Penn Investor Intelligence Series
The opinions expressed below are those of Penn Wealth Management, LLC and are current only through the date posted. These views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed. Past performance is no guarantee of future results.
Net Zero Jobs Created in August 02 Sep 11
For the first time since World War II, the U.S. economy had a net of zero new jobs created for a month. Economists had predicted that 75,000 new jobs would be created in August, which would have still been a very anemic number. Prior months' figures were also revised downward, and the official unemployment rate remained at 9.1%. The less publicized U6 unemployment figure, which also includes those who have given up looking for work, rose slightly to 16.2%. Markets opened down deeply on the news, and the specter of Helicopter Ben printing more money to throw at the problem got a little stronger.
Perhaps the most disturbing component of the Friday jobs report was the statistic showing that 43% of unemployed Americans have passed the six-month unemployed mark. Generally speaking, the longer someone is out of work the more difficult it becomes to find a job. In another report issued Friday, the average hourly earnings of employees were shown to have dropped $0.03 in the month of August.
Unemployment Picture Remains Gloomy 22 Jul 11
New claims for jobless benefits "unexpectedly" rose last week to a seasonally adjusted 418,000 as companies are laying employees off at a level not seen in a year. In addition to the jobs which will be lost at defunct Borders Books, companies such as Cisco Systems and Lockheed Martin have also announced deep cuts. When President Obama stunned the aerospace community two years ago by ending the previously-approved Constellation manned space program, it virtually assured the industry that thousands of workers would be laid off. Companies which are not directly reducing their workforce are still having an impact on the jobs outlook, as they simply will not hire new employees until the economic and regulatory environment is more favorable.
In addition to the sheer number of unemployed, another very disconcerting component of the labor picture revolves around how long the typical job-seeker has been looking. More than one-third of those out of work have been searching for a job for over a year. The average unemployment duration is now longer than at any other point in time over the past 70 years, and the unemployment rate will remain well over 8% throughout 2012. The Keynesian experiment of shoving over a trillion of taxpayer funds out the door, with shotgun like precision, has been a resounding failure. Fiscal restraint and a reduction in onerous and redundant government regulations will--eventually--be what brings the United States out of its funk.
Borders Books to Close its Doors 18 Jul 11
After failing to find suitable bidders while in bankruptcy, Borders Books�the nation's second largest book retailer�has announced it will close its doors for good this September. The liquidation of the remaining 400 stores is expected to start immediately. Borders, which employs over 10,000 workers, has made a number of missteps in the midst of an industry-wide transformation, including a half-hearted and late effort to embrace electronic readers. Its failure to develop a strong digital presence played an enormous role in the company's lackluster sales and ultimate declaration of bankruptcy.
It doesn't seem that long ago that Borders was playing the role of aggressor, as bookstores such as B. Dalton and Waldenbooks were being gobbled up. Amazon then came on the scene, creating a huge online footprint, followed by successful launches of new eReaders such as the Kindle and Apple's IPad. Borders' late and less-than-impressive launch of the Kobo reader failed to win converts as the former giant continued to lose market share. Barnes and Noble now remains the lone megastore book company in the country. As the unemployment rate remains stubbornly high, another 10,000 job seekers is not what the economy needs. The lesson for other companies is to embrace change no matter what their size or apparent strength in their respective industry.
U.S. Economy Adds Only 18,000 Jobs in June; Unemployment Ticks Up 08 Jul 11
We have commented on several occasions that the U.S. economy needs to add about 400,000 jobs per month for over a year to get some true semblance of a real economic recovery. Against that backdrop, the Labor Department announced that a mere 18,000 new jobs were created in the month of June, and the unemployment rate ticked up to 9.2%. Economists had been predicting job gains of between 125,000 and 175,000 for the month.
A breakdown of the report shows the weakness to be broad-based. Manufacturing, business services, construction, and virtually all other sectors showed reduced growth from May's hiring figures, and government employment fell by 39,000 as municipalities struggle to close budget gaps. The average income of the American worker, another key component for the recovery, edged lower for the month.
The two-year-old recovery is the weakest one since the 1930s, and President Barack Obama will almost surely face the highest unemployment rate of any postwar incumbent in history when the 2012 election rolls around. No president has ever been re-elected with an unemployment rate in excess of 8%. The jobs report is also likely to drive the two political sides in Washington further apart, as Republicans will point to runaway spending and regulatory constraints, while Democrats will argue for tax hikes and another government stimulus program.
Mixed Signals Continue to Dampen Recovery 27 Jun 11
Greece continued to dominate the headlines this week, as the specter of a national default remains a real possibility. While Europe--Germany in particular--continues to bail the country out of its financial woes, Greeks have stepped up their national protests against austerity measures. It belies logic, but after a lifetime of living in a socialist state few Greeks are interested in logic. All they know is that their government-backed financial safety net is now in jeopardy.
On the energy front, it was several months ago when President Obama threatened to release oil from the nation's strategic petroleum reserve if prices did not come down. He gained political cover for this move last week when the International Energy Agency announced that it would release 60 million barrels from strategic reserves across the world. We are not sure when the IEA gained such unprecedented power over our sovereign issues, but it gave the president the excuse he needed to tap the reserves, which are designed to provide an immediate oil supply in case of national emergency. In addition to the national defense angle, it makes no sense tapping into the reserves when prices are near $90 per barrel, considering the government may need to refill the supply at much higher prices.
While the employment and economic reports released last week pointed to signs of a weakening recovery, transportation giant FedEx provided a shot in the arm to the markets with an upbeat forecast. Strong orders for U.S. durable goods also provided some cushion for the markets late in the week. While still low, U.S. GDP was revised up slightly to 1.9% for the first quarter of 2011. This coming Thursday, the 30th of June, the U.S. Labor Department will release new data on jobless claims.
Unions, Trial Lawyers Dealt Massive Blow in Wal-Mart Ruling 22 Jun 11
As we predicted would happen, the U.S. Supreme Court--along 5-4 ideological lines--dealt a massive blow to organized labor and torte lawyers as it threw out a sweeping sex discrimination lawsuit against Wal-Mart Stores, Inc. The retailing giant has long been organized labor's number one target, as its employees have refused to unionize.
The case, spearheaded by labor groups, claimed that a whopping 1.6 million women had been victimized by an anti-female, anti-minority bias among management at Wal-Mart. Had the justices ruled against the firm, billions of dollars in back pay and punitive damages could have resulted.
In her dissenting opinion, Justice Ruth Bader Ginsburg claimed that a "tap on the shoulder" process for promotion at the firm was being used, keeping women and minorities from achieving the same level of success as men at the firm. Wal-Mart praised the ruling, which is expected to have a big impact on other similar class action suits in progress.
The Beginning of the End for Taxpayer-Funded Ethanol 17 Jun 11
With a $14.4 trillion national debt and a federal government which seeks to interfere in every aspect of our daily lives, it is refreshing to see glimmers of hope on the horizon. On Thursday, the United States Senate voted overwhelmingly to end the 45-cent per gallon subsidy to farmers growing corn for ethanol. At the same time, it voted to end the protectionist 54-cent per gallon tariff on ethanol imports, which had been dubbed the "Brazil Barrier," as Brazil is the largest source of imported ethanol. In a simultaneous action, the House of Representatives voted to block Department of Agriculture funding for ethanol storage tanks and blending pumps.
Unfortunately, these actions are not yet law. Rather, they are part of a bigger economic development bill which may be a long shot. It should be pointed out that the petroleum industry has also enjoyed special tax considerations for decades, and this must also be part of a major spending reduction plan. Limiting federal funding for these programs has been called a drop in the bucket toward deficit reduction, but to continue to fund these programs with taxpayer dollars is an act of incredible arrogance and fiscal treason by lawmakers snug in the back pocket of special interest groups.
Wisconsin Supreme Court Slaps Down Rogue Judge Ruling 15 Jun 11
In a major victory for Wisconsin Governor Scott Walker, the state's Supreme Court ruled that a law stripping unionized public sector workers of their rights to collectively bargain was legal. The Court also issued a blistering verbal indictment of the judge, Maryann Sumi, who issued a temporary restraining order preventing the law from being implemented--stating that she grossly overstepped her bounds. Judge Sumi (pronounced "sue me") has also been under fire because her son was a political operative for the SEIU and the AFL-CIO--both of whom have members in the public-sector union in the state. Wisconsin has a balanced budget amendment, meaning lawmakers cannot spend more than they take in from taxpayers, and the issue stems from the governor's attempts to erase the state's $137 million budget deficit.
We Spent $2 Trillion on What? Disastrous Jobs Report Released 03 Jun 11
After spending over $2 trillion of taxpayer mone--a figure which is exceptionally hard to fathom--on government stimulus programs designed to put Americans back to work, the U.S. Labor Department released a horrendously bad jobs report on Friday. Nonfarm payrolls rose by just 54,000 last month, as the private sector posted its smallest gain in a year. This pegged up the unemployment rate to 9.1%, as there are 14 million Americans who would like to work but cannot get a job. There can be a difference of opinion on whether or not the TARP program was actually needed to "save" the economy, but there can be no doubt that the nearly $1 trillion spent on QE2 was an unmitigated failure. When the Fed comes to congress to discuss a QE3 program, they will have the door shut in their face.
There is a silver lining to all of this, however. For all of the talk in the media of a Chinese ascendency, America is still the engine of economic growth in the world, and the U.S. economy still dwarfs that of China's. China has a number of systemic problems which will continue to haunt them into the future, and (for whatever reason) few in the media wish to delve into that topic. Secondly, more and more Americans are becoming aware of the $14.4 trillion debt our elected officials have racked up, and they simply will not allow this to continue. Third, expect to see a natural reduction in the mountain of onerous business regulations which have been inhibiting private sector growth. From Dodd-Frank to high business tax rates, American companies have battled a confused, convoluted, and often combative set of rules and regulations being issued from the halls of congress. This murkiness is at its nadir, and we are already seeing the pendulum swing in Washington.
Have manufacturing jobs left the United States for other ports around the world? Of course they have. That is the healthy and transformative nature of capitalism, and a dynamic economy will find new areas in which to lead. It appears that the federal government may now be willing to get out of the way and let that happen.
Private Jobs Report Misses Mark; First Shot Fired in Debt Ceiling Fight 01 Jun 11
Private-sector jobs in the U.S. rose by just 38,000 last month according to ADP, grossly missing the 190,000 mark economists had predicted. Large companies have been cutting workers as of late, and this played a big role in the ADP figure. Keep in mind that the 1.8% GDP rate for the first quarter was reiterated last week, and this is simply not enough growth to sustain a hiring spurt. To put these numbers in perspective, we need to see employment growing at a rate of about 400,000 new jobs per month for at least a period of one year. While the ADP number does not reflect new government jobs created (the BLS will report that figure Friday), the private sector is the engine of American growth�government is the drag. Additionally, state and local governments have been laying off workers to close budget gaps. If there is a bright side in the employment outlook it is that employers have announced 21% fewer planned layoffs thus far in 2011 as compared to the first five months of 2010.
In the political arena, the first shot has been fired in the battle over whether or not to raise the debt ceiling from its current $14.3 trillion limit. House GOP leaders took a symbolic vote Tuesday night to raise the limit with "no strings attached." All Republicans who voted opposed the measure, and they were joined by 82 Democrats voting no. The GOP is demanding a concrete deficit reduction plan before the ceiling is raised; the Dems called the vote a political stunt. What can Americans do to make their voice heard? Contact their senators and respective representative and demand a balanced budget amendment to the constitution be voted on by the people. Our elected officials cannot be trusted to spend no more than they take unless restraints are placed upon them; restraints such as the ones in place in 49 of the 50 states.
May Brings Four Straight Down Weeks to Major Indexes 31 May 11
We have been recommending investors batten down the hatches and prepare for a rough-and-tumble summer since the start of the year, and May's four straight weeks certainly indicate that it will be a volatile ride. While markets should open higher today on the news of a probable deal to bail out Greece (again), the Dow Jones Industrial Average goes into the last day of the month down about 3% since the end of April. It seems so long ago, but we recall that last May stocks suffered their biggest monthly loss in 71 years, dropping 8%. This year, the major concerns surround a moribund employment rate, a hyper-slow recovery, European woes, and a $14.3 trillion U.S. debt which, thankfully, more and more Americans are actually becoming aware of (6.5 cents of every dollar spent by the government goes to pay interest on that debt).
We stand by our expectations for a strong finish to the year, and believe that many good investment opportunities should present themselves over the coming months. The trend should show growing strength in large multinationals such as Caterpillar and Deere, and enhanced performance in the health care sector. Until interest rates begin to rise due to inflationary concerns, we continue to favor companies paying dividends in the 2.5% to 5% range.
Dissecting the Pending Home Sales Plunge 27 May 11
The Pending Home Sales Index (PHSI), which measures contract activity, is considered to be a leading indicator of housing activity. It looks at the window of time between someone signing a contract for an existing single-family home, condo, or co-op, and the transaction actually closing. That being said, the index dropped 11.6% to 81.9 in April, which is the lowest level since September.
The employment picture is still bleak, with the unemployment rate at 9% once again. Additionally, the sheer amount of foreclosures either on the market now or soon to go on sale will continue to keep supply up and values down. It is simply going to take time to absorb the excess inventory, and many sellers would rather remain in their homes than accept the reduced market value. More stringent lending standards are another factor countering the lure of low rates. The 30-year fixed mortgage rate is sitting around 4.66%, close to its 52-week low.
Why the Economy will Limp Through the Summer 26 May 11
A new reading on GDP was just released, reiterating the anemic 1.8% first quarter growth rate. Economists had predicted a 2.2% rate, but many of these "experts" also claim that a $14.3 trillion national debt really isn't a big issue, so we take every prediction they make with a grain of salt. As the first punch (GDP) was being leveled, along came the second on--a jobs report showing that workers filing new claims for benefits remained above 400,000.
Low production, reduced orders, and increased jobless claims are not exactly how the field is prepared for the seeds of economic recovery. The truth remains that the trillions of dollars pumped out by "stimulus" packages have done little to improve the economic landscape, but the increased debt load has done a lot to dissuade businesses from investing. The specter of out-of-control inflation, brought on by a spend-happy Fed, coupled with high unemployment (stagflation) has made the American business community gun-shy. Instead of spending their cash reserves, they prefer to take the more cautious approach of waiting to see what will happen with the debt ceiling and the 2012 budget.
Take a weak dollar (thank you Fed), reduced orders, high unemployment, inflation, and a depressed housing market, and you have a recipe for a long and painful recovery. If there is a ray of sunlight on the horizon it is emanating from the decent earnings reports a majority of companies have been releasing. Another factor assuaging our angst is the fact that Europe appears to remain in a world of hurt. As the leaders of the EU dither (or get sent to Rikers Island for suspected rape), Greece discusses the default option and whether or not it should even keep the euro currency. And, for all the talk of China's rise, the Asian giant remains mired in its own domestic and fiscal issues, still very dependent upon America's pocket book.
For at least the past six months, we have predicted a May through September downturn in the markets, hitting a crescendo as the 2012 budget talks reach their demagogic peak. From an investment standpoint, this will be the point to scoop up some strong, undervalued, large company stocks--preferably those paying nice dividends. We recently added an inverse NASDAQ exchange traded fund to the Penn Dynamic Growth Strategy (PDGS) as a satellite holding to hedge a downturn in the index. As inflation continues to stir up dust, we will look at adding more inflation protected securities to the portfolio as well.
Why Investors Should Not Touch HP 17 May 11
I recall reading a book back in the 1980s entitled One Up on Wall Street. It was written by fabled Fidelity fund manager Peter Lynch, and in the book he extolled the virtues of taking one's personal experiences into account when searching for good companies to buy. You might call this the ultimate in fundamental analysis. This book came to mind during one of the dozen or so hours I spent on the phone with Hewlett-Packard technical support in India. I was sold a bad machine, plain and simple, yet I was unable to find anyone from the company interested in listening to me. That all changed the day I returned the bum machin--90 days late--to the store I purchased it from (they had a very liberal 90-day return policy on electronics). That afternoon I received a call from HP's Palo Alto headquarters. Instead of being apologetic, the manager seemed accusatory in his tone. I swore off HP computers...or anything else from the firm...from that date on.
Fast forward to today. HP cut its outlook and warned of weaker results in its current quarter, sending the stock price down 9% in early trading. Instead of acting like a leader, CEO Leo Apotheker cried every excuse in the book, from blaming investors for overlooking the firm's strong fiscal second quarter to blaming former CEO Mark Hurd for failing to execute strategy. Yesterday we talked about whining in the CEO ranks at Lowe's, and today it is HP. The French may be moaning about pictures of defrocked IMF chief Dominique Strauss-Kahn being frog-marched into a police cruiser, but that is not part of the American culture. Corporate governance is one factor we consider before selecting a company as a sound investment, and whining about the tough global environment or previous executives sends a clear messag--investors beware.
Week in Review 16 May 11
Scandal at the IMF
The International Monetary Fund is the United Nations of the financial world. It robs American taxpayers and spends their money on socialist causes which are in direct conflict with free market capitalism. The organization has been run, at least until Sunday, by the French socialist, Dominique Strauss-Kahn, who probably would have beaten Nicolas Sarkozy in next year's presidential election in the country.
This has all changed, as Kahn sits in a New York courtroom on charges of attempted rape, sexual assault, and unlawful imprisonment of a maid in his $3,000 per night hotel room. The FBI yanked Kahn out of his first-class seat on the aircraft he was taking back to Europe. Ironically, his incredible arrogance was his downfall, as police were tipped off of his whereabouts because he brazenly called the hotel in search of his missing cell phone. France has no extradition agreement with the United States, and this is the last we would have seen of Kahn had the flight taken off. Sarkozy, who makes no secret of his admiration for the United States, received an enormous boost in his reelection chances due to the incident. Kahn's lawyer has indicated his client plans to plead not guilty to the charges.
S&P Downgrades Greek Debt
Speaking of the IMF, its imprisoned director was taking his flight back to Europe for two days of meetings with German Chancellor Angela Merkel to discuss a second bailout of Greece. Despite taking the first bailout, the country has not lived up to its side of the agreement of imposing severe austerity measures on its spending. For that reason, Standard & Poor's has lowered its rating on long-term Greek government debt from BB- to B. The rating agency said that the country might have to resort to a partial debt default. Greece's credit rating is now lower than Angola, Senegal, Nigeria, and Zambia.
Japanese Companies' Profits Plunge
Toyota Motor Company's profits plunged 77% in the most recently-reported quarter, and the company failed to provide an annual forecast, pointing to the March 11 earthquake as the reason. Toyota will likely give up its recently-gained mantle as the world's largest carmaker due to the company's problems. Electronics maker NEC also reported a steep drop (36%) in its quarterly earnings due to the earthquake.
PPG Added to Penn Global Leadership Fund (PGLF)
PPG Industries, a 128-year old industrial company headquartered in Pittsburgh, has been added to the PGLF. The firm is a worldwide leader in aerospace, architectural, automotive, and marine glass and coatings. The firm's steady dividend, its attractive price, and its plan for growth were reasons for its inclusion in the portfolio.
Lowe's Earnings Miss Mark; Not a Harbinger for Industry
One sure sign of poor corporate governance is when management begins blaming the external environment for a lousy quarterly earnings report. Immediately after announcing quarterly earnings of 34 cents per share�sharply below analysts' estimates�home improvement giant Lowe's began issuing excuses. From a tornado, to a cold winter, to cash strapped consumers, to high energy prices, apparently all of the bad news was a result of outside forces. Perhaps the poor service we have received in the stores as of late can be traced back to employees angry at the price they paid at the pump on the way to work. Don't expect Lowe's to be a harbinger for the rest of the consumer discretionary sector�most of the company's problems are internal.
Week in Review 09 May 11
Global Stocks Drop as Commodities have Biggest Selloff in Two Years
Concern about the strength of the global recovery led to a dramatic selloff in commodities last week. As the last stragglers were coming in to buy silver, which had been up a meteoric 160% on the year, the rout began. When the dust settled silver had lost a full quarter of its value over the course of the week. Oil also pulled back from its $112 recent high, closing Friday below $100 per barrel.
A slew of economic reports buttressed the selloff last week, including a report from the ISM showing the manufacturing recovery is losing its momentum. In countries from the United States to the United Kingdom to Russia, orders for goods are beginning to slow. While a percentage of this is a trickle-down effect from the Japanese earthquakes, there is no doubt that the global recovery is on shaky ground, as evidenced by the anemic 1.8% GDP rate in the first quarter.
Consumer prices in developed economies are rising at their fastest pace in nearly three years, driven by higher food and gas prices. Central banks around the world have kept interest rates at ultra-low levels in an attempt to spur economic activity. Of course, this is a dangerous game to play with respect to inflation. India seems to be bucking the trend, raising their lending rates for the ninth time in a year.
Remember the inflation we had in the 1970s, when Gerald Ford printed up his silly "WIN" (Whip Inflation Now) buttons? It is not outside the realm of possibility that an inept Fed and U.S. Treasury Department will usher in a new round of hyper-inflation which they cannot control. While the executive branch dithers, the U.S. Congress must do two things immediately: cut their outlays to match their receipts (don't spend more than they take), and begin ending onerous legislation (like Dodd-Frank) which impedes the ability of small businesses to compete in the world. Until these two actions take place, economic uncertainty will remain in the red zone.
At least we are not Greece�yet. The country is in a world of hurt, and it is causing absolute chaos across Europe. The country now needs a second bailout from the EU, and there is somewhat of a Tea Party-like movement among the ranks of government officials in Germany, who are vowing to fight any new funds going to the socialist nation. It is ironic that there was such an animosity towards the capitalistic nations (such as Poland) of the former Soviet empire joining the EU, as floundering albatrosses like Greece were welcomed in. How interesting it would be if the nation decided to leave the EU in a huff. Doubtful it will happen, but the fireworks are far from over in the Union.
U.S. Special Forces Kill bin Laden 02 May 11
Great Day for America and the World; More Questions Raised about Pakistan
Approximately 40 elite United States Navy Seals attacked a million-dollar compound 35 miles north of Islamabad, Pakistan on Sunday, killing America's most wanted fugitive and bringing some level of closure to the crimes committed nearly a decade ago. After a 40-minute long firefight, bin Laden was found, resisted demands to disarm, and was killed. Members of Seal Team 6--none of whom were hurt in the raid--then extracted his body for DNA testing as proof that they had indeed killed the al Qaeda leader. After running the tests, bin Laden's body was tossed into the sea to deny potential martyrs a site to worship his remains.
While the sophisticated raid was executed with near flawlessness, questions of Pakistani cooperation must be answered. How is it that the most wanted fugitive in the world was nestled in a mansion located 100 yards away from a major Pakistani military compound? Last week it was released that Pakistan was urging Afghanistan to walk away from a long-term strategic partnership with the U.S. and instead look to that country--and their Chinese allies--for help in rebuilding their economy. American and Pakistani interests appear to be at odds, to say the least.
Meanwhile, Pakistan's other neighbor and longtime enemy India has reacted with "grave concern" that Osama bin Laden has been hiding out deep within the nation's borders. India suffered a terror attack on Mumbai in 2008, and the country's interior minister has called on Islamabad to pursue and arrest militants connected to the attack. These issues have serious geopolitical and economic implications for America, and it will take a skilled foreign policy team with a cogent and coherent strategic plan to assure the nation's best interests are being served. Despite all of the open questions, the death of Osama bin Laden marks a great victory for America in the war on terror.
Markets Advance for Week on Strong Corporate Profits 02 May 11
Fed Announces Plans to Phase out Quantitative Easing
Despite some shaky reports at the outset, the quarterly earnings season is shaping up to be another good one. So far, nearly 80% of the companies reporting have posted improved sales and operating earnings over last year, same period. This news helped propel the markets higher, despite relatively weak economic data and a sharp downturn in first-quarter growth.
The Department of Commerce released a report showing that gross domestic product fell from an annualized rate of 3.1% in the fourth-quarter of 2010 to a weak 1.8% in the first-quarter of 2011. Treasury Secretary Timmy Geithner may believe that "gas prices at their current levels are not affecting economic growth," but Americans disagree. Higher gas and food prices squeezed consumer budgets, and a rise in imports reduced the country's output. A slowly improving job market, however, is pushing consumer sentiment up despite the inflation data.
In a first-ever news conference, Fed Chairman Ben Bernanke announced that it would begin phasing out its $600 billion bond buying program in June--not really news, as this is when the plan was scheduled to end. Perhaps the markets celebrated the fact that a new $600 billion plan was not announced. Bernanke did say that the Fed planned to keep rates at their ultra-low levels for the time being. Penn's current forecast for the Fed's first rate hikes would be the first quarter of 2012.
Caterpillar, Merck Soar; Microsoft Mixed 02 May 11
Decline in Windows Sales due to Rise of the Tablet
Caterpillar, the world's largest construction equipment maker, blew away earnings estimates on surging sales in developing countries. We have mentioned the huge profit opportunity for companies selling equipment in places like Brazil, and Cat has positioned itself well in these foreign markets. Drug maker Merck also beat estimates, which the company attributes to a cost-cutting program and increasing sales of diabetes pill Januvia. Both the pharma and the biotech industries are on our overweight list.
Microsoft did not fare as well, reporting a decline in the sale of their Windows operating system. Despite strong profits from their Office and Xbox offerings, investors were not thrilled with the firm's quarterly earnings report, sending the stock price down late in the week. Major companies releasing reports this week include Pfizer, Comcast, MasterCard, and MetLife.
Week in Review 11 Apr 11
Washington Showdown a Sign of Things to Come
It was an action-packed week for political junkies, with a 2011 budget deal (yes, 2011) being hammered out just hours before a government "shutdown." While shutdown may be an inappropriate term (all critical government activities would have continued and social security checks would have still gone out), one critical group of Americans would have paid a steep price--paychecks to our soldiers serving around the world would have been delayed. That is an outrage, and military pay should go out just like social security checks, without the threat of disruption due to wrangling in Washington. In the end, the GOP garnered nearly $40 billion of budget cuts and the shutdown was averted.
The past week was merely a warm-up actfor the events coming our way this summer. Within a few weeks the government will decide whether or not to raise our "mandatory" debt ceiling again. While few see this not happening, the debate will be highly charged and politicized. Hawkish GOP house members are going to demand some form of budget-cutting guarantees in exchange for their vote, and we will hear of the dire consequences to our national debt rating if we fail to raise the ceiling. No matter the fact that 49 out of the 50 states have laws in place to keep spending in check, Timmy Geithner will speak of the logistical difficulty in servicing our international debt if we do not raise the limit.
The real fun will begin as Paul Ryan's budget proposal, which cuts over $6 TRILLION in government spending over the next decade, is discussed. He has argued that no changes should be made to social programs for Americans either in or near retirement, but that fundamental changes should take place within the programs which would affect younger workers. Leading up to next year's elections, the 2012 budget talks will make for a sweltering summer. This, along with geopolitical issues and prices at the pump, will prep the ground for a summer retreat in the market.
Alcoa kicks off the quarterly earnings season today as they announce their numbers after market hours. We would forecast an overall positive season, with the majority of firms either in line or beating expectations. Unfortunately, the market's response to these solid reports will be somewhat muted by the public's concerns about growing inflation. The Fed will continue to bury its head in the sand and claim we have no inflation, while Americans continue to see their paychecks being stretched thinner by higher fuel and food prices.
The major indexes finished the week flat leading into earnings season. Oilsits at $112 per barrel and the dollar continues to lose ground against theeuro, sitting at roughly $1.44 for one euro. The good news for the greenback is the fact that there is little appetite--outside of the Fed--for another quantitative easing program.When we finally begin mopping up the excess inventory (probably following the replacement of the treasury secretary and and Fed chairman), the dollar will strengthen.
Economy 30 Mar 11
Finally, a Decent Jobs Report
Housing and employment have been two of thelead weights hanging around the neck of economic recovery over the past two years. Finally, in today's jobs report, we can see some light at the end of the tunnel. The private sectoradded 201,000 jobs to the payroll in March, with half coming from small businesses. The ADP survey comes out this Friday, but it includes government workers--who rely on tax dollars for their paycheck--so today's figure is abetter gauge of economic growth.
Service-sector jobsaccounted for 164,000 of the newly-created positions, with just 37,000 slated for factory work. This supports our position that theU.S. economy continues to move in the services direction, meaningyounger members of the workforce will need the education and skills required to perform effectively in the workplace.The disproportionate percentage of hiring by smaller companiesas compared tolarger onesalso supports this trend, as a more flexible workforce will be better equipped to adapt to the changing environment.
Finally, layoff trendsare alsoheading in the right direction. The number of planned job cuts by U.S.-based employers fell18% from February'sfigure. If these positive signs continue, it will be very hard for the Fed to argue for another massive stimulus program this June, whenthe monster known as QE2 finally runs out of taxpayer-funded gas.