Business

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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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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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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Markets Outperform the Economy: 08-26-10

Most of what you need to know about the current economic environment in the U.S. can be summed in one sentence: In this economic recovery, the pace of overall growth, job creation and consumer spending are all well below the growth rates of the three previous downturns in 1981-82, 1990-91 and 2001.
 
The economy declined 4.1 percent in the downturn that evidently but not yet officially ended in the second quarter of 2009. This was the deepest recession of the post-World War II period. There was some historical precedence for the expectation of some that a sharp decline would lead to a robust rebound. That has not been the case, as we predicted more than a year ago.
 
Pretty much all of the reports on the economy this summer have come in below expectations. Leading the way this week, housing sales in July plunged to their lowest level in more than a decade, and down 25.5 percent below the July 2009 level. July was the first month that buyers could not qualify for a tax credit of up to $8,000. But the decline was almost double expectations. The number of homes on the market increased only slightly.
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Mid-Week Update 08-25-10

In your upcoming September issue of The Complete Investor, our Growth article highlights some of our well-performing tech stocks. Despite the weak domestic economy, our franchises have bucked the trend – outperforming their own, and Wall Street’s, profit and sales expectations. Among others, we highlight Intel (INTC), the largest semiconductor company in the world, in regards to its stellar earnings report for the second quarter, as well as its desires to make a bigger splash in the mobile chip market with a proposed acquisition. After the issue went to print, however, Intel surprised the market with a different major acquisition.
 
Last Thursday, Intel announced its largest acquisition ever with the $7.68 billion purchase of security software maker, McAfee. Both boards unanimously approved the deal which will provide McAfee shareholders with $48 a share in cash – a 60 percent premium over the stock’s previous closing price. At first glance, the move seemed curious with a dominant hardware company making an expensive foray into software. The multiple, at 3.3 times revenue, is high relative to the average premium paid for internet security acquisitions. According to Bloomberg data, there have been 171 acquisitions in the internet security business over the last five years – the median sales multiple was 2.07. Of course, Intel could easily afford it with roughly $18 billion in its cash coffers.
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Making Sense Of Contradictory Indicators 08-23-10

Short-Term Key: Neutral Long-Term Key: -8 (Neutral)
 
It's no wonder many people find themselves confused about the economy. Two of the most reliable economic indicators we know are currently giving contradictory readings. Yet that discord offers us an important insight into where the opportunities for profit lie.
 
The first of these indicators is the Commodity Research Bureau’s Raw Industrials Index, which is composed of a dozen or so basic commodities, not including oil. None of these commodities are traded on futures exchanges, but simply sold by producers to manufacturers. Because of that, their prices are not influenced by speculators.
 
An uptrend in the Raw Industrials Index can indicate either growing strength in the economy (which creates higher demand for materials) or inflation (resulting from a weaker dollar or tightening commodity supplies).
 
Currently, the Raw Industrials Index stands near 500, just 5% below its all-time high, which was set in early 2008, and very close to its peak set earlier this year.
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Market Update 08-17-10

It was only a matter of time, but China has now officially overtaken Japan as the second-largest economy in the world. According to government statistics, China’s GDP totaled $1.33 trillion in the second quarter, slightly ahead of Japan’s $1.28 trillion output. Given China’s growth momentum and Japan’s own sluggish economic recovery, it appears almost certain that for the full year China’s economy will be larger.
 
This is only the latest milestone for China, as it has already surpassed the U.S. as the world’s largest energy consumer and the biggest car market, and Germany as the largest exporter. Although its economy is still only a fraction of the U.S. economy, China could surpass the U.S. as number one as soon as 2030. Despite prodigious growth in the last few decades, large parts of the country still remain woefully underdeveloped and per-capita income is still less than one-tenth of that of the U.S., still leaving plenty of room for urbanization and growth.
 
With its growth, however, China will put an increasingly large strain on the world’s resources. Not blessed with rich natural resources but flush with cash, the Chinese have been on a rampage to secure resource assets around the world via acquisitions through its state-owned companies.
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Staying safe in a dangerous world 08-16-10

Short-Term Key: Neutral Long-Term Key: -13 (Neutral)Read more...

From Half-Full to Half-Empty: 08-12-10

This week's big news is not the Federal Reserve's statement of the obvious. It's the mounting evidence that the Fed can't do much to improve the situation, and the markets' negative response.

Last week, we wrote to you: "The news is in, and it's no surprise. That's why the markets are taking it so well. The U.S. economy is losing momentum. Yet stock prices are rising even as bond yields stay low."

This week, the markets had a different answer.

Saying on Tuesday that the economic recovery is "more modest" than anticipated, the Fed will stop shrinking its huge portfolio of securities by reinvesting the proceeds of maturing mortgages in U.S. Treasury debt. This move is largely symbolic. But it opens the door for bigger purchases of Treasurys or other securities, if necessary. This would be QE2.

After cutting short-term interest rates to nearly zero in December 2008, the Fed spent $1.7 trillion-plus buying bonds through quantitative easing 1, which ended in March. Then the Fed stopped its purchases of mortgage-backed securities and U.S. Treasury debt and began to talk about an "exit strategy." Forget about that now.

The trouble is, QE1 evidently wasn't enough. One reason is that it gave the banks a lot of money to put to good use. But the banks have been reluctant to lend. All they've had to do to profit is to buy longer-term government securities, which have risen in value as bond yields have fallen. In addition, loan demand has been low because of a reluctance to borrow.Read more...

Mid-Week Update 08-11-10

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With each economic release, our fears about the strength of the recovery seem to be confirmed. With more than two thirds of the economy stemming from the consumer, the ongoing weakness likely begins and ends with labor market. Last Friday’s report for July was uninspiring, to say the least.

The private sector added 71,000 jobs last month, not enough to even keep pace with population growth – while job losses in total were 131,000 (mostly due to the end of 143,000 temporary census jobs). The private payroll figure was below consensus expectations of 90,000 and far off the pace of the nearly 200,000 jobs gained in March and April. To make matters worse, June’s numbers were revised sharply downward as well, further highlighting the labor market weakness.

The unemployment rate held steady at 9.5 percent, but that does not reflect those that have given up looking or have taken on part-time jobs rather than continued to seek full-time employment.Read more...