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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.
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Market Update 12-29-09

Another difficult year is drawing to a close. While the stock market had rebounded very strongly from its March lows, the health of the U.S. economy is still very much in question.

Of course, we will be very happy to see the worst of the recession behind us. A year ago, we were at about its worst point. For example, let’s take one metric, holiday sales. Last year, they fell 3.4 percent. Altogether, the 2008 shopping season was the worst since International Council of Shopping Centers ICSC started collecting sales data four decades ago. This year, consumer sentiment has been gradually improving and, in the contrast with last year, for the holiday season of 2009 the U.S. retail sales rose about 3.6 percent.

A year ago, oil was near its lowest point in five years (the low of $32.40 per barrel was set on December 19th of last year). Today, prices are closing on $79 again. While that is good news for most energy companies, especially in the short run, it could spell trouble for the still-weak recovery.

Gold, a year ago, was at $880 per ounce. Today, after hitting an all-time high of $1,226, it retreated, we think temporarily, to about $1,100 per ounce. Why temporarily? Because its fundamentals are still intact, and we view the correction as a normal part of a longer term uptrend.Read more...

Market Update 12-15-09

The rally in the U.S. dollar is back in force today, with the Dollar Index climbing to its highest level since early October. Given how far it has fallen since March, a rally up to its 50-day average—about 2 percent from here—is certainly a possibility. At first blush that doesn’t seem like all that much, but for currencies, such a move in a relatively short span of time is a big deal.
 
The inverse correlation between the dollar and stocks has been extremely high during the past year, so a rising dollar is frequently seen as bad news for equities as it sends the so-called carry trade to the sidelines. Regardless of the dollar’s moves in the coming weeks, the market is likely to trade in a relatively tight range. Technicians see the 1120 area on the S&P as stiff resistance where stocks will likely stall. Likewise, absent some external shock, downside risk in the near term is also likely to be rather muted. Looking on a somewhat longer time horizon, however, there’s ample reason for concern.
 
This morning we had a much worse-than-expected reading on producer prices, signaling that inflation could be back on the table sooner than most would like to admit. At the same time, we also had a surprisingly weak reading on the New York Empire Manufacturing Index of general business conditions.
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Mid-Week Update 11-18-09

As we head into holiday shopping time, third-quarter earnings season is coming to a close with 95 percent of S&P 500 companies having reported. There have been many upside surprises (80 percent), but as consumer spending and the underlying economy have remained weak – most have been due to maneuvering by management, including inventory controls and cost cutting, as well as lowered analyst expectations. 
 
The market has cheered estimate-beating results, but we’re hardly convinced that the US economy is in the clear.
 
Wal-Mart (WMT), a Growth Portfolio resident and consumer bellwether has been no exception, as evidenced by the company’s recent earnings report. The retail giant saw U.S. same-store sales fall 0.4 percent versus the same period last year, short of the management’s expectations of flat to a 2 percent increase in sales. Earnings were up to $3.24 billion (84 cents a share) from $3.14 billion (80 cents a share) a year earlier as. Like so many others recently, the company beat profit expectations of EPS of 81 cents as CEO Mike Duke cut inventory by 4.1 percent and accelerated other expense-cutting mechanisms.
 
Looking towards the fourth quarter, management sees comparable sales flat (plus or minus 1 percent), but thinks even with the recession officially behind us, shoppers will continue to flock to Wal-Mart for value. We agree.
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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 11-11-09

Earnings season marches on, with over 90 percent of S&P 500 companies having reported. Over 80 percent of those reported have had positive earnings surprises, but we can attribute much of that to the same cost-cutting measures we’ve seen over the last few quarters. What has been somewhat surprising is that almost half those reporting have also beat estimates with their top-line or revenue numbers, while only 30 percent have fallen short of estimates. 
 
Two of our health care picks recently also reported earnings, however, their stocks displayed distinctly different trading after their releases. 
 
Teva Pharmaceutical Industries (TEVA), the Israel-based generic drug company, saw its profits rise 28 percent in the 3rd quarter versus the year-earlier period. Excluding one-time items, net income rose to $806 million, or 89 cents a share, from $630 million or 77 cents, in the year-earlier period. Revenue, which increased 25 percent to $3.55 billion, actually fell slightly short of analysts’ expectations, but the earnings per share did beat those expectations by a penny.
 
The company’s third quarter operations were helped by sales of the company’s most important name-brand drug, Copaxone, which is used to treat multiple sclerosis. In addition, savings relating to last year’s $7.4 billion acquisition of Barr Pharmaceuticals were also a factor.
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Market Update 09-15-09

One year ago, Lehman Brothers became the largest bankruptcy in history, tipping the financial system into crisis mode. The market crashed, credit froze, and the economy sunk into the deepest recession since the Great Depression. Today, the financial system has stabilized, but the number of banks continuing to fail—92 so far this year at last count and more than 400 sitting on the FDIC’s trouble banks list—reminds us that it’s not over. And the hundreds of billions worth of toxic assets, which have seemed to disappear from headlines, still pollute banks’ balance sheets. Read more...

Market Update 08-25-09

Technical analysis continues to drive the market. The results so far have been impressive: blue chips are up more than 50 percent from their lows and small caps have gained an astounding 100 percent plus from the bottom. Never mind that we’re trading at 30 times expected next year’s earnings or that dividend yields are a mere 2.1 percent—not far off the valuations that prevailed at the market’s peak. In other words the market has priced in a strong recovery and then some. More likely, however, we’re heading down the highway at 65 or 70 MPH and the fundamentals steering wheel has been tossed out the window.
 
We may continue down the road unimpeded for a time, but at some point we’re liable to hit a pothole that sends us careening off the blacktop. What form that bump will take is anyone’s guess: further deterioration in the commercial real estate market, disappointing retail sales or a weak dollar all spring to mind.
 
Once we hit that bump, the traders who are all chasing the high beta stocks stock are likely to attempt to exit the speeding vehicle all at once. The end result isn’t going to be pretty for anyone.
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Market Update 08-24-09

Short-Term Key: Negative  Long-Term Key: +38
 
Stocks and commodities gained last week while the dollar – as is often the case these days – fell.
 
As you recall from last week's update, the correlation between these three assets has been unusually close. The see-saw today has stocks and commodities on one side and the dollar on the other.
 
Investors must ask themselves how long this party can continue, and which of these assets they should be left holding when it ends.
 
To be perfectly honest, when the party ends it will probably end for all three assets, with stocks, commodities, and the dollar all losing value. However, while all three will go down, only some will be down for the count...
 
THE RESILIENCE OF OIL
 
Leaving aside the dollar for the moment, let's focus on stocks and one key commodity, oil.
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Market Update 08-18-09

A bad finish to last week marked the first time in five weeks that markets had a weekly decline. The slide continued on Monday as bad news regarding retail sales and consumer sentiment sparked investors’ fears that consumers aren’t going to be spending enough to support economic recovery.Read more...

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