AND THAT’S THE WEEK THAT WAS…

For the Week Ended October 23, 2009

Market Matters…         

Ah…the semi-elusive 10,000 mark.  Often, investors seem more preoccupied with critical index levels than the pure fundamentals of the economy or Corporate America.  Earnings expectations remain optimistic...Dow pushes past 10k.  The Fed expresses concerns about consumer activity…Dow falls below 10k.  Leading indicators reveal economic strength…Dow jumps above 10k.  Railroad execs issue pessimistic comments about the recovery…Dow skids under 10k.  Needless to say, a hectic week on the economic and earnings calendars gave investors plenty to digest (though the “will it or won’t it close above 10k?” monopolized the daily water cooler talk).   

Earnings season garnered much of the headlines and (generally) the results did not disappoint.  Apple, TI, Yahoo, and Microsoft highlighted a group of techs that released upbeat reports (for the most part); Caterpillar and 3M lent support to the recovery within manufacturing; American Express and Morgan Stanley brought renewed hope for financials; Amazon.com and Hasbro offered encouragement for the holidays.  On the other hand, Boeing and Lockheed Martin struggled with program delays and defense cutbacks; eBay forecast disappointing future profits and revenue; Union Pacific and Burlington Northern recorded weak results and claimed the economy will “limp along” for the foreseeable future.  (Railroads are considered good predictors of economic activity.)  Even Coca Cola suffered from consumer belt-tightening and currency issues.  Still, the general mood remained highly optimistic as earnings season moved forward. 

In other news, the gov looked to gain more control over (bailed-out) institutions as the treasury’s pay czar and the Fed revealed plans to limit executive compensation at domestic banks.  The Fed’s proposals even extend beyond troubled firms and seek to ensure that managers do not take on undue risks for potential personal gain at the expense of shareholders and the overall economy.  Morgan Stanley plans to sell its Van Kampen asset management division to Invesco for $1.5 billion.  Carl Icahn offered CIT Group a $6 billion personal “bailout” (in return for a management shake-up).  Cell phone giant Nokia sued Apple over patent infringement.  A major Wall Street analyst reduced his rating on Wells Fargo due to loan quality.  And Raj Rajaratnam, founder of Galleon Group, joined Sir Allen Stanford and Bernie Madoff as the latest “player of questionable character” as he allegedly profited from insider-trading, and ultimately will close his hedge funds, while many of his investors (some high profile) seek mass redemptions. 

Despite reports showing that oil and gas inventories continue to increase, energy traders pushed crude to a one-year high (of about $82/barrel) before late-week selling ensued on (slight) strength in the dollar.  Lately such trades have been more reflective of currency activity than fundamental supply/demand issues.  The Dow Jones again rallied through the 10,000 level (and other indexes followed suit), though investors looked to take some profits late in the week and the “too far too fast” battle-cry of naysayers resurfaced.  When the dust had settled at the final bell, the Dow (and other indexes) gave back considerable ground Friday and a Dow 10k close still remains elusive. 

Weekly Economic Calendar

Move over United States; here comes China.  While the US has long been considered the great economic Superpower, China has emerged as the “go-to” country in terms of leading the world out of global recession.  In the third quarter, its GDP climbed to just under 9% as industrial production and business spending expanded at stronger than expected rates.  The UK’s economy, on the other hand, suffered its sixth straight quarterly contraction, surprising economists who were looking for growth in the second half of the year.  Next week (October 29), the US takes center stage and most analysts are calling for GDP expansion in the neighborhood of 3%; any shortfall could be cause for concern (and again shift the focus to that Superpower, China). 

In other data, the housing sector continued to experience strength as both housing starts and existing home sales climbed as first-time buyers rushed to take advantage of the government’s tax credit which is set to expire in November.  Many analysts are skeptical that such a sector rebound can last once the stimuli goes away and point to “cash for clunkers” as proof.  (Auto sales plummeted in the month following the program’s end.)   Additionally, building permits declined in September, a sign that activity will slow in the months ahead.  Leading economic indicators rose again in September, the sixth consecutive increase, as consumer expectations and jobless claims were among the positive gauges within the release.  Inflation remained far off of most economists’ radar screens as PPI declined last month and even the core release (ex-food and energy) revealed virtually no price pressures (for now). 

Bernanke and friends took center stage again as the Fed’s beige book offered a new look into the data that shapes the mindset of the policymakers.  While most regions of the country have stabilized and are showing improvements in housing, manufacturing, and other sectors, consumer activity remained weak and the jobs situation may indeed hinder prospects for much more than a “sluggish” recovery.  Dr. B. also called on his buds in Congress to enact meaningful financial reform and encouraged Prez O to take steps to counter the escalating budget deficit.  (Now that he will be regulating bankers’ compensation, Bernanke can’t be expected to do everything himself.)

On the Horizon…Earnings season plugs along as energy companies have their days in the sun.  Exxon-Mobil (10/29) and Chevron (10/30) both announce profits and revenues during the week as does consumer products giant Procter & Gamble (10/29).  Given the relatively strong results thus far, analysts are optimistic about the third quarter GDP release, though many did a double-take when the UK missed its projection.  Similarly, many analysts already are looking beyond the upcoming housing release (new home sales) and speculation has begun about an extension to the homebuyers’ tax credit or some other stimulus to aid in the continued recovery of this sector.  As for Dow 10k…will the third time be a charm (in terms of closing above that “critical” level)? 

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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