Weekly Commentary & Outlook
McIntyre, Freedman & Flynn
June 14, 2010
This is Tom McIntyre with another client only update as of
Monday morning the 14th of June 2010
More conflicting economic data combined with ongoing concerns about Europe and the Gulf of Mexico produced an inconclusive week for the stock market.
DJIA Five-Day Composite
NASDAQ Five- Day Composite
As the charts above illustrate, the stock market broke its losing streak with the Dow Jones Industrial Average gaining nearly three percent while the NASDAQ Composite moved higher by over one percent.
The Markets & Economy
Corporate news was slim and so the focus remains on solving the oil leak in the Gulf of Mexico and dealing with the larger issues of sovereign debt in Europe. There was improvement on both scores from a perception point of view and this led to stability in the Euro and higher oil prices. Both of these were positive for equities.
The volatility on a day-to-day basis remains, as many long-term investors are simply waiting on the sidelines, leaving the trading to day traders and so called “high frequency” traders, which provide the bulk of the daily volume.
Within this context the daily game is to focus on what the market deems important and run stocks up or down in response. This pattern is at the heart of the loss of confidence in investing these days, but ultimately this too shall pass.
The issue today has now turned front and center to the status of not only our economic recovery but the global one as well. In that regard the news coming out of China last week was encouraging as their exports continue to boom - while the news coming out of the United States was less encouraging as the retail sales report for May was simply dismal.
This report along with the inability to create net new jobs is starting to convince most people what we have been warning about for months, and that is a slower growing economy as we move into the last half of this year.
The Economic Cycle Research Institute now shows (see graph below) that its year over year growth rate has turned negative. Their interpretation is that the growth rate will slow soon, but it is too soon to conclude whether or not a new recession is in the cards for 2011.
Their track record is a good one and one month’s data is simply not enough to conclude that a double dip is in the cards. It is enough for me to conclude that unemployment is going to remain near double digits right through this year, and thus will become a political issue in the November elections.
This along with deficit spending will be the most important issues facing the voters and the result will likely determine the next series of policy moves that will either make a double dip inevitable in 2011 or lessen those chances.
For right now, the market is pleased with the stability in the currency exchange rates and the lower interest rate outlook is helping many sectors of the economy along with lower gasoline prices for the summer driving season. So the news is mixed, but it looks like the next move for the stock market will be up.
What To Expect This Week
Sorry to say, but President Obama will address the nation tomorrow and liken the Gulf tragedy to the terrorist attacks of September 11, 2001. This message along with his relentless attacks on the oil industry and banking industry could dampen investor’s spirits for a day or two. We shall simply have to wait and see.
The Chinese stock market is closed until Thursday and thus the most important indicator about the global economy will present us with a quiet week of trading. The economic data on inflation will come out, but no one is seriously concerned with this stuff at this point. The only part of the economy where prices are going up is taxes and fees. Not a good trend. As the government sector becomes an ever-increasing part of the economy, we run the long-term risk of going down the same road as many of the troubled countries you read about in the news.
Brocade has been seeing some insider buying recently, always an encouraging sign for shareholders. CEO Michael Klayko has bought about 40,000 shares in the open market since late May and several other insiders have also been making purchases in the open market during that time frame. While insider selling is not always a bad sign for a company, we do believe that insider buying shows management belief in the Company’s future.
Brocade also hosted a Technology Conference for its shareholders and focused investors on new growth areas for the Company. Brocade has a unique mix of products and has an opportunity to take significant market share in new markets, such as cloud computing and virtualized data centers. Both of these areas should be investors’ focus during the second half of this year and should lift growth rates at the Company.
Shares of Brocade have been frustrating, but we believe at these levels Brocade offers an attractive valuation given its robust growth opportunities. We always like it when senior management steps up and buys shares in their company. As the technology spending continues to ramp up around the world, we believe that shares of Brocade will reach $8 within the next 12 months.
(c) McIntyre, Freedman & Flynn