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David Merkel
Ron Brounes
Articles (5983) 

AND THAT’S THE WEEK THAT WAS… For the Week Ended August 28, 2009

August 28, 2009 | About:
The doldrums of summer. While the past few months have been anything but dull for the markets (euphoric may be more appropriate), investors enjoyed a few slow days of peace and quiet. Some prepared for “back-to-school” (without the shopping); others got in last-minute vacations (while gas was semi-affordable); but most simply became rejuvenated in time for that widely anticipated (but sluggish) recovery of the 4 th quarter. While the mood was generally positive throughout the week, volume was light and trading activity lacked the gusto of recent weeks.

Another stimulus program came to a close as Cash for Clunkers ended with a last-minute flurry of activity. (If only the government could get its act together and process those rebates, the program may be deemed a success.) Analysts claimed that over 700,000 cars were bought over the past month and August auto sales should rise on a year-over-year basis for the first time since mid-2007. While dealerships enjoyed a nice rebound in activity (even if just temporarily), banks continued to experience challenges as the Federal Deposit Insurance Company (FDIC) reported that 416 institution were on its “problem” list at the end of the 2 nd quarter (from 305 on March 31) and its reserves were dwindling. (Perhaps, a governmental “free toaster” program for depositors could revitalize the banking industry as well?)

Market/Index Year Close (2008) Qtr Close (06/30/09) Previous Week (08/21/09) Current Week (08/28/09) YTD Change
Dow Jones Industrial 8,776.39 8,447.00 9,505.96 9,544.20 +8.75%
NASDAQ 1,577.03 1,835.04 2,020.90 2,028.77 +28.64%
S&P 500 903.25 919.32 1,026.13 1,028.93 +13.91%
Russell 2000 499.45 508.28 581.51 579.86 +16.10%
Global Dow 1526.21 1,629.31 1,819.50 1,841.91 +20.69%
Fed Funds 0.25% 0.25% 0.25% 0.25% 0 bps
10 yr Treasury (Yield) 2.24% 3.52% 3.56% 3.45% +121 bps

Goldman Sachs was in the news again as controversy has continued to surround the investment giant since the AIG bailout and Lehman failure. Regulators are investigating its weekly “trading huddles” where its analysts supposedly gave short-term stock tips to select clients and traders, though most other customers were not privy to such insight. In fact, some ideas generated at the huddles actually may stand contrary to those recommended in the firm’s widely distributed research reports. (Surely, just one big misunderstanding.) Dell Corp. posted lower quarterly profits, though the result still beat Street expectations and management projected stronger performance in 2010 when businesses get back in technology buying mode. Intel boosted its revenue projections for the next few months, another sign that chip demand is increasing and the business climate continues to improve.

The Dow Jones roared to eight straight days of higher closes, before hitting a stumbling block on Friday (though no one may have noticed as volume was so light) and the days of triple-digit moves ended (for a week at least). The other indexes traded relatively flat during the week and even the positive news from Intel did little to generate any investor enthusiasm in the tech-heavy NASDAQ. Fixed income fared better than most would have expected, considering another $109 billion in government debt hit the Street. Apparently, investors still have an appetite for safety (or perceived safety) in their portfolios. Oil surged to a 10-month high before a larger-than-expected inventory report indicated that crude demand remained weak despite expectations of an economic recovery just around the corner. In fact, natural gas plunged to a seven-year low (and consumers rushed to open those utilities bills with excitement). Ho hum…is it Labor Day yet?

Economically Speaking…

Weekly Economic Calendar

Date Release Comments
August 25 Consumer Confidence (08/09) Surprisingly strong showing
August 26 Durable Goods Orders (07/09) Largest increase since July 2007
New Home Sales (07/09) 4 th straight rise in sales
August 27 Initial Jobless Claims (08/15) Labor appears to be stabilizing
GDP (2 nd qtr) Unchanged at -1% despite more pessimistic projections
August 28 Personal Spending/Income (07/09) Spending helped by Cash for Clunkers
The Week Ahead
September 1 Construction Spending (07/09)
ISM (Manu) Index (08/09)
September 2 Factory Orders (07/09)
Fed Policy Meeting Minutes
September 3 Initial Jobless Claims (08/22)
ISM (Services) Index (08/09)
September 4 Unemployment Rate (08/09)
Nonfarm Payroll (08/09)

“Mr. President, I commit today to you and to the American people that, if confirmed by the Senate, I will work to the utmost of my abilities...to help provide a solid foundation for growth and prosperity in an environment of price stability.” On that note, B en Bernanke apparently will avoid becoming a mere labor statistic on the unemployment report next year. After much consideration, Prez O. invited Dr. B. on his family vacation and nominated him to another term as Fed Chairman, pointing to his “calm and wisdom” in the face of economic crisis. (Why would anyone even want that job these days…sorry Lawrence Summers.) While Bernanke certainly has his critics among grandstanding politicos from both sides of the aisle, few Fed watchers expect Congress to hold up his confirmation. For now, continuity seems to be the best thing.

The economic data of the week was relatively favorable with signs of renewed strength in both housing and manufacturing. New home sales jumped for the fourth consecutive month and the S&P Case-Shiller index even depicted higher home prices last quarter for the first time since 2006. Durable good orders surged in July on increased demand within the transportation sector as both GM and Chrysler put bankruptcy in their rearview mirrors and boosted production, while other companies also benefited from the Cash for Clunkers program. When 2 nd quarter GDP was announced as a decline of 1%, many analysts expected a downward revision (perhaps significant) in the months that followed. Well, the initial revision again showed a 1% decline, a negative showing, but one that many economists believe will be the last contraction in overall activity for a while. The consumer remains one big wildcard for the strength of the economy moving forward. Though the Conference Board reported a better-than-expected increase in its August consumer confidence report, the Reuters/U of Michigan sentiment index offered a contrasting view as it fell to its lowest level in four months. Personal spending in July got a nice boost from the increase auto sales (“clunkers” strike again), though the income component of the release was unchanged and the concerning labor picture continued to hinder consumer activity.

On the Horizon… Next week finds a rather hectic economic calendar (though many traders may be enjoying their last days of summer vacations?). Key reports from housing and manufacturing remain on the agenda, though most eyes will be squarely on the jobless data (currently at 9.4%) for signs that the labor picture may be stabilizing. While most economists expect a push toward a 10% unemployment rate by year-end, the non-farm payroll statistic will be a key indicator of the state of corporate hiring/firing practices. The Fed minutes also provide another glimpse into the mindset of the policymakers. (Congrats Dr. B…enjoy that vacation with the Obamas.)

Ron Brounes


About the author:

Ron Brounes
David J. Merkel, FSA, CFA, is the Chief Economist and Director of Research of Finacorp Securities. His specialty is looking at the interlinkages in the markets in order to understand individual markets better. He holds bachelor’s and master’s degrees from Johns Hopkins University. In his spare time, he takes care of his eight children with his wonderful wife Ruth.

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