"In every war zone that I've been in, there has been a reality and then there has been the public perception of why the war was being fought. In every crisis, the issues have been far more complex than the public has been allowed to know." -John le Carre
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Hindsight
Major market indices were lower last week. The DJIA dropped 3.29%, the S&P 500 fell 3.78%, and the Nasdaq declined 5.02%. Value stocks outperformed growth stocks. And the small cap index lost 6.33%. The 10-Treasury yield lost 14 basis points on the week, closing at 2.68%.
In case you are wondering why the Fed has not pulled the plug on this party before the evening become too late, consider a study just released by the Federal Reserve Bank of San Francisco. The study put the odds of a new recession at just over 50% over the next two years as job growth remains anemic. That's higher than most economists believe likely, and so a rather unnerving assessment.
There was one positive data point, though it was sort of like a backhanded compliment. It showed a 0.9% drop in second quarter labor productivity. The decline ended five consecutive quarters of strong productivity growth as employers worked existing staffers harder and longer for less pay. People don't complain when they fear losing their jobs. This allowed businesses to ramp up production while hiring no one.
How is that good? Since January, productivity increased by 6.1%. A huge gain. Production expansions fueled by low interest rates will increasingly require the hiring of new employees. And this will help put downward pressure on the unemployment rate in the months to come. That's the hope, at least.
According to Deutsche Bank economist Joseph LaVorgna, past productivity gains have almost always slowed quite dramatically at this point in the economic cycle. This translates into an increase in job creation. With any luck, new jobs should start showing up soon, he says. Stay tuned...
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Economically Speaking
- The United States will take Russia's export potential on the world grain market when an export embargo comes into force on Aug. 15, Russian Agriculture Minister Yelena Skrynnik told Ekho Moskvy radio station on Aug. 11, RIA Novosti reported.
- The Fed said this week that "the pace of economic recovery is likely to be more modest in the near term than had been anticipated." The central bank said it will buy U.S. Treasuries with proceeds from mortgage holdings. It set a $2.05 trillion floor on its holdings of government bonds and housing debt to buoy an economic recovery. The Fed's statement followed a government report last month that showed the recession that started in December 2007 was worse than estimated.
- The FOMC met expectations by announcing it would keep interest rates locked between 0 and .25% for an extended period because of soft U.S. economic conditions. Further, it said it would likely provide some additional help in an attempt to bolster the struggling recovery.
- Initial jobless claims unexpectedly increased last week by 2,000 to 484,000, the highest level since February, Bloomberg reported. Companies may be losing confidence in the recovery and could be hesitant to hire.
- The economy "is likely to deteriorate progressively starting sometime next summer," according to researchers at the San Francisco Fed. Over the next 18-24 months, the odds of another recession are higher than that of expansion, as measures of consumer spending and confidence have dropped and private hiring has fallen short of expectations.
- A review by the Congressional Oversight Panel found that banks in foreign countries benefited from the $700B bailout fund that was set up under TARP. In the case of AIG, banks in Germany and France were large beneficiaries of the $70B the U.S. government gave the insurer to avoid a large-scale financial collapse. The report also criticized Treasury officials for not keeping closer tabs on how banks used the bailout funds.
- Retail sales rose less than forecast in July as a lack of jobs caused consumers to hold back on spending. Sales rose 0.4%, led by autos and gasoline. Economists predicted a 0.5% gain.
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Foreign Observations
- Russia's Micex Index was down as bankers fled Moscow to escape smoke from wildfires incited by record heat. 500 wildfires, burning 300 miles east of Moscow, threaten the secretive Sarov nuclear research facility. The U.S. has sent firefighting equipment to assist the Russian's in their efforts to quell the broadening catastrophe.
- Food prices in some Russian retail chains have increased in recent weeks by 15-20 percent, although official statistics have not yet been recorded, Rossiyskaya Gazeta reported Aug. 11. Prices on dairy products and cereals have jumped. Dealers attributed the increase to the abnormal heat.
- South Korea's won fell after North Korea fired artillery into the ocean near a disputed sea border.
- Greece was able to take 39.7 percent off of its deficit in the first half of 2010 compared to the same period in 2009, slightly exceeding the goal established for a bailout, DPA reported Aug. 11, citing local media. The European Central Bank (ECB), the International Monetary Fund (IMF) and the European Union had set a target of 39.5 percent.
- U.S. Gen. David Petraeus congratulated the Afghan Ministry of Defense on Aug. 11 for reaching its goal of having 134,000 trained national army soldiers two months ahead of schedule, CNN reported. Petraeus aid the growth of the national army is encouraging as Afghan troops work together with coalition forces to achieve common goals in the new Afghanistan.
- Foreign countries told Israel not to respond harshly to the recent border-shooting incident, according to Lebanese newspaper A-Sharq al-Awsat, Israel National News reported Aug. 11. According to the report, French Foreign Minister Bernard Kouchner told U.S. Secretary of State Hillary Clinton and others that Israeli Defense Minister Ehud Barak was planning a broad action against Lebanon in response to the shooting. According to sources, there were contacts at the highest levels involving Clinton, French President Nicolas Sarkozy, and Egypt, Jordan and other parties that wanted to rein in the rush to open battle.
- Iran ruled out the possibility of a new war in the region, Foreign Ministry spokesman Ramin Mehmanparast said on Aug. 10, IRINN reported. Iran's view is that despite the intentions of several groups in America, the West, and especially Israel, to inflict damage to regional security, investments rule out the possibility of a war, Mehmanparast stated.
- Russia has notified foreign trade partners of its decision to ban grain exports from Aug. 15 to Dec. 31, stressing that the measure is temporary, Itar-Tass reported Aug. 10, citing the Kremlin press service. Russian First Deputy Prime Minister Victor Zubkov spoke with Egyptian Trade and Industry Minister Rachid Mohamed Rachid, Turkish Agriculture Minister Mehmet Mehdi Eker and Israeli Deputy Prime Minister and Foreign Minister Avigdor Lieberman about the droughts in several Russian regions and about the ban. Zubkov said that the Kremlin will complete an analysis of grain reserves after Oct. 1, at which time it will decide on the possible resumption of grain exports.
- Saudi Arabia has approved a five-year $385 billion investment plan for infrastructure, health, education and welfare projects across the country, Arab News reported Aug. 10, citing Economy and Planning Minister Khaled al-Gosaibi. The plan will prioritize projects directly linked to improving living standards, and aims to increase the country's competitiveness and give it a "knowledge-based economy," al-Gosaibi said. The plan, Saudi Arabia's ninth, is worth 67 percent more than the previous development plan.
- The United States said it will send another $20 million in aid for those affected by flooding in Pakistan, bringing the total to $55 million, AFP reported Aug. 10.
- The Iraqi army will not be ready to handle the country's security on its own until 2020 and will need support from the United States through that time, Iraqi army chief of staff Lt. Gen. Babaker Zebari said Aug. 11, AFP reported. Zebari said security problems may arise after the completion of the U.S. troop withdrawal at the end of 2011 if Iraqi politicians do not find a way to "fill the void." He said the beginning of the U.S. Army's withdrawal is going well because some U.S. troops are still in Iraq.
- The door is open if Iran agrees to resume talks with the International Atomic Energy Agency, U.S. National Security Adviser James Jones said on Aug. 12, the Telegraph reported. When asked whether U.S. President Barack Obama may meet the Iranian leader, Jones said all things are possible if a convergence of paths is found. He said the return of three U.S. hikers would be an important gesture that could lead to better relations. There is no point in a theatrical meeting, he stated, adding it is unlikely the Iranians will agree to U.S. demands to rein in its nuclear program.
- The Hellenic Statistical Authority announced on Aug. 12 that Greece's gross domestic product was down 3.5 percent in the second quarter, compared to the same quarter the previous year, and down 1.5 percent when compared to the previous quarter.
- Chinese People's Liberation Army Maj. Gen. Luo Yuan wrote that countries and their military need respect, in response to the deployment of an American aircraft carrier for naval exercises, Reuters reported Aug. 12. Writing in the Liberation Army Daily, Luo said that if someone "hurts me, I must hurt him," adding that they were not idle words. He said Washington is "pushing its security boundary to the doorstep of others," naming the Yellow and China seas, and said the security of other states is secondary for the Americans. While China does not wish to have enemies, he wrote, China will not be bullied.
- Germany's gross domestic product (GDP) rose by 2.2 percent from first quarter to second quarter, Destatis reported on Aug. 13. It is the first time that a reunified Germany recorded such quarter-on-quarter GDP growth, the statistical office stated, adding that first quarter growth was revised upward with a 0.5 percent increase. The eurozone economy grew at its fastest pace in four years, propelled by Germany's strong growth. Eurozone GDP expanded 1% in Q2 vs. Q1, and was up 1.7% from the year-earlier period. The consensus estimates had been for 0.7% and 1.4% growth, respectively.
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Equity Markets Review
- Cisco Systems beat earnings estimates but forecast lower-than-expected sales due to economic headwinds.
- BP made an initial $3B deposit into the $20B escrow account established to pay for Gulf spill claims, and is said to be close to an agreement with government officials as to how to guarantee the remaining $17B obligation. BP is likely to use future revenues to guarantee its fund, a move that gives both sides an incentive for production to continue in the Gulf. There had also been discussion of securing the fund with BP's oil fields in the Gulf, but sources said the government didn't want to end up owning wells. These options provide the government with collateral in case BP's efforts to generate the funds through ongoing operations and asset sales fall short.
- ING reported a better-than-expected Q2 profit of €1.1B ($1.4B), up from a €71M profit in the year-earlier period. A decline in loan-loss provisions helped the banking division swing back to a profit, but the insurance arm reported a €16M loss after last year's €191M gain because of the "sharp decline in equity markets."
- Disney beat expectations for its FQ3 earnings with net income of $1.3B. The results were helped by an improvement in the advertising climate and by a series of hit movies and sports events. Theme parks continued to struggle as the broader economy remained weak.
- GM is seeking to raise between $12B and $16B when it launches its IPO, which is expected to close later this year. It would be the second largest IPO in U.S. history, behind Visa's nearly $20B sale of shares in 2008. Also, the company announced that Dan Akerson, who has served on GM's board since July 2009 and was previously the managing director at the Carlyle Group, will take Ed Whitacre's place as CEO.
- Deal activity rose this week, boosting hopes that U.S companies are ready to put their $1.8 trillion of stockpiled cash to work. The Blackstone Group agreed to buy Dynegy for $4.7 billion, and International Business Machines said it would acquire Unica for about $480 million.
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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... 1.53%
Materials... 1.71
Consumer Staples... 0.63
Utilities... 1.95
Consumer Discretionary... 2.03
Financials... 0.48
S&P 500... 1.82
Industrials... 1.83
Healthcare... 3.97
Telecommunications... 1.72
Energy... 3.18
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Sports, Culture & Politics
- Renowned energy investment banker and leading proponent of the "peak oil theory" Matthew R. Simmons died in an accidental drowning at his home in Maine.
- U.S. officials reopened 9 percent of the fishing areas in the Gulf of Mexico that were closed due to the oil leak after finding that seafood from the areas is safe to eat, Bloomberg reported Aug. 10. Roughly 22 percent of the Gulf's federal waters remains closed to commercial and recreational fishing.
- Senator Ted Stevens of Alaska was killed last week when a private aircraft crashed in route to a remote fishing lodge. The four other passengers also died.
The weekend’s top-five box office performers as reported by Variety were:
1) The Other Guys, Columbia Pictures, $35,600,000
2) Inception, Warner Bros., $18,600,000
3) Step Up 3-D, Disney, $15,532,000
4) Salt, Sony Pictures, $11,100,000
5) Dinner for Schmucks, Paramount, $10,500,000
Tags:
Weekly Markets Review
by HPWM LLC on August 9, 2010 at 1:10pm
"... [this economic condition] has been brought about by policies which the majority of economists recommended and even urged governments to pursue. We have indeed at the moment little cause for pride: as a profession we have made a mess of things."
- Friedrich August von Hayek, Nobel Speech 1974
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Hindsight
Major market indices were higher last week. The DJIA gained 1.79%, the S&P 500 added 1.82%, and the Nasdaq climbed 1.50%. Growth stocks outperformed value stocks. And the small cap index lost 0.03%. The 10-Treasury yield lost 9 basis points on the week, closing at 2.82%.
According the Fed Chairman Bernanke, the economic outlook remains “unusually uncertain.” And while stocks in July enjoyed the biggest advance in a year, jobs gains were weaker than economists forecast, raising concerns that companies are not hiring enough to assist in giving consumer spending a boost.
Lack of jobs growth (and a looming midterm election) has certain watchers speculating that the Fed may announce additional stimulus measure to boost growth. This could consist of more quantitative easing, which has generally been good for risk assets like equities. That could extend what has been a positive earnings season, thus far. Since the 2Q earnings season began, about 77 percent of companies reporting have beaten analyst’s estimates for per-share profit, Bloomberg reports.
Can stocks continue to climb? Even after the 66-percent surge in equities since March ’09, stocks remain inexpensive compared to historic levels. P/E ratios are at 15.1, compared to a 20-year average of 20.5. And if you look at the forward-looking 12-month estimates, stocks trade at a multiple of 12.2—more attractive still.
Given all the volatility, tumult and uncertainty, one might ask how equities can possibly prosper in this environment?
Look. Few individuals look great when they first wake up. Bed head. Bad breath. Equity markets are still in the AM of their recovery. They went through a long, nightmare-plagued bout of sleep (late 2007 to early 2009). Now, having woken, the market is stretching, yawning and attempting to get up and carry on with the day. But, the temptation to lie down and go back to sleep still exists. And the stock market often appears, similar to you in the early morn, to be a bit out of sorts.
Give it time. A little coffee. A bagel and a hot shower. Suddenly, could be a new market. Stay tuned…
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Economically Speaking
-Consumer spending and personal incomes unexpectedly stagnated in June, underscoring the consequences of a lack of jobs in the U.S. It was the first time since last September that incomes showed no monthly increase. Conversely, the savings rate hit a one-year high.
- The Institute for Supply Management reported that U.S. service sector growth picked up in July. Service companies have expanded every month this year, but the sector continues to grow at a less robust pace than in the manufacturing sector. Its slow recovery has put a damper on overall hiring because it accounts for 80% of U.S. employment.
- Retail sales at U.S. chain stores rose 2.9% in July, falling short of forecasts, as markdowns failed to inspire consumers.
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Foreign Observations
- Despite being a major energy exporter, Venezuela is currently mired in economic recession and suffering from record-high levels of inflation, a dismal condition known as "stagflation." As the country's economy deteriorates on a number of fronts, the government continues to struggle with an electricity crisis and worsening food shortages that are threatening to undermine support for the ruling party in the lead-up to September legislative elections.
- A group of 11 senators raised concerns about China's currency practices, urging the government to take stronger measures to combat "unfair" trade practices. "There is no doubt that the Chinese government is manipulating its currency to keep its value lower than it otherwise would be, which gives its exports a significant price advantage over U.S. manufactured goods," the group wrote. "During this economic recovery, it is critical the administration use all trade enforcement tools available to ensure U.S. industries the opportunity to compete fairly." Earlier Wednesday, Treasury Secretary Geithner said the U.S. will be watching how fast and how much China lets its yuan currency appreciate following Beijing's recent commitments to forex flexibility.
- In be a watershed moment for Taiwan, it said today it is exploring a trade agreement with Singapore. If not blocked by Beijing, which considers Taiwan its own, other countries will likely seek similar pacts with export-hungry Taiwan. Next up? Former colonial ruler Japan, Malaysia or the Philippines. Taiwan has not signed free-trade agreements with major trading partners due to opposition from Beijing, but China is expected to back off following its own economic cooperation framework agreement with Taiwan signed in June.
- Growth in manufacturing activity slowed in many of the world's major economies in July; the weaker pace indicates that factories will not be the strong driver of growth that they were earlier in the year. Growth slowed in a large portion of Asia, with China's manufacturing activity expanding at the slowest pace in 17 months amid tightening measures and uncertain global demand. In Europe, however, activity strengthened.
- Greece met European Union and International Monetary Fund austerity targets, but monitors warned of overspending at local levels.
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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... 1.53%
Materials... 1.71
Consumer Staples... 0.63
Utilities... 1.95
Consumer Discretionary... 2.03
Financials... 0.48
S&P 500... 1.82
Industrials... 1.83
Healthcare... 3.97
Telecommunications... 1.72
Energy... 3.18
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Equity Markets Review
- Procter & Gamble grew net sales by 5 percent during the fourth-quarter of 2010, but net earnings declined 12 percent to $2.2 billion on higher expenses.
On a per-share basis, the company earned 71 cents during the quarter, which was shy of analyst consensus estimates of 73 cents, according to Thomson Reuters.
- Hewlett-Packard CEO Mark Hurd resigned when news broke that he had a personal relationship with a private contractor (allegedly with actress, model and reality TV contestant Jodie Fisher) who received inappropriate payments from the company. HP shares fell 6.4%. Hurd’s replacement will be left with the task of following what was a very successful five-year term.
- Freddie Mac posted a 2Q loss and said it would request another $1.8 billion in government (i.e. taxpayer) aid, reports The Wall Street Journal.
- Fannie Mae posted a $1.2B net loss in Q2 and asked the government for another $1.5B in aid. Continued weakness in the housing market could dampen Fannie's efforts to turn around its 12-quarter losing streak. Separately, the White House denied reports that it planned to change its policy towards Fannie and Freddie Mac, after analysts had speculated the Obama administration might tweak rules at the mortgage giants to spark a refinancing wave.
- GE and Intel announced the creation of a 50/50 joint venture in a new healthcare operation expected to launch by year's end. The companies have collaborated before on bringing technology into homes of seniors and those with chronic conditions via "telehealth."
- The Washington Post Co. confirmed it's selling Newsweek to Dr. Sidney Harman, founder of Harman International. Terms of the deal were not disclosed, but Harman has agreed to keep most of the staff, while Washington Post Co. will retain the pension assets and liabilities.
- Morgan Stanley plans to spin off FrontPoint Partners, the hedge fund it bought in 2006, since the financial reform bill restricts bank ownership of such funds. This would mark the first big structural move by a Wall Street firm in response to the Dodd-Frank financial reforms.
- BP said its "static kill" operation to seal the Macondo well appeared to have been successful, calling it a "significant milestone" in its efforts to bring an end to the Gulf oil spill disaster. A relief well "remains the ultimate solution to kill and permanently cement the well," BP said, and the company hopes to have the first of two relief wells ready by mid-August. The news came as upwardly revised estimates of the spill's size significantly increased the potential fines faced by BP; penalties could top $20B if the company is found liable for gross negligence.
- Sources say Goldman Sachs plans to spin off its proprietary trading business as early as this month to comply with the so-called Volcker rule, while Morgan Stanley is nearing a deal to cede control of its in-house hedge fund firm FrontPoint Partners. The desks manage about $7B and $9B respectively. The moves are the beginnings of what promises to be a major Wall Street shakeup as I-banks offload some of their proprietary trading businesses out of concern employees will bolt for firms unaffected by the new legislation.
- HSBC's reported pretax profit more than doubled to $11.1 billion in the first half.
- BNP Paribas posted a 31% increase in net income as provisions for bad loans dropped.
- Barclay's posted a 29% increase in net profit, but costs soared and revenue fell at Barclay Capital's investment banking unit.
- Société Générale's earnings more than tripled as strong retail operations and lower provisions helped offset a weaker investment banking business.
- American International Group swung to a $2.7 billion net loss for the second quarter because of charges associated with a unit that is being sold. That loss compares with a $1.8 billion net profit a year ago. Still, the company's insurance business generated an operating profit.
- Toyota Motor raised its profit forecast for its fiscal year and posted its highest quarterly net profit in two years after it was able to improve its U.S. finance division and reduce costs.
- Rio Tinto's profits more than tripled in the first half, and the company made plans to increase output in Australia and Africa.
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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.
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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)
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Sports, Culture & Politics
- German authorities said they closed a Hamburg mosque used as a meeting place by the 9/11 attackers, AP reported Aug. 9. Hamburg officials said the Taiba mosque was shut down and its cultural association was banned. The mosque reportedly again became the city's "main center of attraction for the jihad scene." Some members who belonged to the Taiba group and prayed at the mosque reportedly moved on to a radical training camp in Uzbekistan.
- In a proposed $30 billion, 10-year arms package, the United States plans to sell advanced F-15 fighter jets to Saudi Arabia but won't equip them with long-range weapons systems and other arms, diplomats and officials said on Aug. 9, The Wall Street Journal reported.
- Chinese Vice Premier Wang Qishan on Aug. 9 pledged to further enhance relations with the United States, stressing the importance of mutual understanding, Xinhua reported. At a meeting with U.S. Senator Evan Bayh, Wang said China will "push forward the reform and opening-up process."
The weekend’s top-five box office performers as reported by Variety were:
1) The Other Guys, Columbia Pictures, $35,600,000
2) Inception, Warner Bros., $18,600,000
3) Step Up 3-D, Disney, $15,532,000
4) Salt, Sony Pictures, $11,100,000
5) Dinner for Schmucks, Paramount, $10,500,000