Financial Market Update
StrategicPoint of View®
January 25, 2010
Welcome to the StrategicPoint of View -- a market and economic overview of what occurred last week, what's up for this week, and our commentary on the economy and current market activity in general for "Making Money" listeners.
LAST WEEK
Overall earnings reports were strong; unemployment continued to plague the recovery and China’s clamping down on bank lending to control an overheated economy resulted in concerns over global growth. Add to the mix concerns over Greece’s ability to pay its debts, and global markets tumbled this past week.
S&P 500: 1092 (down 3.9% for the week and down 2.06% on the year)
Dow: 10172 (down 4.1% for the week and down 2.45% on the year)
NASDAQ: 2205 (down 3.6% for the week and down 2.82% on the year)
10-year: 3.60% (from 3.66% last week)
Crude Oil (February): $74.54 (from $78.00 last week)
Gold (February): $1,090 (from $1,130 last week)
USD/Euro: $1.4085 (from $1.4388 last week)
THIS WEEK
Earnings reports will likely continue their positive vein (Apple, Amgen, Texas Instruments, Verizon, J&J, Microsoft and Chevron reporting), while the economic data will focus on housing and durable goods orders. Friday we get the first estimate for 4th quarter Gross Domestic Product.
COMMENTARY
Politics rained on the market’s parade this past week, as the President took a populist position on regulating bank behavior and the Federal Reserve Chairman Ben Bernanke shed supporters.
Investors have been anticipating a pullback for months, but – until now - have resisted the urge to sell. Market declines of 5% or more last year were treated as a consistent buying opportunity. Dips translated into rebounds in very short order, leaving the impression that the rally was self sustaining.
The markets didn't slide this week because of some global conflict or a sovereign debt default - two things that many have been predicting in our future. It also wasn't from a stateside commercial real estate implosion that has been hanging over our heads. Instead investors had their confidence shaken, and their reaction was to shoot first, ask questions later. The selling we saw this past week was quite heavy, with Friday's session registering the most volume on the S&P 500 since mid-December.
Ironically, earnings reports this week were quite positive. As of the end of the week, 79% of companies have beat expectations (the average is 61%). GE and McDonald’s came in stronger than expected on Friday, while decent numbers from Google, Goldman Sachs, Southwest Airlines and Starbucks earlier in the week demonstrated that the outlook for many sectors is improving. Investors, however, want more than ‘better-than-expected’ earnings; these goals are already baked into prices. Good news should benefit the markets going forwarded, but for now politics and uncertainty are overshadowing company analysis.
President Obama unveiled plans to crackdown on banking behavior. Specifically, he proposed to limit the banks’ ability to use government largesse (steep loan discounts from the Fed) to fund speculative and profitable trading. Obama would like to use Federal dollars to only support banks which focus on commercial deposits and lending, rather than investment banking (the securities and trading side). Since investment banking profits fueled large bonuses this year, the President’s position is popular.
Ultimately, the President’s goal is to eliminate the too big to fail policy. As long as the banking industry can be ensured of government support no matter what they do, their risky (and sometimes dangerous) behavior will continue. The public can relate to this goal as well.
In the long run, we are not too concerned about the President’s proposals. Although the noise from Wall Street supporters was deafening this week, by the time the proposals wind their way through Congress and get watered down before being implemented potentially years from now, the actual impact on banks’ behavior and their bottom line will not likely be dramatic.
On the other hand, we are somewhat concerned about the potential for a rejection of Ben Bernanke at his re-confirmation hearing this week. This is not a reflection on what we think of Ben Bernanke, but rather our concerns for economic stability.
If Bernanke’s reappointment is rejected, consistent leadership at the Central Bank will be lacking, and confidence could lag. Fear could increase over the U.S.’s ability to handle its growing debt, resulting in rising interest rates that could stall an already muted recovery, take a chunk out of bond returns, and weaken consumer/investor confidence further. The result: a potentially longer downturn until Bernanke’s successor can navigate the treacherous confirmation hearings, get his(her) bearings and establish an accepted track record.
So why the sudden change of sentiment by Senators towards Ben? Either the Senators know something the economists don’t (such as the economy has stabilized and can run rudderless for a while – something we don’t believe) or some politicians are being personally expedient. It looks like the latter to us.
Bernanke is not popular and makes a perfect scapegoat (no political contributions will be denied to those who vote against him). Moreover, the independence of the Fed is something that has always irked Senators, whose voters are demanding that they “do something” to rectify the credit mess and unemployment. Posturing is the name of the game. Too bad it is not altogether benign.
Just as any one person who tosses litter out the car window, does not irreparably damage the environment, one Senator changing his/her vote will not doom the economy. Problems arise when individuals (Senators and citizens alike) think their personal preferences take precedence over societal goals. That’s when we end up with a mess.
This coming week will likely be very important in determining if a longer term market pullback is in the offing. We've seen markets rally on the first trading day of the week 12 straight weeks in a row. Will this trend continue? Will investors over the weekend digest the news from the White House and Senate, look at their unrealized gains and decide perhaps now is the time to batten down the hatches and sell some equity? We are not sure. But we will be watching closely.
Tune into the “Making Money” Show Weekdays at 5:30pm and Saturdays at 9am on AM790 WPRV or through our website, www.StrategicPoint.com.
*Past performance is not indicative of future results. Indices are unmanaged and you cannot directly invest in them. The Nasdaq Composite Index measures all NASDAQ U.S. and non-U.S. based common stocks listed on the Nasdaq Stock Market. The S&P 500 index is based on the average performance of 500 industrial stocks monitored by Standard and Poor’s. The data referred to above was taken from sources believed to be reliable. StrategicPoint Investment Advisors has not verified such data and no representation or warranty, expressed or implied, is made by StrategicPoint Investment Advisors.
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