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Market Update 08-24-10

BHP Billiton’s (BHP) bid to take over Canadian fertilizer producer Potash Corporation of Saskatchewan (POT) has officially been rejected as being too low. But the buzz created by the takeover attempt isn’t dying. First, there was speculation that one of the Chinese state-owned enterprises would step in and shell out the cash for Potash—if anyone has ample cash for the acquisition, the Chinese do. Today, there’s new speculation that BHP’s Australian rival, Rio Tinto (RTP), may partner with a Chinese company and submit its own bid for Potash. Rumors are also circulating that fellow fertilizer producer Mosaic (MOS) may partner with other agricultural companies to acquire Potash.
 
The high level of interest in Potash highlights the bullish case for fertilizers, essential for growing crops. In the long run, population growth and improving standards of living in developing countries should lead to continual demand for fertilizer to increase food supply. In the nearer term, the rally of crop prices due to adverse weather conditions (for example, Russia’s drought and wild fires) reducing supply should lead to an extra demand jolt for fertilizers as farmers scramble to take advantage of more favorable pricing.
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Market Update 08-10-10

We’re at the height of the summer holiday season, and it seems much of Wall Street is away on vacation right now. Yesterday’s trading volume on the New York Stock Exchange clocked in at less than 800 million shares, marking the thinnest trading since the week between Christmas and New Year’s.

Stock prices remain near the mid point of their trading range and we don’t expect much to happen one way or another in the near term. That said, our indicators suggest share prices should have an upward bias in the short run and there are several potentially market-moving events this week, despite today’s early selling.

One key indicator pointing to further gains in stocks is the strong readings we’ve had on the weekly Advance/Decline Line for four weeks running. That tells us a broad swath or the market is moving higher. Echoing this, yesterday the average stock on the NYSE climbed 1.5 percent vs. a 0.55 percent increase on the S&P 500, which was weighed down by the drop in Hewlett Packard which was sparked by a scandal in its executive office.

We don’t know if the Federal Reserve will resume with quantitative easing with its policy setting meeting today, or if that additional pump priming will come down the pike later this year, but given the economic backdrop, QE II seems all but certain. Keep in mind that QE II will likely be good for stocks and may be why stocks have been as buoyant as they have been.Read more...

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This Week's Theme: "Getting By" 07-29-10

This week just might mark the start of the traditional summer lull that often (with notable exceptions) comes to the financial markets. That would not be bad news after the turmoil of spring and early summer.

Bolstering that possible scenario is continuing evidence that the U.S. economy is at least inching ahead. The economy rose modestly in June and the first half of July, the Federal Reserve said yesterday in its latest "beige book" report of regional economic conditions. The report adds to the evidence that the pace of the recovery has been slowing.

The Fed said the economy continued to improve overall, but that the advance was dampened by lackluster retail sales, weak housing and construction, and tight bank lending. The U.S. economy lost jobs in June for the first time this year. A Commerce Dept. report to be released tomorrow is expected to show that the economy's growth rate slowed in the second quarter from a 2.7 percent annual rate in the first three months.

Uncertainty about the recovery is evident in the U.S. Treasury market, where this week's big auctions of Treasury issues maturing in two, five and seven years went well despite low yields. Current yields of those maturities are only 0.6 percent, 1.7 percent and 2.4 percent respectively. On one level, anemic yields are good news because they keep borrowing costs low as the federal government continues to auction off massive amounts of debt.Read more...

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Slower Economy, Rising Stocks: 07-15-10

The Federal Reserve has confirmed what we already know. It downgraded expectations for the economy, according to minutes released yesterday of the latest policy meeting in late June.
Fed officials now expect growth to be slower this year than previously estimated, with inflation also lower and unemployment higher through 2012 than previously forecast. They also said they expect it to take as long as six years before the economy returns to the level of sustainable, moderate growth and unemployment near 5 percent that was in place before 2007.
 
In addition, the Fed said further central-bank action might be necessary if the economic outlook "were to worsen appreciably." But the consensus outlook remains that the economic expansion likely will be strong enough to avoid additional action.
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Market Update 06-29-10

The leaders of the Group of 20 countries have announced that their response to the most pressing economic issue of today, the European credit crisis, is to cut deficits and require higher bank capital reserves once recoveries occur. Advanced G20 economies (excluding the developing country members of G20) will shoot for reducing their deficits by 50 percent by 2013 and to stabilize their debt-to-GDP ratio by 2016. Each member will be able to proceed at their own pace depending on how quickly recovery takes hold in their respective countries, however, giving the appearance that the resolution is more lip service than commitment with any bite.

There’s also a divergence of immediate approach between the U.S. and its European counterparts. While the U.S. has pushed for more stimulative efforts to prevent a double dip recession, the U.K. and Germany are for spending cuts. The G20 as a group is struggling to balance these differing views, and the result is the half-hearted deficit reduction goal. This underscores how difficult it is to get unanimous agreement among nations to take coordinated global action and highlights the-rock-and-a-hard-place dilemma that the highly indebted developed countries find themselves in. On the one hand, national debt is getting out of hand, but on the other, spending cuts could send their fragile economies spiraling into another downturn.Read more...

Mid-Week Update 06-23-10

Economic reports, especially those relating to the financial health of American citizens, have not been overwhelmingly positive lately. In fact, deflationary fears aren’t subsiding, and more quantitative easing from the Fed may be on the horizon, as evidenced by nuances in today’s statement.

The dismal consumer state makes the performance of Growth Portfolio member Apple (AAPL) all the more impressive. While most Americans are struggling to stay employed and pay their bills, Apple is struggling to keep their new offerings on the shelves. Yesterday, the company announced that they have sold 3 million iPads since their new tablet computer was released in early April. The demand has exceeded company and Wall Street expectations alike, and has strained supplies. With an iPad being purchased every two seconds, most retail outlets have resorted to customer waitlists as inventory struggles to catch up to the volume of purchases.Read more...

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Market Update 06-15-10

Ameliorating worries that economic growth had slowed down, the latest reports out of China indicate that the economic giant has kept up its strong momentum. Last week, data showed that international trade surged, with exports in particular blowing away consensus expectations. Industrial production and retail sales also showed improvements as well. This positive data form China has calmed market fears, helping equities in both developed and developing markets rebound.
 
May's numbers for China inflation, however, showed the largest increase in 19 months. Property prices climbed more than 12 percent on a year-on-year basis. While it’s getting clear now that China’s government actions (e.g. raising bank reserve ratio requirements and raising interest rates and certain taxes) haven't stopped the torrid growth in the country as the markets have feared, the future course of action is, of course, unknown. Besides revisiting actions already taken, Beijing could very well finally decide to revalue their currency, especially now that exports have shown robust recovery and domestic prices continue to climb.
 
And on that front, the U.S. continues to pressure China to unpeg the yuan from the dollar.
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Market Update 04-21-10

The preliminary official estimate from China’s National Bureau of Statistics released last week showed that China’s economy grew at the fastest pace in nearly three years in the first quarter. GDP jumped nearly 12 percent year-on-year, further highlighting China’s remarkable recovery. Foreign trade was up 44 percent compared to last year, and retail sales were up 18 percent, thanks to fast rising personal income and also showing the effectiveness of Beijing’s initiative to stimulate domestic consumption. Several banks and the IMF have upgraded their GDP growth forecasts for China, all predicting between 10 and 11 percent growth for 2010.
 
Now that China has left the recession in the rearview mirror, the market participants are concerned it's accelerating too fast. The biggest subject of China’s bubble talk has been real estate. Despite tightening efforts by China’s central bank in recent months, prices continue to skyrocket. In March, real estate prices in 70 urban areas jumped a record 11.7 percent compared to a year ago.
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Market Update 04-07-10

Treasury Secretary Tim Geithner announced earlier this week that the department’s report on global currency policies, originally planned for an April 15th release, will be delayed. The report could have concluded that China is a currency manipulator and may have resulted in sanctions against China—given the mounting pressure in Congress to do so. The delay is intended to give China room to let the yuan float more freely without appearing to wilt to American pressure.
 
The belief is that if China reevaluated the yuan, it would reduce the U.S.’ trade imbalance and improve the competitiveness of American products overseas. However, it could have unintended consequences. The appreciation of the yuan would increase the purchasing power of the currency, letting China import more commodities for less. After China first unpegged the yuan to the dollar in 2005, commodity prices climbed more than 100 percent until peaking in 2008. Given China’s even higher commodity demand now, it would not be surprising to see history repeat itself. If commodity prices skyrocket again, it could cripple the already fragile recovery of our economy. In essence, getting China to reevaluate the yuan may not be the clear win that U.S.
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Market Update 03-03-10

As was widely expected, Australia’s central bank moved to raise the country’s benchmark interest rates at its regularly scheduled meeting. While last month, Australia’s central bank surprised observers by pausing in its rate-raising efforts and keeping its benchmark interest rate unchanged, this time the need to act prevailed.Read more...

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