Brounes & Associates

AND THAT’S THE WEEK THAT WAS…

For the Week Ended August 8, 2008

Market Matters…         

It’s 08/08/08…so let the games begin.  As Olympic host, China takes center stage to show the world it has arrived as a global “player” and economic superpower.  Of course, no event should be more apolitical than the Olympics.  That is, until China banned some participants for their support of Darfur.  And before W. criticized the country’s poor record of human rights on the eve of the games.  And before China deported a few activists who were demonstrating against certain national policies.  (Oh well, the controversies are nothing a couple of gold medals can’t cure.)  Speaking of politics and its crossover into the economy…this past week, presumed candidate Obama advocated for the sale of 70 million barrels of oil from the strategic reserve and also claimed to now support new offshore drilling (if his tire gauge idea fails to prove an effective policy).  As the campaign season heats up, expect plenty of promises (and flip-flopping) from both sides of the aisle.  (How do you feel about those Bush tax cuts this week, Senator McCain?) 

Freddie and Fannie returned to the headlines with both reporting significant losses far in excess of Wall Street expectations.  (Weren’t those analysts following the news?)  Likewise, insurance giant AIG reported its third consecutive quarterly loss as its mortgage portfolio remained deeply underwater.  Citigroup, Merrill Lynch and UBS each reached multi-billion settlements with the New York Attorney General (no, not Spitzer) over certain high-risk securities that the firms will buy back from “defrauded” (too strong?) investors.  Outside of financials, Cisco Systems provided a boost to techs by announcing better than expected profits; likewise, Procter & Gamble  proved that consumer companies can still thrive despite surging commodity prices.  

So just where are investors to turn these days?  Hedge funds have garnered additional interest as of late as investors seek out non-traditional asset classes to help compensate for the challenges of the markets.  In July, Hedge Fund Research reported that the return on a basket of 60 funds designed to reflect the industry as a whole declined by about three percent, the worst monthly showing in six years.  Tutor Investment Corp. will be spinning off its Raptor fund at year-end after bad calls on the energy sector caused ongoing losses for the past two years.  Private equity firm, Fortress Investment Group, reported a larger than expected quarterly loss and the share price has dropped about 40% since its IPO in early 2007.  Bear in mind, not all hedge funds and non-traditional assets are created equal; plenty of “winners” have emerged lately as well.

Anyone remember when oil touched $147/barrel on July 11?  Has the bubble officially burst?  Energy continued its downward spiral as oil fell below $117/barrel, its lowest level since early May.  Rising inventories eased supply/demand concerns and renewed strength in the dollar also helped support domestic securities (thanks European Central Bank…see below).  Equity market volatility remained as investors weighed the negative Freddie/Fannie reports against the positive energy trend (and the Fed’s inactivity…also see below).  Stocks alternatively soared, plunged, and soared again as the major indexes moved considerably higher by week’s end.  Perhaps that jubilant Olympic spirit is contagious?  So let the games continue…USA, USA, USA.   

Economically Speaking…        

Weekly Economic Calendar

They came; they debated; they analyzed; they left.  No one deserves a vacation more than those Fed governors.  With dueling economic dilemmas impacting the country (slow growth vs. inflation), Dr. B. and friends chose to leave interest rates unchanged at the latest policy meeting.  While most Fed watchers still expect the next move to be higher, some believe such action is unlikely before the end of the year as the sluggish labor market and reduced consumer activity continue to spark talks of recession.  The recent decline in commodity prices helped the Fed stay on the sidelines as the threats of inflation have subsided (at least, for the time being).  The European Central Bank and Bank of England both left their key rates unchanged as they also weigh ongoing economic concerns in their countries against continued price pressures.  The move prompted a surge in the dollar and took additional pressure off of the Fed as well. 

On the retail front, same store sales in July were lackluster at best as consumer held off on back-to-school purchases and focused on necessities like food and household goods. (Apparently, last year’s number 2 pencils and lunch kits will still work.)  Even Wal-Mart’s sales came in slightly below expectations and mall stores (Limited, Gap) and luxury retailers (Saks) all struggled as consumers no longer had those tax rebates to spend.  Moving to housing, the FDIC reported that just under 1% of all prime (not subprime) loans originated in early 2007 were at least 90 days delinquent, meaning that the mortgage crisis still has a ways to go before being resolved (and additional write-downs may be on the way).  The weekly jobless claims data showed that more unemployed folks are seeking government benefits than at any time since March 2002. 

On the Horizon…With oil trading near a three-month low (and corn now at a four-month low), the Fed may have just the ammunition it needs to refrain from any rate hikes for the foreseeable future (or, at least, until the September 16th meeting).  Then again, hurricane threats and  geopolitical turmoil in Iraq, Turkey, Nigeria, and suddenly Russia/Georgia can sway sentiment quickly and renew fears about supply disruptions.  Next week’s economic calendar highlights key releases that could prove crucial to the Fed’s thought-process.  July CPI gives economists another look into domestic price pressures, though the recent drop in energy will not yet be reflected in this data.  Then again, economists tend to focus only on core (excluding food and energy) inflation anyway.  July retail sales sheds additional insight into the mindset of the consumer as those tax rebates have all but been spent.  With gas prices on the decline, consumers should have a bit more available disposable income in the months ahead (though, again the July numbers may not show any enhanced activity just yet). Additional confirmation of the consumers’ recent cautiousness should come from the next round of earnings reports that features retailers Macy’s, JC Penney, Nordstrom, and Wal-Mart.  Should the gas trend continue, consumers could emerge from hibernation just in time for the holiday shopping season…wishful thinking? 

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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