AND THAT’S THE WEEK THAT WAS…

For the Week Ended July 10, 2009

Market Matters…         

“New and Improved”…the message of the week.  General Motors emerged from Chapter 11 bankruptcy protection after just over a month, eager to start anew as a “new and improved” automaker.  The Commodity Futures Trading Commission (CFTC) set its sights on “new and improved” trading regulations to limit excessive speculation within the energy and other commodities markets.  Some politicos are calling for a “new and improved” stimulus package to move the economy beyond the worst recession since the Great Depression.  A “new and improved” Public-Private Investment Program (PPIP) was scaled back dramatically as selected managers will begin purchasing toxic assets from ailing banks.  Unfortunately, as the week progressed, investors did not seem too keen on these “new and improved” developments. 

Despite harsh protests by consumer groups and creditors, new GM reopened for business, “leaner and meaner” than ever (hopefully).  A judge’s ruling allowed the once bankrupt company to sell its performing assets to a new government-controlled entity (thanks to a $50 billion “investment” by taxpayers).  The government then shifted its attention to the regulatory world and announced plans to propose trading restrictions on certain commodities and increase the oversight over risky derivative products that have proven so detrimental to the financial markets.  (Of course, the grandstanding again began in earnest as certain politicos still believe too much government is far worse than too little oversight.)  The (bi-)partisan disagreements continued as new debates raged over the success of the stimulus package and whether (and how much) more aid would be needed to help jumpstart the economy.  Expect such rhetoric to be enhanced with each new economic release (see below).  With regard to PPIP, PIMCO was left off the approved manager list, presumably by its own choice, despite being among the investment firms to “champion” the plan.    

The widely anticipated earnings season got started as Alcoa reported another quarterly loss and oil giant Chevron warned that its results would be hindered by poor refinery operations and a weak dollar.  Thomson Reuters predicted that S&P 500 earnings will decline by 36% from last year’s levels with financials (-53%) leading the way and techs (-24%) performing better than other sectors.  This should represent the eighth straight down quarter, though analysts seem more concerned about the ensuing management comments on future operations.  Investors have taken a more cautious approach heading into the new (but not improved) earnings season, particularly after last week’s pessimistic labor data.  Equities dropped throughout the week and fixed income again became beneficiary of safe-haven trades.  (What a difference a few weeks makes.)  The tech-heavy Nasdaq now remains the only major domestic stock index “in the black” for the year.  Fickle energy traders suddenly turned bearish as well as the weak economic data implied that oil demand would be curtailed for the foreseeable future (or, at least, until 2013 according to OPEC’s 2009 World Oil Outlook).  Crude plunged below $59 or over 10% during the week on ongoing economic concerns though consumers ultimately may be recipients of cheaper gas prices.  Now, that’s one “new and improved” development that should be well-received. 

Weekly Economic Calendar

To stimulate or not to stimulate…that is the question.  According to some (like House Majority Leader Hoyer, VP Biden, and even Warren Buffett), $787 billion was not enough to jumpstart the economy and additional stimuli would be needed sooner than later.  On the other hand, Senate Majority Leader Henry Reid believes the plan needs more time to work through the system as only 10% or so has even been distributed thus far.  Economists seem to agree with “Hank,” as the latest Wall Street Journal survey reported that over 80% of respondents feel that the country does not need a new round of stimulus in the current environment.  Still, the “Oracle of Omaha” (that’s Mr. Buffett to you) painted an optimistic picture of the future by stating "We're going to come out of this better than ever, the best days of America lie ahead but not next week or next month.”

On the global front, the International Monetary Fund (IMF) revised its forecast of economic growth for 2010 upward (for a change) and confirmed its belief that the developing economies in China and India will greatly contribute to the global rebound.  Prez Obama joined his world leader counterparts in Italy for the G-8 meeting where the best financial minds (hopefully) discussed exit strategies from the “unprecedented and concerted action” (stimulus) that have been enacted over the past year (and new moves that have yet to occur). 

The May trade balance highlighted a slow week of data as the deficit declined to its lowest level since late 1999 and the weak labor market helped reduce consumer demand for foreign goods.  While initial claims for unemployment benefits fell to levels not seen since the beginning of the year, continuous claims (those folks who remain on the unemployment rolls for over a week) rose by another record amount.  In other words, no matter how one dissects the numbers, the labor picture looks dire and may not begin to improve for some time.  As such, the latest University of Michigan consumer sentiment reading dropped for the first time since February, another sign that the optimism of the past few months may be fading fast.  Retailers struggled in June as well as Abercrombie & Fitch (-32%) and Target (-6.2%) were among those performing worse than expected according to their same-store sales numbers.  The world’s largest retailer Wal-Mart chose not to report for the second straight month, undoubtedly skewing the results downward. 

On the Horizon…Earnings season moves into high gear as financials and techs provide greater insight into the economic recovery and offer guidance for the rest of the year.  Goldman Sachs (7/14), JP Morgan-Chase (7/16), Citigroup and Bank of America (7/17) all report about the progress made within the financial services sector; technology giants Intel (7/14) and IBM (7/16) reveal whether talks about IT spending have returned to the corporate boardrooms.  The June inflation data (PPI and CPI) will be released, though after the past week’s dramatic decline in energy prices, little can be taken from these numbers.  Economists also get news to (over-) analyze from the housing, manufacturing, and retail fronts.   And, of course, the once routine initial jobless claims report becomes more significant with each passing week.  Surely, Hoyer, Biden, Buffett, Reid, and a slew of economists will all be watching. 

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

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