AND THAT’S THE WEEK THAT WAS…

For the Week Ended July 31, 2009

Market Matters…         

Fret not for Wall Street…despite a near-complete and utter collapse of the financial system, a credit crisis and recession that prompted massive losses, a multi-billion bailout at taxpayers’ expense, political “witch-hunts” in which integrity came into question, boardroom departures (with huge severance packages)…its looks like these professionals will be just fine.  A NY Attorney General report claims the initial nine institutions that received TARP money paid out $33 billion in bonuses in 2008.  Of particular note, Citigroup and Bank of America rewarded over 900 employees (combined) with bonuses of at least a million dollars, despite receiving $45 billion each in government aid (and that doesn’t count the $3.6 billion Merrill Lynch employees received).  Imagine how much they would have made if the companies were actually doing well? 

While Prez O. continued his road trip across America to promote health care reform, a group of conservative Democrats (Blue Dogs) came up with their version of a bill, but placed no timetable on it (sorry Speaker Pelosi).  Meanwhile, regulators pushed forward with proposed rules aimed at reducing speculation in the marketplace and focused on naked short selling and strict limits on commodities contracts.  In corporate news, deals were the theme of the week.  Microsoft made amends with Yahoo and forged a 10-year partnership to cut into Google’s share of the search biz (without paying “boatloads” of money in the process).  SW Airlines has its eye on Frontier as it attempts to better a pending deal with Republic Airlines.  IBM is expanding its software empire with the purchase of SPSS for $1.2 billion.  Delphi is set to move out of bankruptcy. 

On the earnings front, energy companies highlighted the week’s reports and the results were not pretty (though were expected).  ExxonMobil, Chevron, BP, and Royal Dutch Shell each reported declining profits as oil prices had dropped considerably since the highs set last summer (when record profits were the name of the game).  Verizon Communications, Sprint Nextel, Viacom, and Time Warner also suffered from business slowdowns during the past quarter.  On a positive note, Motorola surprised analysts by reporting an unexpected profit, while offering a promising outlook, and Deutsche Bank continued the favorable trend among (previously depressed) financials by posting strong earnings on solid investment banking operations. 

Investors digested the mixed earnings news and chose to focus more on the positives.  Despite a temporary setback in China (5% index decline before encouraging comments by its central bank), the Dow moved higher late in the week after GE was upgraded by a major analyst, a sign of an improving climate.  The Nasdaq even flirted with 2,000 for the first time since October 2008 and the S&P 500 edged closer to 1,000, a level not seen since last November.  The Dow ended July with its best monthly performance since October 2002.  Japanese stocks moved to their highest levels in about 10 months and European equities soared to nine-month highs.  Bond investors breathed sighs of relief as a record $115 billion treasury auctions came to a close and foreign bankers emerged as buyers on the final day.  Another good week…more bonuses all around.

Weekly Economic Calendar

Fed Chair Bernanke has suddenly become Mr. Optimist these day (maybe a positive outlook will get him a reappointment?).  Early in the week, he proclaimed that the financial debacle ultimately would produce favorable results as “not only will we will be back on track, but the economy will be stronger than it had been before this started.”  He also urged Congress to move forward with a regulatory reform package to ensure that such dire times will not be repeated.  The Fed’s Beige Book showed that the economy remained weak, though signs of stabilization and improvements in manufacturing, housing, and even labor are occurring across several regions of the country.  Some districts reported enhanced corporate hirings, particularly within healthcare and technology.

The 2nd quarter GDP release gave further indication that the recession is drawing closer to an end as the economy contracted by one percent over the prior three months (as compared to a -6.4 rate in the 1st quarter).  For the first time since records have been kept (1947), economic activity has declined for four consecutive quarters.  New homes sales skyrocketed in June by 11%, the fourth increase in the last six months, and home prices even climbed on a month-over-month basis for the first time since July 2006 according to the S&P Case-Shiller index.  Durable good orders fell in June, though once the volatile transportation category was removed from the statistic, orders actually increased.  (Amazing how strong data can look once economists start picking and choosing which components to include.)  Consumer confidence fell in June as ongoing pressures on the labor markets brought continued concerns and many Americans are refraining from major purchases (now and for the foreseeable future).  On the other hand, jobless claims rose in the most recent week, though analysts pointed to discrepancies from the auto industry.   Looking at the four week moving average as a better gauge, claims for unemployment benefits actually fell to the lowest level since January and continuous claims unexpectedly declined as well. 

On the Horizon…A new month kicks off for the markets and investors hope the favorable trend moves into August (and beyond).  As for earnings season, consumer companies (Procter & Gamble, Kraft) report as do others within housing (Pulte Homes) and insurance (Allstate, Marsh & McLennan).  A hectic week on the economic calendar finds crucial releases from manufacturing and labor, with economists focusing mostly on Friday’s unemployment and nonfarm payroll statistics for signs that the jobs market may be improving (or getting worse, but at a slower pace).  A 10% jobless rate seems inevitable and some analysts believe 11% is not beyond the realm of possibilities.  Obama continues his health-care trek across America (when not chugging beers with cops and professors), though few expect any real action by Congress’ recess.  Hey, Dr. B. maybe you should invite the Prez over for a Bud Light (or Red Stripe)?

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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