Weekly Commentary & Outlook
McIntyre, Freedman & Flynn
By Tom McIntyre
June 18, 2012
Stock markets continued their cautious advance last week as hopes for a victory by the New Democracy party in Greece strengthened throughout the week. At the same time the cross currents of elections in France and Egypt kept the trading rather quiet.
Dow Jones Industrial Average NASDAQ Composite
As the charts above illustrate, the Dow Jones Industrial Average gained 1.7% last week while the NASDAQ Composite moved higher by one half of one percent.
The Markets & Economy
Stock markets both here and around the world have become derivative plays on the various electoral outcomes, as well as the likelihood of various central bank policy moves around the world. It pleases no one that politics and global monetary policy (not that they can really be separated) have become the main story when it comes to analyzing the stock market and its prospects.
The news over the weekend that the so-called pro-bailout parties have won the Greek election was met at first with relief, but similar to last week’s disastrous Spanish bank bailout - the more investors thought the more concerned they became. Greece has bought time but their default and potential exit from the EMU is still on track without any doubt.
Additionally, this morning, the yield on the Spanish 10-year bond has far exceeded 7%. This means that Spain can no longer fund its deficit needs in the financial markets and will require a full sovereign bail out. This along with the stark economic picture facing Greece, regardless of which party has the majority, has turned a rally into a sell-off once again this Monday morning.
Not to mention there was the socialist victory in France, which assures us that this country will now pursue redistributionist and other anti-growth policies when it participates in the G-20 summit this week in Mexico. This is hardly a positive development as Europe and the world needs true growth initiatives such as tax cuts and a shrinking government sector. Unfortunately, there is no Margaret Thatcher on the horizon amongst the elite of the European political class.
As if this were not enough, the Egyptian military has assumed power by dissolving their parliament and emasculating the office of President regardless of who wins. Where is the United States in any of this? Did we not orchestrate the downfall of the previously friendly regime to produce this?
With all of these global problems facing the world and the global economy, where is the leadership of the USA? Last week saw a universally panned economic speech from President Obama on Thursday, followed by speech about deportation of illegal aliens in the USA on Friday. Where is our Secretary of State? Where is our Treasury Secretary? We should be leading and yet we are invisible.
It is no wonder then that the markets are adrift. Business and investors simply cannot figure out what the future is going to look like and so the retrenchment we see in the economic data is likely to worsen.
This has caused investors to turn their focus to our own Federal Reserve Board which meets this week (announcement on Wednesday).
Given the lackluster economic data and the events described above, there is much more anticipation of the FED easing policy once again. This would help stock prices etc… but what is the evidence it would help the real economy? The answer to that is that there is none.
What to Expect This Week
A global summit meeting in Mexico is scheduled, but frankly this is almost always just a photo opportunity. Keep your expectations low.
The real key moment will be on Wednesday when the Fed tells us what they see and what they plan to do about it. Last week, the Bank of England announced another easing move, and perhaps the Fed will too. Financial markets will be on pause until Wednesday.
Finally, the update from the Economic Cycle Research Institute (see next page charts) shows more of the recent slowing trends. The good news is that America still remains the best off with a growing economy and high corporate profits. But the social cost of the current set of policies is dramatically impacting consumer confidence and business planning for next year, as no one yet knows who will be in power and just what kind of fiscal policies will be in place.
Biogen Idec hosted a positive Analyst Day last Tuesday highlighting its robust drug pipeline and new growth initiatives. Management focused investors on the strength of their multiple sclerosis division and how the Company can grow its market share, and the market in general given its potential product launches. Analysts were most interested in the BG-12 drug candidate, which we have written about extensively, and look forward to getting more late-stage data on the drug later this year.
This Company has made great strides over the past two years revitalizing its research and development organization, and investors will reap the reward from that in years to come. Not only have they built the industry leading multiple sclerosis franchise, but new initiatives in the hemophilia and Lou Gehrig’s disease market will drive future growth. Analysts were surprised by the depth and vibrancy of the early- stage pipeline that the management team has been fairly quiet about in the past several quarters.
Shares of Biogen Idec are trading at new 52-week highs this morning, and have not been affected by the overall market at all. All of the research we have read concerning this meeting has been bullish, and we believe that Wall Street is finally grasping what the Company will look like in the years to come. Remember, like most biotech stocks, Biogen doesn’t need global economic growth to increase its share price, but instead needs to develop new products and divisions at the Company. There are 4 major Phase 3 readouts within the next year, all of which should be positive catalysts to the share price. We believe the shares will continue to rally and reach $175 within the next 12 months.
Caterpillar announced last week that the Board of Directors has raised its quarterly cash dividend by 12 percent. The Company raised its quarterly dividend by 6 cents, to 52 cents per share. It will be payable on August 20th to shareholders of record at the close of business on July 20th. This is the largest percentage increase in dividends from Caterpillar since August 2008, which was right before the financial crisis began.
We are always encouraged by rising dividend payouts, and believe that dividends are more important now than they have been in the market for the past 20 years. Investors can’t find much yield elsewhere, and we believe rising dividends help attract several different types of investors in this market. Shares of Caterpillar are closely tied into the global economy, and while there are signs of slower growth, we believe Caterpillar can take enough market share to offset any slowdown. The shares currently yield nearly 2.5% and we believe the shares can reach $120 within the next 12 months.
(c) McIntyre, Freedman & Flynn