That Was The Week That Was – 1st Week July

•     Doing a little dance…get down tonight…Investors expressed joy the final week in June. The markets recovered just as talking heads, investors and analysts couldn’t see if there was an end to the bearish mood. Fears of Recession-2, Greece, high oil, the end of QE2, politicians that didn’t get it, and housing in the dumper, had kept stocks going lower for six consecutive weeks. Investors were rewarded for their patience as the S&P index was up 5.6% for the week.  Check out the following chart illustrating trying to time, or getting in and out of the market, is …. impossible.
• Lesson: We all experience some (or a lot) of anxiety when the markets keep moving lower across all indices. The difference, we learned, between what is a correction and a massive sell-off is that during a selloff no stock is sacred and everyone (Hedge fund, mutual fund and institutional managers) all try to get liquid as quick as they can. Investors trying to time the market and missing just the best 10 market days of the year can reduced total returns from a positive to a dramatic negative. 

Earning season begins this week starting with Alcoa reporting after the bell Monday. Watch for Alcoa to post second quarter earnings of .34 cents a share and revenue of $6.28 billion. In addition, Citi, JPMorgan and Google will also set a tone for investors. Companies have lowered their forecasts compared to last quarter. Materials and energy are expected to post the steepest growth rates. Tech and industrials expected to make the sharpest slowdown. Utilities, consumer staples and telecommunications are expected to show the worst performance.Analysts say they’ve been paying weekly attention to the numbers so there shouldn’t be any surprises. As always, we’ll have to see. And now for last week’s play by play…

• The Future Belongs To America: from a July 2nd Op-Ed in WSJ-Walter Russell Mead wrote, ‘… the United States is better placed to surf this (economic) transformation than any other country. Change is our home field. It is who we are and what we do….’
• According to Bloomberg BusinessWeek-politicians can simply vote to extend the discussions about the debt limit- some think to 2012.
• Barton Biggs, hedge fund manager, once Morgan Stanley CIO, has finally expressed what millions of us have been asking for the last several years – Why hasn’t the government instituted a massive public works program? The UK, with China’s help, and other countries are rebuilding infrastructure while the U.S. Treasury simply spends money and supports low interest rates, a cheap dollar and banks. This would seem to be the perfect time to rebuild with so many roads, bridges and public buildings in disrepair. The President said last week that rebuilding would put some unemployed vets to work…
• Sterne Agee analyst Lynn Collier likes Darden. The restaurant chain which owns Red Lobster had 4th quarter earnings up 19%. Upscale Ruth Chris’s steak house has risen nicely for four quarters. The stock has also gone up from a low of a buck to $6.40 and worth keeping an eye on according to Barron’s.com Jonathan Laing. Ticker RUTH.
• U.S. auto makers report that there is still high pent up demand for their product. The problem is that the supply of small cars remains tight. June sales will be reported Friday this week.
• Citi up but analyst Erik Oja at S&P lowered price to $50 a share from $60 citing industry weakness. C closed up 3.2% and has room to run.
• Oil can average $150 a barrel next spring with spikes to $165-$170. Barron’s sees some short selling this summer but not enormous pressure. They believe there is a great buying opportunity for bulls on petroleum. This is the second leg of the oil bull market as global economic expansion continues. ( Ya’ll know how much I like the oil bidness as a long-term investment.)
• Zynga – the online games developer files for a $1billion IPO. Founded just four years ago the company has more monthly active users on Facebook than the next 15 social games developers combined. And…wait for it…unlike some IPOs actually had a profit in 2010 of $90 million! The IPO is expected for 2012. I’ll keep you informed.
• According to Mark Hulbert at MarketWatch you, me and the candle sticker-maker are richer today than we were in 2007. This from Lipper who reported that 45% of the funds today are ahead of where they were in 2007.
• Emerging markets offer second half investors a richer opportunity. WSJ writer Richard Barley reports that concerns regarding valuations are receding and emerging economies are close to balanced budgets, and debt to GDP should decline. Rising consumer wealth and deepening financial  markets should support asset prices.
• Japan discovers huge trove of rare earth materials under the ocean. Problem is mining it without destroying eco-system.
• S&P the ratings firm put on his ‘good guy’ face and announced the deal cut with Greece was tantamount to having Greece default on its debt. Remember S&P was stamping AAA on just about anything passed under its nose a few short years back. Portugal cut to junk rating on Tuesday. EU shot back that ratings were rigged. Bogus!
• After QE2 where will interest rates go? According to Mark Hulbert’s MarketWatch column of July 5th the real smart people predict rates will go up modestly in the next 30 days and at the end of the year the 10 year Treasury will be at 3% or a slight increase over the current 2.9% yield.
• It ain’t the same emerging market Chinese economy anymore. Businesses moving plants from China and looking for cheaper labor in Vietnam and Indonesia. Others beginning building automation factories to contain labor costs. This due to a stronger Yuan and labor costs doubling over the past two years.
• This Depression has proven, according to the WSJ, the worst recovery since the Great One in 1930. Exports and corporate profits are up but just about everything else is just grinding forward. Consumer debt was 125% of household income before the 2008 meltdown but, and due to many banks forgiving debt, is now 112%.  This is still up from 84% of income in the 1990s. Only 24% of households, according to the U of M study, expect to find themselves in better shape a year from now. This is the lowest this measure has been since right after World War ll.
• Pssst….The Weekday Trader at Barrons.com recommends Callaway Golf (ELY). Trading a shade above $6.00 the stock has a book value of $8.00. With new management coming on board to slash costs shares have an outperform rating by Robert W. Baird and Company of $9.00 a share.
• Who would be dumb enough to buy real estate in this market? Me would. I especially like those that invest in shopping centers.  Regional malls have been the best performing REIT sector according to WSJ. The sector continues to benefit from stronger retail sales and expansion by national discounters.
• Retail sales brightening for June after showing some weakness in May.
• Ford the best American Car Manufacturer? According to Jimmy (The Mouth) Cramer- who oozes love for Ford as doing all the right things. The new Ford five year plan focusing on selling 50% more cars, already up 11% in China, and reducing debt will all contribute to making more money per car going forward. Cramer gives F a strong buy from The Street on July 5th. Morningstar reports autos will eventually cycle higher.
• GM trucks starting to pile up with 122 days of inventory and one analyst Peter Nesvold told Bloomberg, ‘It’s unbelievable we’re right back to where we were.’
• Morgan Stanley analyst Adam Jonas picks GM over Ford. Reasons he gives is that Ford has underperformed and reason he gives for liking GM is that it has underperformed. (You reading it right- same reason- different results.) Wednesday GM up and Ford closed down.
• Watch Fed-Ex! Don Hays of Hays Advisory says watch transports, especially Fed Ex if it breaks above $98.50. (If it hits that number Hays thinks the party is on) The transport index is the economically sensitive index that measures what the stock market thinks about those industries that carry the goods the consumers order. Fed Ex is the canary in the coalmine. FDX closed at $95.50 on Tuesday.
• Bond Investors are getting closer to the point of fish or cut bait as interest rate hikes get closer. A 1% hike in rates can mean a loss of over 9% of principal. Bond managers are in the midst of creating new bond portfolios that be more long/short and employ hedging strategies that can profit when bond prices fall. All sorts of problems come to mind including risk and not knowing what is being bought or owned by the managers. These hedge like funds have little history before being tested on a new generation of Bond Loving investors.
• Buy Citi with CONVICTION shouts Bank of America analyst Guy Moszkowski- ‘cause its going to $53. Shares of Citi fell.
• Retail numbers starting to perk up and lots of movement in retail stores. Good news for MasterCard and Visa.
• New 401k rule that states employers must automatically enroll employees into retirement plan unless they opt out has startling result. Contributions fell as less money invested for retirement. Employers contribute 3% when average employee contribution- if left to their own devices- of 5%-10% they typically would invest. Automatic enrollment is leaving billions of dollars from being invested.

• Alphonse Fletcher, Jr., a NY Hedge Fund manager, who in the 1990s reported 300% a year returns for his firm and later said his flagship fund went 11 years without a single losing month has made promises to three Louisiana pension boards. With $100 million at stake from the three public pensions Fletcher promised 12% returns. Last month when two of the pensions boards asked for some of their money Fletcher didn’t send the cash but instead sent them a promissory note that said, in part, ‘in satisfaction of this redemption request’ that pledged payment in two years! Fletcher’s hedge funds are stated to have assets totaling over $500 million but some assets Fletcher counted at least twice and the actual number is closer to $200 million. The third pension board has since requested liquidation. I’ve seen the cable show Swamp People and if I were Alphonse ‘Buddy’ Fletcher I’d be overnighting a cashier’s check tout suite. 
• A better jobs and retail report made things hop Thursday as markets responded across the board. Oil moved up to closed just shy of $99.00 a barrel on expectation of recovery. CNBC reported NASDAQ at highest level in 10-years.closing at 2873. Gold was up $2.00. But, when revised employment numbers were posted Friday the markets fell, gold was up and oil traded down. Analysts on CNBC were shocked by the news and one said that only better than expected earnings could help offset the pain.
• Prediction that PIIGS will all go bankrupt in   eighteen months. According to Dennis Gartman he concedes that problems will probably be contained in the short term- in the long term he doesn’t see the situation playing out terribly well at all, according to Fast Money Recap. Jon Najarian see big money placing big bets AGAINST the Euro. The short ETF is EUO. PIIGS are Portugal, Ireland, Italy, Greece and Spain.
• Who is the one, if not our bestest, global trading partner, speaks and looks a lot like us and we haven’t had a bad word with in….well..like almost forever? It’s Canada! And right next door our Canadian, almost American, friends are pulling 1.5 million barrels a day of oil out of the ground and we’re turning our nose up buying more ‘cause the way its produced is causing lots of carbon dioxide. CO2 is the cause of global warming, or so say environmentalists. Folks in Edmonton, Alberta are becoming the next oil superstar and we’re all fussy-wussy how its mined from the oil sands with them having the third largest proven concentration of crude oil reserves in the world. (Ya’ll want to read that again?). And we don’t want too much of that yucky oil cause the way its manufactured is polluting the atmosphere. Washington has ignored the building of a pipeline that could double exports from Alberta to the U.S. Seems we’d rather do bidness with governments that use our money to bomb our buildings and kill our citizens.  Did I mention that Alberta plans doubling production over the next 10-years? I think I need a nappy.
• Billionaire John Paulson’s Hedge Fund lost 11% in June as all strategies slumped. I know the feeling, John, about strategies and allocations failing but no one I know lost 11%!
• Financial Advisor Magazine reported that Mass Marketing Investment Advisor Ken Fisher was ordered to pay $375,000 on retirees losses. Fisher’s firm, according to the complaint, did what it does with all its clients and invested her, just like everyone else, into a global strategies equity fund after selling her bond portfolio.  According to the attorney representing the retiree Sharyn Silverstein, who was invested with Fisher for one year from….(drum roll) September, 2007 to September, 2008, both Sharyn and her husband were high pressured to turn their account over to Fisher.  She would’ve lost money even if she stayed in bonds….! 
• Friday’s stunning lack of employment confirmation  blasted the markets into the basement in the first few hours of trading but they closed off their lows. FedEx didn’t collapse and interestingly IBM finished up a penny! That said everything. It ain’t over. For the week we were up. David Blanchflower, a professor at Dartmouth, said the government will launch QE3 by this fall. Employment numbers, as CBS reported, were falling long before the recession and NAFTA may have had something to do with it. Gold closed up $14 and oil was down to close @ $96.48.
• Finally- Investment Newsletter publisher’s the Aden sisters, notoriously bearish, write in The Aden Forecast, ‘We see this prolonged, lumpy recovery as a chance to continue to buy shares we like at cheaper prices.’

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