“Success is never final, failure is never fatal. It’s courage that counts.” –John Wooden

+++
Hindsight
Major market indices finished slightly lower last week. The DJIA lost 0.28%, the S&P 500 faded 0.21%, and the Nasdaq lost 0.44%. Growth stocks underperformed value stocks. And the small cap index gained 1.23%. The 10-Treasury yield lost 10 basis points on the week, closing at 2.51%.
The good news? September defied the trends portended in the trader’s almanac and saw the stock market rise. The bad news? The market was higher in July, as well. Only it was bookended by June and August, both of which saw the market trade down. October may well see this pattern repeated. Up. Down. Up. Down.
Fortunately, we can always look to markets outside of the U.S. that are currently making more productive use of capital. Destinations like select emerging markets, into which roughly one million people are born or migrate every week.
Either way, keep in mind that the economy and stock market have almost no connection much of the time. Much of the economic data discussed by the media is usually meaningless to stocks. The two crucial factors impacting equity markets are interest rates and inflation rates.
When interest rates and inflation are low, and corporate earnings growth increases, stocks advance. If for no other reason than the growth in price/earnings multiples. Higher earnings and higher P/Es lead to a higher stock market.
Last week, the Fed told us that, due to low output and employment growth, it believes inflation is too low; and it is unlikely to lift rates for at least a year. That’s a momentous pronouncement. And now we see the realization of that pronouncement settle in with investors, and stocks are rising. For now.
Of course, we expect rough patches. But, the stage is being set for the next dramatic act. So pull up a chair and stay tuned…
+++
Economically Speaking
- Wall Street economists are joining together in their opinion that international reliance on U.S. trade has diminished to the point that the global economy can expand even as the U.S. enters an economic slowdown, Bloomberg reports. “So long as it doesn’t turn to flu, the world can withstand a cold from the U.S.,” said Ethan Harris, economist at BofA Merrill Lynch.
- Foreclosed homes are selling at an average discount of 26%, with nearly one-fourth of U.S. transactions involving properties in some stage of mortgage distress, reports RealtyTrac.
- The House easily passed legislation to penalize China's foreign exchange practices, sending a powerful signal to Beijing to boost the value of its currency but risking a backlash that could harm U.S. companies and consumers. The measure allows but does not require the U.S. to levy tariffs on countries that undervalue their currencies. Chinese Premier Wen Jiabao has said China would suffer "major social upheaval" if it acquiesces to demands for a 20%-40% rise in the yuan. Earlier Thursday China warned that the bill could seriously affect bilateral ties.
- Three different Federal reserve officials offered three different views on the economy and whether the Fed should buy more Treasury bonds to push down long-term interest rates and stimulate growth: Boston's Eric Rosengren is a strong supporter, Philly's Charles Plosser is clearly opposed, while Minneapolis Fed's Narayana Kocherlakota has been skeptical but his gloomy outlook could sway him. The Fed is a house divided, but if Bernanke really wants to move to quantitative easing, analysts say he's got the votes.
- Analyst Meredith Whitney, who forecast much of the banking crisis of 2008, expects state to undergo a similar crisis to the banking industry implosion as crippling deficits come back to haunt them. "The similarities between the states and the banks are extreme to the extent that states have been spending dramatically and are leveraged dramatically" she said. Whitney warned that banks aren't out of the woods yet, predicting a sharp drop in housing prices and shrinking trading revenues will decimate Q4 earnings.
- The Institute for Supply Management said its purchasing managers’ index expanded in September for the 14th straight month, rising to 54.4%. But, the U.S. new orders dropped to 51.1 from 53.1, and the employment gauge fell to 56.5, the lowest in six months.
- Consumer confidence dipped in September to 48.5, the weakest level since February.
- Business spending on buildings and machinery continued to rise, with the index of capital expenditures increasing 6.5 points to 93 in 3Q.
+++
Foreign Observations
- China's State Council has approved measures to prevent housing prices from increasing too quickly, including requiring a 30 percent down payment on mortgages and limiting the number of homes people are allowed to buy in cities where prices are high or have risen quickly, AFP reported Sept. 29.
- China "firmly opposes" a bill passed by U.S. lawmakers targeting Beijing for allegedly manipulating its currency, according to a Chinese Foreign Ministry spokeswoman, AFP reported Sept. 30. China warned that any pressure on the issue could "severely damage" trade ties.
- Moody's Investors Service downgraded Spanish government debt Sept. 30 lowering the rating from AAA to AA1 with a stable outlook, AP reported. Concerns over Spain's weak economic growth prospects and “considerable deterioration” in the government's financial strength were the cause of the downgrade, said Kathrin Muehlbronner, a Moody's Vice President and lead analyst for Spain. The Spanish economy is likely to grow an average of about 1 percent annually, she stated, citing worsening debt affordability and significant borrowing requirements that make the government vulnerable to market volatility.
- Intelligence agencies thwarted a plot to launch Mumbai-style attacks in London and major cities in Germany and France, Sky News reported Sept. 28. Pakistani-based militants' plan to launch the simultaneous attacks was in the advanced stage but the attacks were not imminent. Intelligence agencies had tracked the plotters for some time. The plot came to light after intelligence-sharing efforts among the United Kingdom, France, Germany and the United States. The U.S. military began assisting its European allies by targeting the leaders behind the plot in the Waziristan region of Pakistan.
- During Inter-Korean military talks lasting only two hours, South Korean officials urged North Korea to admit to, apologize for and punish those responsible for the ChonAn warship attack, but the North said it cannot accept the multinational investigation results, Seoul's Defense Ministry stated Sept. 30, Yonhap reported. South Korea also demanded a halt to North Korea’s military threats and aggressive behaviors at sea borders. The North Korean lead negotiator called for a “humanitarian” approach to dealing with issues.
- Spain’s unemployment numbers increased 48,102 from August to September, putting the total number of unemployed above 4 million, Spain’s Ministry of Labor and Immigration reported Oct. 4. A year ago unemployment grew by 80,367 from August to September, the ministry stated, adding that the annual unemployment rate increased by 8.3 percent or 308,316 individuals.
- Russia's grain-export embargo will not likely be lifted before next July, First Deputy Prime Minister Viktor Zubkov, said Oct. 1, RIA Novosti reported. Zubkov is responsible for the country's agribusiness. He questioned raising the ban, stating that Russia must secure its own reserves, overcome winter and get ready for a new harvest.
+++
Equity Markets Review
- AIG Group agreed to sell common shares in order to pay the government back on the $49.1 billion preferred shares it currently owns.
- For the first time in at least a decade, IPOs in emerging markets raised more than those in developed, industrialized markets, by a total of $138 billion to $62 billion.
- Goldman Sachs sold $2.25 billion from the sale of part of its stake in Industrial & Commercial Bank of China. The bank increased the size of the share placement due to strong demand, cutting its holdings in ICBC by 23%. Goldman continues to own 3% of the Beijing-based bank. Regulatory risks, coupled with ICBC's upcoming rights offering, were considered factors behind Goldman's selldown.
- McDonald’s ) is mulling plans to drop its health insurance coverage for nearly 30,000 workers unless regulators waive a requirement of the health care reform law. The battle is over so-called “mini-med” plans that provide limited benefits to low-wage workers. McDonald’s claims that new requirements in the health bill would make it too onerous to continue to offer the plans and is seeking a waiver.
- AIG and the government are finalizing a plan that would accelerate repayment of some of AIG's debt to taxpayers and allow the government to exit its 79.8% stake, but only after rising to over 90%. The conversion price of the Treasury's $49B in preferred shares is the main point of contention, with AIG officials trying to ensure shareholders "don't lose all the upside," and the Treasury concerned about leaving too much meat on the bone. The plan, which needs the approval of AIG's board, the Treasury, the Fed, and three trustees who oversee the government's stake, could be released soon.
- Research In Motion unveiled its first tablet computer, the PlayBook, which it hopes will compete with Apple's iPad. The device runs on a new operating system and has a seven-inch screen, but will not connect to a mobile phone network.
+++
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... (0.73)%
Materials... (0.66)
Consumer Staples... (0.31)
Utilities... (0.26)
Consumer Discretionary... (0.71)
Financials... (0.77)
S&P 500... 0.21
Industrials... (0.56)
Healthcare... (0.55)
Telecommunications... 0.95
Energy... 2.47
+++
Sports, Culture & Politics
- Rahm Emmanuel will resign his position as white house chief of staff in order to run for the position of Chicago’s mayor.
- Tony Curtis, actor and Oscar nominee, has passed away at 85.
- The Cincinnati Reds clinched the National League Central Division as well as a spot in the playoffs for the first time since 1995 (when right fielder Jay Bruce was seven).
The weekend’s top-five box office performers as reported by The New York Times were:
1) The Social Network, Columbia TriStar, $23,000,000
2) Legend of the Guardians, Warner Bros., $10,885,000
3) Wall Street 2, 20th Century Fox, $10,100,000
4) The Town, Warner Bros./Legendary Films, $10,000,000
5) Easy A, Screen Gems, $$7,000,000