Stock markets here in the USA and Europe are ending the year on a positive note. The concerns of the European sovereign debt issue have been put aside for now as the European Central Bank is essentially embarking on a quantitative easing policy.

 

 

As the charts above illustrate, the Dow Jones Industrial Average gained 3.6% last week and is positive for the year while the NASDAQ Composite jumped by 2.5% and is more or less break even for the year with a few trading days left in 2011.

The Markets & Economy

The holidays are upon us and the mood of the markets is quite a bit more relaxed. The latest move by the ECB to loan money to European banks at one percent and to lower the quality of collateral accepted (that means all sovereign debt) has had two direct purposes both of which are positive for financial markets.

 

• The first one is that it removes the threat of a run on the banking system. Banks can go to the ECB and simply swap their bonds for Euros. Secondly, for the stronger banks (if there are any), they can engage in a carry trade of borrowing at one percent, and buying additional sovereign issues paying 5 percent or higher and thus coin money on the interest rate differential all the while with the ECB in reality taking on the credit risk.

 

This explains why yields have fallen in Europe and why the stress on their banking system has lessened.  Both of which have contributed to the recent stock market rally that is especially rewarding high-dividend paying names.

 

• This backdoor money printing also allows the ECB to maintain the fiction of not wanting to embark on a direct quantitative easing program such as we have here in the United States. The effect though is the same. It buys time for the countries involved, and in this case the entire region, to try and deal with their fiscal problems without having a very deep recession compound the situation.

 

At the same time, of course, the data here in America has been much better than expected. This may or may not prove to be a lasting trend, but lately for instance the seasonally adjusted (take that to mean government manipulated) initial unemployment claims have been falling dramatically. Never mind that the non-seasonally adjusted numbers have been rising. This has encouraged the media to paint a picture of a suddenly improving economy.

The proof that the mood is improving was delivered this morning with a much better than expected consumer confidence number. People are feeling better and the question is this based upon improving conditions, or the usual holiday spirit along with some better than expected economic data, which may or may not get revised.

My view is quite simple and consistent. I have not bought into “the economy is better” argument, and I have not bought into the “economy is collapsing” argument. We are simply in a slow-growing economy that is not providing either enough jobs or enough revenue to solve our economic problems. At the moment the glass is appearing half full, but as anyone knows - the mood will switch many times between now and next November.

The analysis from the Economic Cycle Research Institute (see chart below) continues to forecast a recession in 2012. Their weekly gauge, while hardly encouraging, has not really fallen further in the three months since they made that call. By their own estimates they will either see evidence of this global slowdown by the end of the first quarter or they will be wrong.

My view is that the economy never has recovered from the great recession of 2008. This is confirmed by the GDP data concerning the size of the economy. Since we never moved up, it limits the impact of a slowdown should one occur. Unless Europe blows up that remains my assessment for 2012. This would mean investors should focus on opportunities to buy high quality dividend paying stocks whenever the convulsions of the market give you an entry point.

 

What to Expect This Week

This is a holiday-shortened week as is next week. The New Year’s Holiday will see the financial markets closed next Monday. As such, our next report will be on

Monday the 9^th of January 2012.

Happy New Year to each and every one of you.

Next year is going to be an important one for investors and the future of

our great country.

SYMBOL:  AKAM

 

Shares of Akamai rallied more than 20 percent last week after announcing that it will be purchasing a smaller rival, Cotendo, for $268 million in cash.  This deal will be mildly dilutive to earnings of Akamai in the first year of the deal, although it will be accretive after that.  It is very rare that shares rally this sharply after announcing a major deal, which shows us how excited shareholders are about this acquisition.

Cotendo was only founded in 2008 and makes software that helps speed up websites, and has quite an impressive client list including Facebook, Zynga and Google.  The Company recently launched an aggressive pricing strategy and the management team of Akamai feels they would rather purchase Cotendo than compete on pricing.  This acquisition eliminates a key competitor and places Akamai at the forefront of the cloud computing markets.

This also gives Akamai a more complete solution for its customers, and should give them better pricing trends over at least the next 12 months.  This shows management’s commitment to growing its cloud computing division, which is growing significantly faster than its other product lines.

We are encouraged by the reaction to this acquisition and expect Akamai to be positioned for a much better 2012.  Akamai has long been a rumored takeover target, and this acquisition could make them more attractive to a larger competitor like IBM or Hewlett Packard.  We continue to believe that shares of Akamai should reach $40 within the next 12 months.

 

 

 

(c) McIntyre, Freedman & Flynn

www.mcintyreinvestments.com