AND THAT’S THE WEEK THAT WAS…

For the Week Ended October 29, 2010

 

Market Matters…         

                           

Market/Index	Year Close (2009)	Qtr Close (09/30/10)	Previous Week (10/22/10)	Current Week (10/29/2010)	YTD Change
Dow Jones Industrial	10,428.05	10,788.05	11,132.56	11,118.49	+6.62%
NASDAQ	2,269.15	2,368.62	2,479.39	2,507.41	+10.50%
S&P 500	1,115.10	1,141.20	1,183.08	1,183.26	+6.11%
Russell 2000	625.39	676.14	703.43	703.35	+12.47%
Global Dow	1,984.48	1,947.85	2,030.30	2,021.14	+1.85%
Fed Funds	0.25%	0.25%	0.25%	0.25%	0 bps
10 yr Treasury (Yield)	3.85%	2.52%	2.56%	2.61%	-124 bps

 

Heading into the midterms, analysts are using history as a guide to anticipate how the markets will react to the results.  The rally of the past few months indicates that investors expect a big Republican victory and (pro-biz) sectors like health-care (reform the reform) and energy (drill, baby, drill) have been among the top performers.  Of greater note, equities have done best historically with a Dem Prez in the White House and a Republican-led Congress stonewalling his every move.  Such a combo has led to double-digit gains (more than 15%) over a 70-year horizon, proving that gridlock may actually work best in this country.  While corporations may be padding the pocketbooks of their favorite candidates with “legal” contributions, Moody’s reports many continue to stockpile cash as they await greater certainty in the economic and regulatory climates.  Almost $1 trillion in cash still sits in balance sheets as companies have taken advantage of the low rate environment to borrow, but remain slow to hire or reinvest in operations. 

 

The week on the earnings front brought decent signs from Big Oil and some consumer-related companies.  Exxon-Mobil, ConocoPhillips, and Royal Dutch Shell each experienced strong demand for refined products and benefited from higher commodity prices.  Royal Caribbean produced a solid quarter and raised its cruise outlook for 2011.  Visa revealed that consumers are starting to spend more as revenues bested expectations and retailer Coach predicted a favorable holiday season.  Microsoft reaped the rewards of higher Windows and Office sales.  Ford posted its sixth straight quarterly profit, a nice showing for the one major domestic automaker that avoided bankruptcy.  On the downside, US Steel reported a surprising loss and 3M issued a negative outlook for the economy and lowered its full-year forecast.  Google continued to make enemies as online travel companies (Expedia, Sabre, Kayak) teamed up to oppose the company’s proposed purchase of ITA Software, claiming an unfair advantage in the travel search biz.  IBM looked to put some of its “cash on the sidelines” to work by announcing an additional $10 billion in share repurchases, despite the fact that its price stands near a record high.  Bank of America tried to move past the latest foreclosure debacle (and even admitted a few mistakes), while rival Citigroup found itself on the Goldman Sachs “conviction buy” list. 

 

For their part, investors spent much of their time speculating about the next Fed move (rather, the magnitude of it) as rumors surfaced that the bond buying program (see below) may not be as large as many had hoped.  With a “nice” bout of inflation on the line, analysts and others weighed in about their views of the potential program and the overall impact on the economy.  Stocks rose and fell with each passing Fed-related comment (and ended flat for the week) and oil remained volatile as traders worried about the outlook for crude demand.  As the Fed meeting drew closer, TIPS (Treasury Inflation Protected Securities) began offering negative yields, a dynamic that occurs because fixed income investors expect inflation to rise in the future which would result in higher total returns for these securities over the next few years.  In the meantime, perform that civic duty at the voting booth.  The strength of the markets may very well depend on it. 

Economic Calendar

Date	Release	Comments
October 25	Existing Home Sales (09/10)	Better-than-expected showing
October 26	Consumer Confidence (10/10)	Improved but still at historically low level
October 27	Durable Goods Orders (09/10)	Disappointing after factoring out transportation
	New Home Sales (09/10)	Improvement from horrendous summer
October 28	Jobless Claims (10/23/10)	Initial claims and moving average both fell
October 29	GDP (3rd Qtr)	Slow growth on par with expectations
The Week Ahead
November 1	Personal Income/Spending (09/10)
	ISM (Manu) Index (10/10)
	Construction Spending (09/10)
November 3	ISM (Services) Index (10/10)
	Factory Orders (09/10)
	Fed Policy Meeting Statement
November 4	Jobless Claims (10/30/10)
November 5	Unemployment Rate (10/10)
	Nonfarm Payroll (10/10)
	Consumer Credit (09/10)

 

“Dr. B…you’ve got some ‘splainin’ to do…”  (“Explaining”…Ricky Ricardo reference…never mind.)  The Fed steps front and center next week as the policymakers meet to set a plan of action to help direct the economy.  A “quantitative ease” in the form of a bond buying program is all but a foregone conclusion, but the jury is still out about whether the Fed will buy a mere $250 billion or in excess of $1 trillion like in the past.  Results of a recent Wall Street Journal survey of noted economists shows that the “experts” think the Fed will start slow ($250 billion), monitor for the next few quarters, and add as needed (what’s a few hundred billion between friends?).  While some investors worry that such a move may not be enough to provide much needed stimulus, others fear that any “easing” will prove devastating to the economy over the long-haul.  In fact, PIMCO’s Bill Gross (of “new normal” fame) believes these bond purchases will be “ineffective” and are “truth be told, somewhat of a Ponzi scheme.”  Even one of Bernanke’s own (KC Fed Prez Hoenig) likened the move to a “bargain with the devil.” 

 

Shifting to the numbers, the housing sector showed signs of rebirth (haven’t we said that before?) as new and existing sales rebounded from a dismal summer, but still remained well below levels from earlier in the year when incentives were available.  Consumer confidence rose in October, but still stands near historically low levels.  Durable good orders jumped by the largest amount since January, but sans-transportation purchases, the release revealed slower manufacturing growth.  Labor got a bit of good news as initial jobless claims fell in the latest week and even the less volatile four-week moving average showed improvement.  Economists were mixed about the latest data and how the Fed should interpret it.  On one hand, the domestic economy is showing signs of improvement and, given some time, the private sector may be able to work through the sluggishness without more government intervention.  On the other hand, the economy is moving at a snail’s pace and additional stimulus is needed now to prevent another turn to the dark side.  With those contrasting views in mind, the Commerce Department reported that 3rd quarter GDP rose by 2.0%, on par with forecasts, yet weak enough to justify the presumed Fed action.

 

On the Horizon…Earnings season takes a backseat to politics and the Fed next week.  The midterms usher some new folks into office to take their rightful spot to “grandstand” like their predecessors.  Meanwhile, the Fed finally announces the much anticipated “QE” program.  Bear in mind, the markets have already built in certain expectations for both so expect potentially big moves (who knows which way?) after the results are reported.  By the way, the always fun unemployment releases (among others) bring the oh-so-hectic week to a close. 

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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