AND THAT’S THE WEEK THAT WAS…

For the Week Ended August 21, 2009

Market Matters…         

Just who is the great economic Superpower these days?  At times, it seems, “as China goes…so goes the world equity markets.”  Early in the week, the Shanghai Composite suffered its largest percentage decline since late 2008 and the index had lost over 20% for the month on concerns about the sustainability of its recovery.  The global markets watched and Japan, Europe, and the US indexes followed suit (downward).  However, by mid-week, all eyes were back on the domestic market as another selloff in China was overshadowed by signs of growing US economic strength and reports of enhanced energy demand.  More than ever…“it’s a small world after all.” 

The global bailout plans moved into a new stage as the Swiss government relinquished its control over banking giant UBS by selling off its investment to the tune of a $1.13 billion profit or a 30% annualized return.  While the US government has yet to reap similar benefits, several major banks have paid off their TARP loans and the CEO for one of the poster children for financial distress, AIG, announced his firm should be able to pay back the government and may even be able to “do something for shareholders as well.”  (Bonuses for everyone?)  While many auto dealers complained about the rebate process on the “cash for clunkers” program, GM stepped forward and will begin providing advances to participants who continue to wait for the government to move through its traditional red-tape.  (Then again, isn’t GM part of the government these days?) 

The health care debate (and political infighting) raged on (complete with widespread town hall civil disobedience).  Rumors that the government would remove its public health plan option sent related health-care stocks soaring early in the week, though the jury is still out as Prez O guaranteed approval of an overhaul and then bashed Republicans for their efforts in blocking any plan whatsoever.  (Biz as usual in DC.)   In earnings news, the housing sector received mixed signals as Home Depot bested expectations, while rival Lowe’s fell short and reduced its outlook.  Cost-cutting was widespread among retailers as TJX, Gap, and even Target benefited from increased margins, though sales remained lackluster at best.  HP struggled in its PC and printer segments, though management expects a healthy rebound in its fiscal fourth quarter. 

Fixed income benefited from some early “flight-to-quality” trades and a report that showed strong foreign demand for treasuries in June (despite ongoing rumors to the contrary).  Stocks fell sharply in sympathy with the China sell-off, though buyers reemerged in a big way on positive signs from the earnings and economic reports (see below).  Likewise, oil prices shook off some early week negativity and surged to 2009-highs as a surprising plunge in inventory levels revealed growing demand (perhaps to coincide with the beginning of a global economic rebound?).  On that note, Dr. B.’s favorable comments about the prospects for recovery (though slow at first) were extremely well-received as investors seemed to all but forget about following Shanghai and the US markets assumed the leadership role once again.  The domestic major indexes shrugged off the weak start and pushed to new highs for the year.  Take that, China. 

Economically Speaking…        

Weekly Economic Calendar

In addition to the Home Depot and Lowe’s earnings reports, housing news was prevalent during the week and the results were somewhat confusing.  The National Association of Home Builders reported that its Housing Market Index climbed for the second month in a row and reached its highest level in over a year.  Likewise, applications for mortgages increased for the third straight month on declining interest rates.  However, foreclosure rates remain on the rise and, according to the Mortgage Bankers Association, 13.2% of mortgages are delinquent or worse (in foreclosure); in fact, subprime is no longer the only area of concern as the unsettled labor picture has prompted homeowners with strong credit to fall behind on their prime mortgages as well. 

Though housing starts fell in July, the decline was entirely attributable to apartment activity and construction of single-family homes actually rose for the fifth straight month.  Additionally, existing home sales in July surged by over seven percent as buyers took advantage of the misfortunes of others (in foreclosure), though prices continue to fall because of transactions related to these distressed properties.  In non-housing news, separate regional reports from the New York and Philly Feds boosted the outlook for the domestic manufacturing sector and the overall economy.  Wholesale inflation remained benign as PPI fell by a wider than expected 0.9% in July and prices have plummeted over the past 12-months by the largest percentage (6.8%) since records have been kept, dating back to 1947.  (Be forewarned…oil just hit a 2009-high.) 

Policy-makers met for their annual conference (and boondoggle?) and Fed Chair Bernanke shared a favorable assessment about the recovery process from “the most severe financial crisis since the Great Depression.”  Of course (as in typical CYA-fashion), Gentle Ben tempered some of his remarks and reiterated that, while the recession seems to be coming to an end, the rebound should  be slow and unemployment remains a concern.  He also spoke of the need for financial regulatory reform to ensure such a debacle is not repeated.  The Fed also extended its Term Asset-Backed Securities Loan Facility (TALF) lending program in order to help stem the potential “challenges” that remain among commercial mortgage-backed securities. 

On the Horizon…Earnings season winds down as retailers Staples and Tiffany offer their reports of the past quarter, though investors seem to have begun looking forward rather than back these days.  On that note, consumer confidence and personal spending/income provide new glimpses into the mindset of the consumer and whether they ever plan to get back on track in time for some last minute back-to-school and holiday shopping activity.  Economists get additional insight into the potential rebound of the housing sector as the new home sales release confirms (or denies) purchase activity, while durable goods orders provide another look into manufacturing.  And perhaps, there will be another positive Bernanke sighting or two along the way. 

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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ron@ronbrounes.com

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