Weekly Recap & Outlook – 10.07.11

Tower Private Advisors


  • Nice rallies; could have been better
  • Bank of America stock on sale
  • Recession fears past, U.S. added jobs this month

Previous Posts

Capital Markets Recap

In spite of downgrades of Italy and Spain this week–albeit by a lesser ratings agency, Fitch–European bourses outperformed the U.S. Also on the positive side, the Fear Index (OEX Volatility Index) receded sharply this week. That this week’s rally might not have been enthusiastically embraced was supported by the performance of two indexes above, the high-Beta (i.e. market sensitive) Russell 2000 Small-cap index and the MSCI Emerging Markets Index. We could appreciate the rally more if those two groups had participated.

Top Stories

According to today’s first top story on the Bloomberg terminal, if you were one of the 66% who assigned recession odds of 50% or more in last week’s survey, you might want to rething that. According to Bloomberg, “U.S. Payroll Growth Beats Economists’ Forecasts as Recession Concern Eases.” That’s right, an increase of 103,000 jobs–about 57,000 less than needed just to keep up with the monthly increase in those who could be added to the labor force–is enough to ease concerns about recession.

Bank of America (BAC) stock is back below $6 for the first time since March 12, 2009, just nine days after the market’s bottom after possibly the worst financial crisis in U.S. history. Apparently, others beyond Warren Buffett see value in the shares. Wellington Management, for one, is the fifth largest holder of BAC shares, behind the big indexers, State Street Corp (think SPDR ETFs), Vanguard (think S & P 500 index fund), and Blackrock (iShares ETFs). While JPMorgan holds the fourth position, its shares are divided amongst a host of funds. So it could be argued that Wellington is the largest active manager holding BAC shares. They seem to know what they’re doing. My colleague, Kevin Noll, put his finger in the air and seemed to recall that Wellington managed more pension fund money–via mutual funds and separately managed accounts–than anyone else.  Wellington is also notable for the fact that, in the second quarter, it increased its holdings by 21.3%. The average price of BAC shares in the second quarter was $11.88. The stock is trading for precisely 1/2 that as I type.

For just $1 more than the fanciest Venti drink at Starbucks–I think it’s a new Salted Caramel (not car-mull; it’s care-a-mell) Mocha–you can buy a share of BAC. For now, you’ll collect a pitiful one penney per quarter dividend, but I’m guessing that will be increased . . . some day. The shares are trading for 29% of book value. If even as much of 20% of its assets are worth zero, that’s still just 36% of the tangible book value, and if the stock appreciates to 50% of tangible book value, that’s a 38.9% return. Say it takes two years to get there…that’s a cool 17.9% per year. Now, you might argue–and I’d probably agree with you–that BAC stands for Bad Apple Corporation, but you might as well make some money on the backs of the scoundrels. There might even be a good apple in the bunch there who manages to get the ship righted.

Most other headlines this week seemed to center around two other themes: Apple, and the death of its co-founder Steve Jobs, and Europe, which seems to be slowly coming to its collective senses.

With respect to the former, there have been many tributes to the impact that Steve Jobs, via Apple, have had on our gadget driven lives. I am struck by the fact that he entered eternity the same way as the poorest beggar in Calcutta, India, by breathing one last breath. The verse from the Old Testament book of Amos comes to mind, ” . . . prepare to meet thy God, oh Israel.” (Amos 4:12).

Oh, and there’s that Occupy Wall Street thing, where the money-grubbing capitalist pigs are being taken to task for exploiting the earth and the poor, the destitute, the spotted owl. I have yet to see a class-warfare-esque protest directed at Hollywood stars or Major League Baseball, but I suppose that would only happen in my Utopia. Speaking of protests and juxtaposing them with Apple and Steve Jobs, our friends at Strategas Research Partners featured the photos below in their Weekend Reader dispatch.

As to Europe, here are the headlines as they popped up this week:


  • Greece has Cash to Meet Needs Until mid-November, Venizelos Says
  • Dexia to Set up “Bad Bank” with Belgian, French Guarantees


  • European Bank Rescue May Cost Up to $2 Trillion, Fink says


  • ECB Buys Governments Time on Banks as Greek Default Risk Looms
  • EU Sees Coordinated Bank Aid Push as Merkel Urges Conditions
  • Merkel-Sarkozy Divided on Default Threat to Banks


  • Spain, Italy Credit Ratings Are Cut by Fitch as Europe Debt Crisis Worsens

We hosted Don Rissmiller, Chief Economist at Strategas Research Partners, in seminars we presented in Warsaw and Fort Wayne. You can click on the link under Previous Posts to see his [my summary] presentation. With respect to Europe, please take especial note of how he handicaps the odds of what Europe needs to do versus what it should–at least in Don’s eyes–do.

This Week

It’s the first week of the month, so that means Nonfarm Payrolls. Accordingly, it was the week’s most important report, as it addressed the all-important issue of jobs. In spite of the low correlation between the two, the market seemed to take comfort on the release, Wednesday, of ADP’s Employment Change report. Instead of the +75,000 private payrolls increase economists expected, the report came in at +91,000. That positive report was supported by the weekly Initial Jobless Claims report, which showed 9,000 fewer applicants than expected, but 6,000 more than the previous week’s figure. Auguries and portents aside, the Nonfarm Payrolls report showed that 103,000 jobs were added in September, and August’s goose-egg report was revised to show that 57,000 jobs were added in July. Further, Private Payrolls increased by +137,000 likewise trouncing the estimate (+90,000) and the previous release (+17,000, revised up to +42,000). Manufacturing Payrolls, however, contracted by -13,000. The all-important Uenmployment Rate stayed flat at 9.1%. The Household Survey, from which the unemployment rate is determined, showed an increase of 398,000. The Average Workweek grew by 0.1%, while Average Hourly Earnings grew by +0.2%, as compared to August’s -0.1% drop.

There were a couple of broad-based indicators this week. The ISM Manufacturing report, which used to be called the Purchasing Managers Index, came out a little better than expected (51.6 v. 50.5) and better than the July figure (50.6). The greater than 50 reading indicates that the manufacturing sector continues to expand, albeit it just barely. While 50 is the demarcation line between expansion and contraction, recession isn’t usually signaled until it gets closer to 47. The service-sector version, ISM Non-Manufacturing, was a little bit better, at 53.0, versus an expected reading of 52.8 and a little weaker than the prior reading of 53.3.

Next Week

Key indicators to watch

  • NFIB Small Business Optimism (Tuesday) – September
  • Minutes of FOMC meeting (Wednesday) – September 21 meeting – probably the most important release of the week
  • Initial Jobless Claims (Thursday) – weekly
  • University of Michigan Consumer Sentiment (Friday) – preliminary October

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