Weekly Markets Review 12-16-2009

December 16, 2009

“The problem with socialism is that, sooner or later, you run out of other people’s money.” – Margaret Thatcher
Equity markets were flat last week on mixed economic data. For the week, the DJIA and S&P 500 rose 0.80% and 0.04%, respectively, while the Nasdaq lost 0.18%.
Japan reported less than expected GDP growth, followed by Greece's government debt downgrade, and then Standard & Poor's analysts cut Spain's credit outlook to negative. Also, an auction of U.S. Treasury debt was softer than expected. This is all, of course, a continuation of the concerns over rising public debt levels that was brought to the surface back by the troubles in Dubai last month. This news could have sent markets lower. But it did not, as analysts upgraded some major Dow components and a weaker dollar saw traders buying risky assets.
In keeping with my Business Courier article of three weeks ago, Brazil continues to be exciting. 3Q GDP growth numbers come out Thursday, and the number may be large, significant of a huge expansion over the last year. Industrial production expanded 2.2% in October over September, and there is good reason to believe the expansion will continue. Anecdotal evidence suggests car sales grew at more than a 40% annual pace in November as consumer responded to government tax breaks which expire in January. The government also recently extended a few consumer tax breaks last week. These include discounts on construction materials and commercial vehicles as well as furniture and hybrid cars.
Brazil's largest challenge is its low investment rate, which is lower than any other large emerging market country. The consequences are clear: Brazilian roads and railways are inadequate and its major shipping ports are overcapacity. Even electricity had to be rationed by the government back in 2001 and 2002 because of insufficient supply. The government announced a "Growth Acceleration Program," which is focused on fixing these problems through targeted investment of $60 billion. The program was originally supposed to run between 2007 and 2010, but red tape has left more than half the funds still in the bank.
Brazil's economy is likely to be the fifth largest in the world by 2020. The fact that it has achieved so much with so little in the way of infrastructure is further evidence of the awesome potential of that country .
Finally, while there is still much pessimism in the air, and investors continue to shun many risk assets, the bond market (which tends to be the smartest part of the market) continues to believe that these markets are going higher, and that risk assets are worth holding. I find it hard to bet against them. In fact, if stocks were trading at the same level as credit, these markets would be much higher. And for those who argue that the equity markets have rallied too much, keep in mind that the S&P 500 would have to rise 41% from here just to return to where it stood three years ago. Stay tuned…
Equity Markets Review
* It's too soon to know whether the United States' recovery will last, U.S. Federal Reserve Chairman Ben Bernanke said in a speech to the Economic Club of Washington D.C. Bernanke also pledged to keep key interest rates at record lows for an "extended period," citing "formidable headwinds" that include a still-weak job market, cautious consumers and tighter credit. These factors "seem likely to keep the pace of expansion moderate," he said. The Fed also said inflation is under control and expected to remain tame.
* U.S. foreclosure filings will hit 3.9M in 2009, surpassing 2008's record total of 3.2M. But the short-term picture is somewhat brighter, with November filings down 8% to 307K, the fourth straight month of contraction after peaking in July, reports RealtyTrac.
* Past-due commercial mortgage-backed securities rose 4.06% from 1.17% a year earlier, the Mortgage Bankers Association (MBA) said yesterday (Monday). That's the most since the body started tracking such data in 1997. Roughly 3.43% of bank-owned loans on offices, apartment buildings, shopping centers and other income-producing properties were at least 90 days past due, up from 1.38% a year earlier, the MBA said. "Commercial and multifamily mortgages continued to feel stress in the face of the weakened economy," said Jamie Woodwell, MBA's vice president of commercial real estate research.
* Consumer credit fell by $3.51 billion in October, or 1.7% at an annual rate to $2.48 trillion a U.S. Federal Reserve report showed. That was significantly lower than the $9.4 billion drop expected by 34 economists polled by Bloomberg News. "The closer we are to turning the corner in the labor markets, the closer consumers will be to taking on more credit," said Chris Rupkey, chief financial economist at The Bank of Tokyo-Mitsubishi UFJ Ltd. told Bloomberg.
* Mortgage and credit-card delinquency rates should decline next year, ending a trend of unprecedented year-over-year increases that began in 2006, TransUnion said in its 2010 outlook. Credit-card debt delinquency is expected to decline to 1.04% from 1.07% this year, as consumers "keep incremental debt to a minimum and aggressively manage debt repayment."
* Moody's fingered the U.S. and U.K. among top-rated sovereign borrowers, saying the two must prove they can reduce their bulging deficits or risk a downgrade to their AAA credit ratings. Moody's called the pair merely "resilient" rather than "resistant," a label it applied to Canada, France and Germany. Under its most pessimistic scenario, the U.S. could lose its rating in 2013 if economic growth lags, interest rates rise and the government fails to shrink the deficit or recover its loans to the financial sector.
* Japanese Prime Minister Yukio Hatoyama's Cabinet crafted a 7.2 trillion yen stimulus package to help shore up the flagging economy, AP reported Dec. 8. Lawmakers said the increase of 100 billion yen will be financed by issuance of construction bonds. The package is focused on improving employment conditions, corporate financing of small and midsize firms and boosting private consumption by facilitating the purchase of environmentally friendly products. Japan’s economy expanded less than a third of the pace initially reported in the three months to September, Bloomberg reported Dec. 9. Gross domestic product rose at an annual 1.3 percent rate.
* A survey of 369 U.S. firms showed China will continue to be U.S. companies' top investment destination in 2010, the American Chamber of Commerce (AmCham) in Shanghai said yesterday (Wednesday). More than 90% of those polled by AmCham had an optimistic business outlook for the Red Dragon, up from 81% in a similar 2008 survey. The study also revealed that 64% of companies polled plan on increasing their 2010 investments in China, up from 58% that increased their investments this year. "American companies are finding that their performance in China is the bright spot in an otherwise difficult global picture," said AmCham Shanghai Chairman J. Norwell Coquillard.
* Wholesale inventories in the United States gained by 0.3% in October, the Commerce Department said, easily surpassing economists' expectations of a 0.5% decline. The gain is the first after a string of 13 straight declines, fueling hopes the nascent recovery means companies will continue to add inventories. Sales at the wholesale level also gained in October, rising 1.2%, better than the 0.7% gain economists were expecting, The Associated Press reported.
* The Obama administration plans to announce that it intends to extend the life of the $700 billion financial bailout fund until next October, Reuters reported Dec. 9. One official said the administration was expected to pledge to use no more than $560 billion from the fund. Another said the plan would be to tap the program to help homeowners secure mortgages through the government's housing program and to free up credit for small businesses to spur job growth.
* Russia's gross domestic product dropped 8.9 percent in the third quarter when compared to the same period in 2008, and grew by 13.8 percent when compared to the second quarter of 2009, RIA Novosti reported Dec. 11, citing the Russian Federal Statistics Agency.
* Timothy Geithner told a Congressional oversight committee Thursday it was essential for the government to extend its $700B bailout program for banks another year to ensure continued stability, while admitting that the government will likely lose money from some of its biggest recipients - AIG, General Motors and Chrysler.
* Net worth for households gained 5% to an estimated $53.4 trillion in the third quarter, the U.S. Federal Reserve said yesterday (Thursday), marking the second consecutive quarter of growth. The gains came as U.S. stock holdings rose almost 17% to $7.4 trillion, according to the Fed's quarterly flow of funds report.
* The Procter & Gamble Co. Chairman A.G. Lafley said he will retire on Feb. 25, and named Chief Executive Officer Robert McDonald as his successor. Procter & Gamble more than doubled sales under Lafley, aided by the $61 billion acquisition in 2005 of Gillette Co. Lafley, who stepped down as P&G's CEO this past summer, was also responsible for reviving the Tide laundry business in 1992 by introducing a liquid form of the detergent and a Tide with bleach.
* The Kroger Co. reported 3Q profits that were just shy of analyst expectations, citing deflation, increased competition and lower consumer spending. Share lost 11%.
* Five high-ranking American International Group Inc. executives last week said they are ready to resign if U.S. "pay czar" Ken Feinberg cuts their compensation significantly, The Wall Street Journal reported, citing people familiar with the matter. Among the executives is are the company's general counsel, Anastasia Kelly and the heads of AIG's largest insurance businesses, The Journal said.
* Global shipper FedEx said late Monday its FQ2 profit will exceed forecasts due to better-than-expected growth in international and ground shipments. CFO Alan Graf said overseas demand has "improved significantly" since Q1. Investors' reaction underscored FedEx's role as an economic bellwether: "It's definitely an up arrow for the global economy," Wells Fargo economist Mark Vitner said.
* Kuwait Investment Authority, the nation's sovereign-wealth fund, sold its $4.1 billion stake in Citigroup Inc., KIA said in an e-mailed statement obtained by Bloomberg News. The stake was purchased last year for $3 billion, netting KIA a profit of $1.1 billion. KIA's sale "will be a confidence-booster," M.R. Raghu, head of research at Kuwait Financial Center SAKC told Bloomberg. "It looks to be good news, making a profit in these times."
* The AOL Inc. and Time Warner Inc. marriage officially ended yesterday (Thursday), as AOL began trading on the New York Stock Exchange (NYSE) as a separate company. The "new" AOL is focused on generating ad revenue from a network of Web sites that include a lot of original and some syndicated content, as well as serving ads to Web publishers, pitting it squarely against juggernauts like Google Inc., Yahoo Inc. and Microsoft Corp.. AOL shares fell in their first day of trading, declining 0.63% to close at $23.52.
Weekly Sector Review
The sectors of the U.S. economy, as well as the S&P 500, have performed as follows:
Last Week / YTD
Information Technology… 1.71% / 54.05%
Materials… (0.67) / 42.25
Consumer Staples… 0.78 / 12.81
Utilities… 6.69 / 8.30
Consumer Discretionary… 3.56 / 37.73
Financials… (1.97) / 14.43
S&P 500… 0.98 / 22.49
Industrials… 2.03 / 18.32
Healthcare… 1.86 / 17.01
Telecommunications… 5.05 / 3.10
Energy… (2.51) / 9.58
2010 Country GDP Growth Estimates
Bespoke Investments has posted the consensus 2010 GDP growth estimates for 28 countries (+Europe) based on Bloomberg's survey of economists. As shown, all but one country is expected to see GDP growth in 2010. Spain is the lone country expected to see a decline in GDP at -0.40%. China is expected to see the most growth by a wide margin at 9.40%. Indonesia and Singapore rank second and third as 5.55% and 5.50% respectively. The US is tied with Canada for the best GDP growth estimate (+2.6%) of the G-7 countries. European G-7 countries and Japan are expected to see growth in the 1%-1.5% range.
Our research shows that in the four quarters coming out of a recession, the US has averaged GDP growth of 5.4%. With a consensus estimate of +2.6%, economists are clearly expecting a weak recovery in the US. However, does anyone remember a time when economists weren't expecting a weak recovery? (source: Bespoke Investment Group)
Sports, Culture & Politics
* Famed commodities investor Jim Rogers says the U.S. Federal Reserve should be audited and th en abolished, backing up a belief of U.S. Rep Ron Paul, R-TX, Rogers told Yahoo Inc.'s (Nasdaq: YHOO) Tech Ticker. The Fed is "the only institution in the world I know of that doesn't expect to be audited," said Rogers, adding that "it's incomprehensible to me these people are saying they have no reason to be audited - they must have done something wrong, must have something to hide."
* Iranian Foreign Ministry spokesman Ramin Mehmanparast stated that Iran's stance in the nuclear dispute is clear and there is no need for third-party mediation, Earth Times reported Dec. 8. Mehmanparast said Turkey and other countries indicated interest in mediating, but Iran's need for civil nuclear technology and its stance are irrevocable. He said world powers were moving in the "wrong direction" by putting political pressure on Iran to revise its stance. He added that talks with the United States were not on Tehran's political agenda but Iran was still prepared to talk with Washington as part of the P-5+1 group.
* Foreign Ministry spokesman Ramin Mehmanparast said Iran’s nuclear expert Shahram Amiri who was kidnapped on a pilgrimage visit to Saudi Arabia last May was turned over to Washington by Riyadh officials, Iran's Mehr News Agency reported Dec. 8. Mehmanparast accused the United States of abducting Iranian citizens, adding that Iran's Foreign Ministry has done everything in its capacity to obtain release of 11 Iranian nationals that were abducted directly by the United States or its agents across the globe.
* Climategate Continues… http://wattsupwiththat.com/2009/12/04/a-devastating-response-to-theres-nothing-to-see-here-move-along/#more-13710
* Osama bin Laden must be killed or captured in order to defeat al Qaeda, Gen. Stanley McChrystal, the top U.S. commander in Afghanistan, said Dec. 8 before a U.S. Senate committee, Reuters reported. McChrystal said that killing or capturing bin Laden would not by itself defeat al Qaeda, but that bin Laden is an iconic figure and that his survival emboldens al Qaeda franchising organizations around the world.
* Harry Reid is Wrong on History and Wrong on Healthcare Reform... http://www.usnews.com/articles/opinion/2009/12/08/harry-reid-is-wrong-on-history-and-wrong-on-health-reform.htm
* U.S. troops will remain in force in Afghanistan beyond July 2011, U.S. Defense Secretary Robert Gates on Dec. 10 told Afghan soldiers at Kabul International Airport, CNN reported. He said that for the first time, Afghanistan has foreign military support, and that the United States plans to remain a partner in the future.
* Climate Scientist Steps Down Amid Controversy… http://www.fa-mag.com/green/news/4806-climate-scientist-steps-down-amid-controversy.html
* A recent Forbes survey found that the total number of billionaires around the globe plunged from a record 1,125 in early 2008 to just 793 in March 2009 - a net decline of 332, or 29.5%. Even worse, the total net worth of the world's recognized billionaires plunged 45.4%, from $4.4 trillion in 2008 to just $2.4 trillion this year (numbers are based on stock prices and other values assessed in mid-February). That translates to an average net worth of just $3 billion, down 23%, or $910 million, from 2008.
* Al Qaeda senior leader Abu Yahya al-Libi was killed in a U.S. drone airstrike Dec. 8 in Pakistan's South Waziristan region, Geo TV reported Dec. 11, citing unnamed U.S. officials. The drone reportedly fired two missiles at a vehicle carrying al-Libi. Pakistani officials and local Taliban have denied that al-Libi was killed in the airstrike.
* The Heisman Trophy was awarded to Alabama’s Mark Ingram on Saturday night, winning the closest vote in the award’s 75-year history. He will lead Alabama against Texas in this year’s BCS Championship.
Over the weekend, the top-five box office performers as reported by The New York Times were:
1) The Princes and the Frog, Walt Disney Studios, $25,000,000
2) The Blind Side, Warner Bros., $15,450,000
3) Invictus, Warner Bros., $9,085,000
4) Twilight: New Moon, Summit Entertainment, $8,000,000
5) Christmas Carol, Walt Disney Studios, $6,871,000

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