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Fed To The Rescue?: 09-02-10

This past week has brought a mix of economic news, but the markets, happy to leave behind a dismal summer, took the bad ones on the chin. The strong rally that we saw yesterday was brought on by the good news on the manufacturing front: as was signaled by the ISM factory index, manufacturing in the U.S. expanded. The index itself rose to a three-month high of 56.3 (readings above 50 indicate expansion). While still positive, much of the gains stemmed from higher prices paid – a sign of inflation not growth.

Good news from Australia and China also encouraged investors to come in and buy shares. China’s purchasing managers index rose to 51.7 last month from 51.2, also signaling growth.

At the same time, the consumer slump just does not let go. Construction spending in July fell twice as much as forecast, led by a slump in homebuilding that will depress growth, Commerce Department figures showed yesterday. Consumers remain strained. The sales of both new and previously owned homes both declined to the lowest level on record in the month of July – as the demand propped up by the tax incentives ended. In the meantime, mortgage rates continue to fall. Today, Freddie Mac made it known that the average rate available for a 30-year fixed rate mortgage has declined to 4.32 percent.

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Mid-Week Update 09-01-10

With the economic recovery flagging, buyers have been hesitant to jump full force into the market. But while the S&P 500 remains underwater for the year, even with today’s rally, some more conservative stocks like utilities are coming back into favor. Case in point is Income Portfolio’s Aqua America (WTR), one of the largest publicly traded water utilities. Based in Pennsylvania, Aqua America has seen its shares outperform the market by 20 percentage points this year as they’ve reached levels last seen in April 2009.

Given the company’s recent earnings report, it’s not too hard to see why, either. The company collected $178.4 million in revenues during the second quarter, a 6.6 percent increase over the same period in the prior year. With effective cost controls, the company’s net income jumped over 15 percent year-over-year to $29.9 million. The company’s revenue stream has been helped by favorable rate decisions in many of its main states of operations, including Pennsylvania which accounts for roughly half of Aqua’s business. In addition, the company has been awarded surcharges to help cover various infrastructure investments made to improve their network reliability as well as comply with environmental requirements. All told, the already-awarded increases will add $43.7 million in annual revenues to the company’s top line (the company collected $670 million in revenues in full-year 2009).

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Market Update 08-31-10

The Bank of Japan stepped up its stimulus program over the weekend, announcing another 10 trillion yen (a little short of $120 billion), six-month loan program to try to prop up its sluggish economy. The goal is to try to get credit flowing more freely and to weaken the yen, which reached a 15-year high versus the dollar earlier this year as investors flocked to the yen’s perceived stability. In addition, the Japanese Prime Minister Naoto Kan announced a ¥920 billion (approximately $11 billion) economic stimulus. All these measures are aimed to help Japan’s economy, whose exports are being hurt by the strong yen, and whose domestic production remains sluggish.

The foreign exchange market reaction was lukewarm to the news, and the yen has held its ground on belief that the additional loan expansion alone (no quantitative easing was announced) will be insufficient to reverse the yen’s recent strength. The Asian stock markets, however, received a jolt from Japan’s actions in addition to expectations of further quantitative easing from the U.S. and the E.U., with the MSCI Asia Pacific Index booking its biggest gain in five weeks immediately after the announcement.

While Japan’s economic recovery, too, is slowing, at 3.4 percent it is still projected to grow faster than either the U.S. or the E.U.

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Market Update 08-30-10

Stocks lost ground for the third week in a row last week, despite a strong rally on Friday. By Wall Street’s perverse way of thinking, that day’s gain was justified since the latest reading on GDP, though down considerably from last month’s estimate, was nevertheless slightly higher than what analysts were expecting this go ‘round.

Investors also liked what they heard from Ben Bernanke last week at a gathering of economists in Wyoming. The Fed Chairman’s comments also fell in the “bad news is good news category,” in that he indicated the central bank stood ready pump more money into the banking system if the economy shows further signs of weakening.

The Fed isn’t the only central bank intent on jump-starting an economy with more money printing. After a surprise meeting yesterday the Japanese central bank said it was going to add an additional $118 billion in liquidity. The European Central Bank, which meets later this week, is also likely to buy back bonds to offset the negative effects of recently imposed austerity measures. Adding to worries here at home, President Obama stepped into Rose Garden to yesterday to tell the media that he had discussed with advisors possible additional measures to aid the anemic recovery, though he had nothing concrete to share with the press or the American public.

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Get ready to ride the QE2 08-30-10

Short-Term Key: Neutral Long-Term Key: -5 (Neutral)

For those who follow the school calendar, summer ends this week, bringing with it the start of a traditionally weak period for stock prices. October, of course, has been the worst month for market disasters, but September has statistically been the weakest month. With the uninspiring economic data that has been pouring in over the past few months, investors have every reason to be nervous.

On Friday, for example, the Commerce Dept. reported that the U.S. economy grew at a rate of just 1.6% during the second quarter. Stock prices rose on the news, simply because everyone had feared an even worse performance. Nonetheless, we see no reason to cheer the fact that the pace of economic recovery is slowing. We doubt this quarter's growth will be much better.

The other notable event that occurred on Friday was Ben Bernanke's speech to economists at the Kansas City Fed’s annual gathering in Jackson Hole. The gist of his remarks is that the Federal Reserve stands ready to intervene should there be further signs that the economy is turning down.

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