Weekly Commentary & Outlook
McIntyre, Freedman & Flynn
By Tom McIntyre
June 13, 2011
Last week the market continued its reaction to the indisputable evidence of a global slowdown, as well as the farcical leadership being shown in Europe, as to how to deal with their various sovereign debt problems.
As the charts above illustrate, the Dow Jones Industrial Average dropped 1.6% while the growth-oriented NASDAQ Composite fell 3.3%
on the week and is back to even for the year.
The Markets & Economy
The financial press and the Obama Administration are now in full panic mode over the loss of momentum in the economy here at home. For its part, the Obama Administration has reacted by firing its chief economic spokesman, which leaves only Treasury Secretary Geithner left from the original team. No announcement has been made as to his successor and there hasn’t there been any indication that the anti-growth economic policies being pursued in Washington are about to change.
This morning’s Wall Street Journal ran a front-page story on the dropping estimates for GDP growth and employment numbers. Even with today’s drop in estimates the economists are likely too optimistic. They still see unemployment falling to below 8% by the end of next year despite a slowing rate of growth in the economy.
These economists must be trying to get a job with the Obama Administration if they believe that. Obviously, if the unemployment rate did not fall over the past two years (it started the Obama administration at just over 7%,) then it is unlikely to fall given the uncertainties which are in the news. This includes next year’s presidential election that will come complete with plenty of “soak the rich” rhetoric and other anti-growth proposals.
At the same time, however, the stock market has dropped six straight weeks and the pessimism is as great as last August, which represented the bottom for 2010. Corporate profits remain quiet good (see Caterpillar’s announcement below), and trillions of dollars remain on the sidelines with nowhere to go but equities.
What to Expect This Week
More economic data is expected to confirm what we already know and that is that the global economy slowed in April and May. The numbers due out on industrial production and inflation will confirm the problems, which have already been acknowledged. What may prove more interesting is the new ISM regional numbers for May, which may start to show a bounce back as Japan starts to rebuild and restock in earnest.
In any event, the story line has now been written and will not change this week. We have gone from an economy which was in a self-sustaining upturn (I never bought it) to one which will need more help. Read that to mean that the Fed will continue with its extremely accommodative policies for the foreseeable future. It will no longer be called quantitative easing after June 30, but it will still be there.
This Fed is the most politicized that I have ever seen. It knows the data and it knows the political schedule. Given that the economy does not change on a dime, it will move sooner rather than later.
Finally, the latest from the Economic Cycle Research Institute shows another decline to a year over year positive number of 4.1.
While this has been falling, you should remember two things.
- First of all, last year at this time, it went negative without a recession and
- Secondly, the coincident numbers are moving back up.
Thus just when everyone is now convinced of a slow-down, there might be a temporary break in the clouds that would send stocks higher.
Caterpillar announced last week that they are raising their dividend and re-affirmed its earnings guidance for the remainder of this year. The management raised the quarterly dividend by 2 cents to 46 cents. The dividend is payable as of August 20th to shareholders of record as of July 20th. Management expects earnings per share between $6.25 and $6.75 and revenue between $52 billion to $54 billion.
Shares of Caterpillar have been under pressure as the market has now sold off for the last six weeks. Fears of a global slowdown have been weighing on the shares. We believe this is a buying opportunity and the shares should bounce back in the next several months. Caterpillar has an enormous backlog of business and we still believe the shares will reach $150 within the next 12 months.
Marathon Oil announced the completion of the regulatory review process by the SEC concerning the spin-off of the Company’s refining and sales business from its exploration/production operations. This spin-off was announced in January and is now set to be complete on June 30th of this year. We believe this transaction will create further shareholder value and expect to hold shares of both companies.
After the separation, Marathon shareholders will get one share of Marathon Petroleum for every two shares they hold of Marathon Oil. Marathon Petroleum will now be the fifth largest domestic refinery, with the capacity to refine 1.1 million barrels a day. We believe the separation will give the companies the proper focus on their individual businesses and warrant higher valuation multiples.
Since announcing this transaction, the shares of Marathon have rallied sharply and we expect the upward trend will continue. As Wall Street starts to value these companies as separate entities we believe the valuation is headed higher. We think the combined valuation of the two companies will reach $60 within the next 12 months.
(c) McIntyre, Freedman & Flynn