And That's the Week That Was
Brounes & Associates
By Ron Brounes
June 29, 2012
With the campaign season heating up, Republicans were seeking that one striking blow to send the O’s packing and move a “true” Conservative into the White House. Overturning ObamaCare (while downplaying RomneyCare) could be just the ticket. With the party faithful anticipating victory, Chief Justice Roberts checked his conservative credentials at the door, sided with the “Liberals” on the Court, and voted to uphold health care reform. Obama’s biggest legislative accomplishment lived on and Republicans felt betrayed by one of their own. While Big Biz and insurers may vehemently objected to the ruling, at least the decision brings a form of closure and clarity to the debate about the fate of the $2.7 trillion health care industry. That uncertainty, more than anything, weighed on the minds of execs and hindered many from hiring and investing until the matter was resolved. Now that they know the rules of the game, they can plan accordingly.
The European summit competed with the Supreme Court for headlines and the early feedback was quite favorable (heard that before). The leaders plan to coordinate bank oversight through a supervisor and allow bailout funds to aid capital positions of ailing institutions. While high fives and much back patting ensued, many analysts remained “cautious” at best (pessimistic at worst).
In transaction news, pipeline operator EQT Midstream became the first IPO since Facebook and fared better in its initial week of trading. (Meanwhile multiple analysts initiated coverage on Facebook and offered more “hold” than “buy” ratings.) Microsoft is acquiring social networker Yammer Inc. for $1.2 billion. Anheuser-Busch InBev is buying the outstanding interest in Mexico’s Grupo Modelo for $20.1 billion. AOL will be rewarding shareholders with a $400 million share buyback plan using proceeds from its recent patent sale to Microsoft. Best Buy’s management looks to be exploring the possibility of taking the company private. Elsewhere, Google joined the tablet game with the introduction of Nexus 7. Research in Motion posted another massive quarterly loss and delayed the launch of the next generation Blackberry. Delta is taking a sizable hit on ill-placed hedges on (suddenly plunging) oil prices. Homebuilder Lennar reported solid earnings and issued a favorable outlook for the housing market. The building behemoth is also targeting China for much-needed funding in a major development in San Francisco, California (see below).
A rather “challenging” quarter ended on a positive note as news out of Europe brought renewed optimism to both the equity and oil markets. Crude surged almost 10% late in the week on the summit results (and new concerns from Iran), though prices still have lost considerable ground over the past three months. Stocks closed the week (and the quarter) on a roll as investors liked what they learned from Europe and also welcomed the promise of a resurging housing sector. Additionally, though the Supreme Court’s ruling may not have been what many investors desired, the decision ended much of the ongoing uncertainty (which always proves detrimental to the markets). Hey Prez O, maybe Vice Prez John Roberts has a nice ring to it? (Sorry Joe.)
After years of disagreement with each sovereign country putting its national interests above the EU itself, the key leaders seemed to be in a compromising mood as even the likes of mighty Germany made certain concessions at the recent summit. Spain appears likely to benefit in the quickest fashion as its ailing banking sector soon can tap directly into the rescue fund and not rely on the government for the capital infusion. For some, the summit represent a long awaited move toward compromise and recovery; for others, it’s just one more unsatisfying “tease” and another reminder of the challenges of unifying countries with vastly different economies, interests, and goals. Meanwhile, US builder Lennar is seeking over $1.5 billion in capital from China Development Bank for a major housing development partnership in San Francisco that has been long stalled due to funding needs. The economic cooperation move that would represent a new phase in the relationship between the two Superpower countries.
Closer to home, the housing recovery seems to be picking up steam as new home sales in May jumped to the highest level in more than two years, while pending home sales also rose, and prices fell by a smaller-than-anticipated percentage in April. Durable goods climbed for the first time in three months, a positive sign for the suddenly lackluster manufacturing sector. Jobless claims were little changed in the latest release, though the consumer may be turning more cautious as the labor market weakens. Consumer spending was flat in May for the first time in six months and a key sentiment index fell to its lowest level in six months. Neither should be perceived very favorably as the consumer still represents about two-thirds of the activity of the economy and he/she will be needed to jumpstart things for the remainder of the year.
As the economy shows signs of sluggishness, the talking heads at the Fed have been sharing their two cents about how best to right the ship. Dennis Lockhart (Atlanta Fed Prez) remains open to the possibility of additional stimulus. James Bullard (St. Louis Fed Prez) opposed extending Operations twist at the recent meeting, but didn’t have a vote. William Dudley (New York Fed Prez) lowered his outlook for inflation, and believes that the EU debt crisis and the stalling domestic labor picture could have significant impact on the overall economy in the months ahead.
On the Horizon…Fireworks will be in display as investors (at least those in town and not taking advantage of low gas prices) dissect the true results of the European summit so expect some of the early euphoria to die down a tad. After a down quarter, fund managers look to make up lost ground by finding hidden value in the market carnage as they start the second half of the year on a high note. Key economic release from manufacturing and labor highlight the week, though investors get a holiday break in between. The unemployment picture could go a long way toward impacting consumer activity for the rest of the year. (At least Justice Roberts has a job for life.)
The information set forth was obtained from sources which we believe reliable but we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation by us of the purchase or sale of any securities. Past performance is not a guarantee of future performance.
(c) Brounes & Associates