The Week in Review: 11.2.09 – 11.6.09

This week, the markets seesawed back up, with the Dow gaining 2.56%, the S&P 2.29%, and the NASDAQ 2.68%.  The Dow continued teasing us by dancing around 10,000, finally ending the week just above it.  The yelled-about correction doesn’t seem to have started, after all.

On Friday, the market was able mostly to shrug off the disappointing employment figures, which showed the U.S. at 10.2% unemployment.  Thursday, data released showed a 9.5% annualized rise in worker productivity.  These facts taken together mean that companies are doing more work with fewer workers. Manufacturers are demanding even more from their workers in an effort to cut costs- productivity in manufacturing plants is up 13.6%.

Next week will be light in economic data. As always, we look toward initial jobless claims.  Otherwise, earnings season is winding and we will see how the market reacts as it digests companies’ reports.

The Week in Review: 10.26.09 – 10.30.09

While we had been seeing earnings figures as the primary influence on the markets for the past few weeks, the economy drove the market this week. The different data that came in had opposing effects.  The two most important reports were Thursday’s GDP numbers, coming in at an unexpectedly high 3.5% growth, and Friday’s consumer spending report, in which spending dropped by the most it has in nine months.  The drop in spending was widely attributed to the cessation of the “cash for clunkers” program. Durable goods orders were up 1%, in line with expectations.

On Wednesday, commentators were quick to yell “correction!” when the markets dropped.  On Thursday, they backpedaled and resumed a less alarmist route.  On Friday, the correction talk came back.   While we can’t say for sure if there is a correction brewing or not, we still remain confident in the markets in general.  We expect the year to end with the markets above current levels, at the least.

To quantify the week, The Dow was down 2.60%, the S&P 4.01%, and the NASDAQ 5.08%.

Next week is a very heavy week for economic data.  Most significant will be ISM manufacturing data, productivity numbers, unemployment figures, automobile sales, and the pending home sales index.  The combination of these and other figures next week should help to paint a clearer picture of our position in the recovery.

The Week in Review: 10.19.09 – 10.23.09

After a rollercoaster ride of a week, the markets ended down, owing to a big final dip on Friday.  For the week, the Dow was down .2%, the S&P.7%, and the NASDAQ .7%. Sadly, we again dropped below 10,000 before the week was out.

The dip on Tuesday might be blamed on the housing numbers for last month, which showed 590,000 starts, compared with the 610,000 that were expected.  On Thursday, initial jobless claims were  announced.  The figures were higher than many expected, up 11,00 from last week to 531,000, after a trail of consecutive decreases.   Earnings figures helped propel stocks through the week, with many earnings results even better than we had hoped.  However, the boost was evidently not enough.

There continues to be net flow of cash out of equities.  As we are known to advise, investors help us know what’s right by doing what’s wrong.

Next week, we look toward durable orders numbers for a picture of the manufacturing sector.  Durable orders are considered a leading indicator, so they may show us what’s coming next in manufacturing activity.  Also next week we will see consumer confidence data.  We hope the figures will have improved- all the talk of an immediate recovery should have helped to loosen purse strings a bit.

The Week in Review: 10.12.09 – 10.16.09

Stocks had another nice set of gains this week, despite a loss Friday.   We also briefly crossed the much-coveted 10,000 mark in the Dow, though it is a psychological mark only.  The Dow was up 1.33%, the S&P 1.51%, and the Nasdaq .82%.  For the year, we are now up 14%, 21%, and 37%, respectively.

Retail sales fell 1.5% last month, versus an expected 2.1% loss. We are in the undesirable position of celebrating a mere 1.5% loss in retail sales.  Initial jobless claims, too, fell to lower levels, now at their lowest since January.  Again, we celebrate a paltry half-million people filing their initial jobless claims. We look back at 2007, when 350,000 was considered very high.

The S&P 500 index is now trading at about 15 times 2010 earnings.  Under normal circumstances, this would be a clear sign of undervalued stocks, and we would expect to see a quick return to a 20-times level, given where we are in the economic cycle.  However, with unemployment reaching 10% and interest rates at or near 0%, the economic environment is anything but “normal.”  We expect to see a return to historic valuation levels- but not before these other wrinkles are ironed out.

Money continues to flow into bonds, while money market funds and equities continue to have negative flows.  This is surprising, as we believe we are primed for a correction in the bond markets.  It is predominantly professionals coming out of money market funds, while mutual funds are dominated by individual investors. The “average investor” can, as usual, be relied upon to show us what the wrong move to take is.

Next week is a relatively light one in economic news; the main focus is housing numbers that will be released.  Of course, we will also have an update in weekly claims.  Earnings reports will take the main stage, and will certainly drive the market next week.  For those companies reporting, we expect generally positive results.

The Week in Review: 10.5.09 – 10.9.09

Our hopes at the end of last week were realized as the markets had a nice bounce this week.  The Dow was up 3.98%, the S&P 4.5%, and the NASDAQ 4.45%.  The earnings season is upon us- and so far, things are looking good.  Both Chevron and Alcoa posted good numbers.  The dollar gained somewhat on Friday, but stocks seemed unruffled and continued their upward march.   Jobless claims were down more than expected as well—to 521,000 from a revised 554,000 last week.   Wholesale inventories were down more than expected, potentially forecasting gains for retailers as well.

Next week we will focus on retails sales numbers, and of course, initial jobless claims.  We hope for a continuation of the downward trend for weekly claims. Although this week’s numbers were a step in the right direction, the overall number of jobless claims is still uncomfortably high.

The Investment Environment

When valuing an asset, one assesses the present value of the future returns that asset will bring.  The present value, PV, of a future cash flow, C, is calculated using the number of years in the future that the flow will be received, t, and the interest rate, i. Specifically, PV= C/(1+i)^t.  The important thing to note from this equation is that the interest rate i is in the denominator of the equation— as it rises, the value, PV, falls.  To say it another way, lower interest rates generally mean higher values of current assets and thus, higher stock prices.  Thus, high interest rates portend lower stock prices.

With this in mind, keeping interest rates low should bolster stock prices.  Jim Hardesty has prognosticated that interest rates will remain low, and we will see no major changes in the Fed’s strategy in the next 18 months.

The  importance of the upcoming earnings announcements cannot be underestimated.  As we enter the earnings-reporting season, we are confident that the numbers released by many companies will be stronger than anticipated.  This development will be a sure sign that we are well on our way to an economic recovery.

The Week in Review: 09.28.09 – 10.2.09

This week saw another disappointment in the markets, with each index down about 1.5%.  Traders reacted poorly to news on Thursday of a decline in manufacturing data a  fear there might be more job losses than expected Friday, challenging some hopes of a speedier recovery.   On Friday, the fears were realized, as the jobs reported indicated 551,000 initial jobless claims, up 17,000 from last week, and significantly higher than the expected 535,000.  The quarter still ended strong, however, despite this week’s numbers.  This week’s slide may be a recognition by the markets that the recovery might still take some time, and the losses are a correction of previous high hopes.

Next week, we look to initial claims to see if this week’s dip can be corrected.  Also, we will be looking at wholesale inventory numbers.  Until now, much of the recovery can be attributed to restocking of inventories.  The numbers next Thursday will give some insight into the status of these inventories- if there is some natural demand returning there, it would suggest some movement toward recovery.

The Week in Review: 09.21.09 – 09.25.09

This week saw a slight pullback in the markets.  The Dow was down 1.6%, the S&P 2.2%, and the NASDAQ 2%.  The transport sector, generally considered a leading indicator, took a particular beating this week, ending down about 3%.  Despite the week’s losses, the markets are still on firm footing. Quarter-to-date, we are hovering around a 15% gain.  Year-to-date, the markets are up about 18%. With three business days to go in the month, it seems we may have dodged the “September Curse.”

We saw the economic indicators mixed this week.  There was a brief upward spike in stock prices Wednesday after the Fed’s announcement that although the economy was improving, interest rates would stay low.   This spike changed quickly to a dip, illustrating the maxim that traders “buy the rumor and sell the news.”  Once the announcement was made, it was already old news, and those who saw gains from the announcement sold their stocks to cash in.  Sounds a little like the old days!

Gold seems to be the topic du jour.  Investors view gold as a hedge against inflation, which some are predicting to be a result of the Fed’s monetary policies.  Gold is showing signs of speculative investment as money has recently poured into the gold ETFs.  Gold ETFs must buy gold when people buy shares, driving up its price.

Next week is a very heavy week for economic data.  We will get unemployment numbers for August, the Institute for Supply Management figures for manufacturing and Consumer Confidence, to name a few.  We are also in the earnings pre-announcement season which may bring some positive surprises.

The Week in Review: 09.14.09 – 09.18.09

This week saw another set of impressive returns in the markets. The Dow finished the week +2.2%, the S&P +2.45% and the NASDAQ  +2.5%. Our fears of a correction in September are abating, and we remain hopeful that the month can finish strong.

Housing starts for August were up 1.5% since July, more evidence that the  housing market’s worst is past.  Jobless claims fell to 545,000 last week from 550,000 the week before. Inflation was up .4%.  We do not like inflation, of course, but a small dose of inflation is certainly preferable to deflation- the specter that has haunted us these past months. The Federal Reserve released its industrial production numbers, which were up 2.08% on a month-to-month basis.  The bump may be largely attributable to the “cash for clunkers” program.  We look forward to untainted-but-still-improving numbers for these figures next month.

Next week, the Treasury is issuing a record $112 billion in notes in 2-, 5-, and 7-year bonds. In anticipation, prices have inched up a bit. The Treasury is not, to date, having any trouble selling these bonds to investors.  Build America Bonds are driving down competing municipal bond yields, causing problems for income investors.  The supply of tax-exempt municipals is down and demand for them is still high.

We remain disappointed that nothing has changed in financial regulation, despite the chaos in the markets made clear by our recession.  Firms are borrowing short and lending long- leaving themselves open to problems covering their obligations yet again.

Next week, we will be watching the reports on Leading Indicators, Initial Claims, and Durable Orders.

Hardesty Horizons – 2Q 2009 Newsletter

This link will take you to Hardesty’s second quarter 2009 newsletter: Hardesty Horizons 2Q 2009.  This quarter’s theme is “The Sun Peeks Through the Clouds.”