Weekly Recap & Outlook – 12.24.10

Tower Private Advisors

Below

  • U.S. stock indexes back to pre-Lehman levels
  • Acronyms
  • Modest economic improvements

Prior Posts

Capital Markets Recap

 

Top Stories

Copper is often referred to as the metal with a PhD because of uncanny ability to reflect the global economy.  Like most economists, its record is rather mixed.  For example, it didn’t peak until June 2008, whereas the S & P 500 and MSCI EAFE indexes peaked in 2007.  It recently confirmed the new relative high in the S & P 500 with its own absolute high, as the chart below indicates.  There has been a piling up of troubling sentiment data (see Prior Posts, above), such that copper not confirming the move in stocks would have been another troubling development.

The BRIC (Brazil, Russia, India, China) countries, this week, extended an invitation to South Africa to join the club.  I suggest BRISC, instead of the natural BRICS, as it reflects their sharper economic growth.  On related notes, it was suggested by a commentator that Hungary and Turkey be added to the PIIGS because of those two countries’ troubles, making for PIIGSHT.  I’ll leave it to you to do the minor unscrambling.  We heard from a fund company wholesaler this week that his firm likes the CIVETS (Columbia, Indonesia, Vietnam, Thailand, Singapore) countries.  If you saw Jack Nicholson in The Bucket List, you might remember that civets are the African cats that . . . uhh . . . produce–maybe discharge is a better word–the Kopi Luwac coffee beans.

Kopi Luwak, also known as caphe cut chon (fox-dung coffee) in Vietnam and kape alamid in the Philippines, is coffee that is prepared using coffee cherries that have been eaten and partially digested by the Asian Palm Civet, then harvested from its feces.[2][3] The civets digest the flesh of the coffee cherries but pass the beans inside, leaving their stomach enzymes to go to work on the beans, which adds the coffee’s prized aroma and flavor.[4] Only around 1,000 pounds of civet coffee make it to the market each year, and a pound can cost up to $600 in some parts of the world and about $100 a cup in others.  [from Wikipedia]

Separately, Will Landers, who manages the Blackrock Latin America fund, which is 71% heavier than its policy allocation to Brazil, that he is “absolutely” enthusiastic about Brazil, although everyone else seems to disagree with him, that market being down by 0.5% this year.  He insists that Brazil is “still one of the cheapest markets in the world,” and he expects it to rise by 34% over the next year.  I know that “hope” isn’t a sound investment strategy, and I don’t think “expects” is either.

As one of the Prior Posts details, bond fund investors began to withdraw from bond funds for the first time in two years.  Whereas we think that those monies could eventually find their way to equity funds, an analyst interviewed by Bloomberg suggested that,

Most of the money was probably pulled by insitutional investors looking to lock in higher yields by buying bonds directly, rather than through funds.  “I would guess most retail investors are staying put because you aren’t seeing the money go anywhere else.”

Indeed, where as the outflows totaled $8.62 billion, inflows into stock funds were just $6.4 billion.  As usual, PIMCO probably gave some indication of what may be to come, as it filed with the SEC to allow its behemoth–the world’s largest, in fact–Total Return bond fund to invest in “equity-linked securities.”

This week the FCC voted 3-2 to adopt its Net Neutrality (NN) rules.  In essence, the rules will prohibit Internet Service Providers (ISP) from limiting broadband access to certain users.  As simple as that may sound, the rules run to 194 pages and are available here.  The classic case is a company like Netflix, whose users are enormous bandwidth hogs, as they stream video into their homes.  Presumably, without the salvation of the net neutrality, ISPs like Comcast could have limited–i.e. charged different rates–to certain users; more perniciously, they could have been malevolent and charged more for competing purveyors of its own offerings.  If you click on the graphic nearby, you will be taken to a website that walks you through the thought process behind what NN is attempting to produce, an Open Internet.  There were concerns from one of the FCC’s commissioners that [pcmag.com]:

  1. Consumers may not benefit from NN (gasp!)
  2. The order may inhibit innovation
  3. The FCC lacks the authority to adopt the proposed rules [as if that's ever prohibited overreaching by a government agency.]

This Week

Economic releases this week were marginally better over the prior releases of the indicators.  Here is a bulleted list. The prior and expected values are green if bettered; red, if not.

  • Q3 GDP – third release:  2.6% vs. 2.5% prior; 2.8% expected
  • Existing Home Sales:  4.68 million (annual pace) v. 4.43 million prior; 4.75 million expected
  • House Price Index:  +0.7% vs. -1.2% prior; -0.2% expected
  • Durable Goods Orders:  -1.3% vs.  -3.1% prior; -0.5% expected
  • Durable Goods, non-defense, ex. aircraft (i.e. capital spending):  +2.6% vs. -3.6% prior; +3.1% expected
  • Personal Income:  +0.3% vs. +0.4% prior; +0.2% expected
  • Personal Spending:  +0.4% vs. +0.7% prior; +0.5% expected
  • Personal Saving:  +5.3% vs. 5.4% prior; no forecast
  • Initial Jobless Claims:  420,000 vs. 423,000 prior; 420,000 expected
  • University of Michigan Consumer Confidence:  74.5 vs. 74.2 prior; 74.5 expected
  • New Home Sales:  290,000 vs. 275,000 prior; 300,000 expected

Next Week

Key Indicators to Watch

  • Initial Jobless Claims (Thursday) – Weekly

Others

  • CaseShiller Home Price Index (Monday) – October
  • Chicago Purchasing Managers Index (Thursday) – December – this could be a key indicator if it’s really bad/good
  • Pending Home Sales (Thursday) – November
  • Milwaukee Purchasing Managers Index (Friday) – December

Graig Stettner, CFA, CMT

Vice President & Portfolio Manager

Tower Private Advisors

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