retirement interruptus: That Was The Week That Was-1st Week June

May was plain awful and Bears had their day, week, month and the Bulls lunch along with it. The only good news was some air taken out of metals speculation and Treasuries found plenty of new friends as they made their best showing in nine months. Still there’s lots to be concerned about even though the Bear and Bull camps are almost evenly split with consumers still not feeling confident enough to jump into the investing pool.
Bad news first – the first week of June was summer 2010 redux and followed the script offered in May. It was all about disappointing numbers from home prices, employment numbers, jobless claims, manufacturing levels (we can point finger at Japan and Mother Nature for that), and non farm payrolls. The financials took the biggest hit along with manufacturers. Europe, surprisingly with the Greek problem still hanging like the sword…, was up 1%, Asia was even-steven and Latin America was only down 1% for the week. Some, but not all, commodities did well- cotton and natural gas were up. It was a short week and we expected better the way it started. Over the past five weeks the Dow has lost 4.7% and investors question how much more will it fall.

Here are the day-to-day reports as the week unfolded and some interesting sidebars:

James Cox, managing partner of Harris Financial Group, thinks the worst of the sell-off is over (remember this dear reader) and, he said that last Tuesday before the big one day sell-off.
Every trading month should start by skipping Monday and going right to Tuesday as news about a financial deal last week to bail out Greece reached trader’s ears. Markets up triple digits, oil up and gold off a smidge. The dollar declined, which helped crude move up. In MarketWatch doomster Irwin Kellner scribbled that the best we can expect from the U.S. economy this year is 2% growth. Seemed like a dead cat bounce to suck in investors as the rest of the week showed.
Bulls, according to Doug Kass at the Street, got it wrong and what they missed was: Constructive action would be made on reducing the deficit; broadening eurozone debt contagion; uneven domestic economic recovery and persistent drop in home prices. Someone was whispering something last Tuesday.
Had lunch with a realtor up north this past weekend who informed me that home prices were down some more and he was expecting a bunch of new foreclosures to hit this month to keep the trend going. PBS radio reports at least 2 more years of sluggish home sales. (I don’t want to hear this any more than you do but presents opportunities for some!)
OUCH! Nervous traders drove the market down substantially Wednesday as employment numbers were not good and a slew of negative news caused them to pull the plug on equities and dive back into Treasuries. No surprise auto sales off their feed as Japan tsunami cut necessary parts from the supply chain. Oil fell but stayed above $100 (this still from $75 one year ago).
From the Street –Industry is scared to hire because of too many fractures in the economy. ( Or is it that industry has learned how to make more profits with less?). Construction was a bright spot as spending rose by 0.4% in April while economists were expecting a dip of 0.5%. Still construction lost about 20,000 jobs since May 2009.
Tiffany, recently, as of the previous week, loved as the rich-man’s stock, was downgraded to Hold from Buy by Deutsche Bank. On the other side of the coin much unloved Citi was given a ‘Buy Now’ by RBC Capital Makets analyst Gerard Cassidy who smothered the stock with affection writing that it was trading at Bargain Basement Prices and was worth $52. a share from its current $39.65.
Economists point to the lack of consumer spending but Macy’s cash registers are ringing. The company doubles its dividend while same store sales rose 7% in May, so reported Barrons.
Dow 20000? MarketWatch’s James Altucher wrote it and gave these reasons: (1) Every Bull market needs a rest and in the next 12-18 months the Dow will be at 20000 (2) Obama wants to be reelected (3) When stimulus hits it’ll be with a multiplier of 10x’s – not $600 billion but more like $3 trillion (4) Stock buy-backs are at their highest levels (5) Corporate profits are at their highest levels ever (6) Major stocks are dirt cheap: Apple trades for 12 x’s, Microsoft 10x’s and Intel 8x’s earnings. They could double or triple in the next 18 months.(7) Non-financial companies are hoarding almost $2 trillion of cash. I’ll take a measly 10% increase, Jimmy, who wants to be piggy, huh?
Overseas investors not as enthusiastic about shorting U.S. securities. According to CNBC’s Squawk on the Street last Thursday morning -the ratio of those long to short is 12-1. Also some traders now long the dollar, switching their bearish sentiment as QE2 comes to an end. This may, of course, impact metals and oil.
Legg Mason, the 11th largest money management firm that traces its roots to the late 1890s may be broken up, as reported in Investment News. The firm has had a rough go since the depression began and its principal shareholder Trian Fund Management may begin proceedings to sell off assets. In the meantime highly placed executives have been leaving the firm on their own volition. Many of their funds managed by Smith Barney.
No question it’ll be another stinky summer with enough worries on our plates to keep us from buying so-called bargains. Thursday last everything was off except the Naz which gained 4 points. Oil fell to slightly below $100 as traders learned of an over supply in the U.S. Michael Kahn, technical writer for Barrons.com wrote, ‘Over the years, the summertime has not been kind to investors. This year does not look to be an exception.’
QE2 is ending as Bernanke wraps up buying Treasuries that was created in order to combat inflation, keep interest rates low and stimulate the economy. According to David Kudia of Mainstay Capital Management, ‘The easy money is gone.’ He suggests that post QE2 investors develop a healthy allocation to risk assets as well as an exposure to mid-cycle sectors. He also suggests a small allocation to commodity-based assets as a hedge against inflation and dollar-price uncertainty.
And, dear reader, you ask what are the mid-cycle sectors David suggests? The following chart from Fidelity provides the answer:
From the Department of Lets Make Things Worse: Major banks may be made to increase their capital cushions in order to provide greater liquidity the next time an economic crisis of this magnitude strikes. Banks are already hoarding cash & limiting lending. They’ve been bailed by the government, borrowed at a quarter point and turned around to buy U.S. Treasuries at a half to three points and made money with no effort. No one ‘splained’ that they had to lend to consumers and business and so they did what banks always do. Now they may have to hoard and limit lending even more.
Bank failures have leveled off and nationwide according to the FDIC only 5 takeovers in May. There are 100 or fewer banks on the FDIC problem list. A far cry from where we were one year ago.
Electronic Arts the California software maker is about to test its games online. It plans to sell downloadable games directly to consumers as it steps up efforts to do more on the Internet than selling discs at stores. The company is known for their Battlefield and Need For Speed Games. ERTS closed at $24. last Friday.
Fiat said that Chrysler could skip an IPO . In talks with Canada and the United Auto Workers CEO Marchionne said he hopes that they all can find a way to allow them to exit at a proper time without having to go through the Initial Public Offering phase.
Tech has lately been treated like a stepsister with the rare exception of LinkedIn IPO. Groupon plans to go public in a deal that could value the ecommerce company at $20 billion. Still after 2 1/2 years the company has been losing money at a steady pace. Some think it is reminiscent to Amazon in its early days. Others think it is 1999 all over again.
CNBC guest suggested investing long the dollar versus the Euro and/or buy the long Dollar ETF UUP. Monday morning pre-market dollar lower…
Friday last Alan Greenspan on CNBC said he would vote for a return to 1990’s tax rates and that if he were in Congress he would be honest with the American people and tell them the truth that their future Medicare and Social Security could well not be there without changes. Also he said the government had no choice but to raise the debt ceiling. The GOP fired back and said The Chairman was wrong and raising taxes was exactly the wrong thing to do and that the government did not have a revenue problem but a spending problem. Nothing was said about the wise one’s statement on modifying future entitlement programs.
Jimmy ‘The Mouth’ Cramer said he has a solution to the market: (1) Markets need to fall to 10,000 on the Dow and provide buying opportunities (2) Oil needs to come down (3) Agreement on raising debt ceiling (4) Indication China will cease raising rates. I am biting my lip.
This Tuesday June 7th, The Ben Bernanke will be discussing the U.S. economic at the International Monetary Conference in Atlanta. Given the level of recent uncertainty you can bet investors will be more than keen to hear his comments.
Finally, according to Morningstar the bad news may continue for several months. The summer doldrums continue and reallocating and positioning portfolios going forward to mid-cycle makes a lot of sense. This may be the last year investors are able to sell and get some tax advantages. We’ll be working on that and making sure clients are aware of options available to them.