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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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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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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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Staying safe in a dangerous world 08-16-10

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

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Market Update 08-03-10

The European bank stress tests were completed a couple of weeks ago in an effort to reduce investor anxiety, but now U.S. banks are coming into the spotlight again after the International Monetary Fund (IMF) announced its own findings. IMF’s report on the U.S. financial system concludes that while the U.S. banking system is stable for now, it is not out of the woods. Banks would need to raise billions of dollars in the event of deterioration in the real estate market and the general economy. Banks could need an additional $76 billion to meet their capital reserve requirements in an adverse scenario. Read more...

What will hold back stocks 08-02-10

Short-Term Key: Neutral Long-Term Key: -18 (Neutral)
 
Today, it seems the world is betting on the reemergence of growth. Stock prices are rising in response to reports of higher-than-expected earnings in the manufacturing and construction industries.
 
However, this good news does nothing to change our long-term expectations that the market will remain in a trading range. While we can't pick a precise upside limit, we can say with confidence that stocks will not enter a full-fledged bull market. Commodity prices, which will rise along with growth, will act as a major tax on the American consumer and put the brakes on the market.
 
On the other hand, a bear market seems equally unlikely. A real tumble in stock prices would be a clear sign that the economy is also faltering. That would prompt the Fed to launch another huge round of monetary easing which would stop the losses.
 
While this trading range continues, one of the best places to make money is in commodities. So let's look at the contrasting fortunes of oil and copper.
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How to profit from Chinese consumers

Short-Term Key: Neutral Long-Term Key: -21 (Neutral)Read more...

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Market Update 07-20-10

China’s economy grew 10.3 percent (annualized) in the second quarter, down from the 11.9 percent mark in the first quarter but still, at double digits, easily at the front of the pack among major economies. China’s State Information Center reports that in the second half of the year, export growth may slow down to 16.3 percent as a result of slowdown in the global recovery. The press is reporting this as a halving of China’s export growth rate because the year-on-year improvement was 35 percent in the first six months of the year.
 
However, it should be noted that China’s exports improved by approximately 30 percent in the second half of 2009 compared to the first half, so the slower growth rate can partially be attributed to having a tougher comparison benchmark. To put it in a perspective, compared to the first half of this year, Chinese exports will still grow by about 12 percent sequentially even if the forecast for the slowdown in the year-over-year growth is on target, hardly a terrible figure. It’s worth reiterating that for all the talk of China slowing down, it will still remain the fastest growing major economy, and many economists think that a more moderate growth pace is better for the well-being of the country in the long run.
 
Indeed, with growth moderating from overheating pace, the Chinese government will find it easier to take a more supportive stance on its economy.
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Market Update 07-13-10

The International Monetary Fund, or IMF, has raised its global growth forecast for 2010. On the heels of better than expected growth in the first half of the year, the organization now calls for the world economy to expand 4.6 percent this year, up from its previous 4.2 percent projection in April. The forecast for next year was kept unchanged. The usual suspects of fast growers like China, India, and Brazil are leading the charge (the growth rate forecasts for all three were also upgraded). Not surprisingly, the IMF report reflects the same divergence trend between developed and developing countries we have been discussing in this newsletter.
 
However, even as it issued its more optimistic outlook, the IMF is urging countries to implement plans to lower deficits—further ballooned by stimulus efforts in late 2008 and 2009 to battle the financial crisis and recession—over the next few years, citing financial risks threatening global economic recovery. The report noted that while there is little evidence that the debt crisis in Europe has spilled over, some countries are struggling with high deficits, unemployment, and constrained bank lending, all factors that could derail recovery. As if we needed more proof that the European debt woes are serious, Portugal’s credit rating was cut today by Moody’s.
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Search For Middle Ground: 07-08-10

It's clear that investors (the relatively few that were actually participating) had turned overly optimistic during the 13-month stock-market run-up to the April highs. But now the gloom is very thick indeed, at least it was until this week.

Amid a continuing price boom in bonds, recently sending yields on benchmark 10-year U.S. Treasury securities to below 3 percent, equity markets may already be pricing in the slower growth that evidently lies ahead. By many measures, stocks overall are at their cheapest level since 1985, aside from the darkest period of the financial crisis in the fall of 2008.

It's too soon to tell when good value will start to ring louder than anxiety about the economy and investor risk aversion. This week's rally, with the Standard & Poor's 500 up a big 4.7 percent in just three days, is a welcome sign. But it so far represents only a bounce from a deeply oversold condition and the market's 2010 low.

It's encouraging that news on the corporate-earnings front remains positive, with reports for the second quarter about to start. And credit-rating upgrades on corporate bonds exceeded downgrades in the second quarter for the first time since before the financial crisis. Time will tell, as the cliché goes.

Meanwhile, there's good news and bad news in the International Monetary Fund’s latest assessment of the global economy, released this week.Read more...

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