And That’s The Week That Was …
Brounes & Associates
By Ron Brounes
June 17, 2011
With the unemployment rate hovering just over nine percent, the economy claimed one more victim of the times. (And “Times” means the age of Twitter, not the recession as has been the more typical culprit.) Following an embarrassing “sex” scandal (that may have not been a big deal for his constituents in Queens), Congressman Anthony Weiner tendered his resignation to spend more time with his pregnant wife (and perhaps some old Internet friends). As has become the norm for disgraced politicos, expect to the see the former NY mayoral hopeful hosting his own cable show within the year. (Somewhere Prez O is breathing a sigh of relief.)
With stocks on a six week losing streak, investors looked for any sign of optimism and found it in the corporate boardrooms. M&A transactions graced the weekly news headlines and the enhanced activity showed that execs and managers feel more confident about future biz prospects than the average investor. Energy Transfer is buying Southern Union for $4.2 billion to become one of the largest domestic natural gas pipeline companies. Reinsurer Transatlantic is merging with rival Allied World Assurance in a deal valued at over $3 billion. Capital One is acquiring the US online banking biz of Netherlands-based ING to the tune of $9 billion. Facebook may be moving closer to IPO (in early 2012) and analysts peg a potential valuation at over $100 billion. (What’s that mean for the Winklevoss brothers?) On a negative note, Web-based Pandora Media’s IPO initially was met with strong investor enthusiasm as its stock price surged in early trading, only to fall below the offer price by day two.
In other pessimistic corporate news, automakers continue to feel the pinch of the Japanese supply chain “challenges” as both Honda and Ford warned of dismal profit numbers that will underperform estimates in the upcoming periods. Research in Motion continues to be losing the battle with Apple as Blackberries are having trouble stacking up against iPhones and iPads. After a less than stellar earnings’ quarter, Best Buy remains committed to reinventing itself with a stronger Internet presence to better compete against the likes of Amazon.com.
Though OPEC ended last week’s meeting in a stalemate, rumors still have Saudi Arabia boosting crude production by another 10 billion barrels a day. Prices plunged below $93/barrel during the week on the potential for enhanced supply and the continuing Greek (debt) tragedy. Gas has also been on the decline in time for the summer travel season though prices at the pumps still remain about $1 above last year’s levels. Equity investors could not seem to be able to make heads or tails about the state of the economy and biz environment as volatility (and triple-digit moves on the Dow) once again ruled the day. Weakness in the latest round of data has threatened the already shaky recovery and the end of QE2 (Fed’s bond buying program) adds even more uncertainty. Throw in a mess in Greece (in government and on the streets) and investors didn’t have much reason to dip those toes back in. By week’s end, however, France and Germany appeared to be consenting on bailout terms and the six week Dow losing streak came to an end.
What a difference a year makes…not really. Guess a bailout doesn’t buy as much as it once did. S&P officially made Greece the world’s lowest rated sovereign debt dropping its rating to triple C in anticipation of a default in the coming days/weeks/months. The major players (government officials, regulators, and central bankers) can’t seem to agree on the next plan of action and the “people” have taken to the streets (again) in violent protest over austerity measures. Meanwhile, China is experiencing an opposite problem as its government raised the reserve requirement for the sixth time in 2011 to (hopefully) counter the latest inflation reading, which showed prices rising at the fastest pace since mid-2008.
Closer to home, Dr. B. made another plea to Congress about the domestic debt situation (we are not Greece) as politicos continue to use the debt ceiling as a bargaining tool for budgetary matters. Bernanke warned about the US losing its AAA status (and investor confidence may very well follow suit). Most economists do not believe the Fed should step in and act again in the aftermath of QE2 and fear that future stimuli may actually cause more harm than good. On the data front, though retail sales in May actually fell for the first time in 11 months, the results were somewhat better than expected. Wholesale inflation (PPI) experienced its smallest gain in 10 months, though the core CPI (retail) climbed to its largest increase in three years. As gas prices appear to be on the decline (for now), economists do not seem too worried about prospects for inflation. The once strong manufacturing sector continues to feel the fallout of the disasters in Japan as industrial production remained weak in May and some regional reports revealed tighter times across various parts of the country. Though jobless claims fell to 414,000 in the latest release, many analysts believe that a level below 400,000 is imperative for job creation. Finally, leading economic indicators, a predictor of future activity, revealed surprising growth, a nice way to end the week from an economic perspective.
On the Horizon…Fed policymakers get together next week to discuss the state of the economy and debate the need for additional stimuli. QE3 anyone? The controversial bond buying programs ends in June so investors and economists will keep an eye on the next round of data for signs that the economy can finally “go at it alone.” A recent Wall Street Journal survey pegged a future rate cut well into 2012 so corporations and home buyers should still have the luxury of affordable credit for the foreseeable future. Greece will remain in the news and investors hope for some prompt solution (help from Germany?) before contagion spreads to Portugal, Spain and Ireland. (When have we heard that before?) As the problems in the EU linger, the euro falls against the dollar and domestic exports get more expensive across the globe (well, maybe not in China?). The durable goods orders report gives analysts another sign about the suddenly “down-and-out” manufacturing sector. Any affordable trips to Athens available these days?
(c) Brounes & Associates