Archive for September, 2011

The third quarter of 2011 came to a close on Friday with the Dow closing down 241 points, culminating an up-and-down week in which the index gained 142 points, or 1.32%.  Despite the weekly ‘rally’, the Dow fell 5.6% in September, and 12.1% in the third quarter – the Dow’s worst quarterly performance since 2008.  For the year, the Dow is now down 5.7%.

On Monday and Tuesday, the Dow gained 272 and 147 points, respectively, mainly on the strength of optimism that European leaders were taking further steps to stabilize the eurozone.  Though markets were up, US economic indicators continued to disappoint.  On Monday, the release of new home sales in August showed a 2.3% decline on a monthly basis (the fourth consecutive month of declining sales), and on Tuesday, the consumer confidence reading rose only .2 points to 45.4 – analysts had expected a jump to 46.6.

After a down day on Wednesday in which the Dow lost 180 points, Thursday saw the index regain 143 points following news out of Europe that Germany had agreed to expand the European Financial Stability Facility (the main rescue fund that eurozone members will use to aid struggling nations), and on positive US GDP and jobless claim numbers.  A revision showed that the US economy grew at 1.3% in the second quarter (up from an initial reading of 1.0%), and jobless claims for the week fell below 400,000 to 391,000, the lowest level since April.  Analysts had expected 420,000 claims filed.

Though domestic reports released on Friday showed slight upticks in September manufacturing orders and consumer confidence, Thursday’s momentum quickly faded, with the Dow’s fall mainly attributed to a report showing a decrease in US personal income and negative data coming from abroad.  A Chinese September manufacturing report showed a decline for the third straight month, while a report from Germany showed a 2.9% decrease in July retail sales – the biggest drop in over four years.  Considering the importance and size of both economies, investors viewed these reports as particularly troubling.  Also causing consternation was the acceleration of eurozone inflation to 3%, dimming hopes that the European Central Bank will lower interest rates to help stimulate growth.

With the eurozone embroiled in financial distress, and domestic markets still tempered by weak economic data, the fourth quarter of 2011 doesn’t look to be any stronger than the first three.  If Europe can make progress on the Greek debt problem, this would be a great help to the market.

Next week, the economic reporting highlight comes on Friday, when the September employment numbers are released.  Look for the unemployment number to remain static, at or close to the current 9.1%.  The major fear remains that the US will slip back into a recession.

Have a good weekend,

James Skjong

 

European debt worries and general disappointment in the Fed’s latest stimulus efforts led to a down week for markets both at home and abroad.  The Dow, after losing 284 and 391 points on Wednesday and Thursday, respectively, finished in positive territory on Friday, but still down 738 points for the week, or 6.4%.

A number of factors led to the late-week market decline.  The biggest culprit was the Fed’s action, or inaction as characterized by many, on Wednesday, when it announced its latest stimulus plan, nicknamed “Operation Twist.”  Under the plan, the Fed proposes to sell short-term securities and buy $400 billion worth of long-term securities in an effort to lower longer-term interest rates, thereby stimulating economic activity and home buying and refinancing.  The proposed measure, combined with the Fed’s admittance of the existence of “significant downside risks to the economic outlook” and “sluggish economic growth”, disappointed investors.  Not helping matters on Thursday was the release of a European purchasing managers report, which indicated potential recessionary conditions in the Eurozone, and also a Chinese manufacturing report, which showed a contraction in Chinese manufacturing in September.  China will still grow about 9% in 2011.

To add to the discontent, Moody’s, one of the three main credit rating agencies, downgraded financial institutions Bank of America, Wells Fargo and Citigroup, putting pressure on financial stocks as a whole.  The reason for the downgrades to Bank of America and Citigroup, according to Moody’s, resulted from a decrease in the probability that the US government would support the banks during a major financial crisis (not too big to fail).  However, the downgrades do not reflect a weakening of the banks’ intrinsic credit quality – Moody’s recognized that both banks have made significant improvements to their capital and liquidity positions, improved their abilities to measure and monitor risk, and adopted lower risk appetites.  The downgrade for Wells Fargo was the result of low levels of core capital due to the Wachovia acquisition.  In all three cases, we feel the banks remain financially sound, and we continue to invest in their trust preferreds as appropriate.

The events of this week continue to underscore the fact that equity markets are going to struggle, given the current macroeconomic state and gloomy economic outlook.  In this environment, we feel trust preferreds continue to be the most sound investment opportunity when compared to other types of fixed income, and certainly common stocks.

Next week’s economic calendar is a full one.  On Monday, August new homes sales data will be presented, and on Tuesday, the September consumer confidence report will be released.  Wednesday will feature the August durable orders (leading indicator of manufacturing activity) report while on Thursday, initial jobless claims and the third revision of second quarter GDP will highlight the day.  Friday will bring a close to the week with the September Chicago PMI report (manufacturing data) and another consumer confidence data set.  Look for consumer confidence to remain low, manufacturing data to remain muted and for the jobless claims number to unimpress.

Have a good weekend,

James Skjong

 

The market surged 4.7% this week, as the resolution of the European debt crisis continued.

On Thursday, collaboration between the US Fed, the European Central Bank, the Bank of England, the Bank of Japan, and the Swiss National Bank was announced to provide dollar liquidity to the European Banks. This coordinated approach should relieve some short term liquidity concerns.

However, US economic data remains pessimistic.  Employment data continues to be weak with initial jobless claims rising to a 2 month high of 428,000. Manufacturing data also continues to struggle, which will further hamper new hiring.

In this uncertain economic period, we continue to add high quality U.S. Bank trust preferreds that are priced below par and paying 7.5% on average. For those who have government or corporate bonds elsewhere, where yields are particularly low, we recommend locking in this years’ appreciation and moving into higher yielding trust preferreds.  While bank equity shares have been under pressure, we feel the Banks are solvent and adequately capitalized to pay their trust preffered dividends.

Next week, Ben Bernanke will provide comments on the US macro economy after the Federal Open Market Committee meeting on September 20^th and 21^st.  We believe he will address the need for economic stimulus given the poor employment data.  Important economic indicators released next week include housing starts and existing home sales.  Investors are expecting August existing home sales to be 4.75 million, compared to July existing home sales of 4.67 million.  As usual, next Thursday will provide another report on unemployment filings.

Have a good weekend,

Nat Beebe

 

 

 

European debt worries and President Obama’s much-anticipated jobs speech dominated economic headlines this week, as both issues greatly impacted markets both at home and abroad.  Hopes were high mid-week that actions taken in Europe, combined with a focused, ambitious jobs plan would help allay recession fears, but it was not to be.

The market reaction to the President’s jobs speech was a Dow decline of 304 points on Friday.  Part of the Dow decline can be attributed to continued uncertainty of a potential default of Greek government bonds.  The speech had some positive aspects including the President’s support of new trade agreements with Columbia, Panama and South Korea.  However, the over-all impact of the President’s proposals was thought to be modest.  For instance, a relatively big portion of the spending proposal simply continued existing stimulus programs: the one-year reduction of the payroll tax and the continued existence of unemployment benefits.  New tax incentives to employers were short-run in nature and thus viewed as more limited than the situation warranted.  In addition, several parts of the proposal were not expected to get bi-partisan support such as sending money to school districts and cities to retain employees.  Finally, the plan to fund this jobs initiative will not be released until later in the month, creating some uncertainty.

Earlier in the week, on Wednesday, the Dow gained 276 points on the back of optimism surrounding Obama’s jobs speech and news out of Europe that a German court ruling upheld the country’s involvement in supporting its Eurozone neighbors in financial distress.   Approval of an austerity plan in Italy also boosted investor confidence.  The rally was short-lived, however, as on Thursday, the Dow slipped 119 points after Fed Chairman Ben Bernanke failed to elaborate on any stimulus action the Fed might take in the months ahead in a speech delivered in Minneapolis, and on uncertainty surrounding the jobs plan.  Rumors on Friday that Greece planned to default on its debt over the weekend and the sudden resignation of Germany’s European Central Bank representative did little to help turn markets around, and after its fifth decline in the last six sessions, the Dow closed below the 11,000 mark, down almost 250 points for the week.

Next week, economic highlights include the release of August retail sales data on Wednesday and August inflation data on Thursday.  Look for a slight decrease in retail sales for the month and a very slight uptick in prices.

Have a good weekend,

James Skjong