April 2, 2010AND THAT’S THE WEEK THAT WAS… For the Week Ended April 2, 2010
Market Matters…
Welcome to the second quarter 2010. As investors closed the books on another successful quarter (the best initial three month period since 1999), plenty of mixed opinions remain and “experts” continue to debate the magnitude and longevity of the current equity market rally. Since stocks fell to a 12-year low in early March 2009, major indexes have surged far higher and faster than any analyst predicted. (At least, those reputable ones who aren’t coming out of the woodwork these days to say “I told you so.”) Since March 9, 2009, the Dow is up about 65%, while the S&P 500 (+75%-ish) and Nasdaq (+90%-ish) have rewarded investors with even greater returns.
The cockeyed optimists believe that tons of cash remains on the sidelines and retail (smaller individual investors) have yet to participate in this significant movement, instead opting for the safe-haven of treasuries. According to these “glass-is-half-fullers,” once retail investors regain their confidence, the real rally will begin. (Can you say Dow 11k? 12k? How about 14k?) On the other side of the coin, pessimists (they call themselves…realists) point out that S&P 500 price ratios are now about 13% above the average since 2005 and the massive equity price run represents far more than the modest recovery (thus far) should dictate. They believe that much of the strength has been artificially created by public stimulus and after the gov begins to shift policy, the private sector may not fare quite as well. The Fed is shutting down its program to buy mortgage-related securities and many economists fear that the already struggling housing sector will suffer even more. Additionally, as earnings season approaches, they argue that most of the recent quarterly profit increases reflect cost-cutting measure as opposed to rising revenues.
In other news, the China/Google battle picked up steam as an apparent blockage of all searches by Chinese users may turn out to be a mere programming glitch. Still, the company continues to take its strong anti-censorship stand, while the Chinese government refuses to be told what to do by an outside enterprise. Auto sales soared in March as Toyota (among others) benefited greatly from much-needed (and appreciated) customer incentive plans. Apple moved closer to releasing an iPhone for the Verizon network and ending its exclusive agreement with AT&T. Treasury will soon begin selling shares in Citigroup (from TARP) and stands to profit in the neighborhood of $8 billion on the transaction. (Where are those bailout naysayers now?)
As the classic Greek tragedy appears to have stabilized (for now), the dollar lost ground to the euro and oil prices surged to a 17-month high above $84/barrel. Stocks began the second quarter where the first one left off as the initial trading day found nice gains across most indexes. Bear in mind, volume was rather light as some investors took a few days off to celebrate (insert your favorite religious holiday). With the markets closed for Good Friday, many managers scrambled to position portfolios in advance of the key labor releases (which came on that very same day), knowing they would be unable to execute trades until the beginning of next week. Perhaps we could all use a day off from the markets (and the never-ending “expert” debates). Economic Calendar
With Greece firmly on EU life support and preparing to raise funds through a new bond offering, Ireland took center stage as the latest country with its hands out. (Move over, Portugal.) The Irish government plans to add billions of euros into its banking system and buy underwater loans to be placed into a national “bad bank.” Meanwhile, manufacturing continues to expand worldwide and lead the global economy in this recovery. Germany posted its best month of sector expansion ever reported (14-year survey), while France and Italy also enjoyed stellar results. Shifting continents, China, Taiwan, and South Korea all revealed solid manufacturing gains as well. At home, the Institute of Supply Management reported the best showing in March since July 2004 and February factory orders climbed for the 10th time in the past 11 months.
In other domestic news, March consumer confidence rebounded from a dismal report in February and personal spending rose for the fifth consecutive month. While investors had to wait until Good Friday for the government’s labor releases, they had a few precursors to digest in advance. The ADP/Microeconomic Advisers national employment report showed that 23,000 private sector jobs were lost from the economy in March, while the jobless claims moving average fell to its lowest level since September 2008. Following those seemingly contradictory reports, investors, analysts, and traders alike were forced to wake up early on their day off and turn on CNBC for the REAL labor data. And the answer is…the economy added 162,000 nonfarm jobs in March, it strongest showing in three years, and the unemployment rate remained at 9.7% for the third consecutive month. While the numbers appears to be another nice sign for the improving health of the economy, investors will have the opportunity to “speak” come Monday.
On the Horizon…With Alcoa set to kick off another earnings season on April 12, analysts will be looking far beyond the general profit/loss numbers and deciphering exactly how the companies are achieving them. Over the past few quarters, investors have seemed satisfied with the trend toward better results and even praised company management for cutting costs to help the bottom line. Now, they want to see enhanced revenues as indications that business and consumer activity is actually picking up (and not just when incentives are offered). While the Fed plans to keep its funds rate at near 0%, policymakers are unwinding one major program when they stop purchasing mortgage-backed securities. The housing sector continues to be weak and many fear the policy shift will do more harm than good. Then again, at some point, the economy needs to be weaned off of the massive government intervention and the US would do well to follow China’s lead. Expect the debate to continue about the (over-)valuation of the equity market as the new quarter begins. While the “too far, too fast” argument has grown a bit fainter in recent weeks, plenty of naysayers expect a pullback in the near future. (Just don’t let them ruin our long weekend.)
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) (c) Brounes & Associates
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