Weekly Update – September 23, 2011

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