AND THAT’S THE WEEK THAT WAS…

For the Week Ended August 14, 2009

Market Matters…         

While bears-o-plenty continue to proclaim “gloom and doom” (and a drop back to the March lows in equities), at least one noted naysayers may have shifted to the other team.  Hedge fund manager John Paulson purchased over $165 million shares of Bank of America and has become the banking giant’s fourth largest shareholder.  Paulson was among the select few who predicted the subprime debacle (and profited accordingly) so his allocation into financials may be interpreted as a nice vote of confidence from an unexpected source.  Meanwhile, the Federal Reserve made a few bold moves to promote its case for recovery as well.  Following the policy meeting (see below), Bernanke and friends announced their intent to cease the program of buying treasuries (up to $300 billion) in October, as a major economic lifeline may have served its purpose well.  Additionally, banks have scaled back borrowing from the Fed’s emergency short-term lending facility, a sign that the frozen credit markets have thawed considerably.  Finally, the “cash for clunkers” program was expanded (again) as the Administration will allow car buyers to receive vouchers for future purchases as automakers (happily) report dwindling inventories. 

Retailers took center stage in the earnings game as Wal-Mart and Kohl’s beat expectation, but still offered cautious projections for the months ahead (including the upcoming holiday season).  Macy’s posted a declining profit, but shared an optimistic outlook as it benefits from cost-cutting measures.  Liz Claiborne, on the other hand, reported a wider loss and new streamlining plans and J.C. Penney issued some pessimistic comments about the state of the consumer.  Seemingly recession-proof McDonalds announced strong July same-store sales as its coffee drinks have competed effectively with the “big boys.”  On the transactional front, China continued its expansion into the global commodities markets as China National Petroleum Corp. and Cnooc Ltd. have eyes on the Argentinean unit of Repsol YPF SA's to the tune of $17 billion.  Microsoft and Nokia are teaming up to take on PDA leader Research in Motion (Blackberry) in an alliance that brings the popular software together with a solid cellular player.

Fixed income investors got a boost from a successful 30-year bond auction as $75 billion in new treasury securities were well-received during the week.  The Treasury also announced a plan to issue more TIPS (inflation-adjusted bonds), a move aimed at alleviating concerns by China (the largest foreign holder of US debt) that the gov would allow a surge in inflation as it tries to finance the stimulus plans.  Higher inflation would increase the yields on TIPS and result in greater costs for the government.  Bond prices fell mid-week after the Fed announced its intent to end its treasury purchase program, though the auction news was a welcome relief and a late-week flight-to-quality also ensued.  Investors focused on the lackluster consumer activity as revealed in both earnings and economic releases and worried that economic growth will be stunted as long as shoppers remain in hibernation.  Despite favorable reviews by the Fed, major equity indexes gave up slight ground during the week with the S&P 500 and Nasdaq still flirting with 1,000 and 2,000 respectively.  Any new buying opportunities created, Mr. Paulson (John, not Henry)?

Economically Speaking…        

Weekly Economic Calendar

No rest for the weary (especially when auditioning to keep a job).  Fed Chief Bernanke guided the latest Fed policy meeting that saw strong signs (and language) pointing to the recession nearing an end.  The Fed claimed the economy is “leveling out” and felt the treasury purchase program could go away with no material detriment to the nation’s financial system.  The accompanying statement also indicated that the funds rate would remain just above zero for “an extended period” as many anticipate the recovery to be slow to take hold.  Noted economists apparently have Bernanke’s back as a recent survey revealed that most prefer he remain on as Fed Chair for another four-year term and Prez O should reappoint him based on his showing in righting the ship during the worst economic downturn since the Great Depression.  (Then again, some point out that he was actually driving the ship with the recession began.)  Treasury Secretary Geithner shared some tough talk as he objected to certain concerns that major financial companies have not learned their lessons and the recent profits (that’s you, Goldman Sachs) are indications of newfound (old-fashioned) risk-taking.  "I don't think the financial system is reverting to past practice, and we won't let that happen.”  (Guess all those bonuses were well-deserved?)  

The economic data of the week offered mixed signals as retail sales surprisingly declined in July despite the popularity of the “clunker” program, though continuous claims for unemployment benefits fell to the lowest level since April.  (Then again, the clunker program wasn’t initiated until late in the month so the August reading may better account for this enhanced activity.)  The anticipated rebirth of the consumer may be on hold for now as the Reuters/U. of Michigan sentiment index fell again and individuals continue to worry about the state of the jobs market.  While the trade deficit increased in June, exports climbed for the second consecutive month (for the first time in a year) and manufacturers experienced increased demand for products like semiconductors and telecommunication devises.  Likewise, industrial production rose in July as the “new and improved” domestic automakers attempt to get back on track.  On another favorable note, inflation remains a non-issue (for now) as CPI was unchanged from June and prices have fallen by 2.1% over the past year.  On the global stage, the French and German economies posted surprising growth in the second quarter and, though the broader euro-zone countries continue to contract (ever-so-slightly), the recovery is already taking hold in that region of the world.  

On the Horizon…Retailers stay in the limelight as Target, Limited, and Gap Stores highlight a list of companies announcing quarterly earnings.  The HP report provides a further glimpse into the world of technology, while Home Depot confirms or denies whether the so-called housing rebound is for real.  On that note, the economic releases include July housing starts and existing home sales, while the wholesale inflation gauge hopefully shows that price pressures are not yet creeping into the producers’ side of the equation either (which would be good news for Dr. B.).   

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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