The headwinds of European debt concerns and the evaporation of Chinese stimulus continues to assault the markets, although the major indices held in there pretty well considering the drag the Eurozone is going to put on global growth. The run, well maybe a jog for now, for safety persists as Treasury securities recorded a second-straight session of meaningful gain.
The dollar rallied as the euro got slammed again -- pretty much shaping up as our commentary suggested would be the case via the March 24 letter entitled Can the Dollar Rally Continue? (archived on the website) – as even ECB council member Axel Weber acknowledged that Greece’s fiscal crisis is threatening “grave contagion effects.” He’s got it partially right at least, it’s just not the Greek budget but the entire entitlement-centric system is crumbling, and another EU banking crisis is not out of the question. To repeat, so-called rescue packages can ease the concern on a day-to-day, even week-to-week basis, but eventually the Eurozone will have to ultimately face reality; their system is not sustainable.
Eight of the 10 major S&P 500 industry groups decline for the session, led by energy, industrials and consumer discretionary shares. The traditional areas of safety out-performed the market for a second day – health-care and consumer staples were the only groups in the black. Naturally, with this weakness, volume has begun to pick up, hitting levels that we haven’t seen with this consistency since early in 2009.
Click here to read the full Daily Insight
Brent Vondera, Senior Analyst
Acropolis Investment Management
www.acrinv.com
Thursday, May 6, 2010
Wednesday, May 5, 2010
Daily Insight: Driven to the Shadows, Lost in Translation and Pending Home Sales
U.S. stocks took a little bit of a beating yesterday, as the market has run into the headwinds of EU debt troubles and China’s early-stage unwind of their stimulus measures via the tightening of lending standards. The broad market has dropped 3.5% over the past seven sessions, but then again it had rallied 80% from the March 9, 2009 13-year low.
As we’ve been touching on, the Chinese are in the process of reining in their stimulus efforts for fear of further inflating the housing market. Traders on the Shanghai Exchange got their first chance to react this week (they were closed on Monday) and pushed the index down another 1.2% to a seven-month low. Also in the region, the Aussie central bank hiked their benchmark interest rate for the fifth time in six months – man, it would be nice to have short-term rates at 4.25%. But maybe a little too much too fast Aussie’s, looks like you’ve been tricked into thinking the Pacific growth story is sustainable; we’ll see as the Chinese lay off the nitrous.
The EU sovereign debt crisis also played a role in spooking traders after Germany’s economic minister added uncertainty to the situation when he stated the $140 billion EU/IMF rescue was not intended to cover Greece’s borrowing needs for the next three years, but possibly just 18 months – more on this below.
Market sentiment will continue to ebb and flow because the EU government debt problem isn’t going away. Talks, plans and even implementations of bailouts may ease investor concerns in the short term but the reality of dealing with these structural issues will be harsh and felt by the global economy.
Basic material shares led the major industry groups lower, with industrials and tech also down big. The relative winners were traditional areas of safety – health-care and consumer staples – but they also closed lower as all 10 major groups declined.
Click here to read the full Daily Insight.
Brent Vondera, Senior Analyst
Acropolis Investment Management
www.acrinv.com
As we’ve been touching on, the Chinese are in the process of reining in their stimulus efforts for fear of further inflating the housing market. Traders on the Shanghai Exchange got their first chance to react this week (they were closed on Monday) and pushed the index down another 1.2% to a seven-month low. Also in the region, the Aussie central bank hiked their benchmark interest rate for the fifth time in six months – man, it would be nice to have short-term rates at 4.25%. But maybe a little too much too fast Aussie’s, looks like you’ve been tricked into thinking the Pacific growth story is sustainable; we’ll see as the Chinese lay off the nitrous.
The EU sovereign debt crisis also played a role in spooking traders after Germany’s economic minister added uncertainty to the situation when he stated the $140 billion EU/IMF rescue was not intended to cover Greece’s borrowing needs for the next three years, but possibly just 18 months – more on this below.
Market sentiment will continue to ebb and flow because the EU government debt problem isn’t going away. Talks, plans and even implementations of bailouts may ease investor concerns in the short term but the reality of dealing with these structural issues will be harsh and felt by the global economy.
Basic material shares led the major industry groups lower, with industrials and tech also down big. The relative winners were traditional areas of safety – health-care and consumer staples – but they also closed lower as all 10 major groups declined.
Click here to read the full Daily Insight.
Brent Vondera, Senior Analyst
Acropolis Investment Management
www.acrinv.com
Tuesday, May 4, 2010
Daily Insight: Spend It Like You Got It and Factories Humming
U.S. stocks were able to shake off some market weakness overseas and China’s continued pull-back of stimulus measures, as they tighten lending standards, to end two-sessions of decline on Monday. The three major indices gained back most of Friday’s losses.
Certainly a bang-up manufacturing report helped to ease some concerns but the Commerce Department showed the income/spending ratio deteriorated again, which means spending is being stolen from the future. These reports pretty much offset each other, if one is thinking beyond the here and now. More on this data below the jump.
A reader expressed surprise that I didn’t touch on the attempted car bombing in Times Square in Monday’s letter, particularly since I’ve spent several years talking about the importance of geopolitical risks/domestic security with regard to economic growth. The markets found it unnecessary to put in any additional terrorist premium as futures trading was not affected in the least, so I decided not to use space on the topic. However, while we’re on it now, even though it didn’t seem like a serious explosive device, one would think it to be a large enough act to raise concern of the larger issue of terrorism, but no worries for this market…yet. When risks lurk around many corners, it’s only a matter of time before some form jumps out and scares the complacency out of everyone.
Industrials, consumer discretionary (spend it like you got it), and financials led the market higher. The S&P 500 index that tracks basic material shares was the only group down for the session.
Click here to read the rest of the Daily Insight
Brent Vondera, Senior Analyst
www.acrinv.com
Certainly a bang-up manufacturing report helped to ease some concerns but the Commerce Department showed the income/spending ratio deteriorated again, which means spending is being stolen from the future. These reports pretty much offset each other, if one is thinking beyond the here and now. More on this data below the jump.
A reader expressed surprise that I didn’t touch on the attempted car bombing in Times Square in Monday’s letter, particularly since I’ve spent several years talking about the importance of geopolitical risks/domestic security with regard to economic growth. The markets found it unnecessary to put in any additional terrorist premium as futures trading was not affected in the least, so I decided not to use space on the topic. However, while we’re on it now, even though it didn’t seem like a serious explosive device, one would think it to be a large enough act to raise concern of the larger issue of terrorism, but no worries for this market…yet. When risks lurk around many corners, it’s only a matter of time before some form jumps out and scares the complacency out of everyone.
Industrials, consumer discretionary (spend it like you got it), and financials led the market higher. The S&P 500 index that tracks basic material shares was the only group down for the session.
Click here to read the rest of the Daily Insight
Brent Vondera, Senior Analyst
www.acrinv.com
Monday, May 3, 2010
April 2010 Recap
Market volatility picked up in April as investors grew concerned about the indebtedness of several European countries, a major oil spill in the Gulf of Mexico, and Goldman Sachs’ legal mess. Despite the concerns, the S&P 500 managed to post a 1.58 percent gain for the month.
Corporate earnings reports helped offset some of the negative sentiment, with 77.9 percent of companies in the S&P 500 that have reported beating expectations. According to Bloomberg, earnings estimates for companies in the S&P 500 increased 10 percent on average in April, the largest monthly increase since at least 2006. Earnings have certainly benefited from low expectations and year-ago comparisons, but this era is rapidly coming to a close. On the bright side, positive earnings results and outlooks with little price movement allow the fundamentals underlying the market to catch up to the price action.
A bigger reason for domestic equities’ April performance was the Fed’s decision to keep its benchmark interest rate at a record low to help keep the economy from dipping back into a recession. The Fed continues to paint a “Goldilocks” scenario for the economy in which growth is not too hot and not too cold. Although there are signs of prices picking up in the production pipeline, consumer prices have been showing deflationary signs in recent months. In addition, it’s very unusual for the Fed to tighten until the unemployment rate goes down.
Small caps continued to outperform large caps during April. Smaller firms tend to thrive in low interest rate environments, which allow them to borrow cheaply to fuel their growth. Additionally, new net inflows into small cap funds may also be providing support to small cap stocks, with the four-week moving average inflows topping $701 million in April according to Lipper FMI data. Small caps began the year with outflows exceeding $144 million.
The best performing S&P 500 sector was Consumer Discretionary, which benefited from improving sales data and consumer confidence. Consumer Discretionary and Industrials, which has benefited from global economic improvement, are the top performing sectors year-to-date. Healthcare stocks were the worst performers in April as the sector’s earnings reports exposed the bottom-line effects of the new U.S. healthcare legislation.
Volatility, as measured by the VIX Index, perked up 25 percent. For a market that seemed overly complacent in recent months, the return of volatility can be interpreted as a healthy development. The uptick in volatility coincided with several negative events including fraud charges by the SEC against Goldman Sachs, continued Eurozone debt problems, financial regulation concerns, and tightening by numerous foreign central banks.
Problems in Greece, Spain, and Portugal sent investors fleeing to the safety of U.S. assets. As a result, Treasuries rallied and the dollar strengthened. Mortgages followed Treasury yields lower, with spreads more or less unchanged, as the market yawned in response to the Fed’s MBS-buying program coming to an end. Meanwhile, Commercial MBS gained despite widespread worries about rising commercial defaults and high-yield bonds add to a record run that began in late 2008.
Overall, investors continue to show desire to put cash that yields nothing to work, but they are hesitant to stick with riskier bets in the face of volatility. Investors have plenty of headwinds ahead including the removal of monetary and fiscal stimulus, interest rate uncertainty, weak housing market, national debt burdens, Chinese economic and policy questions, expiration of the Bush tax cuts, and the growth-restraining effects of the rapid rise in commodity prices.
Peter Lazaroff, Investment Analyst
Acropolis Investment Management
www.acrinv.com
Corporate earnings reports helped offset some of the negative sentiment, with 77.9 percent of companies in the S&P 500 that have reported beating expectations. According to Bloomberg, earnings estimates for companies in the S&P 500 increased 10 percent on average in April, the largest monthly increase since at least 2006. Earnings have certainly benefited from low expectations and year-ago comparisons, but this era is rapidly coming to a close. On the bright side, positive earnings results and outlooks with little price movement allow the fundamentals underlying the market to catch up to the price action.
A bigger reason for domestic equities’ April performance was the Fed’s decision to keep its benchmark interest rate at a record low to help keep the economy from dipping back into a recession. The Fed continues to paint a “Goldilocks” scenario for the economy in which growth is not too hot and not too cold. Although there are signs of prices picking up in the production pipeline, consumer prices have been showing deflationary signs in recent months. In addition, it’s very unusual for the Fed to tighten until the unemployment rate goes down.
Small caps continued to outperform large caps during April. Smaller firms tend to thrive in low interest rate environments, which allow them to borrow cheaply to fuel their growth. Additionally, new net inflows into small cap funds may also be providing support to small cap stocks, with the four-week moving average inflows topping $701 million in April according to Lipper FMI data. Small caps began the year with outflows exceeding $144 million.
The best performing S&P 500 sector was Consumer Discretionary, which benefited from improving sales data and consumer confidence. Consumer Discretionary and Industrials, which has benefited from global economic improvement, are the top performing sectors year-to-date. Healthcare stocks were the worst performers in April as the sector’s earnings reports exposed the bottom-line effects of the new U.S. healthcare legislation.
Volatility, as measured by the VIX Index, perked up 25 percent. For a market that seemed overly complacent in recent months, the return of volatility can be interpreted as a healthy development. The uptick in volatility coincided with several negative events including fraud charges by the SEC against Goldman Sachs, continued Eurozone debt problems, financial regulation concerns, and tightening by numerous foreign central banks.
Problems in Greece, Spain, and Portugal sent investors fleeing to the safety of U.S. assets. As a result, Treasuries rallied and the dollar strengthened. Mortgages followed Treasury yields lower, with spreads more or less unchanged, as the market yawned in response to the Fed’s MBS-buying program coming to an end. Meanwhile, Commercial MBS gained despite widespread worries about rising commercial defaults and high-yield bonds add to a record run that began in late 2008.
Overall, investors continue to show desire to put cash that yields nothing to work, but they are hesitant to stick with riskier bets in the face of volatility. Investors have plenty of headwinds ahead including the removal of monetary and fiscal stimulus, interest rate uncertainty, weak housing market, national debt burdens, Chinese economic and policy questions, expiration of the Bush tax cuts, and the growth-restraining effects of the rapid rise in commodity prices.
Peter Lazaroff, Investment Analyst
Acropolis Investment Management
www.acrinv.com
Daily Insight: Q1 GDP and Chicago PMI
U.S. stocks gave back nearly all of the prior two-session rebound on Friday as the broad market declined 2.51% for the week – the first meaningful pullback in 10 weeks. The Dow held just about the 11K mark, but slipped 1.75% for the week. The NASDAQ got thumped by 2.73% last week, but is still up 14% over the past three weeks. The broad market made a key reversal as it hit a new 19-month high, failed to hold that level, and dipped below the prior week’s close.
Financials led the declines, the group generally leads no matter the direction, falling more than double that of overall market. Tech, industrials and consumer discretionary shares rounded out the worst-performers. The S&P 500 index that tracks utilities shares was the sole gainer, up about 0.5%.
Greece struck a EU/IMF deal but it effectively ensures the country will remain a zombie as a huge percentage of its revenue will be necessary to pay these loans back – revenues that will already be depressed as its economy has become ultra-dependent on government spending. The Greek government also pushed out its schedule for getting the deficit within the 3%-of-GDP EU guideline – although “guideline” isn’t the correct word as budgetary rules are not enforced and can’t be based on the zone’s massive entitlement programs. They now say that the threshold will be met by 2014, previously stated to be achieved by 2012, but that’s highly unrealistic as well. The deal will involve direct loans to Greece, for now planned at $145 billion over three years with EU members on the hook for $80 billion of it.
Click here to read the full Daily Insight
Brent Vondera
www.acrinv.com
Financials led the declines, the group generally leads no matter the direction, falling more than double that of overall market. Tech, industrials and consumer discretionary shares rounded out the worst-performers. The S&P 500 index that tracks utilities shares was the sole gainer, up about 0.5%.
Greece struck a EU/IMF deal but it effectively ensures the country will remain a zombie as a huge percentage of its revenue will be necessary to pay these loans back – revenues that will already be depressed as its economy has become ultra-dependent on government spending. The Greek government also pushed out its schedule for getting the deficit within the 3%-of-GDP EU guideline – although “guideline” isn’t the correct word as budgetary rules are not enforced and can’t be based on the zone’s massive entitlement programs. They now say that the threshold will be met by 2014, previously stated to be achieved by 2012, but that’s highly unrealistic as well. The deal will involve direct loans to Greece, for now planned at $145 billion over three years with EU members on the hook for $80 billion of it.
Click here to read the full Daily Insight
Brent Vondera
www.acrinv.com
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