Market Matters…         

Candidate Mitt Romney believes picking fights with his friends’ enemies will strengthen those “friendships” come November.  While the Obama-bashing continued in earnest (that’s what political rivals are supposed to do, right?), this week he took several shots at Federal Reserve Chairman Ben Bernanke.  Romney claimed that he opposed the prior round of Fed bond-buying and any further quantitative easing would be “the wrong way to go.”  While Congressional Republicans continue their attacks on the Fed, Romney announced that Bernanke’s time in the limelight would be limited as he would replace him if elected (though such moves are beyond the scope of the White House…he can merely fail to reappoint him to a new term in 2014). 

As for the O-bashing, Romney seized on the Congressional Budget Office’s assessment of the budget and the likelihood of a fifth straight year of a $1+ trillion deficit, while equating the direction of the US economy under the current Administration to that of Europe.  (He also made a crack about the never-stale Obama birth certificate “controversy” that is sure to win brownie points with Tea Partiers who remain lukewarm to his campaign.)  Meanwhile, the Prez picked up on the CBO’s prediction of recession if end-of-year tax increases and spending cuts come to fruition and blamed Republicans for the “same failed policies that led to the crisis in the first place.”  And, thus, the political theater grows more entertaining by the day.

As earnings season winds down, hopefully investors stopped watching a few weeks ago.  Lowe’s posted lackluster results and offered a pessimistic outlook.   Best Buy reported that earnings dropped over 90% as lower margins on popular items like iPhones and iPads impacted the bottom line.  Dell continued it longstanding woes as it suffered weaker-than-expected revenue and management lowered future guidance.  Rival HP also experienced a downbeat quarter as PC sales continued to lose out to handheld devices and tablets.  In other corporate news, Apple became the most valuable company of all time (based on its $620-ish billion market cap), surpassing Microsoft’s prior record from late 1999.   Aetna continued its trek into government-based managed care with the announced $5.7 billion acquisition of Coventry Health.  Glencore seems willing to walk away from its proposed $30 billion deal with mining giant Xstrata.

After a six-week winning streak, investors took a break to book profits, survey the landscape, and speculate about Fed action.  With the indexes closing in on highs for the year, they focused on contrasting comments and new doubts that the Fed is planning to act at the September meeting.  While the housing sector showed signs of a nice rebound and the consumer remained surprisingly active, some analysts now believe that the overall direction of economy does not warrant a move at this time.  Though stocks dropped much of the week, a late rally moved the indexes closer to break-even.  Oil climbed to its highest level since early May as inventories continued to decline, though no one seems too concerned about inflation (for now).  Summer doldrums are coming to a quick close as the political season begins to heat up.  Keep up the good sound bites, Mr. Romney. 

Economic Calendar

The Fed took top billing again this week as Dr. Bernanke was forced to address questions posed by the Republican chairman of the House oversight committee (Darrell Issa) about the “who’s, what’s, where’s, when’s, why’s, and how’s” of monetary policy.  The chair defended his policymakers’ previous actions and explained that the current state of economic affairs may, in fact, lead to more stimulus down the road.  (Perhaps he should ask Chief Economist Romney for advice?)  The Fed also released minutes of the most recent policy meeting which showed that most officials are leaning toward more action sooner than later and bond buying (QE3) remained high on the list of potential moves.  Though the economy continues to grow, some worry that unemployment still remains too high for comfort and any “outside shock” to the system (ongoing European woes, natural disaster, Congressional action on taxes/spending or lack thereof, ill-timed Biden blunder, etc.) could bring the dreaded “R” (recession) word back into the daily discussion.       

Meanwhile, two Fed Officials shifted gears away from consensus and expressed reservations that future actions are a foregone conclusion for the September meeting (and somewhere Dr. B. was grimacing).  Atlanta Fed Prez Lockhart pointed out that certain “challenges” within the domestic economy are beyond the reach of the Fed and must be dealt with by Congress (listening Representative Issa?), while St. Louis Prez Bullard claimed that the modest growth may allow his cohorts to take more time in assessing the situation.  With a November election on the horizon, however, the Fed also must be leery of appearing too political (even if a Romney victory could cost the Chairman his job).   If the policymakers plan to act, September is probably better than October from a pure appearance standpoint. 

Across the globe, the ECB looks closer to initiating a bond buying program of its own, though Germany continues to object.  Chancellor Merkel also met with Greek President Samaras to reject his appeal for more time to enact tough austerity measures, despite her insistence they she wants the ailing country to remain in the EU.  French President Hollande apparently is on the same page as his German counterpart. 

Closer to home, the housing sector depicted even more signs of strengthening as both existing and new home sales rose in July.  Durable goods orders also surged to its best gains of the year, a seemingly nice recovery for a suddenly worrisome manufacturing sector, though analysts point out that once the volatile transportation component was removed, the number looked far weaker. 

On the Horizon… The data of the week focuses on the consumer as income/spending and confidence releases foreshadow upcoming activity on the retail front. The Fed stays atop the headlines as the Beige Book details the current state of affairs across the country.  Bernanke is scheduled to deliver remarks at a monetary policy symposium next week and investors will look for more clues about future action.  (Will noted economists Romney or Issa be attending?) 

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

www.ronbrounes.com

             
 

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