The Nvest Market Blog, our current thoughts on the Street

Financials Pummeled - Weekly Market Summary

posted 06.23.2008 at 3:12 p.m. by steve

Stocks struggled again last week (click here for details), making the month of June a frustrating experience following the 2 month rally that began with the collapse of Bear Stearns on March 17. The week’s downward price action was most noted in the financial stocks, as banks of all sizes saw their stock prices slashed amid more mortgage-related write-downs and analyst revisions. As we have been saying for many months now, the banks have a large task ahead of them to improve their balance sheets. Further exacerbating the market’s woes was the downgrade suffered by bond insurers MBIA and Ambac from AAA to AA.

Meanwhile, oil continues to waver back and forth at elevated levels. Extreme single-day price swings in the commodity are further building a case that speculation is a serious problem. Further, inflation is showing up in more and more places. One bit of good news is that company surveys are showing salary and wage increases, the biggest component of inflation (wages and labor cost), are not expected to meaningfully accelerate in response to higher prices. While marginal wage increases will pinch the consumer, this should help contain inflation pressures.

As we look ahead to the upcoming Fed statement this week, we are likely to see the FOMC hold the Fed Funds rate constant and suggest in its statement that the primary risk concerns are now more balanced between promoting economic growth and inflation. Such comments would suggest that the Fed has entered more hawkish stance, and is shifting its focus to fighting inflation. Inflation is, in our view, the largest barrier to a sustainable stock market advance, and economic recovery.

With the second quarter quickly approaching an end, we are hopeful that the Fed can successfully communicate to investors and markets worldwide that it knows what it is doing and that it will fight inflation. That would likely assist in strengthening the dollar and weakening oil’s advance. If those things can happen, the market may preserve some of the recovery that has occurred since mid-March.

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Global Inflation - Weekly Market Summary

posted 06.16.2008 at 3:17 p.m. by steve

Despite economic data that looked marginally improving, the markets depreciated on continued inflation concerns. Retail sales in May came in stronger than expected including revisions, rising 0.8% month/month (ex-gasoline), and 2Q GDP is currently trekking in positive territory. Inflation is increasingly appearing to be a worldwide problem, not one for the U.S. alone as the dollar appreciated 2.4% on the week against other major currencies; it is leading many to believe that we are in a stagflation environment with slow economic growth. With inflation popping up in more places, it is clear that central banks are becoming more focused on containing it. We have now heard comments from the ECB, Canada and even our own Fed chairman Bernanke indicate they will be more aggressive at fighting inflation. This probably means that interest rates, which have been cut aggressively to promote growth, are not likely to stay low for very long. With the key players making these comments, it is almost certain that a global slowdown is still in the process of unfolding, and the equity markets continue to discount this data (click here for last week’s market details).

All of the above suggests that our estimate of a muddling along experience for the equity markets is most likely correct. If the government begins raising rates, housing prices are likely to continue their decline because the cost of borrowing will be on the rise. That probably translates to a prolonged lack of consumer confidence and no quick recovery for the economy. However, the one thing that could fix most of these problems by our count, is a drop in energy prices. That item alone could alleviate much of the inflation that is being observed in food and other products.

While oil looks more bubbly all the time, asset bubbles have a way of going on longer than one would expect. The Fed is undeniably between a rock and a hard place. They can raise rates in hopes of strengthening the dollar and containing inflation at the expense of economic growth; or rates can go unchanged and risk ongoing inflation to preserve the feeble growth still going. It will certainly be interesting to read the statement following the Fed’s next meeting!

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Bad Start to the Weekend - Weekly Market Summary

posted 06.09.2008 at 3:20 p.m. by steve

The market was setting itself up to end almost flat for the week - and then came Friday (click here for a summary of last week). Oil, which had been moving down for most of the week advanced sharply on Friday, up almost $11 per barrel on talk from the European Central Bank that it may raise rates, prompting the dollar to decline in value against the Euro. Further exacerbating the sharp run-up was the threat from a Deputy Prime Minister, Shaul Mofaz that he may be forced to attack Iran. Its almost a shame that we sent out our newsletter to clients so early in the day Friday, as it almost sounded funny if you didnt have a chance to read it until the weekend.

In this market, it seems as though the primary driver of valuation is going to continue being indications of inflation. There is probably no commodity more closely tied to unexpected inflation than energy, and when energy goes up, it will push the stock market down. While we are admittedly not oil experts, it doesnt take a genius to conclude that speculation in the commodities futures markets such as NYMEX Crude is an issue. One day prices moves like what was experienced Friday are not typical of supply and demand fundamentals those didnt really change as a result of anything that came out Friday. This oil market has all the telltale traits of a bubble, including the pundits that suggest its different this time. In every bubble environment, there are always those vocal people suggesting that the rules of economics dont apply. It happened with tech in the late 90s, as everyone was saying that the growth of the internet was unstoppable, and that people would no longer shop in stores. Reality check: the rules did apply to internet companies, and the correction was severe. For the sake of the consumer, we hope that the reality check comes very soon!

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Weekly Market Summary

posted 06.02.2008 at 10:40 a.m. by steve

The holiday shortened work week was a positive one for the stock market, closing marginally up each day of trading. The S&P 500 gained +1.8% for the four days ending the month of May. While encouraging, the week was not without its troubling headlines. It seems that while housing prices continue to fall, inflation is still a major concern. For instance, Dow Chemical and Kodak announced that they will be raising prices by 20%. We continue to hope that given the slowed state of the economy, that these are just lagging effects and that slowing demand will temper further inflation.

Meanwhile, with May behind us and the summer vacation season about to begin, trading volume has been on the decline. It is likely that in the next few months, the equity markets will trade within a range as there is no real volume to move the market significantly one way or the other. We have talked some in recent weeks to the point that trading volume since March 17 has been light, and that new investment is index-hugging. These are two tell-tale signs that there is not much confidence by investors, and that they are just attempting to stay in the game. That trend will likely continue for at least a few more months while the state of the world economy continues to reveal itself.

Be on the lookout in the coming days for our Monthly Commentary to arrive in your email. We hope that you find it insightful. As always, please feel free to share it with friends and colleagues!

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