AND THAT’S THE WEEK THAT WAS…

For the Week Ended March 18, 2011

 

Market Matters…         

                           

Market/Index	Year Close (2010)	Qtr Close (12/31/10)	Previous Week (03/11/11)	Current Week (03/18/11)	YTD Change
Dow Jones Industrial	11,577.51	11,577.51	12,044.09	11,858.52	2.43%
NASDAQ	2,652.87	2,652.87	2,715.61	2,643.67	-0.35%
S&P 500	1,257.64	1,257.64	1,304.28	1,279.20	1.71%
Russell 2000	783.65	783.65	802.83	794.66	1.40%
Global Dow	2,087.44	2,087.44	2,138.29	2,093.63	0.30%
Fed Funds	0.25%	0.25%	0.25%	0.25%	0 bps
10 yr Treasury (Yield)	3.31%	3.31%	3.39%	3.28%	-3 bps

 

So let the games (distractions) begin.  Consulting firm Challenger, Gray & Christmas estimates that businesses lose about $3.8 billion in worker productivity during the NCAA basketball tournament as armchair QBs (point guards) over-analyze the teams and matchups; fill out their brackets; blog/tweet/text their prognostications; watch video streams on office computers; and commiserate around the water cooler as surefire Final Four teams are eliminated in early round upsets.  Others doubt that the $3.8 billion is truly accurate, claiming that March Madness distractions merely replace online shopping, long coffee breaks, excessive texting, and run-of-the mill paper shuffling that occur everyday in virtually all offices throughout Anytown, USA.      

 

Unfortunately investors have had no shortage of more serious distractions lately as many have focused their attention on the devastation in Japan and the ongoing political turmoil that is spreading in the Middle East.  With the earthquake death toll now expected to move to the tens of thousands, “experts” differ on the severity of the damaged nuclear reactors and the associated radiation risks faced by the Japanese people.  Likewise, economists have begun forecasting the short- and long-term repercussions, not only on Japan’s economy, but on those of its trading partners.  In Japan, carmakers have halted production; manufacturers have suspended operations; retailers have closed stores; insurance companies face major claims; tech companies cannot meet global chip demand.  The areas most impacted contribute an estimated six percent to the Japanese economy, which is the third largest in the world (US, China).  In terms of a “contagion,” Japan buys significant commodities from Indonesia and Australia; employs over 200,000 workers from the Philippines; sends over 1 million visitors (and tourist revenue) yearly to Thailand; and is a major source of investment throughout Asia (and beyond).   While “optimistic” analysts claim that the rebuilding process will contribute to future economic growth, such recovery is months (if not years away) and the country already faces major budgetary concerns due to excessive debt.  Almost lost in the daily headlines, the Libyan conflict grew more dire (before a so-called “truce” was declared when a “no fly zone” was established by the UN) and the anti-government uprising has spread to Bahrain (with frightening threats of moving into oil-rich Saudi Arabia).    

 

Amid the global tensions, investors initially overlooked any and all positive news: HP (and several financials) increased dividends; FedEx raised revenue guidance, Berkshire Hathaway is buying Lubrizol for $9 billion.  Crude dropped to the lowest level in weeks on concerns about Japan’s weaker demand, but rose back above $101/barrel on ongoing Middle East conflicts.  US stocks took early clues from Asian markets (Japan’s index fell 6% day one and 11% day two) as major indexes plunged over three consecutive days and even fell into negative territory for the year on a flight-to-quality into treasuries.  Some analysts claimed the pullback was long overdue as equities had gotten ahead of themselves; others sought value in the downturn and the market turned higher late week.  Still traders remained very focused on key headlines from Japan, Libya, and even Portugal (see below).   By the way, anyone catch a Morehead St. – Louisville final?  

Economic Calendar

Date	Release	Comments
March 15	Fed Policy Meeting Statement	Offered a very welcome optimistic outlook
March 16	Housing Starts (02/11)	Biggest drop in 27 years
	PPI (02/11)	Energy and food prices surged, but “core” index tame
March 17	Jobless Claims (03/12/11)	Moving average at lowest level since July 2008
	CPI (02/11)	Fastest pace since mid-2009 on oil and food gains
	Industrial Production (02/11)	Output slowed, but January revised higher
	Leading Economic Indicators (02/11)	8th consecutive increase
The Week Ahead
March 21	Existing Home Sales (02/11)
March 23	New Home Sales (02/11)
March 24	Jobless Claims (03/19/11)
	Durable Goods Orders (02/11)
March 25	GDP (4th quarter revised)

 

Against the backdrop of several global crises at the same time, Bernanke and friends got together to discuss economic policies and they delivered a rather optimistic assessment of the domestic recovery (with no direct mention of Japan or the potential impact on trade).  The Fed pointed to the pickup in consumer spending and a “gradually improving” labor market in claiming that the economy now stands on “firmer footing.”  While acknowledging that rising commodity prices were certainly worth watching, the policymakers called the effect of oil to be “transitory” (defined as short-lived, temporary) and they do not seem overly worried about inflation at this point.  Still, they maintained a commitment to keep rates low (around 0%) for an “extended period” and did not make any changes to the controversial bond buying program. 

 

Across the pond, the European Central Bank seems likely to raise its short-term rates as early as April.  This week, the European Union’s finance ministers agreed on new economic policies to toughen sanctions on countries that do not abide by the strict budgetary guidelines, but failed to address the need to enlarge the bailout funds.  Portugal moved closer to bailout territory as Moody’s downgraded its debt two notches on concerns about its deficit reduction prospects and nervous investors shied away from its latest auction, sending borrowing costs even higher.         

 

The domestic economic releases confirmed that higher commodity prices are indeed impacting the inflation picture as both wholesale (PPI) and retail (CPI) prices rose at their fastest paces since mid-2009.  Still, the core (ex-food and energy data) climbed at a much more modest pace, allowing the Fed some wiggle room as it institutes (and monitors) its policies.  Housing starts suffered the worst month in 27 years as the sector seems far from recovering.  The labor picture looked a bit better as the latest jobless claims release showed fewer folks moving to the unemployment line and the four-week moving average now stands at its lowest level since July 2008.  Though industrial production fell in February, the January upward revision revealed continued strength in manufacturing.  Finally, the index of leading economic indicators rose for the eighth straight  month, seemingly consistent with the Fed’s upbeat assessment of the recovery.  

 

On the Horizon…Japan, Japan, more Japan.  Throw in Libya, Bahrain, and Saudi for good measure.  These days, global developments continue to prove just how “small small” the world has become.  As the third largest economy continues to assess its damage and the ongoing nuclear threats, its trading partners begin to (try to) quantify exactly what that means for future growth.  Analysts will be watching closely to see just how quickly manufacturers, retailers, and other biz can re-establish operations.  Oil prices enjoyed a nice reprieve for a few days, but the ongoing Middle East conflict promises continued volatility as nervous traders watch activity in the Arabian Kingdom ever-so-closely.  Lost in the shuffle, the European sovereign debt “challenges” seem far from over.  Looking for more distractions…what and where exactly is TruTV? 

Brounes & Associates is a Houston-based consulting/marketing firm that performs research, marketing, and education projects for financial services companies and other professionals.  “And That’s the Week That Was” is a weekly market/economic commentary that is distributed each Friday afternoon.  Any financial professionals who have interest in rebranding the piece and sending to their investors should inquire to:

Ron Brounes

713-962-9986 (Direct)

ron@ronbrounes.com

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