Daily Insight

Please accept my apologies for the extremely late Daily Insights this morning. As Brent mentioned the other day, he is on vacation and I plum forgot until I walked in the door.

Market Activity for July 30, 2008

Markets were strong yesterday which was particularly refreshing because it built on the rally the previous day. The S&P 500, the broadest measure of large cap activity, gained 0.80 percent, adding to the 2.30 percent advance on Tuesday.

Instead of a single factor, there were several issues driving the market higher. First, the ADP Employer Services report showed that payrolls had grown by 9,000 jobs this month, while most economists were expecting a loss of 60,000 jobs. This survey isn’t the most important jobs picture, but any good news on employment is greeted positively these days.

Second, the Federal Reserve announced that it would maintain the emergency borrowing plan extended to Wall Street firms through January. 30 of next year. The program was established in March during the most acute phase of the credit crisis when Bear Stearns collapsed and was scheduled to end in mid-September. Other programs were also extended through January that should encourage lending between investment banks.

Third, energy shares were helped by rising oil prices, but those prices didn’t extend to losses on other stocks. Oil gained 4.58 a barrel to 126.77, or 3.75 percent. Large integrated oil companies like ExxonMobil and Chevron gained 4.30 percent 5.34 percent respectively.

Finally, financial shares continued their rally with Bank of America gaining 4.31 percent on top of the 14.83 percent gain on Tuesday. Financial stocks have had an amazing rally since July 15th. Bank of America, for example, has gained more than 80 percent since the low only 15 days ago. This is remarkable rally for a two week period. Obviously, the stock is still well blow prices from even at the beginning of the year, but it does seem to suggest that there is a bottom for financial companies. For the year the stock remains down 15 percent including dividends through yesterday.

Of course, all of this is yesterday’s news. Today, the focus is entirely on the GDP report that shows that the economy grew at an annualized rate of 1.90 percent in the second quarter. While that may seem like good news, it was less than the forecasted growth rate of 2.30 percent and the gains can largely be attributed to the one-time federal stimulus check sent out during the quarter. Housing continues to take its toll on the overall economy.

Whenever a new GDP figure is released, the government also puts out revisions to the previous two quarters. Markets right now are focusing on the revision from the fourth quarter of last year that was revised from a positive figure to a negative number. The first quarter still shows a gain of 0.90 percent, though it is subject to one more revision.

Classical definitions of recession are based on two consecutive quarters of contraction in GDP. However, the organization that now calls recessions, the National Bureau of Economic Research (NBER), now defines a recession this way:

The NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. For more information, see the latest announcement on how the NBER's Business Cycle Dating Committee chooses turning points in the Economy and its latest memo, dated 07/17/03. (Source: http://www.nber.org/)

Therefore, although we haven’t yet experienced two consecutive quarters of recession, the NBER may still call one in the coming months. Generally, the NBER makes their official announcement well into or even after the recession itself.

Stocks opened lower on the news but are now heading back to neutral. If there is anything to be learned by the volatility we have seen this year, though, intra-day movements can be all over the board.

I promise to get Daily Insights out much earlier tomorrow. Also, we now publish Insights along with other articles on our blog, http://www.acropoblog.com/.

Best,


David Ott, General Partner