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July 2010 Monthly Economic Update
Dow Jones: @11,000 or @ 7,000?
July 2010 Monthly Economic Update
July 2010 in Brief
The month in briefMay 2010 Monthly Economic Update
May 2010 Monthly Economic Update
The month in brief. Stocks corrected, investors sighed, and Wall Street couldn’t wait for May to end. In performance terms, it was the Dow’s poorest May since 1940 and the S&P 500’s weakest May since 1962.(source) European debts hung like a dark cloud over the markets – and took attention away from earnings and some positive indicators at home. Domestic economic health. Consumer incomes outpaced consumer spending in April: while personal spending was flat, personal wages were up 0.4% and disposable incomes up 0.5%, and the savings rate increased half a point to 3.6%.(source) We also had a bit of deflation: the Consumer Price Index and the Producer Price Index each declined 0.1%. (Core CPI was flat for April.)(source) The unemployment rate kicked up to 9.9% for April, even as the economy added 290,000 more jobs (more in the government sector than private sector!).(source)
The twin consumer sentiment barometers showed monthly gains: the University of Michigan/Reuters survey improved to 73.6, and the Conference Board’s index hit 63.3, a level unseen since September 2008.(source) More concretely, we had April improvements in industrial output (+0.8%), retail sales (+0.4%) and durable goods (+2.9%).(source)(source)
The Senate passed its take on the financial industry reform bill 59-39 on May 20, with the next stop reconciliation with the House version passed in late 2009. That may occur during June.(source)
Global economic health. The whole world watched Europe, fearing that even as the EU/IMF plan to ease the debt burden on Greece, Italy, Spain, and Ireland got underway, it wouldn’t be enough. The 27 European Union governments have amassed debt equal to 80% of the EU economy.(source) The flashing red debt light naturally led economists to ponder the chances of a double-dip recession. German chancellor Angele Merkel’s mid-May opinion that the bailout effort had “done no more than buy time” didn’t exactly boost confidence within global markets.
How about Asia? Well, new tensions between North Korea and South Korea built in late May, adding to global financial concerns. Away from that, Japan’s household spending retreated by 0.7% in April (better than the -2.5% economists expected) and its unemployment rate reached 5.1%.(source) Manufacturing indexes in China, Taiwan, South Korea and Australia all pointed to further expansion in May (though the pace of expansion was slower than in April).(source)
World financial markets. There were actually some monthly gains in May – the Philippines All Shares Index advanced 1.0%, and Chile’s IPSA rose 0.6%. That positive news aside, sizable May losses occurred on multiple continents. The DAX fell 2.8%, Canada’s TSX Composite 3.4%, the Sensex 3.5%, the South Korean Kospi 6.0%, the Hang Seng 6.4%, the Bovespa 6.6%, the FTSE 100 7.1%, the Singapore STI 7.5% … and all of those indices did better than the Dow. Others suffered double-digit drops: Australian All Ordinaries, -10.3%; Spain’s IBEX, -11.1%; Russia’s RTSI, -12.0%.(source) The MSCI World Index lost 9.91% in U.S. dollar terms; the MSCI Emerging Markets index fell 9.18% in those terms last month.(source)
Commodities markets. So how did gold do given all this turmoil? Very well. Those futures gained 8.88% in May. The other notable NYMEX/COMEX gains: coal, +7.72%; milk, +7.59%; pork bellies, +6.30%; orange juice, +5.62%; silver, +5.15%. The major monthly declines included oil (-11.89%), gasoline (-12.46%), copper (-12.62%) and at the bottom, sugar (-14.47%). The U.S. Dollar Index gained 6.00% in May.(source)
Housing & interest rates. The numbers were influenced by expiring tax breaks, an expiring school year and warmer weather, but they were still encouraging: existing home sales rose 7.6% for April month according to the National Association of Realtors, and the Commerce Department had new home sales up 14.8% that month (and 47.8% above year-ago levels).(source) Pending home sales, affected by the same phenomena, were 5.3% higher in March and reached a five-month peak.(source) Housing starts increased by 5.8% for April, but the Commerce Department had building permits down 11.5% - again, an effect of expiring federal credits.
With no murmurs of the Federal Reserve hiking interest rates in the near future, average rates on assorted home loans remained low. In fact, they went lower. According to Freddie Mac’s Weekly Primary Mortgage Market Survey on April 29, the average rate for a 30-year FRM was 5.06%; on May 27, it was 4.78%. The average rate for a 15-year FRM went from 4.39% to 4.21% during that interval. As for 5/1-year hybrid ARMs and 1-year ARMs, the average rates for those home loan types in the May 27 survey were 3.97% and 3.95%. Compare that to 4.00% and 4.25% in the April 29 survey. With Treasury yields going lower last month, some called this the American silver lining to the European debt crisis.(source)
Major indices. The numbers tell a rather painful story, hopefully not to be repeated in June. The CBOE VIX rose 45.40% in May, the biggest monthly percentage increase since October 2008.(source)
| % Change | 1-Month | Y-T-D | 1-Year |
| Dow Jones | -7.92% | -2.79% | +20.62% |
| NASDAQ | -8.29% | -0.53% | +28.84% |
| S&P 500 | -8.20% | -2.30% | +20.13% |
| 10-Yr TIPS | +2.33% | -10.81% | -20.96% |
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends.
June outlook. Will the austerity measures and bailout package in the European Union inspire confidence? Will investors stop selling out of fear and buy with renewed confidence? Will the correction reach a point of capitulation soon? (Has it already?) Can certain European countries alter their financial behavior as well as their balance sheets? These are the big questions. Could a rebound start with news of a drop in the jobless rate, and further encouragement from other domestic indicators? There is plenty of bullish sentiment left in the tank – and there could plenty of volatility to contend with this month and this summer if the situation in Europe isn’t stabilized. Let’s hope that the market has witnessed a bottom and can return to rally mode.
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European Debt and the U. S. Markets
EUROPEAN DEBT & THE U.S. MARKETS
Why the crisis has Wall Street stressed.
It would be wonderful if the U.S. financial markets could “decouple” themselves from what is going on in Greece, Portugal and Spain. Unfortunately, the debt situation in these countries is like a ripple in a pond. The question is, how strong will the ripple ultimately be and will its full force reach our markets?
The problem. Greece, Spain, Portugal, Italy and Ireland are all carrying enormous debts. On May 1, the New York Times put up a chart breaking this down: Greece owes $236 billion, which believe it or not is the smallest debt among these five countries. Portugal’s debt stands at $286 billion – and it owes roughly a third of that to Spain. Spain carries around $1.1 trillion in debt, and its economy is in horrible shape (20% unemployment). According to the Bank for International Settlements, it owes $220 billion to France and $238 billion to Germany. Ireland has $867 billion in debt, with about 40% of that owed to the U.K. and Germany. Italy owes $1.4 trillion, including $511 billion to France (almost 20% of France’s GDP).(source)
After the euro was launched, Greece had access to a whole bunch of cheap debt - and the country used it nonchalantly. In the years since the establishment of the euro, Greece’s debt-to-GDP ratio has remained repeatedly above 100%.(source)
Europe’s biggest banks are heavily exposed to these debts, and so are some of ours: names like Citigroup, Bank of America, Goldman Sachs, JPMorgan Chase and Morgan Stanley. In fact, these five banks have $2.5 trillion of cross-border exposure in the crisis, with Citigroup the most exposed. So you have potential risk to these banks, the euro, and the European and world economy.(source)
The offer on the table. Fortunately, Greece has the chance to accept a $146.5 million bailout from the International Monetary Fund and the European Union in exchange for austerity measures (less government spending and a lower standard of living). This would help Greece avoid default – that is, having to renegotiate its debt and possibly assume more. (As a sovereign nation, Greece cannot go bankrupt.) Many economists think Greece will go into a deep recession (or depression) which could last most of the decade.(source)(source)
April 2010 Monthly Economic Update
April 2010 Monthly Economic Update
If you don't know who you are, the stock market is an expensive place to find out.
What a Difference a Year Makes!
What A Difference a Year Makes!
First Quarter 2010 Economic Update
The quarter in brief. The opening quarter of 2010 can be summed up in four words: so far, so good. Despite murmurs warning us of a correction, a double dip recession, and a tepid recovery with sustained high unemployment, stocks appreciated nicely this quarter. It was a quarter in which major healthcare reforms became law, the dollar made a comeback, the housing market lagged and the global economy revved up its collective engines. Despite murmurs and warnings that the recovery was going to be weak and prolonged, it was a very positive time for investors.
Domestic economic health. Consumer spending, obviously the prime driver in a recovery, increased by 0.4% in January and 0.3% in February.(source) Consumer sentiment was up and down: in the Reuters poll, it went from 74.4 in January to 73.6 in both February and March, about where it was last September.(source)(source) The Conference Board survey read 52.5 for March, up from 46.4 a month earlier yet below January’s reading.
March 2010 Monthly Economic Update
March 2010 Monthly Economic Update
The month in brief. Stocks rocketed north in March. The DJIA, NASDAQ and S&P 500 all advanced between 5.2-7.2% for the month.(source) Whispers about a double-dip recession, a possible correction and prolonged malaise in the real estate sector were not loud enough to take the market out of rally mode. Shouts of victory and shouts of anger accompanied the passage of the President’s long-envisioned health care reforms. Economically, slow and reasonably assured growth seemed the order of the day.
Domestic economic health. First the indicators, then over to Congress. March’s ISM manufacturing index came in at a very strong 59.6, and the ISM service sector index read 55.4.(source) Durable goods orders rose by 0.6% in February, the tenth advance in the last 11 months.(source) Data showed personal spending up 0.3% for February, even as personal wages were flat.(source) It was hard to get a fix on consumer confidence. The Conference Board’s index soared from 46.5 in February to 52.5 in March, even as the IBD and University of Michigan indexes fell.(source)
The Potential of the BRIC Nations
THE POTENTIAL OF THE BRIC NATIONS
Why emerging market equities have the world’s attention.
Brazil. Russia. India. China. These four nations have some of the fastest-growing economies on earth and are becoming drivers in the world economy. In the coming decades, they may command as much attention as the U.S., Japan and other “heavy hitters” … or more.
The future aside, we know one thing about the BRIC nations and other emerging markets: collectively, stocks in these countries have outperformed U.S. stocks for the last 20 years.
During this past decade alone, the MSCI Emerging Markets Index brought a total return of 102.4% while the S&P 500 posted a total return of -10.0% (-24.1% before dividends). Across the 1990s, the S&P 500 produced a total return of 432.0% - pretty impressive. Yet the MSCI Emerging Markets index posted a total return of 2408.6% for that decade.(source)(source)
Great volatility … but also great potential. If U.S. stocks soar or fall, emerging markets really feel the effect. We’ve seen them recoil in the first quarter of 2010. Yet short-term slumps aside, there are compelling arguments for investing in emerging market equities as part of a diversified portfolio.
Look at last year’s returns. In 2009, the benchmark index in Brazil (the Bovespa) gained 82.66%. Russia’s RTS gained 128.62%. India’s Sensex 30 advanced 81.03% and China’s Shanghai Composite rose 79.98%.(source)
2009: The Financial Year in Review
2009: The Financial Year in Review
“Many an optimist has become rich by buying out a pessimist.”
Robert Allen
The year in brief. The market improved; the economy improved. The doomsayers with visions of “Dow 4,000” were disproven. The Great Recession in all probability ended. Unemployment reached and remains at 10%, and major automakers went bankrupt, reorganized and shed brands. Stocks went on a nine-month rally of historical proportions. Major healthcare reform made its way through Congress. It was a hard year for Main Street but a gratifying year for Wall Street.
