For the Week Ended January 7, 2011

 

Market Matters…         

                           

 

Market/Index	Year Close (2010)	Qtr Close (12/31/10)	Previous Week (12/31/10)	Current Week (01/07/11)	YTD Change
Dow Jones Industrial	11,577.51	11,577.51	11,577.51	11,674.76	+0.84%
NASDAQ	2,652.87	2,652.87	2,652.87	2,703.17	+1.90%
S&P 500	1,257.64	1,257.64	1,257.64	1,271.50	+1.10%
Russell 2000	783.65	783.65	783.65	787.83	+0.53%
Global Dow	2,087.44	2,087.44	2,087.44	2,092.80	+0.26%
Fed Funds	0.25%	0.25%	0.25%	0.25%	0 bps
10 yr Treasury (Yield)	3.31%	3.31%	3.31%	3.33%	2 bps

 

As the new year kicked off, bullish investors were expecting more of the same after the double-digit returns of the past two years.  Speaker Boehner (R) took charge of a seemingly more market-friendly Congress and Prez O. tapped a Wall Street guy as his new Chief of Staff.  Early data showed continued strength in manufacturing, the sector that has led the recovery, and an optimistic Fed believed that the economy was on the right track (and QE2 can only help speed the process along).  The massive amount of “cash-on-the-sidelines” (estimated $2 bln on US and European company balance sheets) implied more biz transactions in the coming months and shareholders looked for enhanced dividends as well.  Even Facebook may be close to a stock offering as a private investment by Goldman Sachs prompted news that the highly sought-after company could be headed for IPO in 2012; another social networker, LinkedIn, may actually beat it to the punch.  The Dow enjoyed a five-day winning streak and all was good in the markets.  

 

Unfortunately, as the week progressed, many of the same “ol’, same ol’” concerns resurfaced.  News that Europe is no where close to moving beyond its debt issues included a bank regulatory proposal that spooked bondholders about the future risks of their investments. The unemployment releases (see below) confirmed that companies are still not hiring as rapidly as analysts had hoped and even a generally upbeat Dr. B. warned that a more normal labor market could still be four to five years away.  Suddenly the winning streak came to a close (though some investors simply may have engaged in profit taking) and the previously euphoric mindset was stymied a bit. 

 

Retailers received some surprising news as December same-store sales numbers disappointed as the late-year blizzard kept post-holiday shoppers out of the stores.  Some found solace in the fact that online statistics are not included in such data (related sales jump 13% this holiday season) and the combined revenue numbers for November and December grew at the strongest pace since 2006.  Consumers continued buying cars last month, however, as GM (+8%), Ford (+6.8%), and Chrysler (+16%) all experienced solid demand, though Toyota (-5.5%) still struggled with recall (and reputation) issues.  With gasoline prices surging beyond $3/gallon in recent weeks (just in time for holiday travel), crude reversed course this week and dropped from above $92/barrel to below $88 on fears that supplies will increase (demand will fall) in the coming weeks.  After a substantial late-year run-up in energy prices, traders seemed content to lock in some profits.

 

Corporations took advantage of the low interest rates and issued new debt at a potentially record-setting pace.  In the first three days alone, $27 billion of investment grade bonds hit the market.  (The January record is $80 billion.)  Stocks started the year strong before giving back some early gains late in the week.  Superstitious investors still tout the January Effect and January Barometer (stock move higher over the first five days AND the entire first month of the year) as proof that 2011 will be another blockbuster year for the markets.  So with three weeks remaining, the early signs look pretty good (that investors can take prolonged vacations come February 1). 

Economic Calendar

Date	Release	Comments
January 3	Construction Spending (11/10)	Third consecutive increase
	ISM (Manu) Index (12/10)	Sector expanded for 17th straight month
January 4	Factory Orders (11/10)	Solid growth confirms strength in manufacturing
	Fed Meeting Minutes	More optimistic about growth prospects
January 5	ISM (Services) Index (12/10)	Strongest showing since May 2006
January 6	Jobless Claims (01/01/11)	Slight increase though 4-week average declined
January 7	Nonfarm Payroll (12/10)	Fewer than expected job additions
	Unemployment Rate (12/10)	Lowest level since May 2009
	Consumer Credit (11/10)	Slight expansion in borrowing in November
The Week Ahead
January 12	Fed Beige Book
January 13	Jobless Claims (01/08/11)
	PPI (12/10)
	Balance of Trade (11/10)
January 14	CPI (12/10)
	Retail Sales (12/10)
	Industrial Production (12/10)

 

One number does not a trend make.  Additionally, some times seemingly similar data look quite contradictory and serve to confuse investors more than aiding them in their decision making.  (Then again, any long-term focused advisor will tell you not to focus so much on every new release.)  Early in the week, the Automatic Data Processing/Macroeconomic Advisers employment report showed that 297,000 private sector jobs were added to the economy in January with small biz leading the charge in term of new hires.  Coupled with the fact that the four-week moving average for jobless claims had dropped again (seven times in the past 12 weeks), investors felt confident that labor was finally turning the corner and the late-week jobless rate and nonfarm payroll data would confirm this favorable trend. 

Unfortunately, the Labor Department’s report depicted job growth of only 103,000 (113,000 private sector jobs), far less than expectations.  While the unemployment rate actually fell to 9.4%, the lowest level since May 2009, naysayers pointed out that a shrinking labor market contributed more to the drop than a significant increase in hiring.  (Apparently, fewer people are actually looking for jobs these days…perhaps out of frustration of lengthy unsuccessful searches.)   Thus, the dilemma…who is an investor to trust: the government (Labor Department) or a payroll giant (ADP) and some “renown” economists (Macroeconomic Advisors)? 

In other economic news, the Institute of Supply Management reported that both the manufacturing and services sectors continue to expand (over 17 and 12 months in a row respectively).  Likewise, factory orders grew at a robust 0.7% pace in November.  Though Chairman Bernanke delivered a confident outlook to Congress based on enhanced consumer spending and business investment, he also warned the politicos that the budget deficit must be addressed now to prevent future financial challenges in the near future.  He also confirmed the policymakers’ commitment to the $600 billion bond buying program (QE2) to address the high level of unemployment and other sluggish economic factors (like housing). 

 

On the Horizon…So was the holiday season really as strong as most retailers claimed?  So is inflation about to rear its ugly head?  Next week should help answer these questions as some key data will be released.  After the disappointing same-store sales numbers, investors are eager to see the December retail sales report; the recent run-up in crude price may begin to work its way into the PPI and CPI data. Investors also look to start a new equity market winning streak to keep hope alive that January turns out to be a positive month (and the rest of the year will follow suit).

 

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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The information set forth was obtained from sources which we believe reliable but we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation by us of the purchase or sale of any securities.  Past performance is not a guarantee of future performance.