Weekly Commentary & Outlook
McIntyre, Freedman & Flynn
By Tom McIntyre
January 9, 2012
Happy New Year to everyone and it was for stock investors.
The stock market, at least here in the United States, ended on a positive note last year and has started on a positive note this year. As the charts above illustrate, the New Year saw a first week gain of over one percent for the Dow Jones Industrial Average. while the NASDAQ Composite jumped 2.65% in the first four trading days of 2012.
The Markets & Economy
Since we last reported to you a couple weeks ago the big change, which continues to dominate the trading, has been the not so subtle easing by the European Central Bank that we discussed then. This has resulted in a stronger dollar that has put pressure on gold, and has oddly enough given a constant support to the bid for US government bonds despite generally better-than-expected macro-economic data that includes last Friday’s employment report.
The Euro as a result is showing weakness against the dollar (take that all you dollar skeptics), and in fact is at record lows against the Japanese Yen. Of course, the financing by the ECB has also alleviated in the very short-term the concerns about a banking or sovereign debt crisis in Europe. Don’t worry though, today there is another summit meeting between France and Germany, and I am certain nothing good can come of it.
Thus for the near-term we are left with a surprisingly durable domestic economy, which is being aided by global monetary flow of funds, given our status as the world’s reserve currency and most stable country in an increasingly unstable world. This has been the case for 70 years and yet it still manages to surprise people and most commentators.
As far as last Friday’s employment report that showed the unemployment rate dropping to 8.5 percent, do not get too excited. The rate itself is falling for the wrong reason. Not because the economy is healthy and producing new jobs, but just the opposite. The economy is so sluggish that the government has simply stopped counting over three million people in our country as being unemployed. This is because they have given up or have become part of the so-called underground economy. All one needs to see are the nearly 50 million Americans collecting food stamps to realize things are not going well on the employment front.
The chart below illustrates just what I am talking about. The fall in the unemployment rate is due entirely to the fact that fewer people are now in the labor force relative to the size of the population. Based upon this mathematical formula, the government could report falling unemployment rates as the work force (as calculated by the government) is shrinking - quite the opposite of what one would expect in a thriving and growing economy.
My only point here is to caution, that once again while the world is not ending tomorrow, neither is a real boom in economic activity to be expected. Both extremes are an incorrect way of thinking as to where we are. Both are used to scare investors away from the stock market, when for all practical purposes it is the only asset class worth playing at this point.
Finally, the latest from the Economic Cycle Research Institute does not give any indication of a rebound in 2012 (see the chart below).
Their weekly year-over-year growth rate is now below negative 8 percent and their call for a recession while controversial is still in effect.
What to Expect This Week
Another European summit today provides the market with the likelihood of more disappointment tomorrow. So stay tuned. Should also watch the headlines coming from the Mideast as Iran continues to keep the price of oil high with its bellicose rhetoric.
Earnings reports for the fourth quarter will not really begin until JP Morgan reports on Friday, then next week is really when things get rolling.
On the economic front, later in the week will be news on retail sales and initial employment claims, but I doubt they will be market moving.
Pioneer Drilling announced last week that they are acquiring Go-Coil, L.L.C. for approximately $110 million in cash. Go-Coil provides coiled tubing services to exploration and production companies for onshore and offshore oil and gas markets. Pioneer continues to grow its production services division, and this acquisition gives the Company a more complete solution for its customers in this space.
When Pioneer raised money roughly six months ago, we believed they would use that capital for acquisitions. This deal makes a lot of sense for Pioneer as it broadens their product offerings and will add about $30 million to EBITDA in 2012. We believe this is likely the last acquisition for the Company and expect management to focus on the integration of these two companies.
Shares of Pioneer have been quite volatile over the past 2 years, but we believe the Company is now positioned for solid growth over the next several quarters. We believe that the oil and gas drillers are undervalued, and expect the sector will outperform the market in general. Pioneer has a conservative valuation and we think the shares should double over the next 18 months.
Last week we sold our shares in Verizon. The shares have performed very well over the past two years, and we sold the shares near multi-year highs. We will continue to follow the Company and are not opposed to buying the shares again - likely at a lower share price. Verizon is one of the great companies in our Country. We just believe the shares are fully valued over $40.
When the management team of Verizon tried to pass along a $2 fee for certain customers, we became concerned that business conditions were not optimal at the Company. Since we sold the shares, the management of Verizon actually warned that iPhone sales are depressing their profit margins so the shares have sold off. We are actively looking for a better place for the capital we raised through the sale of Verizon shares.
(C) McIntyre, Freedman & Flynn