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Market Update 03-02-10

The bifurcated economy continues to plod along. The manufacturing segment is doing fairly well thanks in large part to strong export demand, which has risen for seven consecutive months. The service sector, however, continues to struggle.Read more...

Mid-Week Update 02-24-10

Despite some positive economic news that has come out in recent weeks, one area of the economy that has yet to show real signs of improvement is retail spending. American consumers are still reeling from the near collapse of the U.S. economy, and nearly 10 percent of them don’t have a job (many more if you count partially employed). This raises doubts about the sustainability of the recovery, given that personal consumption accounts for roughly 70 percent of U.S. GDP.
 
Consumer sentiment is still not back to normal. Yesterday the Conference Board announced that its consumer confidence index had fallen from an upward-revised 56.5 to 46.0. The historic average of the index is 95.6, which means that the recovery, from the consumer’s perspective, has a long way to go. When consumers were asked to assess the current-day conditions, the relevant index fell 5.8 points to 19.4 – its lowest level since 1983. Perhaps even more worrisome, the Expectations Index, which measures the six-month outlook, also declined, dropping 13.5 points to 63.8.
 
The main factor contributing to these declines was, not surprisingly, the dismal job climate.
Read more...

Market Update 01-12-10

Earnings season began with Alcoa reporting its results yesterday. Traditionally, it’s the report from this aluminum giant and the Dow Industrials member that marks the start of the season – and this time, the season certainly did not start with a high note.
 
Alcoa earnings disappointed – the largest U.S. aluminum producer’s profit trailed estimates, despite strong metal prices. High energy prices were one of the main culprits.
 
Higher energy prices were also behind the widened U.S. trade deficit reported for the month of November. The lower dollar helped U.S. companies to sell abroad; the overall increase in exports was achieved for the seventh month in a row. The size of the increase, 0.9 percent, to $138.2 billion, reflected increasing overseas demand for food and American-made automobiles and semiconductors.
 
Signs of recovery, however, are still few and far apart.
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Mid-Week Update 12-09-09

In 2008, tight lending conditions hurt farmers’ ability to take on loans – preventing them not only from making capital expenditures on things like tractors and other machinery, but also hurting their ability to buy fertilizer. As demand weakened, fertilizer companies, including our Mosaic (MOS) and Potash of Saskatchewan (POT) took it on the chin with shares losing more than two-thirds of their value in some cases.
 
With the supply-demand balance out of whack, Mosaic responded quickly – announcing as far back as December 2008 that it was prepared to significantly reduce its phosphate and potash output to combat weak demand.
 
Despite the sharp decline in total sales, margins and earnings per share, Mosaic’s financial position has remained strong. We believe the company will emerge strong from the economic downturn. Moreover, it will remain an essential company to own in the resource space as the world population (along with incomes and food demand in the developing world) continues to grow. Mosaic remains a market leader in North America in potash, with a nearly 40 percent market share. More importantly, it’s the second-largest global potash producer, with a global market share of 13%.
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Market Update 11-17-09

Investors’ appetite for risk just keeps getting stronger. Unfortunately, that’s not necessarily a good thing. And while this trend may continue through the upcoming holiday season, the risk of a major setback remains quite high.
 
The economic and survey data continue to point to a less-than-rosy outlook. Yesterday investors cheered the October retail sales headline, which was up 1.4 percent for the month. But the breakdown numbers were far less encouraging. Autos and auto parts were the big contributor in the latest period, something we don’t foresee happening going forward. Manufacturers have since scaled back production (as seen in this morning’s Industrial Production reading for October) as the government’s Cash for Clunkers program merely just robbed future months’ sales rather than kicking off a bull market for car sales.
 
Excluding autos and auto parts, retail sales fell short of expectations in the month, rising just 0.2 percent vs. a consensus view of a 0.4 percent rise. You may recall that we had a similarly misleading top-line retail sales number last month as a result of rising gasoline prices.
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Mid-Week Update 08-19-09

The consumer continues to be under duress. Job losses continue to mount; while weekly readings are down from their highs, initial unemployment claims are still running above expectations. For those already out of work, they face only a finite amount of unemployment benefits. Housing prices continue to fall, again, at a slower pace, but the effect is still the same as Americans can no longer draw on their home values for spending or count on the ever-rising house price for future wealth increases. Credit lines are being drawn in by card issuers and consumers face high fees for their outstanding debt balances. Without question, these factors have had their effect on consumer spending (and saving). Retail sales continue to contract more than economists have expected. The savings rate, at 4.6 percent, remains close to the 13-year high it reached in May.   Read more...

Market Update 07-14-09

In today’s speech, Treasury Secretary Geithner commented on global recovery – the topic of interest to all market participants and beyond. He remarked that the global economy will likely experience setbacks in the recovery, pointing out that the damage to the financial system, the loss of wealth and the excessive borrowing in recent years will likely take a long time to fix. New jobs won’t be created until growth returns, and credit conditions are still “unusually tight” despite improvements from the last fall. We are still in the catch-22 environment: concerned over their jobs, people are expected to be more frugal and spend less, but without increases in consumer spending (which accounts for about 70 percent of U.S. GDP), growth will be very difficult.Read more...

Market Update 06-16-09

Yesterday, the market saw its biggest tumble in a month. The S&P 500 Index fell 2.4 percent, its largest fall since mid-May. Between the March 9th low and last Friday, the Index had risen 40 percent, the sharpest rally since the 1930’s, and the market had continued to make gains despite numerous negative economic data points. However, these gains were being made on increasingly light volume which is not a bullish sign. It may suggest that the market has reached its upside, running out of buyers who may now wait until there are actual signs of recovery (rather than the economy declining less). Read more...

Market Update 06-02-09

On several occasions in recent months we’ve made reference to the fact that during this rally (a rally of historic proportions) stocks have remained highly correlated. By that we mean they’ve been moving together in a very uniformed manner, regardless of their individual prospects.
 
It has become commonplace, for instance, to see a company report lousy earnings and offer a bleak outlook and nevertheless still see its share price rise by several percentage points. For some inexplicable reason, for instance, shares of General Motors traded higher yesterday, even though the stock was set to cease trading at the end of the day. This kind of action tells us that systemic factors are driving stock returns rather than news that will impact companies’ earnings prospects. The last time stocks were so highly correlated was in October, 1987.
 
To justify recent returns you have to an unwavering faith that our banking sector is functioning as it should—and it’s not; that the downturn in the housing sector has or will soon end—but it hasn’t/won’t; and that the consumer is going to shrug off rising unemployment, rising gasoline and food prices, rising foreclosures and rising interest rates and return to his/her spendthrift ways—but he/she won’t.
 
In short, stocks are priced to perfection here.
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