Weekly Commentary & Outlook
McIntyre, Freedman & Flynn
By Tom McIntyre
October 10, 2011
Stocks rebounded last week and are off to a very strong start this morning as the economic data shows few indications of recession and because Europe is beginning to disclose their intentions as to how to deal with their sovereign debt crisis.
 
As the charts above illustrate, the Dow Jones Industrial Average gained 1.7% last week while the NASDAQ Composite did even better with a jump of 2.7%.
The Markets & Economy
It is impossible to anticipate the daily emotional reaction to the news flow emanating from Europe. Clearly though, the move last week by the French and Belgium governments to essentially nationalize a troubled large bank, has bought the authorities there some time.
Time, of course, is what the Europeans love to waste and they used this past weekend to hold another meeting between the leaders of Germany and France. The outcome is that they will do “everything necessary” to make sure the European banking system does not fail despite the issues of sovereign bankruptcy in countries such as Greece.
When pressed for what this phrase meant, the leaders simply said, “Wait until the end of this month and they will thrash it out.” While this seems like a very weak response, the interpretation so far seems to indicate that an American style TARP plan or something similar will become available. At any rate, with one major bank nationalized and the implication that others could follow, it seems that investors there and around the world are lowering their fear levels concerning a seizing up of the global banking system.
For our part, this outcome was always inevitable, as the policy of doing nothing would see the Euro zone break apart with unknown consequences. The elite of Europe have stroked their egos for some fifty years concocting this absurdity, and they will never let it go even if it means printing money and for rich countries to subsidize the poorer ones.
Don’t get me wrong here, the situation in Europe is of the highest order of confusion, but the outlines of the solution, which itself will hardly bring prosperity, are now coming into focus. This will allow the markets to return to their usual role of evaluating earnings and the prospects for global economic growth etc…
In that last regard, the news from the United States last week was quite clear. There is no evidence of an economic recession having begun through September. The recent forecast by the Economic Cycle Research Institute calling for a recession has received much attention because of their excellent track record.
Thus last week’s economic data of ok ISM releases and a better than expected jobs report have taken some of the sting out of that forecast for now.
In regard to the unemployment numbers, they were better than expected, but still lousy. The unemployment rate remains at a politically unacceptable 9.1%, but private sector jobs created increased to 137 thousand while the government sector continues to shrink (see chart next page).
This trend is one that must continue if we are to avoid the pitfalls of Europe. The public sector must shrink and resources must shift to the private sector for growth and wealth creation to occur there. Remember, the government sector is paid for by the private sector wealth and income machine. Thus the public sector can never be allowed to grow without constraint. In the United States this has historically meant that the federal government needs to remain around 20% or less of the size of the economy.
President Obama or even Warren Buffett, both of whom are truly obsessed with redistributionist policies of a static economy, do not understand this basic truth. Perversely, their point of view hurts those in society the most who cannot absorb the loss of opportunity. Sadly, I don’t expect any progress to be made now that President Obama is determined to spend his entire time running for re-election rather than in governing.
What to Expect This Week
Today, of course, is Columbus Day - a federal holiday and while the markets are open the news flow is diminished.
Later on this week, the third-quarter earnings news will begin and I expect that the numbers and the outlooks will be better than the gloomy mood on Wall Street expects.
Finally, at the end of the week, the European summit of all the leaders of the EU zone will begin. Let’s see if they can keep the momentum rolling on their plans to escape the fruits of bad economic policy that they have presided over for forty years.
                                                                           SYMBOL: DOW
Dow Chemical announced today that they signed an agreement with Saudi Arabian Oil Company to build one of the largest chemical plants in Saudi Arabia. This deal has been in the works since 2007, and the final cost of the plant will be $20 billion. The joint venture expects to begin production in 2015, and both companies believe the plant will generate $10 billion in annual revenue within a couple of years of being up and running.
This deal makes a lot of sense for Dow Chemical as it allows the Company to access Saudi Arabia’s cheap hydrocarbons. Also, we expect this plant will increase the sales opportunities to Asia and other emerging markets. This also gives the Saudi Arabians an opportunity to diversify away from their heavy reliance on oil production.
Shares of Dow have not been performing well the last several months due to fears of a global economic slowdown. This is a sign that management sees robust growth in the future, and the ability to finance this deal at this time is impressive. We are happy to see the Company get back to its growth strategies that they had to put on hold due to the financial crisis.
Dow is a cheap stock and we don’t believe the shares will stay down at these levels. We expect the Company can earn up to $3 per share this year. The stock is currently yielding more than 4 percent. We believe the Company will raise this dividend within the next 12 months. We still expect the shares of Dow will reach $40 within the next 12 months.
 Three-Month Chart
(c) McIntyre, Freedman & Flynn
