Daily Journal of Commerce Archives - Page 18 of 21 • Rutherford Investment

Stocks Surge On Hopes Of Resolution Of Europe Debt Issues

Published December 12, 2011
As officials continue to struggle to save the European Union, save the euro and resolve sovereign and bank debt issues, global leaders are making concessions.

The long simmering sovereign debt crisis in Europe has brought the EU to the verge of breakup. Some analysts have been predicating its demise in the very near future. Meanwhile, the fate of the euro also hangs in the balance.

Both of these matters threaten the stability of Europe, politically and financially. European leaders have long struggled to find a solution, but without success. The problem is difficult because all member states must agree to any proposed solution.

Germany and France have emerged as the dominant voices of the struggle, but even French sovereign debt is under siege. Other peripheral, AAA-rated European countries have found their debt under attack, S&P has warned them all. Clearly an answer is needed.

A European summit was scheduled for Dec. 9. In the days leading up to the meeting, some developments have occurred and some concessions have been made.

Angela Merkel, the German chancellor, wants tougher rules written into the treaties governing the European Union. However obtaining these consents will be a long process that may last years. Nicolas Sarkozy, the French president, although generally supportive, has reservations.

One wonders how the treaties could be amended without the common effort of the French and Germans.

Others want the European Central Bank to back up European banks and sovereign states. But the ECB has maintained that this is beyond the mandate of the ECB. Anyway, the Germans do not support this notion, because they know they will be the ultimate backstop. Additionally, a recent auction […]

December 16th, 2011|Categories: Daily Journal of Commerce|Tags: debt crisis, debt issues, european banks, european summit, governing the european union, sovereign debt|Comments Off

What’s Up In Europe?

Published November 11, 2011
Previously, Europe was in the lurch, and U.S. markets were whipsawed by events in Athens. Turmoil ensued in Greece, one of the smaller economies in Europe, as the government called for a referendum on the European bailout, which may in fact turn out to be a referendum on the Greek role in the European Union.

At stake was whether Greece would continue to be part of the European Union. Markets throughout the world took a giant gasp as the future of the EU was called into question. U.S. markets tumbled. Could a country even leave the EU? What did this mean for the euro?

By the end of the week, the Greek government survived, barely. George Papandreou, the Greek prime minister, said he would form a new government and he might not be the leader. A vote on the future of the EU would not be held and for the moment, the euro would go on.

Italy was up next in the spotlight, and its failure would be a much more important event. Its economy is much larger than Greece’s. By some indications, it is a stronger economy, but one-year bonds there now command a 6 percent interest rate. When compared to 32 percent for Greece, this is a strong indication that investors do not believe the Italian economy can long survive. The German bonds, of the same maturity, command about 0.25 percent to borrow. Investors pay the Germans to hold their money.

When Italy, Greece, Spain and Portugal joined the EU, they were allowed to borrow at the interest rate of countries in the EU. The rates were a fraction of […]

November 14th, 2011|Categories: Daily Journal of Commerce|Comments Off

Stocks Suffer Worst Quarter Since 2009

Published October 11, 2011
The Dow Jones industrial average ended the third quarter of 2011 down 12 percent – the largest decline, by percentage, since the first quarter of 2009. That was after Lehman Brothers collapsed, and fear reigned supreme. Secretary of the Treasury Timothy Geithner said that March 2009 was when we looked into our grave.

The first quarter of 2009 is not a good reference point for a quarter, the current one, that started on a good note and saw some improvement in gross domestic product, consumer confidence and manufacturing output.

In August, household incomes fell. This was the first monthly decline in overall personal income since October 2009. Real disposable income is actually down for the year 2011. Personal spending was flat in inflation adjusted terms.

Each time the market tried to rally, it was crushed. September was the fifth straight month of market declines, the longest string since March 2009. However, that month also marked the beginning of a two-year market rally.

Worries persisted about the European debt crisis, which has drug on for over a year. Talk of a double dip recession gained currency, though such a predication was rejected by Warren Buffett. The global economy appears to be slowing, with the notable addition of China to the watch list.

The periodic good news followed by headlines of bad news led to one of the most volatile periods for stocks ever. In the quarter, the Dow moved by more than 200 points a day 18 times, and more than 400 points on four consecutive days. Investors’ nerves and confidence were rattled.

Financial stocks were among the hardest hit, with many banks falling by […]

October 12th, 2011|Categories: Daily Journal of Commerce|Tags: disposable income, double dip recession, lehman brothers, timothy geithner, warren buffett|Comments Off

Economic Growth Slows; Bernanke Takes Congress To Task

Published September 9, 2011
After rolling through Labor Day, we continue to have high unemployment. It’s at 9.1 percent, and even President Obama says it will remain high through 2012. If so, Republicans are salivating over the opportunity to retire the president after only one term.

The pundits already are expecting Republicans to gain enough seats to take control of the Senate. Because of Democrats’ large victory in 2006, they have about twice as many seats to defend as Republicans. This gives the Republicans a big advantage going into the elections, so it is their election to lose.

As if high unemployment wasn’t enough bad news, housing starts have been moribund, the Philly Fed index fell to its lowest level since March 2009 – the recent market bottom. The consumer confidence index tumbled as well, to its lowest level since April 2009; the drop was far bigger than anticipated. As the global economy slows, and fears of the European debt crisis continue, worries over another
recession have put a damper on the markets. According to David Kelly, chief market strategist at JP
Morgan Funds, “… the market is an engine flooded with liquidity but without a spark.”

Economic growth is surely slowing not only in the U.S. but globally as well. Economic forecasters are
expecting GDP to grow from 1.5 percent to 2.9 percent next year. At 1.5 percent, we are not in a
recession; however, it will feel a lot like one. Employment really needs GDP growth of 2.5 percent to
reduce unemployment.

What will the market do between now and the end of 2011? As always, the pundits are divided. While
the case can be made for the S&P of […]

September 14th, 2011|Categories: Daily Journal of Commerce|Tags: consumer confidence index, debt crisis, global economy, jp morgan funds, recession|Comments Off

US Congress Reveals Itself A Circus

Published August 5, 2011
“You can always count on Americans to do the right thing – after they’ve tried everything else.” –
Winston Churchill

All eyes have been on the U.S. Congress … unfortunately. The world has lost confidence in our ability to manage and pass laws. As we crawfished toward a resolution of the debt ceiling crisis, we no longer looked like a country with strong leadership, but rather like a banana republic.

As David E. Sanger wrote in the New York Times on Aug. 1, “… the brush with default has added a new dimension. It has left America’s creditors and allies alike wondering what had changed in American politics that a significant part of the country’s political elite was suddenly willing to risk the nation’s reputation as the safest place for the rest of the world to invest.

“It raised questions about whether the United States now faces brinkmanship over a variety of issues
between an emboldened conservative movement and a president whose authority is under challenge,”
Sanger continued. “And for all the talk on the right about ‘American exceptionalism,’ especially among
members of the Tea Party, it put doubts in the minds of many about whether America’s military and
economic dominance is something the country is still willing to pay for – and will always survive.
“The new head of the International Monetary Fund, Christine Lagarde, seemed to give voice to that
concern when she noted on CNN that in the past there was always ‘a positive bias towards the United
States of America, towards Treasury bills.’ The events of the past few weeks, she said delicately, are
‘probably chipping into that very positive bias.’ ”

Democrats […]

September 14th, 2011|Categories: Daily Journal of Commerce|Tags: american politics, conservative movement, treasury bills, winston churchill|Comments Off

June Swoon? Is Sell In May And Go Away Still Applicable?

Published June 10, 2011
May was a bad month for stocks. The S&P dropped 1.4 percent for its worst loss in nine months. Since World War II, June has been flat as often as it has been up, making it the third worst month of the year.

So, should investors sell and go away? Should they find better returns somewhere else? Can they find better returns somewhere else? What about risk? These are all questions investors should be asking themselves.

Why is the market behaving so badly? Or is it? Through June 3, the S&P was up 3.4 percent year to date, and up 22 percent on a trailing 12 months. To be sure, the market was up more in the first quarter of this year based on year-to-date numbers, but gave back some of its gain in the second quarter. The market did the same thing last year.

Earnings season is over, so people tend to worry about the next season. Besides, after such a run-up,
it is not unusual to have a pullback.

Data revealed weakness for the first quarter this year, as it did last year. Weakness reappeared relating to jobs, construction and manufacturing. Commodity prices were elevated. Higher prices for gasoline and groceries have slowed consumer spending, and confidence. Private-sector job growth was weak, and state and local governments now have slashed about 850,000 jobs so far this year. In addition, the market has had to absorb uprisings in the Middle East and the impact on oil prices. Then there is concern over sovereign debt in Europe, our own debt crisis and the earthquake and tsunami in Japan with its resultant effect on our […]

June 15th, 2011|Categories: Daily Journal of Commerce|Comments Off

Verdict On Bernanke’s First Press Conference

Published May 6, 2011
When I published “Who Shot Goldilocks?” in 2004, I recommended that the Federal Reserve announce rate decisions by communicating in plain English at a press conference where the chairman could be asked questions. This was because of Alan Greenspan’s notoriously obfuscatory pattern. Seven years later, on April 27, Chairman Ben Bernanke held such a press conference.

Bernanke first read from a prepared statement and then took questions from reporters. As befits the U.S. Federal Reserve, reporters from around the world were in attendance. Questions were asked by reporters from the U.K., France and Japan. It was an event that Americans can be proud of as our central bank chairman set new standards for openness and transparency … with the entire world watching and participating.

Among the policy matters that the chairman discussed was the end of Quantitative Easing II, which will be completed by June 30. There will be no change in the present policy of reinvesting matured debt and interest into new purchases. But the $600 billion program of bond purchases by the Fed will come to an end.

Bernanke defended QE II in a strong statement. He said that at the time the program was begun, the U.S. was looking at a double dip recession and that it was on the cusp of deflation. It was necessary, he said, and it worked. The program triggered significant changes in the financial markets, and the easing financial conditions led to a stronger economy, just as the first quantitative easing effort had done in March 2009.

The chairman said there would be no change to the target range for the federal funds rate at 0 to […]

May 10th, 2011|Categories: Daily Journal of Commerce|Tags: Bernanke, double dip recession, inflation expectations|Comments Off

The Teflon Market

Published April 11, 2011

Stocks recently enjoyed their best first quarter since 1998, and begin April on an upbeat note. For the first quarter of 2011, the Dow closed up 6.9 percent, the S&P 500 was up 5.95 percent, and the NASDAQ was up 5.15 percent. Those are strong showings in the face of continued uprisings in the Middle East, rising prices for oil and commodities, and the Japanese earthquake and tsunami. The market, dubbed by some as “the Teflon market,” just kept rising in the face of bad news. Volume was steady, if not spectacular – a sign that the market had not entered a frothy stage. Indeed, retail investors have not yet become excited about the market, which reached its highest levels in three
years.

Traders are unwilling to bet against the market. Short sellers had the lowest level of loans against stocks sold short in five years. The ratio of long bets on the market to short bets is near a six-year high. Hedge funds are less willing to take the short side against a rising tide. Bond funds continued to experience outflows, while some bond funds slipped into negative territory for the year to date. Readers and clients know that I have been encouraging the reduction of exposure to bonds for some time. I see no reason to change that position, particularly as Fed futures are betting on a rate rise by the end of the year.

Surely the massive intervention in the markets by the Federal Reserve not only stemmed the downward trend, but aided in the recovery. Quantitative easing – an effort by the Fed to buy bonds, and keep interest […]

April 12th, 2011|Categories: Daily Journal of Commerce|Tags: bond funds, federal reserve, japanese earthquake, low interest rates, retail investors, short sellers|Comments Off

Just When We Thought It Was Safe To Go Out In The Woods…

Published March 11, 2011

Recent indicators show the world economy is strong. The U.S. Institute for Supply Management index just hit a seven-year high. Aided by U.S. workers dropping out of the workforce, according to government numbers, U.S. unemployment dropped to below 9 percent as about 225,000 jobs were added in the private, nonfarm sector. German unemployment reached a new post-reunification low. Swedish gross domestic product growth hit 7.3 percent in the fourth quarter, and China is working to throttle back its growth.

Companies are sitting on huge amounts of cash. Merger and acquisition activity has picked up, as have initial public offerings. Growth seemingly has returned.

But just when the outlook is starting to look brighter, storm clouds gather on the horizon. Uprisings in the Middle East have added uncertainty to the strength of the recovery. Certainly tyrants in power for decades felt the sting, but so did oil markets. And what about U.S. foreign policy? Is the U.S. a net winner or loser? What are the economic effects?
Politically, we should be concerned about our feeble response to the various crises. Our policy seems to be to take a passive position and let events unfold. President Obama may occasionally comment that some person should go, but it is hard to see that we had much impact on events.

In spite of our passivity, Egyptians seemed to be very angry with the U.S. Bahrain, meanwhile, seems to be angry with the U.S. because of its passivity. And is the House of Saud immune from the kind of unrest that is spreading in the Middle East? And what about our strong men in Iraq and Afghanistan? […]

March 16th, 2011|Categories: Daily Journal of Commerce|Tags: acquisition activity, gaddafi, management index, merger and acquisition|Comments Off

Slow Economic Recovery Yields Few Jobs

Published February 11, 2011

The stock market is often regarded as a leading indicator of the economy. If so, the market is forecasting a bright future. The underlying economy has shown growth in profits with most S&P 500 companies beating estimates and raising profits. Industrial production is up. Consumer confidence is up. Retail spending and income are up. Confidence, spending and income are especially important because the consumer represents about 70 percent of the economy. Companies are sitting on large caches of money that can be expected to be redeployed through mergers and acquisitions, stock buybacks and dividends. IPO activity is picking up.

Even banks have begun to cooperate with the government in the effort to stimulate the economy by lending money to small and midsize businesses. Fed futures suggest that the Federal Reserve will not increase interest rates until the end of 2011.

Money has been leaving bond funds and flowing into stock funds in a reversal of past flows. Until the recent crisis in Egypt, money was also flowing into emerging economies because they are expected to grow faster than the U.S. economy, and because they don’t have a housing crisis. However, the trouble in Egypt reminds all investors of the political risk in sinking money into emerging countries.

The catalyst for the market’s rise has been the Federal Reserve buying bonds via so-called quantitative easing, a loose money policy, low interest rates, and rigorous belt tightening by companies. The Fed has been aided by a low rate of inflation.

The first round of quantitative easing began on May 9, 2009, after the markets rose about 80 percent from lows of March 9, 2009. When […]

February 17th, 2011|Categories: Daily Journal of Commerce|Tags: consumer confidence, economy companies, emerging economies, lending money, mergers and acquisitions, midsize businesses, retail spending|Comments Off