Market Update — May 28

Market Update – May 28^th


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DUE TO MEMORIAL DAY, MY NEXT BLOG WILL BE ON WEDNESDAY, JUNE 2.

Then, we’re headed to summer hours.  I’m going to blog on a less regular basis.  As I’ve said several times, my goal is to start writing some shorter blogs (more issue-based).  My kids are out of school for the summer and I need to make the most of that time.  But, I will still be blogging.


Have a great holiday weekend.


Now, on to what I have been thinking about…


Greetings from the resident pessimist. The markets had a big rally on Thursday.  People are attributing this to two factors:

1. China denied reports that they are moving out of European debt.  This gave support to the euro.  Investors sold Treasuries and bought risky securities.
2. Stocks had dropped 11% from their recent highs and a bounce was overdue.

Regardless of the reason, China’s announcement did not solve the structural problems in Europe or the US.  Because I can apparently only see the glass as 1/80^th full, here are some of the things that I’m thinking about today:

1. China doesn’t like the stronger dollar (because the yuan is pegged to the dollar).  China enjoys the benefits to their export-driven economy that result from a weaker currency.  As a result, it makes sense that they would support the euro.  This shouldn’t surprise anyone.
2. Q1 GDP was lowered from 3.2% to 3.0%. Even before this minor downward adjustment, this growth rate is low by recovery standards.  When you break the GDP number down, it is mostly inventory adjustment (which is not that unusual).  But, the bottom line is that sales growth is closer to 1.6% to 1.7%.  So, after inventory adjustments are done, that’s our best indication of where we are.
3. Growth of 1.7% will not do anything for our unemployment problem.  For that matter, 3% growth will not solve our unemployment problem.
4. We saw more miserable numbers with the first time claims for unemployment insurance.  There were 460,000 filings in the past week.  These numbers are relatively high for a recovery.
5. Geithner was in Europe lecturing the Europeans on continuing to stimulate the economy and following through on their commitments.  Apparently, the flight attendants must be serving the whacky weed on Geithner’s flight.  The idea of our government lecturing any other government (even the Europeans) about fiscal policy is somewhat amusing.

On the positive side of today’s news, corporate profits increased 9.7% in Q1 accelerating from the 8.2% rate in Q4. Year-over-year, profits increased 42.7%.  Obviously, this has been good for stocks.  Of course, when a company operates with fewer employees, it’s easy to improve profits.


More good news…this time about housing. Fannie Mae said the amount of loans at least 90 days behind fell to 5.47% in March from 5.59% in February. The prior-year rate was 3.15%. The last time the rate fell on month was March 2007.


Here’s some news that I think we all already knew, but it’s still painful to hear. Government scientists now say that oil is spewing from the Gulf leak at a rate 2.5X to 5X faster than previous estimates.  Now, scientists are saying that somewhere between 18 million and 39 million gallons of oil have leaked.  While this has obviously been a big news story, it strikes me as deserving even more attention.  We’re losing a tremendous amount of fishing resources and we’re at risk of losing some of the nation’s most beautiful beaches.  People are losing their livelihood.  And, of course, I’m not ignoring the fact that eleven people lost their lives from the explosion.


It seems like we have a government response to disasters, regardless of whether they are man-made (terrorism) or naturally occurring (e.g., hurricanes, tornadoes, floods, etc.).  Yet, with this disaster, we’re relying on BP to solve the problem.  It’s really alarming.


Commodity prices rose 4% on Thursday. The Financial Times attributed this to a report by the US National Oceanic and Atmospheric Administration that predicted a really strong hurricane season.  I’d like to think that commodities rose as a result of investors moving back to risky assets.  The idea that the market responds to a prediction like this is somewhat scary.  (It doesn’t seem like these predictions have a high accuracy rate.)


A survey said that nearly one in five drivers could not pass a written driving exam if they had to take it today. New Yorkers fared the worst.  Of course, I’m not sure that they need to know the laws – it’s rare that they get to drive more than 5 MPH.


Apple vs. Microsoft. Apple’s market cap passed Microsoft’s this week ($230 billion vs $227 billion).  When I heard this, I looked up the annual revenue and I was surprised to see that Apple’s was $42 billion and Microsoft’s was $58 billion.  I had actually expected to see that Microsoft’s was much larger than Apple’s.


THIS IS REALLY IMPORTANT (and yes, capital letters mean I’m screaming)…please click through on the link below and take five minutes to read David Einhorn’s editorial from Thursday’s New York Times.  For any of you who have heard me speak in the past year, you know that I am in 100% agreement with what he said.  (He even uses the same GM analogy that I use.)  I could have written this – just not as well as he did.  I think that this is really important for people to think about.


http://www.nytimes.com/2010/05/27/opinion/27einhorn.html?pagewanted=print

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