Weekly Recap & Outlook – 03.18.11

Tower Private Advisors

Prior posts

Below

  • A roller coaster week
  • Ugly February economics
  • You’re on your own next week

Capital Markets Recap

This wraps up one crazy week, and looking at the table above, one would never know it.  Markets were in free fall on Tuesday, after Japan opened down by (-)7.26%–they were down bigger overnight in Japan.  From Monday’s trading in the U.S., Japan is up by 5.2%, although still below last Friday’s close by the figure above.  As mentioned in one of those posts above, a correction–an opportunity to buy at lower prices–is more comfortable in the abstract than in the here-and-now.  We have had a 7% correction in the S & P, and that might just be enough for us to move on, but I’d guess we’ve got some more work to do.  Still, our key services expect this to just be an interruption in a further move higher.  If you like the Japan rebuilding theme, buying key industrials and commodity stocks would be advisable.

Overnight, the G-7 countries acted in a coordinated–key word, that one–fashion to push down the value of the Yen.  It had risen for a number of reasons, and a strong currency is the last thing a crippled Japanese manufacturer needs right now.  Speaking of crippled, there is talk of some technology supplies being crimpled (4:46 Bloomberg headline:  Car Industry and iPad2 Hit by Japan Supply Worries), and that has prevented tech stocks from rallying as much as other groups–in fact, some haven’t rallied at all.  Apple closed today at almost the lowest levels of the week, although it was not helped by rumors that Steve Jobs might step down entirely.

Top Stories

It was a pretty quiet week all told and aside from nuclear disasters, Libya, and the Mideast.  Bullet points follow.

  • Uranium May Drop 26% After Quake Shuts Reactors - with Three Mile Island referenced in many news stories, you can rest assured that nuclear aspirations in the U.S. are kaput, yet talk of solar and wind supplanting anything is ridiculous.
  • Japan stocks–using 10-years of smoothed earnings–i.e. Ben Graham’s favored method–pegs Japan valuations at 40+ year low. 
  • Berkshire Hathaway buys Lubrizol
  • Japan’s Quake Rebuilding May Revive Laggard Northeast - we’ve seeing this theme a few times: while a natural disaster hardly seems like a bullish event, the eventual rebuilding could spur certain industries and sectors higher
  • Barney Frank proposed a $2.5 billion tax levy on banks with more than $50 billion in assets and hedge funds greater than $10 billion to pay for cuts in housing programs that the Republicans are targetting in their budget cuts. Curiously, he left out mutual fund companies from that group.  I wonder why.  Frankly, maybe it’s because Fidelity is headquartered Boston.  It Contrafund–which we like a lot–has $60 billion in it, alone.  Of course, mutual fund companies didn’t have anything to do with the financial crisis, unlike those scoundrelous (don’t look it up) hedge funds and nasty banks.
  • Nike‘s stock just did it today, falling by about 10%.  It left a gap in the price–that’ll be significant resistance–that was big enough to drive a truck through.  According to Bloomberg, they missed an earnings estimate for the first time since 2006.  That doesn’t get rewarded on Wall Street.  That gets pounded.  Swoosh! $4.1 billion of market capitalization into thin air.
  • There is increasing talk of a tax holiday, whereby companies would be able to repatriate overseas earnings to the U.S. and not have to pay tax on it.  If the companies were to bring the estimated $1 trillion back now, it would cost them $350 billion in taxes.  The Treasury will–as it now stands–likely not see any of that since it’s stuffed in overseas subsidiaries.  This was done in 2004, when the rate was cut to 5.25%.  Then, 45% of the overseas profits were repatriated.
  • Perhaps the week’s biggest story was that the Federal Reserve gave big banks the greenlight to pay dividends, but advised a 30% of profits maximum.  Immediately, Wells Fargo and JPMorgan announced the would pay dividends; the former, at a 0.63% annual clip; the latter, at 2.19% clip.
  • Cisco Systems announced it would pay a heady $0.06 quarterly dividend, for a 1.40% annual yield.  Investors responded with rabid enthusiasm, bidding up those shares by $0.14 or 0.816%.

This Week

If a tree gets chopped down in the woods and there’s no one to hear it, does it make a sound?  Or, if an economic statistic gets released in the middle of a nuclear meltdown does anyone care?  Well they did, and no one did, which is pretty much a good thing because the statistics were pretty lousy.

There were a whole lot fewer Housing Starts and Building Permits than expected this week.  Starts fell by (-)22.5% from January to February–probably just the weather; while Building Permits fell by (-)8.2%–probably just the weather.  Industrial Production and Capacity Utilization both shrank a bit–probably just the weather.  The Producer Price Index (PPI) rose by 5.6% on a year-over-year basis, while the Consumer Price Index (CPI) rose by just 2.1% over the same period–probably just the weather.  This seems like a good time to point out why the Federal Reserve and Gentle Ben aren’t terribly excited about commodity price inflation–yes, food and energy.  Notice that while the prices that producers paid–on all goods–were up substantially, consumer prices–on all goods–barely moved.  In the chart below, the white line is the PPI; orange, the CPI.  Both are normalized at 100 at February 28, 2010.

But that’s all so one-month ago.  The Philly Fed and Empire State Manufacturing data are for March, and the former far exceed economist estimates (43.4 v. 28.8) and beat the estimate (35.9) by 21%.  Somewhat more subdued, the Empire State index bested both its prior figure and the consensus amongst economists.

Next Week

A bunch of stuff coming next week, but you’ll be on your own.

  • Chicago Fed National Activity Index (Monday) – February – this index has shown great predictive value; therefore, economists don’t forecast it
  • Durable Goods Orders (Thursday) – February
  • Initial Jobless Claims (Thursday) – weekly – economists say 383K; I say 373K
  • Q4 GDP (Friday) – third iteration
  • University of Michigan Consumer Confidence (Friday) – final March

Housing related indicators

  • Existing Home Sales (Monday) – February
  • House Price Index (Tuesday) – January – this is the broadest gauge of home prices in the U.S.
  • New Home Sales (Wednesday) – February

Regional indicators

  • Richmond Fed Manufacturing index (Tuesday) – March – odd, I’ll be there then

No Weekly Recap nor Outlook next week.  Mr. & Mrs. WR&O will be in sunny Richmond, Virginny

Thanks for reading this far.  Any and all errors and omissions were made solely to either obscure the truth or hide the author’s ignorance.  Tower Bank and its subsidiary, my employer, do not support nor endorse any part of this dispatch.  Frankly, they cringe upon seeing it and wish it would go silently into the night.  Until the proverbial–and in my case more like eventual–pink slip, I shall continue undetered, just for you.

Graig Stettner, CFA, CMT

Vice President & Portfolio Manager

Tower Private Advisors

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