That Was The Week That Was – 1st Week August

•  Rep Gabrielle Gifford's returned to the House to vote for the debt increase. ‘ I had to be here for this vote. I could not take the chance that my absence could crash the economy.’ 

 

• Nervous traders witnessed a massive selloff that started overseas and ended Thursday in a massive drop in the last hour of domestic trading. Computer trading programs triggered a race for the bottom as investors and traders watched the carnage.
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• It was the worst day in three years and blame was spread to Tea Party activists, overseas and domestic governments along with corporations sitting on trillions of cash and refusing to do anything with it.  It started with investors worried about the European debt crisis that now included Spain and Italy. On this side of the waters the straw that seemed to break the backs of domestic markets was the news by Bank of New York Mellon who announced they would start charging big customers 13 basis points to hold cash. John Brady, Senior VP for MF Global, said, ‘I think that has shaken the markets. Charging customers to hold cash is pretty punitive. It starts to smell like Japan.’ Computer sell programs kicked in and once started could not be reversed.  The National Post in Canada seemed to have a handle on the worst day since 2008 and put the blame: U.S. Politicians, Tea Party Activists and spending cuts during a fragile economic recovery; weak employment; Chaos in the Euro zone with government officials not saying a word about Ireland or Portugal; a commodity selloff with oil falling to a five month low and both the Swiss and Japan trying to weaken their currencies and counteract the world’s expectation of a safe haven.
• No surprise that major investors and traders were expecting a United States default Monday as politicians wrangled for a political edge and completely forgot about what the job they were voted to do. The Debt deal didn’t mollify investors but sparked fears that spending cuts could curtail growth. The crash was a complete surprise and almost a perfect storm set up by the governments on both sides of the Atlantic. Nothing was safe as margin accounts were unwound and sell at any price- the rule of the day.

 

 As if it couldn’t get worse Standard & Poor’s lowered its debt rating of the United States (for the first time in History!) to AA+ from AAA! The rumors of a downgrade had been swirling all day Friday as the markets had a 400 some point swing day from up-down- and finally ending slightly up in a mixed market day. While it was business as usual in Washington with lawmakers off on another vacation and the President campaigning S&P drew a line in the sand and was firm on its decision to downgrade U.S. debt. The reason the ratings agency gave…the political system of the United States has become less stable and that the budget cutting announced earlier this week didn’t go far enough. We deserve better.

• Before you throw in the towel a few syllables about what’s good. Corporate profits remain robust. Around 80% of the S&P 500 companies have reported earnings and aggregate earnings and revenue are both up about 13% from one year ago, according to Yardeni Research. Corporate cash is at recover levels and a growing number of companies are buying back shares and raising dividends. Here are a few companies  Dave Kansas at WSJ mentioned as having attractive valuations:
• The S&P 500 trading at 13.6 P/E versus traditional 16.
• Apple sitting on $76 billion in cash. 14 x’s forward earnings.
• Intel at 9 times
• General Electric at 12
• IBM at 13
• Ford at just 6 times forward earnings.

• Warren Buffett, ‘Be fearful when others are greedy, and be greedy when others are fearful.’

 

• Gold fell as traders unwound margin accounts. In case you were wondering. In a panic nothing holds.

 

• All the efforts of Quantitative Easing 2 were wiped out in a few hours which will give the Ben Bernanke pause to consider QE3. On CNBC Market Wrap discussion included the very real possibility of the Fed stepping in to stabilize markets with a QE3. Especially if the Fed thinks the country is slipping into a recession!

• In order that we not forget: Jimmy Cramer’s Rant against the Federal Reserve and The Ben Bernanke just celebrated a 4 year anniversary, ‘ They know nothing!’ on August 3rd. The rant heard around the world happened one year after the markets collapsed and the Fed dithered and sat on its hind legs doing nothing. At the time one Fed official, Bill Poole of St. Louis, wanted to RAISE interest rates. The discount rate at the time was 6.25%.  Unemployment was accelerating along with mortgage foreclosures and the stock market was posting losses each week. Finally someone awoken The Ben Bernanke and rates started to come down but very slowly. Without Cramer it may have happened much later. (I’m not a huge fan of the Jimster but give him credit when its due). Will this happen again?
•  Lies the government, brokers, bankers and mutual fund salespeople tell you: it’s not true that most Americans are ill prepared for retirement. Research at the Rand Institute shows that 7 out of 10 Americans aged 66-69 are adequately prepared for retirement. The report does state concerns notably among singles with no college education, and especially among single women, are especially vulnerable.
• George Soros, billionaire, hedge fund manager and all around left wing crackpot, is leaving the investing- for -others business. The 80-year old Soros says his hedge fund will return investor money and act more like a family business. Some have suggested that the types of investment that brought Soros money and fame may be getting a little long in the tooth and this is a good time for him to hang up his spurs as long as his legacy is intact.
• Consumer Reports’ rule for investors: Don’t invest in anything that eats or needs repainting.
• From the Department of  Another Way To Game The System: Rules were enacted, eight years ago, to curb analysts from meddling with trading. This was to support a so-called Chinese Wall and not fluff the company value to investors in order to get at the company investment banking biz. Now there is a new game afoot. Seems that after the 40 day Quiet Period, after a new stock is issued, investment houses are apt to release positive reports on stocks they  brought to market. Traders buy just before the expiration of the 40 day period in anticipation of the bullish report.  Game on!

• Jimmy (The Mouth) Cramer comes in second at a Louie Look-a-like Contest: Jimmy top right and Louis C.K. star and producer/director of Louie seen on cable channel FX in the other uncanny pix.

Here’s the rest of the week play by play as it unfolded…

• Monday last the markets soared at the open and just as quick dropped like a stone as manufacturing numbers came under question plus whether or not Congress would actually agree to increase the debt. At the close all indices closed off their lows. I  watched CBS news Monday as 4 Congressmen were interviewed by Scott Pelley and three of the four were candidates for anything other than doing the work of government. Dysfunctional and ignorant are probably safe descriptions. Even Joe Biden said that the last two weeks showed how dysfunctional Congress is.
• Jim O’Neill, head of Goldman Sachs asset management arm, told Bloomberg that portfolio weightings into emerging markets for most investors should be raised. When asked which of the BRIC countries he likes the best the Jimster said, ‘I would actually pick Russia right now.’ Market Vectors Russia (RSX) is up 4.5% in 2011.
• Technician Michael Kahn at Barrons.com illustrated weakness in the industrials. Interestingly he also stated that the weakness extended to the airfreight biz- (remember FedEx gave sterling going forward projections for the balance of 2011). Caterpillar and 3M also closed lower and fell below their own rising trendline.
• Surprise! Toyota raises outlook after a 99% profit slump. The Japanese automaker said it expects a second half rebound. The automaker, with all its problems, is still in the hunt as #1 world auto maker. Morningstar likes shares in TM to $105 and they closed Monday a tad under $82.00. All domestic manufacturers had superb July as Chrysler was up 20% and Ford and GM were up 8% and 9% and both suffered stock losses on Monday and Tuesday.
• Your friendly neighborhood banks are working on language to include in savings and check documents that include arbitration as the only way a customer can resolve a dispute. Forget about taking your case to court or joining a class-action lawsuit some banks  have already included arbitration language into their agreements.  Regions bank just strengthened language in their 43 page agreement when a customer opens an account to read: ‘will not have the right to pursue a claim in court or a jury decide the claim and you will not have the right to bring or participate in any class action or similar proceeding in court or in arbitration.’ Banks with  mandatory arbitration are: Well Fargo, JP Morgan, TCF, BB&T, Huntington and Regions.
• Stocks cratered in the last hour of trading Tuesday. The debt limit was passed and sent to the President. Notably absent were any photos of the government officials who made the ‘deal’ possible. It was a sad pix of the Prez sitting all alone at a desk and signing the bill into law. See him below on August 2nd and then signing the health care bill into law with all BFFs. The Prez  usually has a big crowd even when he orders lunch.  Note all the pens lined up in front of him –Stocking stuffers?   Tuesday stocks had been meandering all day, slightly off their feed, when consumer spending was revealed as anemic and threat of a ratings cut by either Moody’s or S&P  finally triggered computer sells. Late news printed by the WSJ that afternoon was as poignant as a Mickey Spillane story: There’s no doomsday on the horizon, as much fun as it would be to prepare for one. There’s not even necessarily a crash. But there’s likely to be a long period of challenging conditions for investors. The 18% average real returns (after inflation) of the 1980s and 1990s are as over as M.C. Hammer pants. The 7% real returns of the last two centuries look optimistic, too.’
• A sympathetic Bounce is what we were looking for in the markets after 7 days of down, but it wasn’t what we got on Tuesday. Government lead us to the brink and many still don’t have a clue to what they did. Jimmy (The Mouth) Cramer on his Mad Money said he was Not recommending investors to sell- even though-he said- he had done it before and had no qualms to do it again.
• The Swiss aren’t too thrilled with a stronger Franc and announced they would do whatever needed to be done to halt the rise of their currency. A stronger currency buys less goods and services. News crushed the Swiss Franc while both the Euro and Dollar jumped.
• Japan nixed a stronger Yen on Thursday. The global battle for cheap currency is on. Gold will benefit from this price war.
• Stocks finally edged into positive territory but not without a lot of anxiety Wednesday. GM reported a 7.6% gain over  last year and investors still have turned away from the autos in 2011. Efram Levy, analyst at S&P, has a strong buy and a $42.00 target on the stock, still shares are down 26% this year. Ford is down 31%. Some fault the talks with the UAW but the UAW is lovey-dovey and wants nothing to disrupt the manufacturing process or jobs
• Psssst- Regions Bank Vice President John Turner, Jr. bought $50,000 shares of the bank at $5.94. Morningstar has shares of RF fair valued at $8.00.

• Hello? Dendreon the company once being whispered as the possible thousand dollar a share because of its cancer drug. Sales were disappointing and shares in DNDN were slashed Wednesday by 62%! Zipcar, a most recent IPO in its first quarter as a public company announced narrower than expected loss and shares were up.
• Retired or Expecting to Retire? Republican House Majority Leader Cantor said Wednesday that Americans better get used to Entitlement Promises being broken. He went on to say that when the committees meet they will look to preserve benefits for those 55 and older. ‘This is the better way for American’s to get their house in order.’ Still no word about reducing Congress’ automatic pay raises, reducing their pensions or benefits as a way of sharing the pain – since the U.S. government has a lot to account for the financial crisis and they way its been handled.  
• Finally- while we can expect volatility on the S&P downgrade both Moody’s and Fitch have affirmed the United States debt as AAA, although Moody’s cautioned it may downgrade U.S. debt in the future. The U.S. joins China and Japan in the AA club. Other double As include: Belgium, Spain, Israel, Taiwan, Saudi Arabia and Abu Dhabi.

Questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.