Monday, June 25, 2012

Market Week: June 25, 2012

The Markets

A dismal Thursday cancelled out much if not all of the rest of the week. The Dow's 250-point loss made Thursday the index's second-worst day of the year. The good news? Oil fell below $80 a barrel for the first time since October, offering hope for lower gas prices to follow. Meanwhile, the price of gold plunged roughly $60 an ounce.

Last Week's Headlines

Investor reluctance to buy Spanish 10-year bonds pushed the yield briefly above 7%, a level widely considered unsustainable, though it retreated later in the week. An audit of Spanish banks showed that in a worst-case scenario, they would need as much as €62 billion in assistance; however, the Spanish government said it will request as much as €100 billion from the EU's bailout fund. Meanwhile, despite objections from Germany, the European Central Bank announced it will accept a broader range of collateral, including mortgage-backed securities and auto loans, to help eurozone banks continue lending.
G-20 summit leaders said European Union members pledged to take whatever steps are necessary to preserve the EU, while five emerging nations (Brazil, Russia, India, China, and South Africa) agreed to increase their contributions to the International Monetary Fund in exchange for greater power in the organization. In Greece, newly elected leaders were able to form a coalition government that is committed to upholding the European bailout agreement.
Twist again: The Federal Reserve's Open Market Committee extended "Operation Twist" through the end of the year. The program, which had been scheduled to expire at the end of June, will use the proceeds from sales of short-term Treasury bonds to buy $267 billion of longer maturities in addition to the $400 billion already purchased. Operation Twist is intended to stimulate the economy by keeping long-term interest rates low. Fed Chairman Ben Bernanke also said the Fed is prepared to take additional steps if the unemployment situation doesn't improve.
The Conference Board's index of leading economic indicators rose 0.3% in May, reversing the previous two months' declines. Stock prices, consumer expectations, and hours worked in manufacturing held down the index. The board's chief economist said the data indicated the economy is muddling through and the risk of a 2012 downturn is low, but that foreign and domestic economic headwinds would make further strengthening difficult.
Home resales fell 1.5% in May, according to the National Association of Realtors®, though they were 9.6% higher than the previous May. It was the 11th consecutive month of year-over-year gains.
Manufacturing activity in the Philadelphia region dropped substantially in June; the Fed's survey of general business activity fell to -16.6 from -5.8 in May. Any figure below zero indicates contraction rather than growth.
Moody's slapped 15 of the largest banks in the United States and Europe with credit rating downgrades of between one and three notches, citing their extensive exposure to potential volatility in global capital markets.

Eye on the Week Ahead

As the quarter draws to a close, investors will be watching to see what emerges from a European Union summit at week's end. Domestic housing data also is on tap.

Key dates and data releases: new home sales (6/25); home prices (6/26); durable goods orders (6/27); final Q1 gross domestic product (6/28); personal income/spending (6/29).

Data sources: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Monday, June 18, 2012

Market Week: June 18, 2012

The Markets

Equities markets seemed to take hope from reports of plans by central banks to help ensure liquidity in the financial markets if necessary after the weekend's Greek parliamentary elections. The large caps of the Dow and S&P 500 fared better than either the Nasdaq or the small-cap Russell 2000, while the Global Dow's gains mean that it has now almost broken even for the year. Meanwhile, the 10-year Treasury yield continued to edge downward.

Last Week's Headlines

The likelihood of a Greek exit from the eurozone was reduced as the pro-bailout New Democracy party won the most votes in Sunday's elections. It will now try to form a coalition government with another pro-bailout party that received enough votes to give the two parties a majority in the Greek parliament.
Higher bond yields abroad continued to raise concerns. Despite the promise of eurozone assistance for Spanish banks, Spain's 10-year bond yield hit 6.96% at one point--a new euro-era record for the country--and Moody's cut Spain's credit rating three notches from A3 to Baa3. Concerns about Spain seemed to affect Italy, the eurozone's third largest economy, as Italian 10-year yields also surpassed 6% and rates for other maturities rose substantially at auction.
The European Central Bank recommended a more centralized European banking system to counteract the potential consequences of interdependence between sovereign nations and banks that have purchased their debt; such a system could oversee lenders and provide Europe-wide deposit insurance.
Good news, bad news: The silver lining to a slowing global economy was a drop in consumer prices--the first in two years and the largest since December 2008. According to the Bureau of Labor Statistics, May's 0.3% decline was largely the result of lower gas prices; not counting food and energy, prices were up 0.2% for the month and were 2.3% higher than last May. Energy costs also pushed wholesale prices down 1% in May, leaving the Producer Price Index up less than 1% in a year.
Despite increases in spending on cars and clothing, retail sales fell 0.2% in May. However, the Commerce Department said sales figures, which are not adjusted for price changes, were 5.3% ahead of last May. Nonstore retailers, up 12.4% in a year, saw the biggest gains.
According to the Federal Reserve, U.S. industrial production slipped 0.1% in May, though it was 4.7% higher than a year ago. Meanwhile, the Fed's gauge of general manufacturing business conditions in the New York region remained positive with a reading of 2.3, but was 15 points lower than the month before.
The collapse of the housing market helped cut the median net worth of U.S. households by almost 40% between 2007 and 2010, according to the Federal Reserve's 2012 study of inflation-adjusted consumer finances. The Fed said groups for whom housing was a larger share of assets saw even bigger declines in their median net worth than the overall decline from $126,400 to $77,300. The median pretax income fell almost 8%; hardest hit were more highly educated families, those headed by someone younger than 55, and families in the South and West. Median incomes for retirees and other nonworking families were up.
Rajat Gupta, a former board member of Goldman Sachs and Proctor & Gamble, was convicted of three counts of securities fraud and one count of conspiracy for leaking insider information to hedge fund manager Raj Rajaratnam, while former financier Allen Stanford was sentenced to 110 years in prison for running a Ponzi scheme and defrauding clients.

Eye on the Week Ahead

The week is likely to be dominated by reaction to the Greek election results and the European debt situation, including any reaction from G-20 leaders, and by the Federal Open Market Committee's last meeting before the scheduled expiration of its Operation Twist bond-buying program.

Key dates and data releases: home builders' survey (6/18); housing starts (6/19); Federal Open Market Committee meeting (6/20); home resales, Philadelphia Fed manufacturing survey (6/21).

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Thursday, June 14, 2012

Private Equity Has Too Much Money to Spend on Homes (Bloomberg)

Funds planning to invest more than $6 billion to buy and rent foreclosed homes are finding it easy to raise money. The difficulty is spending it.

The number of low-cost foreclosed homes coming to market has dropped, bulk sales have been slow to materialize and prices are recovering in markets such as Phoenix, making it hard for private-equity firms, hedge funds and pension systems to buy as many homes as they need.

Read the full article here.

Monday, June 11, 2012

Market Week: June 11, 2012

Downs and ups: Helped along by an easing of monetary policy in China, domestic equities had their best week of the year, more than reversing the previous week's losses. The renewed comfort with risk sent Treasury yields up.

Last Week's Headlines

As Greece prepared for next Sunday's elections, the focus in Europe shifted to Spain. Though a Spanish bond auction saw adequate demand, the interest rate on the 10-year bond was higher than at the previous auction. After Treasury Minister Cristobal Montoro said that Spain had in effect been cut off from global capital, a weekend consultation with European finance ministers led to an agreement that Spain will request as much as €100 billion in loans from the European bailout fund to help the country's ailing banks.
China's central bank took steps to spur the country's slowing economy by lowering the target benchmark interest rate on loans by 0.25% to 6.31% and cutting the rate paid on deposits. However, it also will allow banks new flexibility to offer slightly higher deposit rates and charge slightly less for loans if they choose.
Nasdaq OMX Group Inc. said it will offer $40 million in cash and trading discounts to compensate financial firms that lost money as a result of the technical problems with trading in Facebook's May 18 IPO.
The U.S. services sector's growth increased slightly in May. The Institute for Supply Management's index registered 53.7% in May--0.2% higher than April's reading. Thirteen industries reported growth, while arts/entertainment/recreation, health care, and mining saw contraction.
Orders at U.S. factories fell 0.4% in April. According to the Commerce Department, it's the first time in more than three years that there have been two straight months of declines.
Increases in output and the number of hours worked led to a 0.9% decline in labor productivity in Q1 2012, according to the Bureau of Labor Statistics. Labor costs were up 1.3%, and though hourly compensation rose 0.4%, inflation-adjusted compensation fell 2% during the quarter.
Federal Reserve Chairman Ben Bernanke told Congress the European situation poses significant risks to the U.S. financial system. He also warned that though the Fed continues to foresee moderate growth, the so-called "fiscal cliff"--the January 1 expiration of tax cuts and start of federal spending cuts--also poses a "significant threat to the recovery."
A decline in both imports and exports of capital goods and industrial materials and supplies cut the U.S. trade deficit in April by almost 5%, according to the Bureau of Economic Analysis. The decline in exports was the first since November.

Eye on the Week Ahead

Greek elections next Sunday might clarify whether the country is likely to abandon austerity programs required by its bailout agreement, a decision that could affect its eurozone membership. Domestically, retail sales and manufacturing data could shed light on the state of the economy. Finally, volatility could accompany Friday's quadruple witching options expiration, especially given its proximity to the weekend's Greek elections.

Key dates and data releases: wholesale prices, retail sales, business inventories (6/13); consumer prices (6/14); industrial production, Empire State manufacturing survey, international capital flows, quadruple witching options expiration (6/15); Greek elections (6/17).

Thursday, June 7, 2012

'Waiting Till You're 80 To Retire': Are you serious?

On Monday, an interesting article released with the opinions of Chief Executive Officer Robert Benmosche of AIG. You might remember AIG as the world's largest Insurer before the 2008 Crisis, during which American Insurance Group (AIG) took a multi-billion dollar bailout from the US Government. With the Crisis now into its 3rd year and AIG's bailout shoring up its books, Mr. Benmosche makes the case that there is no bailout coming for retirees (or hopeful retirees).

The article states:

“Retirement ages will have to move to 70, 80 years old,” Benmosche, who turned 68 last week, said during a weekend interview at his seaside villa in Dubrovnik, Croatia. “That would make pensions, medical services more affordable. They will keep people working longer and will take that burden off of the youth.”

Well that's nothing new. We all take into account we may need to work longer to make up from the losses incurred during the Crisis.

But the truth of Mr. Benmosche's message is the false belief that retirement is a choice. The simple fact is retirement comes at different times for different people due to age related illness and other personal situations. Not to mention that at a time when the younger generation is having problems finding long-term employment, those who are 60+ have even more problems finding work. A convenient point he misses from that villa in Dubrovnik.

Monday, June 4, 2012

Market Week: June 4, 2012

The Markets

Signs of a slowing economy both here and abroad brought back investor pessimism last week--especially on Friday, when a disappointing employment report gave equities their worst day of the year and a loss of more than 2%. The week left both the Dow and Russell 2000 in negative territory for the year. However, the Dow's 8.7% loss since its year-to-date high in early April is better than either the S&P 500's 9.9% slide in the same time or the Nasdaq and Russell 2000's declines of 12% and 12.8% respectively.

The recent flight to quality turned into a stampede, sending the 10-year Treasury yield to a record low level as demand pushed the price up. And as the dollar strengthened--the euro was below $1.24 by week's end--oil prices plunged to just over $83 a barrel.

Last Week's Headlines

Only 69,000 new jobs were added to the economy in May. It was the lowest number since last May, and it nudged the unemployment rate from 8.1% to 8.2%. The Bureau of Labor Statistics said the increase, the first in 11 months, is partly the result of more people once again seeking employment. The jobs numbers for March and April also were revised downward, and including the number of underemployed and discouraged workers would put the unemployment rate at 14.8%.
U.S. economic growth was even slower during the first quarter of 2012 than the 2.2% initial estimate. The Commerce Department's revised figure for gross domestic product was 1.9%, substantially lower than the previous quarter's 3%. Consumer spending picked up 2.9% in Q1, but business spending was off.
Spanish bond yields rose once again, hitting roughly 6.6% and spurring concern about the government's ability to continue to aid the country's troubled banks.
Discouraging overseas economic data also contributed to last week's anxiety. According to Eurostat, the European Union's statistical agency, unemployment in the eurozone hit its highest level on record (11%) in April. Also, surveys of purchasing managers in both China and Europe indicated either virtually flat growth or actual contraction.
Home prices in the 20 cities measured by the S&P/Case-Shiller index were up 0.1% in March--the second increase in a row--though they were down 2.6% from a year ago. However, increases were seen in some of the areas that have seen the biggest declines, including Detroit and Phoenix.
Freddie Mac said mortgage rates last week hit a low not seen since it began keeping records in 1971. The rate on a 30-year fixed mortgage fell to 3.75% (it was 4.55% a year ago), and the 15-year rate fell below 3% for the first time to 2.97%.
U.S. manufacturing growth continued to slow as the Institute for Supply Management's index fell to 53.5% in May from April's 54.8% (any number over 50 represents growth).
The Commerce Department said April construction spending rose 0.3% and was up 6.8% from last year. The 2.8% growth in private residential construction was responsible for most of the April increase, while public construction spending was down 1.4%.

Eye on the Week Ahead

Central banks both here and abroad may be in the spotlight. With the approaching expiration of QE2 at the end of June, the Fed's "beige book" report will be parsed to see whether it might make a case for additional monetary stimulus, and the European Central Bank is one of four central banks meeting on interest rates. Data on GDP for both the eurozone and Japan also will be released.

Key dates and data releases: factory orders (6/4); U.S. services sector (6/5); labor productivity/costs, Fed "beige book" report (6/6); balance of trade (6/6).

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