Brighton Perspective

Economy in U.S. Grew at 5.7% Pace, Most in Six Years (Update3) - Bloomberg.com

Economy in U.S. Grew at 5.7% Pace, Most in Six Years (Update3) - Bloomberg.com.

Nice growth but 60% was due to inventory reductions. That isn't sustainable. We'll need to see more corporate spending (which did improve more than expected), more consumer spending (which didn't) and less government spending (which was a small net negative on growth).

Biggest concern after listening to the State of the Union address last night regards "doubling exports in the next five years". As has been noted several times this morning on other sites, doing so not only involves producing goods other markets want but stimulating demand in those markets.Easier said than done - most easily accomplished by devaluing the dollar!

Earnings: Why Solid Earnings Aren't Good Enough for Fickle Investors - CNBC

Earnings: Why Solid Earnings Aren't Good Enough for Fickle Investors - CNBC.

Missing the point here (though the manager of the Palantir Fund does appear to get it) - my belief is that market participants are not seeing the top line growth necessary to make earnings growth sustainable. Earnings growth exceeding estimates is nice but when the growth is driven by cost containment it is not sustainable. So investors are recognizing that expectations for forward earnings growth are unsustainable and adjusting prices accordingly.

A recent analysis by David Rosenberg showed that after stripping out financials from the 20% of companies that had reported, top line growth year over year was 0%. That should not surprising in light of economic performance over the past year. It also should engender concerns regarding the ability of companies to continue to grow going forward. You can only squeeze so much blood from a stone.

Weekly Update

The Markets                            Financial markets were down sharply on the week. Markets were down Wednesday, Thursday and Friday on continued uncertainty regarding potential regulatory changes and the possibility of restrictions on financial institution activity. Added to this uncertainty was mixed earnings announcements from the corporate sector as earnings season continues and the distinct possibility that Bernanke would not be renamed Fed Chairman. By week’s end, investors were increasingly concerned that the nascent economic recovery was under pressure with many pundits calling for a potential “double-dip”.   Market/Index 2009 Close Prior Week As of 01/22/10 Week Change YTD Change DJIA 10428.05 10609.05 10172.98 (4.11)% (2.79)% S&P 500 1115.10 1136.03 1091.76 (3.90)% (2.09)% MSCI World 1168.47 1198.22 1149.89 (3.83)% (0.81)% Russell 2000 625.39 637.96 617.12 (3.27)% (2.57)% Fed. Funds .25% .25% .25% 0 bps 0 bps 10-year Treasuries 3.84% 3.68% 3.62% (6) bps (22) bps Last Week's Headlines ·      New housing starts fell by 4% surprising analysts expecting an increase ·         Conference Board Index of Leading Indicators increased for the ninth consecutive month ·         Producer prices increased 0.2% for the month and 4.4% for the year, due mainly to increasing energy prices   Upcoming Items of Interest ·         Continued earnings announcements for 4Q09 and calendar year 2009 ·         Fed announcement on short term rates on Wednesday ·         4Q GDP announced on Friday ·         Existing home sales on Monday, consumer confidence on Tuesday, new home sales on Wednesday, durable goods orders on Thursday and employment cost index on Friday    Data source: All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Headlines and upcoming items of interest are pulled from published reports of Vanguard, Briefing.com and Reuters. Past performance is no guarantee of future results. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The MSCI World Index is a free-float adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets.

Senate Vote on Fed Chairman Likely to Be 'Very Close': Aide - CNBC

Senate Vote on Fed Chairman Likely to Be 'Very Close': Aide - CNBC.

There are plenty of reasons to remain skeptical of market valuations and of market and economic expectations for 2010. However, this potential event is, for me, at the top. I've said repeatedly over the past year that Bernanke's actions at the Fed were the only positive actions any branch of the government has taken to counter the credit crisis and the recession.

So, for getting things right, while others get things wrong (think Geithner), Bernanke's possibly on the way out. Combine this with overly optimistic earnings growth expectations and a White House push for further financial institutions regulations, which will likely prove ineffective and counter-productive, and you have enough evidence to expect a market correction. Market participants despise uncertainty more than anything and that is about all we have right now.

Jim Cramer thinks a 1,000 point correction (I'm assuming for the Dow), which would be another 10% (on top of the 5% from this week). I've thought for several months a 15-20% correction would occur in 2010 and that seems more and more likely now.

Obama Calls for Limiting Size, Risk Taking of Banks (Update2) - Bloomberg.com

Obama Calls for Limiting Size, Risk Taking of Banks (Update2) - Bloomberg.com.

I've stated before that what the financial markets need is not more regulatory oversight or more unnecessary regulation. Forced fragmentation is unlikely to help improve the financial markets or the economy. Better enforcement of the existing rules and regs by the appropriate regulatory authorities is more likely to be effective.

The market reaction suggests participants are in agreement. Right now, the focus should be on improving regulatory and fiscal clarity for businesses. This lack of visibility is a primary contributor to the "jobless recovery". Put it in context of an individual - if you're not sure if you're going to have to pay more taxes or if you're going to get a raise, you're going to be cautious about spending money. Companies are not going to hire if management believes costs are going to rise and/or growth prospects are going to be restricted.

As long as this uncertainty exists it is going to be difficult to reconcile 26% earnings growth expectations with 3% GPD growth expectations.

Weekly Update

The Markets                            Equity markets were mostly flat all week before finally falling on Friday thanks to weaker than expected news from Intel. Fixed income markets were firm as yields declined by 15 bps. The Fed’s Beige Book also showed economic growth continued slow and steady while businesses increased inventories. On the downside, retail sales for December disappointed as consumers failed to spend as much as expected. The bottom line for the weekly reports was slow and cautious growth with continued regulatory uncertainty contributing to a lack of hiring by businesses.   Market/Index 2009 Close Prior Week As of 01/15/10 Week Change YTD Change DJIA 10428.05 10618.19 10609.05 (0.08)% 1.74% S&P 500 1115.10 1144.98 1136.03 (0.78)% 1.88% MSCI World 1168.47 1198.26 1198.22 (0.75)% 2.55% Russell 2000 625.39 644.56 637.96 (1.02)% 2.01% Fed. Funds .25% .25% .25% 0 bps 0 bps 10-year Treasuries 3.84% 3.83% 3.68% (15) bps (16) bps Last Week's Headlines ·      Trade deficit increased more than expected. ·         Initial jobless claims were slightly higher than expected. ·         CPI increased less than expected. ·         Industrial production increased and met expectations.   Upcoming Items of Interest   Earnings season continues which will clearly influence investor behavior. Additional news will include the latest updates on the producer price index and residential new construction. On Thursday, we’ll get the Conference Board update on the leading indicators index.     Data source: All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Headlines and upcoming items of interest are pulled from published reports of Vanguard, Briefing.com and Reuters. Past performance is no guarantee of future results. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The MSCI World Index is a free-float adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets.

The High Cost of No Price — The American, A Magazine of Ideas

The High Cost of No Price — The American, A Magazine of Ideas.

I'm venturing slightly outside the financial markets but this is something that impacts financial planning decisions. Or at least it should.

We, as consumers, have the right to shop for property insurance, vehicle and life insurance to find the best combination of coverage terms and price for each of us. Yet, we can't shop for health insurance. How many really know the full cost of their health insurance policy?

I think this is one of the keys to resolving the health care issue - enable consumers to shop for their own health insurance. My thought is enable companies to cross state lines, allow consumers to choose any company, coverage, etc they prefer and have companies providing health benefit dollars, then pay the insurance company directly. In this scenario, the company dollars are fixed, the consumer knows what they get and what it cost and recognizes clearly the full cost/benefit ratio. Competition managed by the consumer, to me, is vastly superior to the current model or to anything currently being proposed in Washington. While I'm sure it is not without fault, it can work.

Retail Sales Fell in December - WSJ.com

Retail Sales Fell in December - WSJ.com.

I've said repeatedly for months, be skeptical of market action and data reporting. This is especially true of any data subject to later revision. It should not be surprising that sales fell slightly or that new jobless claims were higher. The economy is apparently recovering but slowly. As long as there is regulatory uncertainty businesses will be hesitant to hire. Top line growth will be scarce and, in order to meet unreasonable earnings expectations, companies will have to contain costs. The largest cost for most businesses is labor. As long as labor remains concerned about losing jobs, consumers will constrain spending. Vicious cycle but solvable with regulatory clarity.

Weekly Update

The Markets   Equity markets held up well despite news that wasn’t quite as strong as investors had expected. All major indexes opened 2010 on a positive note advancing more than 1% and in many cases more than 2% for the week. The underwhelming jobs data helped push down the 10 year yield as it fell slightly. Fed meeting minutes also highlighted the fragility of the economic recovery.       Market/Index 2009 Close Prior Week As of 01/08/10 Week Change YTD Change DJIA 10428.05 10428.05 10618.19 1.82% 1.82% S&P 500 1115.10 1115.10 1144.98 2.68% 2.68% MSCI World 1168.47 1168.47 1198.26 2.55% 2.55% Russell 2000 625.39 625.39 644.56 1.76% 1.76% Fed. Funds .25% .25% .25% 0 bps 0 bps 10-year Treasuries 3.84% 3.84% 3.83% (1 bp) (1 bp) Last Week's Headlines ·      Non-farm payrolls dropped by 85,000 which was much more than expected. ·         Consumer credit declined by $17.5 billion in November, an 8.1% decline which was the largest since 1980. ·         The ISM Purchasing index reached its highest level since early 2006. ·         Factory orders increased more than expected. ·         Construction spending declined more than expected.   Upcoming Items of Interest   This week brings the Fed Beige Book on Wednesday, jobless claims, retail sales and business inventories on Thursday and the CPI and industrial production data on Friday. It is also the start to 4Q09 earnings season with Alcoa up first.    Data source: All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Headlines and upcoming items of interest are pulled from published reports of Vanguard, Briefing.com and Reuters. Past performance is no guarantee of future results. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The MSCI World Index is a free-float adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets.

Job-Creation Hopes Dashed; 85,000 Shed in December - CNBC

Job-Creation Hopes Dashed; 85,000 Shed in December - CNBC.

Economists are forecasting no better than 3% GDP growth while investment strategists are forecasting better than 26% earnings growth. The basic formula for GDP in the U.S. is G+I+C+(X-M) which is governtment spending (up drastically) + corporate spending (down drastically) + consumer spending (surprisingly steady) + the net of exports - imports.

The government and consumers are spending but corporations have not. The key reason, in my opinion, is the heightened uncertainty as to their future costs associated with healthcare and environmental legislation. Corporations are unwilling to take on new spending given the distinct possibility they will have substantial new costs forced on them in the near future. Thus, to meet earnings expectations (for public companies) and to remain viable (for private companies), corporations continue to search for cost reductions. Labor is the most visible. Hence, job cuts continue.

U.S. Competitiveness in Global Markets

I hear many people complaining that the U.S. isn't competitive any more. That we don't make anything. We've lost our leading role in global economics.

This clearly highlights one reason why. The Public Sector is not productive and not wealth creating.

The EU Will Not Bail Out Greece: ECB Official - CNBC

The EU Will Not Bail Out Greece: ECB Official - CNBC.

There has been a lot of discussion about replacing the U.S. dollar as the global business currency. The Euro was frequently mentioned as the leading possible replacement. However, the headline above and the story to which it is linked, highlight why that is highly risky for global businesses. While the EU is attempting to replicate at a sovereign level the U.S. states, provincial interests still prevail. If the EU is not willing to support all members, how can global industries confidently replace the $ with the Euro?

The $ decline was in some part intentional as it helped lift the economy. The dollar has strengthened lately on signs of a stronger recovery, supported today by good retail numbers for the Christmas season, signs of inflation (though still apparently benign) and by global realization, I believe, that there is no immediate successor to the dollar as the global currency of choice.

Even if the EU does ultimately step in to help Greece, the lack of commitment evidenced now should impact the Euro. It appears that each sovereign government in the EU will place what is right for its constituents above what is right for the EU.

Weekly Update

The Markets   Equity markets turned down during the final, holiday-shortened, week of the year but that didn’t dampen the enthusiasm building for 2010. The indexes all finished 2009 much higher than where they began the year showing remarkable resiliency. The breadth of the 9 month long rally was impressive as well as the Dow, the S&P, The World, and the Russell 2000 all posted healthy gains. Of some interest was the rather significant increase in 10 year T-bond yields over the last month. Yields had reached 3.94% in June before gradually falling to 3.20% on November 30. The year closed with yields at 3.84%. It will be interesting to see if this plays out as a signal of market expectations for higher inflation, as a risk premium for owning more U.S. Government debt or simply part of the sine wave we’ve seen in yields since early June.     Market/Index 2008 Close Prior Week As of 12/31/09 Week Change YTD Change DJIA 8776.39 10520.10 10428.05 (0.88)% 18.82% S&P 500 903.25 1126.48 1115.10 (0.01)% 24.71% MSCI World 920.226 1171.56 1168.47 (0.26)% 26.98% Russell 2000 499.45 634.07 625.39 (1.37)% 25.22% Fed. Funds .25% .25% .25% 0 bps 0 bps 10-year Treasuries 2.24% 3.81% 3.84% 3 bps 150 bps Last Week's Headlines ·      Consumer confidence was slightly higher than expected as reported by the Conference Board on 12/29. ·        Initial Jobless claims were well below expectations.   Upcoming Items of Interest   The new year enters with a busy week of reporting. We get the latest ISM reports for manufacturing activity (Monday) and service-sector activity (Wednesday), construction spending (Monday), factory orders (Tuesday), FOMC meeting minutes (Wednesday) and, on Friday, unemployment rate, payroll and consumer credit. We’ll also hear throughout the week about the strength of the Christmas retailing season. This will be important to participants as a gauge of consumer sentiment. Early reports are that consumers were spending more than expected and that should be a sign of optimism for 2010.  Data source: All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Headlines and upcoming items of interest are pulled from published reports of Vanguard, Briefing.com and Reuters. Past performance is no guarantee of future results. The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The MSCI World Index is a free-float adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets.