the level of stress in the government debt market is subsiding. This has been evidenced by a lessening in the cost of insurance on debt (swaps). Should this continue, it will enhance the appetite for risk assets like equities, and provide price support in the months ahead.
Now abroad… If you have been reading this missive for a while, you will know that we place much credence in the long-term opportunities available within the world’s emerging markets. We have been investors there for some time. And recently, our horizons have been expanding.
Turkey has established itself as a very exciting opportunity. A bridge between the western and eastern worlds, Turkey’s economy is dynamic and currently supported by strong underlying trends that point to long-term growth ahead. Its economy is the sixth largest in Europe and in the top 20 worldwide with a 2009 GDP of $615 billion.
According to a 2009 International Monetary Fund (IMF) report, Turkey’s per capita GDP of just over $8,700 is greater than any of the BRICs. Industrial output leaped by 21 percent in the 12 months ending March 2010, inflation fell to 6.1 percent last year from double-digit levels a year before, and public debt is less than 40 percent of GDP.
More growth, less debt? Sounds attractive. Perhaps more Turkey and less baloney would be good for us all. Stay tuned…
Economically Speaking
- Consumer confidence fell to a five-month low in July on mounting fears that the poor employment scene may hurt the economic recovery, Bloomberg reports.
-U.S. economic growth slowed to 2.4% in the 2Q, compared to a consensus forecast of 2.6%, as consumer spending cooled. Consumer spending, which accounts for 70% of the economy, increased at a 1.6% rate, less than the 2.4% predicted.
- California Governor Arnold Schwarzenegger declared a state of fiscal emergency yesterday, as California faces a $19B shortfall in a budget that is already more than a month overdue. Schwarzenegger ordered state employees to take three unpaid days off a month, starting in August, in order to preserve cash for paying the state's debt and for essential services; the decision will affect tens of thousands of state employees. Any additional delay in the budget threatens California's already-weak credit rating, but analysts expect it will be weeks before lawmakers reach an agreement.
- The U.S. government needs to lay out a credible plan to address its rising debt if it wants to maintain its triple-A credit rating, said Steve Hess, Moody's top sovereign analyst for the U.S., East Asia and Australasia. At present, the U.S. appears to have "no plan" to deal with its fiscal outlook.
- U.S. President Barack Obama said on Aug. 2 that the U.S. economy must grow faster and called long-term unemployment a "huge problem," Reuters reported, citing an interview on CBS' Early Show.
Foreign Observations
-Vietnam’s long-term foreign and local-currency ratings were cut to B+ from BB-, with a stable outlook, Fitch said in a statement on July 29, Bloomberg reported. Vietnam’s sovereign creditworthiness deteriorated on the back of weaker external finances and rising external financing requirements amid an inconsistent macroeconomic policy framework, Ai Ling Ngiam, a director in Fitch’s Asia Sovereign team, said. She also cited a weak banking system.
-The Brazilian government posted a primary surplus of 24.8 billion reais ($14 billion) in the first half of 2010, up 34 percent from the same period last year, according to the Treasury Department, Xinhua reported July 29. The amount is equivalent to 1.46 percent of the Brazilian gross domestic product (GDP), compared to a surplus of 1.24 percent of GDP in the same period of 2009. The Treasury Department accumulated a primary surplus of 47.7 billion reais in the first half of 2010, a year-on-year increase of 9.25 percent.
-German unemployment fell, the Labor Office stated on July 29, DPA reported. The number of people out of work in seasonally adjusted terms dropped by another 20,000 during July, bringing the unemployment rate to 7.6 percent.
-China has surpassed Japan to become the world's second-largest economy, Shanghai Daily reported July 31, citing a statement from Yi Gang, head of China's State Administration of Foreign Exchange. Yi said China is in no rush to make the yuan a fully convertible or global currency and will not push to promote it as a reserve currency for others.
-Chinese manufacturing slowed in July, with the official purchasing managers’ index sinking to its lowest level since February 2009. Chinese growth is being restrained partly by government curbs on lending and property speculation but, taken together with disappointing growth in the U.S. and elsewhere, the slowdown in Chinese manufacturing will likely add to global recovery fears.
-Russia is undertaking an ambitious modernization program in order to ensure its strength in the long term. However, it lacks the expertise, capital and technology to accomplish its goals on its own and must appeal to foreign firms and investors. The Kremlin is making changes to Russia's strict laws concerning foreign businesses and investment, but is taking care to maintain control and avoid importing potentially dangerous levels of foreign influence along with foreign business.
Equity Markets Review
-Exxon Mobil and AstraZeneca Plc joined 70% of companies in the MSCI World Index that have reported better than expected profits so far in the 2Q earnings season, reported Bloomberg.
-Genzyme rallied on word that Sanofi-Aventis may offer as much as $70 a share to buy the maker of medicines for genetic diseases. Global takeovers have reached $1.06 trillion this year, 9.4% more than the same time in 2009, according to Bloomberg.
-Beleaguered BP CEO Tony Hayward will step down as of October 1, and will be replaced by American Bob Dudley who has been heading up the company's Gulf spill response. Hayward will be nominated as a non-executive director of TNK-BP, the company's Russian joint venture. "It will be a different company going forward," BP said.
- ArcelorMittal, the world's largest steelmaker, reported a Q2 net profit of $1.7B (see details below), beating analysts' expectations of a $1.26B profit and reversing a net loss of $792M in the same period last year. However, the company warned that Q3 results will be hurt by a seasonal dip in demand and an economic slowdown in China.
- Schlumberger and Smith International received unconditional U.S. regulatory approval for their planned merger, just a day after EU regulators cleared the deal. The merger must now be approved by Smith shareholders at their Aug. 24 annual meeting.
-Disney announced it's selling its Miramax film studio. Filmyard Holdings, whose partners include construction tycoon Ron Tutor and investment firm Colony Capital, will buy the studio for $660M, ending months of talks with various bidders. Disney agreed to the plan after Tutor and his investment partners paid a nonrefundable $40M deposit and presented a financing plan.
- BP will try the "static kill" operation Aug. 3 to stop the oil leak in the Gulf of Mexico and hopes to finish a relief well by the end of August, incoming BP CEO Robert Dudley said July 30, Reuters reported. BP is currently engaged in a $25-30 billion global asset sale, Dudley said.
-HSBC Holding Plc reported that first-half net income doubled and earnings topped Wall Street estimates.
-Avis Budget Group offered $46.50 a share for Dollar Thrifty, topping the bid from rival Hertz.
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... (1.62)%
Materials... (0.15)
Consumer Staples... (0.63)
Utilities... (0.55)
Consumer Discretionary... (0.39)
Financials... 1.01
S&P 500... 0.10
Industrials... 0.73
Healthcare... 0.32
Telecommunications... 1.65
Energy... 0.21
Observe & Report – The Economy
The U.S. recession was even worse than previously thought, with bigger drops in consumer spending and housing, according to revised figures. The U.S. economy shrank 4.1% from 4Q 2007 to 2Q 2009, compared to the 3.7% drop previously recorded.
Other interesting (and/or revised) data points included:
-The peak of the previous expansion occurred in 4Q07.
-The worst quarter of the economic slump occurred in the final quarter of 2008, when Lehman Brothers collapsed and GDP shrunk by 6.8%.
-The jobless rate doubled, reaching a 26-year high of 10.1% in October. U6 unemployment (accounting for those unemployed and no longer collection benefits) ascended higher, to 17.4% in 4Q09.
-Residential construction fell at a 22% annual pace from 2007-2009, 1% worse than previously expected, which was already the worst housing slump since the Great Depression.
-Consumer purchases were cut for each of the last three years, with the biggest reduction taking place last year.
-The economy grew an annual 2.4% rate in 2Q, following a 3.7% rate in 1Q.
-Personal income was revised up by $18.2 billion in 2007, $152 billion in 2008 and $156 billion last year, revised upwards largely based on corporate dividends not falling as much as projected.
-Disposable income, or money left after taxes, grew 1.5% a year from 2007 through 2009, compared with a 2.2% previous projection.
-Higher incomes and less spending meant bigger savings as a proportion of disposable income, with the savings rate reaching 7.2% in 2Q09, the highest since ’92.
Observe & Report – Opportunities for Rent
U.S. apartment landlords are seeing a surge in rentals as mounting foreclosures reduce homeownership and an improving job market for young adults encourages them to find their own places to live.
The number of occupied apartments increased by 215,000 in the 64 largest U.S. markets in the first half of the year, according to MPF Research, almost twice the units added in all of 2009 and the most since the firm began tracking the data in 1992. The vacancy rate declined to 6.6 percent last month from 8.2 percent in December.
“Overall demand is pretty stunningly strong in the first half,” Greg Willett, a vice president at the Carrollton, Texas- based apartment-industry research firm, said in an interview.
Investors are betting the expanding ranks of renters will lead to earnings increases next year of about 5 percent to 10 percent or more for apartment real estate investment trusts such as Equity Residential and AvalonBay Communities Inc. UBS AG this month raised its rating on AvalonBay, Essex Property Trust Inc. and Post Properties Inc. to “neutral” from “sell.”
The change signifies a “less bearish” view on apartments, while acknowledging that “headwinds will remain,” according to the July 7 report by New York-based analysts Dustin Pizzo, Ross T. Nussbaum and Derek Bower.
“The apartment REITs have priced in the most growth within the broader REIT group and as such are most vulnerable if the economy slows and job growth does not begin to come through in a meaningful way,” they wrote.
The Bloomberg REIT Apartment Index gained 24 percent this year through July 23, double the 12 percent advance in the broader Bloomberg REIT Index. The Standard & Poor’s Supercomposite Homebuilding Index fell 5.4 percent. (Source: Bloomberg)
Sports, Culture & Politics
- Madoff trustee Irving Picard is preparing to file a wave of lawsuits against Madoff investors who were "net winners," ultimately withdrawing more than they had originally deposited. Picard said these investors "made money at the expense of the people who didn't," and intends to claw back some of the funds for redistribution to other Madoff victims. The "net winners" protest they shouldn't be punished for withdrawing funds that turned out to be just a fraction of what they thought they had in their accounts.
- Representatives Charles Rangel of New York and Maxine Waters of California will each face public trials by the House Ethics Committee as to whether they violated various ethics rules and abused the power of their respective offices.
The weekend’s top-five box office performers as reported by Variety were:
1) Inception, Warner Bros., $27,520,000
2) Dinner for Schmucks, Paramount, $23,300,000
3) Salt, Sony Pictures, $19,250,000
4) Despicable Me, Universal, $15,542,630
5) Cats & Dogs: Revenge of…, Warner Bros., $12,525,000

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