Market Update - August 6, 2010
http://www.watermarkasset.com/articles/48/1/Market-Update---August-6-2010/Page1.html
By Mark Miller
Published on 08/6/2010
This week was all about jobs. Though the July unemployment rate held steady at 9.5%, nonfarm payrolls
fell by 131,000 last month as the rise in private-sector employment was
not enough to make up for the government jobs lost...
Jobs & Slow Motion Growth
This week was all about jobs. The Labor Department announced that initial claims for unemployment benefits jumped to 479,000 from an upwardly revised 460,000 the week before. Thomson Reuters had forecast new claims would fall modestly to 455,000. Then, on Thursday, ADP, the payroll company, reported that private employers increased hiring slightly in July. And, on Friday investors learned that the job market was alive, but only barely. Though the July unemployment rate held steady at 9.5%, nonfarm payrolls fell by 131,000 last month as the rise in private-sector employment was not enough to make up for the government jobs lost. Only 71,000 private-sector jobs were added while 143,000 temporary workers on the 2010 census were let go.
Traditionally, the jobless rate is viewed as a trailing indicator with employers only hiring after business has improved and demand has stabilized. In this recession, with the unemployment rate so high for so long, investors are starting to talk about the jobless rate as a leading indicator on the theory that the economy can’t improve significantly until more people are working again. In either case, the number is an important one as investors expect to see more job creation at this stage of an economic recovery.
The government also released its first look at second quarter GDP growth. Coming in at a modest 2.4% annual rate, the economy is growing in slow motion. Revisions to previous data showed that the recession was worse than originally thought and that the pace of recovery is clearly in decline.
Earnings Season
On the positive side of the ledger, as of Friday, July 30th, 336 companies in the S&P 500 had reported Q2 earnings, with 68% of them beating analyst’s estimates. JP Morgan points out that in addition to continued earnings growth, we have seen a remarkable trend in profitability. Companies have returned to average profitability levels while retaining record amounts of cash that can conceivably be used for additional growth and profitability going forward. Perhaps some of it will even be used to hire more workers. The S&P 500 Index jumped 7.0% in July and the foreign stock EAFE index gained 9.4%.
FINREG & Housing
In July, the President signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law. This may have helped to alleviate some of the uncertainty plaguing capital markets on the one hand, while on the other, its sheer size alone would indicate that it may be years before we know the full impact it will have on markets.
Despite the scope of the legislation, Congress chose to postpone addressing the problems facing the mortgage giants Fannie Mae and Freddie Mac. Currently, the Obama Administration is seeking public input on the future of the housing finance system and the overall role of the federal government in housing policy. No small task, one institutional commentator recently pointed out that changing the system won’t necessarily improve it. In the meantime, the government agencies and U.S. taxpayers remain the ultimate guarantors for the vast majority of home borrowers in today’s market.
Mortgage rates have dropped to new lows, at least for our lifetimes. Conforming ($417,000) 15-year mortgages are now below 4%. If you’ve been waiting to refinance and are willing to go through the exercise, we can’t imagine a more opportunistic time to do so.
Ultimately, the housing finance system will be changed. Annaly Capital Management, in its comments to Washington, noted that “if the new system is significantly different than the housing finance system we have now, the consequences may be that our housing finance system is smaller, perhaps more appropriately priced, but with lower housing values and less flexibility and mobility for borrowers.” We may ultimately return to a time when a house was more a place to live than an investment to own.
Strategies
Growth has slowed, inflation is off the table for now and deflation is becoming a potential concern. Until we see the economy start to grow on its own, we remain focused on fixed income yields, foreign growth and U.S. companies with strong earnings, particularly those doing business in growing economies. We will continue to manage equity exposure through the use of structured notes containing downside market protection. Our focus is on capital preservation, low volatility and tactical allocation in markets and sectors that appear to offer opportunity. Despite all the headline gloom, we remain confident in the ability of our economy to recover and look forward to the significant buying opportunities that are surely ahead.
This week was all about jobs. The Labor Department announced that initial claims for unemployment benefits jumped to 479,000 from an upwardly revised 460,000 the week before. Thomson Reuters had forecast new claims would fall modestly to 455,000. Then, on Thursday, ADP, the payroll company, reported that private employers increased hiring slightly in July. And, on Friday investors learned that the job market was alive, but only barely. Though the July unemployment rate held steady at 9.5%, nonfarm payrolls fell by 131,000 last month as the rise in private-sector employment was not enough to make up for the government jobs lost. Only 71,000 private-sector jobs were added while 143,000 temporary workers on the 2010 census were let go.
Traditionally, the jobless rate is viewed as a trailing indicator with employers only hiring after business has improved and demand has stabilized. In this recession, with the unemployment rate so high for so long, investors are starting to talk about the jobless rate as a leading indicator on the theory that the economy can’t improve significantly until more people are working again. In either case, the number is an important one as investors expect to see more job creation at this stage of an economic recovery.
The government also released its first look at second quarter GDP growth. Coming in at a modest 2.4% annual rate, the economy is growing in slow motion. Revisions to previous data showed that the recession was worse than originally thought and that the pace of recovery is clearly in decline.
Earnings Season
On the positive side of the ledger, as of Friday, July 30th, 336 companies in the S&P 500 had reported Q2 earnings, with 68% of them beating analyst’s estimates. JP Morgan points out that in addition to continued earnings growth, we have seen a remarkable trend in profitability. Companies have returned to average profitability levels while retaining record amounts of cash that can conceivably be used for additional growth and profitability going forward. Perhaps some of it will even be used to hire more workers. The S&P 500 Index jumped 7.0% in July and the foreign stock EAFE index gained 9.4%.
FINREG & Housing
In July, the President signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law. This may have helped to alleviate some of the uncertainty plaguing capital markets on the one hand, while on the other, its sheer size alone would indicate that it may be years before we know the full impact it will have on markets.
Despite the scope of the legislation, Congress chose to postpone addressing the problems facing the mortgage giants Fannie Mae and Freddie Mac. Currently, the Obama Administration is seeking public input on the future of the housing finance system and the overall role of the federal government in housing policy. No small task, one institutional commentator recently pointed out that changing the system won’t necessarily improve it. In the meantime, the government agencies and U.S. taxpayers remain the ultimate guarantors for the vast majority of home borrowers in today’s market.
Mortgage rates have dropped to new lows, at least for our lifetimes. Conforming ($417,000) 15-year mortgages are now below 4%. If you’ve been waiting to refinance and are willing to go through the exercise, we can’t imagine a more opportunistic time to do so.
Ultimately, the housing finance system will be changed. Annaly Capital Management, in its comments to Washington, noted that “if the new system is significantly different than the housing finance system we have now, the consequences may be that our housing finance system is smaller, perhaps more appropriately priced, but with lower housing values and less flexibility and mobility for borrowers.” We may ultimately return to a time when a house was more a place to live than an investment to own.
Strategies
Growth has slowed, inflation is off the table for now and deflation is becoming a potential concern. Until we see the economy start to grow on its own, we remain focused on fixed income yields, foreign growth and U.S. companies with strong earnings, particularly those doing business in growing economies. We will continue to manage equity exposure through the use of structured notes containing downside market protection. Our focus is on capital preservation, low volatility and tactical allocation in markets and sectors that appear to offer opportunity. Despite all the headline gloom, we remain confident in the ability of our economy to recover and look forward to the significant buying opportunities that are surely ahead.