AND THAT’S THE WEEK THAT WAS…

For the Week Ended July 24, 2009

Market Matters…         

Strike up the band!  We’re back, baby!  (Or are we?)  During the week, investors analyzed the less than dismal earnings news and decided that corporations were back in biz, the economy was recovering, and the markets were oversold.  (Just when did “so so” news prompt such euphoria?)  By the end of trading Thursday, the Dow had pushed past 9,000 to its highest close since early November and the Nasdaq remained on a 12-day winning streak.  Technical traders (those seeking trends via charts) joined the party once the S&P 500 surged past 950 and the naysayers’ voices grew more faint as the week progressed.  In reality, a substantial contingent of analysts (not only bears) believe the recent upward moves have been overdone and the markets are due a pullback in the days, weeks, months to come.  The most pessimistic of the bunch think that a retest of the March lows remain a possibility (but why dwell on the negatives?). 

Thus far, earnings season has been a whopping success as companies across various sectors have posted better than expected results or, at least, offered solid outlooks for the quarters that follow.  (Then again, when expectations are so low, even mediocrity looks decent.)  Equipment-maker Caterpillar’s earnings plunged 66%, but management sees indications of stabilization and raised its 2009 forecast.  Ford returned to profitability last quarter, while its rivals turned to the government for survival.  Apple reported strong sales of iPhones and Macs; AT&T’s earnings fell, but still topped analysts’ expectations and the iPhone craze offered future promise as well.  Yahoo announced its first earnings increase since first quarter 2008.  Starbucks bested forecasts as cost-cutting measures kicked in, while McDonalds benefited from its push into specialty coffees.  Not all news was positive, however, as Microsoft suffered its first yearly revenue decline since the company went public in 1986.  UPS reported lower profits and predicted a dire outlook for the near-term.  Amazon.com didn’t surpass earnings projections as analysts have grown to expect.  Wells Fargo and Morgan Stanley bucked the trend for positive news from financials as the latter’s CEO complained that his company became too conservative in the challenging times.  (Wasn’t that one of the lessons Wall Street was supposed to have learned?)   

CIT Group tried to avoid bankruptcy as the small- to mid-sized business lender struck a $3 billion financing deal with current bondholders and is waiting for more participants in another debt exchange.  The company is also pursuing other restructuring possibilities which includes selling off its aviation and rail-finance units.  In other “bailout” news, the Pension Benefit Guaranty Corp will be assuming over $6 billion in pension liabilities from Delphi Corp as the auto supply company worked through its own bankruptcy reorganization. 

By Friday, stock traders enjoyed a day of lackluster activity, booked a few profits (as the Nasdaq streak ended), slapped some high fives, and departed a bit richer for the week.  The major equity indexes surged upwards of four percent for the week and are all “in the black” (for now).  Let’s hope next week’s earnings bring even more optimism (and that band keeps playing). 

Weekly Economic Calendar

Fed Chair Bernanke took his “positive” message to Capital Hill where he spoke to Congress about the success of the stimuli that have been enacted and explained how the economy is stabilizing, but the rebound “will be weak compared with historic recoveries…”  He also assured lawmakers that the Fed will keep rates at “near zero” as unemployment remains a bigger issue than inflation in the current environment.  Dr. B. talked in detail about the global financial system and impressed upon Congress that the US cannot be expected to “drive the world economy” on its own.  The Fed also proposed new mortgage and home equity regulations that are designed to offer greater consumer protections from the perceived predatory practices of certain lenders. 

Politicos continued their “delightful” banter over health care with certain Democrats (of all people) raising issues over the proposed increased taxes.  (Don’t these folks favor any and all tax hikes?)  Meanwhile, Prez O. extended his timetable for Congress to reach consensus and also took to the airwaves to make his points about the crucial need for reform (after seeing his approval rating on this issue slip before his eyes).  Republicans chimed in to accuse Obama of socialism (among other hateful things), so it remained “business as usual” in the Nation’s Capital. 

Businesses already struggling to make payrolls got more challenging news this week as the minimum wage jumped from $6.55 to $7.25 an hour.  A Washington research group projected that 2.8 million workers will be directly impacted by the increase, while another 1.6 million above minimum wage earners may see their compensation adjusted as well.  While many employees rejoiced at the extra funds soon to hit their pocketbooks, others grew even more concerned about the potential consequences.  Over 3 million jobs were lost in the first half of the year and employers may be forced to make additional cuts rather than incur higher labor costs.  The unemployment rate is hovering around 9.5% and “experts” expect it to hit 10% by year-end.

The economic calendar was rather light during the week, though the limited news was well-received just the same.  Leading economic indicators rose for the third straight month, another promising sign of an upcoming recovery.  Likewise, the housing sector got a boost as existing homes sales climbed in June and prices jumped to their highest level in eight months.  Finally, a consumer sentiment index (Reuters/U of Michigan) beat analysts’ expectations. 

On the Horizon…Investors return from a relaxing weekend (hopefully) only to find the equity markets at levels not seen in months.  They can either…book some profits as they wait for more signs of strength OR keep the trend going and take the markets to even higher heights.  Of course, the next round of earnings will go a long way to deciding.  Energy companies report in the coming days as ExxonMobil (Thursday) and Chevron (Friday) highlight the week of earnings.  Bear in mind, oil was trading above $140/barrel last summer so year-over-year earnings comps may look weak, though energy prices have been trending upward again since last March.  A hectic economic calendar find news from manufacturing, housing, and labor so investors have plenty to dissect in the coming week.  Get some rest and let’s hope for more of the same.

Brounes & Associates is a Houston-based consulting/marketing firm that performs research, marketing, and education projects for financial services companies and other professionals.  “And That’s the Week That Was” is a weekly market/economic commentary that is distributed each Friday afternoon.  Any financial professionals who have interest in rebranding the piece and sending to their investors should inquire to:

Ron Brounes

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ron@ronbrounes.com

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