Weekly Commentary and Outlook
McIntyre, Freedman & Flynn
By Tom McIntyre
June 11, 2012
Stock markets rebounded last week on the perception (which turned into reality over the weekend) that Europe would find some sleight of hand method of rescuing the Spanish banking system.
As the charts above illustrate the Dow Jones Industrial Average gained 3.6% while the NASDAQ Composite jumped by some 4 percent on the presumption of yet another European bailout.
The Markets & Economy
Today’s update will be brief, as I do not want to go on about the specifics of the latest bailout. Suffice it to say that it kicks the can down the road in terms of dealing with the problems in Spain and Europe. It does not solve any problems facing the Euro region and it will not be very long before more countries come looking for bailout money.
The reality this morning is that Spain’s sovereign debt (which this bailout money will be added to) is trading down and its credit default swaps are trading higher. This is not a very good sign for the bailout at this point. On top of that, now Ireland and Greece (which votes again this weekend) want similar and more lenient terms to their previously negotiated bailouts.
Thus, Europe remains a total quagmire. The elites still have dreams of keeping the Euro afloat by federalizing the debt, but without the acquiescence of Germany there is no deal.
It is almost hilarious that over this past weekend the socialists in France appeared to solidify a hold on parliament by winning the first round of their elections. France has already decided to lower its retirement age to just 60 and soon hopes to raise taxes on anyone still earning any money. Does this sound like a recipe to fix Europe’s problems? Not to me and not to Germany and the other countries, which are expected to bankroll the profligate fiscal policies to which France is now heading.
Here at home, the debate is similar. President Obama indicated last week that the private sector is doing “just fine” and recommends that the country spend more money to hire in the public sector. Obviously, one can only ask why the federal government, whose employees have increased over the past four years, should be interested in subsidizing local and state governments. After all the USA itself is running annual deficits in excess of one trillion dollars.
You get the picture. Elections both here and around the world have consequences and investors are getting caught up in the outcome and what it means for policy. For the moment, this is now acting as a negative for the stock market in my opinion.
What to Expect This Week
The economic news remains very light and frankly the markets are already anticipating that the slowdown trend of recent weeks will continue. The real market moving events occur next weekend when Greece votes. The outcome will have implications for the Euro. In addition, investors will be on hold heading into next week when the Federal Reserve Board meets and tells us what they have decided to do and why.
As far as the economic outlook is concerned, the latest report from the Economic Cycle Research Institute (see the graph below) shows more weakness. Clearly the slowdown we see now is the one they have been forecasting for the past ten months or so. Most economists expect GDP growth to struggle to get to 2 percent this year. However it still remains doubtful that the economy will actually shrink. That would bring about money printing the likes of which we have yet to see and we have seen trillions already printed.
Last week shares of Akamai Technologies were volatile after Netflix announced it was building its own content delivery network, or CDN. The shares dropped nearly 15 percent early in the week but rallied the last couple of days to finish positive for the week. Several analysts came to the defense of the stock and the Company also detailed the limited implications of the Netflix strategy. Also, there were two large insider purchases last week after the stock tumbled.
The sell-off in the shares was an overreaction given how small of a customer Netflix is to Akamai. Last year Netflix only accounted for $5 million in revenue, which is roughly a half of 1 percent of the Company’s total revenue. Also, most believe that other companies would not use the Netflix CDN, so it should not change the competitive landscape. Finally, Netflix has been talking about doing this for years so this should not have been a surprise to any investor.
The day the shares tumbled Akamai’s Chief Scientist Thomson Leighton purchased 147,240 shares of Akamai. This is notable because Mr. Leighton also purchased 100,000 shares following the Company’s disappointing earnings report in April. There was another insider that picked up roughly 30,000 shares as well. We are always encouraged when insiders make large share purchases following stock declines.
While we are happy that the shares of Akamai snapped back later in the week, we admit this has been a frustrating stock for shareholders. With so few insiders making large purchases in the technology sector, we believe this is a very positive sign for the future of the Company. There have been takeover rumors concerning Akamai for some time and we think the Company still would fit very well with a larger tech conglomerate. We still believe the shares will reach $40 within the next 12 months.
(c) McIntyre, Freedman & Flynn