Economic & Market Update: October 12, 2009

“Markets Resume the March Higher”

Chris Maxey, Analyst

http://www.Fortigent.com

Last Week’s Highlights:

Economics This Week:

S&P Bounces Off Important Support Level

Following several weeks of poor performance in the equity markets, the S&P index surged higher in five consecutive days, finishing the week up 4.5%.  It is a fairly uncommon phenomenon for the S&P to rise Monday through Friday, having occurred only 12 times in the last 10 years, with the last occurrence in November 2006. 

Last weeks price movement was a strong signal for market bulls, as the S&P was teetering at the 50-day simple moving average (SMA) on the previous Friday.  A strong break below the 50-day SMA had the potential to send the equity markets into a corrective phase.  Fortunately, that did not turn out to be the case and the long-term trend remains intact. 

Source: Stockcharts.com

One of the major catalysts last week was an upbeat earnings report from Alcoa.  Analysts were expecting a $0.09 per share loss on higher cost cutting.  In reality, Alcoa posted net income of $0.04 per share due to extreme cost cutting measures, and higher aluminum prices.  Revenue growth has been difficult to come by in recent quarters with companies relying primarily on cost cutting to drive profitability, but Alcoa’s report may be the first of a changing trend. Quarterly profits for PepsiCo and Marriott also surpassed analyst’s estimates.  Three companies does not a trend make, however, this is positive news heading into the meat of earnings season. 

It was an expectedly light week on the economics front.  The only major surprise was consumer credit, which fell by $12.0B in August, well in excess of the $10.0B that had been expected.  Consumer debt is now down for seven consecutive months, and by more than $110B over the past year.  Attitudes towards debt are undergoing a massive sea change with consumers finally realizing that an over-leveraged lifestyle is no longer an American birthright.  Additional pay downs are expected in the coming months which will create necessary headwinds to the economic recovery. 

Source: Econoday

Race To The Exit

Australia became the first country in the G-20 to raise interest rates last week.  The Reserve Bank of Australia (RBA) moved the overnight cash rate from 3.0% to 3.25%.  It was a bit of a surprise move as economists were not expecting a change in rates prior to the November RBA meeting. 

Australia is in a relatively favorable position compared to other developed economies because the global downturn did not prove as severe in that corner of the world.  But this begs the question of who will be next, and right now there does not seem to be a clear answer.  The US and its European counterparts suffered a major blow to their respective economies during the crisis last year.  Financial leaders are wary of tightening monetary policy before a recovery is firmly in place.  Fed funds futures are predicting a rate hike within the first six months of 2010.  Given Bernanke’s stance that monetary policy will remain accommodative for an extended period of time, and the current dis-inflationary forces that are emerging in the US, it seems unlikely US rates will move higher prior to the second half of 2010.  However, we suspect that Bernanke & Co. will move quickly. Rate hikes of 50bps or more are a distinct possibility as the Fed moves to sop up the excessive liquidity.

The Week Ahead

It will be a busy week from an economic and earnings standpoint.  Investor focus will turn to the retail sales report on Wednesday.  The expiration of the ‘cash for clunkers’ program will weigh on the headline sales figure, but it is hoped that the later than usual September start to the school season will provide a modest boost.  Also on Wednesday, the minutes from the September FOMC meeting will be released.  Investors are watching closely for indications around the Fed’s intentions for the mortgage purchase program, which is scheduled to expire in early to mid 2010.  Finally, on Friday, the Treasury will release the International Capital flows report.  This closely watched report provides important data on foreign demand for Treasuries and other financial securities. 

 Third quarter earnings season kicks into high gear this week.  The key companies that are scheduled to report include Citigroup, Goldman Sachs, General Electric, Google, IBM, Johnson & Johnson and JP Morgan Chase. 

Vladimir Putin is traveling to China for three days, starting on Monday.  He is scheduled to hold meetings with Chinese Premier Wen Jiabao.  The two sides are set to discuss economic cooperation and joint projects that both countries, notably cooperation on energy.  On Wednesday, the European Commission will provide a status report on the enlargement of the European Union.  Current candidates for inclusion in the EU include Croatia, Macedonia and Turkey.  Another five eastern bloc countries are working towards candidacy.    

Quotable:         “An economist is someone who knows more about money then the people who have it.”  Anonymous

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