As we approach the end of summer, the overall market sentiment seems to be positive. However, we still need to see clarity on the main issues which include:
1) The European Debt Crisis – how they handle the immediate shortfall in Greece and will the ECB keep building a better firewall? (update below)
2) U.S. Presidential and other elections – will Congress avert the fiscal cliff by extending the Bush Tax cuts in some way?
3) China is seeing a slowdown – they are likely to ease monetary policy again…will it keep the growth engine moving forward?
These are the main issues that worry investors and business leaders. Clarity on any of these over the next few months will impact confidence levels. The S&P 500 is up over 11.5% for the year but the Flow of Funds data still shows that fear is still prominent in the psychology of investors. Year to date, investors have added $201 Billion to bond funds and have taken $68 Billion out of equities funds (note: these figures do not include hybrid funds). While the flow out of equity funds does not have a direct correlation to the true demand for equities, it is still a little hard to believe that equities funds continue to have outflows while the market continues to rise. What typically happens though, is institutional investors make the first move to reposition assets while the masses wait until the fear subsides. This usually happens after the markets have moved significantly higher. Continue reading
Markets Continue to Push Higher
U.S. stocks finished the week higher for the sixth consecutive week, pushing the S&P 500 near a four year high. Since June, the S&P 500 has rallied over 11% amid speculation that the ECB will initiate a sovereign bond buying program and assumptions that the Fed will add additional stimulus. Building permits in the U.S. rose to a four year high and consumer confidence unexpectedly increased in early August.
Trading volumes have been very thin over the past few weeks as news out of Europe has been quiet as most European political leaders are on their summer leave. Meanwhile, here in the U.S. Congress started their summer recess on August 6th and is not in session again until September 10th, although based on their outstanding lack of accomplishments it’s doubtful anyone will notice. Continue reading
Drought in U.S. Threatens Food Price Surge
Financial markets finished higher for a fifth consecutive week today, extending the longest weekly advance since March. However, some of the recent optimism was cooled today by a worse than expected Chinese trade report and a report from the USDA confirming that the U.S. is in the midst of the worst drought in decades.
The drought plaguing America’s Heartland sent corn prices to a record high. The USDA announced in a report this week that they project a “massive” slump in the corn harvest. As investors this may be concerning because fewer crops translate into higher food prices for consumers. The United Nations released a report this week that showed world food prices jumped 6% in July. This year’s drought has also taken its toll on other crops such as soybeans, which are essential to products such as cooking oil, margarine and peanut butter.
More immediate shocks from the drought are already being felt in the livestock business. Large pastures that are used to feed livestock have “burnt away” this year and cattle farmers are doing all they can to keep their livestock fed. As farmers try to avoid the higher feed costs they are sending younger cattle to the slaughter house because they cannot afford to feed them. Farmers are also accepting much lower prices for these cattle due to the increased supply. Ben Davis of FCS Financial said, “Cattlemen are accepting $900 for cows that would have cost $1,500 a few months ago”. Continue reading
The Labor Department reported today that the U.S. economy created 163,000 jobs in July, up from a revised 64,000 jobs that were created in June. The average estimate among economist surveyed by Bloomberg called for a gain of 100,000 jobs. Meanwhile, the unemployment rate actually climbed to 8.3% as more people entered the workforce in July. Although this better than anticipated jobs report mitigates fears that the U.S. could spiral into a “double dip” recession, it also points to a struggling economy that cannot create enough jobs to bring unemployment figures down.
Ben Bernanke stated that, as a “rough estimate”, jobs would need to increase by 150,000 to 200,000 per month to reduce the unemployment rate. The Fed is scheduled to meet again in September and the August jobs report will be a defining factor on whether or not the Fed will take additional steps to increase their balance sheet and add additional stimulus in the form of QE3.
Although payrolls are rising, without the drop in unemployment, all that is happening is the economy is hitting the brakes and the gas at the same time; it makes a nice sound and the wheels spin, but ultimately it’s not moving forward. We would like to see unemployment recover so that the economic recovery can “move forward,” at least at a faster pace than we see right now. Continue reading
Investors finished the week relatively bullish as most major indices ended the week higher. This bullish sentiment was supported by better than expected earnings, reports showing better than anticipated U.S. economic data and hopes for a stronger response to the debt crisis in Europe.
As of yesterday, 72% of companies that reported earnings beat Wall Street expectations. This seems to be a recurring theme over the past few earnings seasons. Analysts continue to overestimate the negative ramifications the European debt crisis is having on these companies’ profits and these companies have been extraordinarily efficient at cost cutting and repositioning strategies. Meanwhile a few highlights from this past week include:
-Pepsi beat expectations and announced that the current U.S. drought should not affect their raw material input prices this year as they already hedged their commodity input costs with forward contracts.
-Apple missed expectations for only the second time since 2003. Sales of Apple’s iPhone were less than expected as most consumers delayed their purchase of the iPhone in anticipation of a newer iPhone 5 model projected to hit stores sometime this fall. Some analyst project Apple to sell over 50 million new iPhones in the 4th quarter.
– Caterpillar beat analyst expectations and raised their projected full-year profit forecast. CAT stated in their earnings announcement that developed countries are replacing their aging machinery inventory and that U.S. construction spending is increasing.
The U.S. economy grew at a 1.5% annualized rate in the 2nd quarter, which is slightly better than expected but still down from a 2% rate in the first three months of the year. Although this report was slightly better than the anticipated 1.4% annualized rate, growth still remains lackluster as the softening job market continues to curb consumer spending. The report below shows that durable goods orders rose in June and last week’s unemployment claims fell. Housing remains a key component in restoring consumer confidence in the U.S. economy and June housing reports suggest that the housing market is beginning to show signs of life. With just over 100 days before the November elections, the uncertainty surrounding who will be our next president may also be deterring consumers and businesses from making large purchases.
On Thursday, European Central Bank President Mario Draghi stated that the ECB will do “whatever it takes” to preserve the Euro, including purchasing sovereign nation bonds. German Chancellor Merkel and French President Hollande instilled further confidence in a joint statement saying that they are “committed to do everything it takes to protect the Eurozone”. These comments pushed Spanish and Italian yields sharply lower and investors cheered these comments sending markets higher. This rhetoric surrounding the ECB’s proposal to buy sovereign bonds is a giant step in the right direction for Europe assuming the ECB is prepared to do what they say they will do. We will continue to monitor these developments as they unfold.
Enjoy the weekend. Let’s hope we get some rain soon.