Sunday, January 29, 2012

More Mixed Messages on the U.S. Economy

This past week, firms such as Apple Inc. and Caterpillar Inc. surprised investors with strong results while others such as Ford Motor Co. and Proctor & Gamble Co. suggested that weakness in Europe contributed to their poor results.  (Note: 169 of S&P 500 companies have reported quarterly results; earnings are up 3.15% and revenues are up 6.5%).  
Additionally, the U.S. Commerce Department said fourth quarter economic growth increased 2.8% (up from last quarter’s 1.8%, but less than the expected 3.0%) and Thomson Reuters/University of Michigan’s consumer sentiment index increased to 75 in January, up from 69.9 in December. 
However, on Wednesday, the U.S. Federal Reserve provided somber comments when it said it would keep short term interest rates near zero  until late 2014 (an extension of about 18 months from its previous plan) because of heightened unemployment, a depressed housing market and Eurozone financial issues.


Investors remain hopeful, but mixed economic messages increase market uncertainty. In addition, while the Federal Reserve’s actions, along with the potential for more quantitative easing (printing money) have historically been positive for risk assets such as equities, the frequency of these actions may be approaching the point of diminishing returns.

Sunday, January 22, 2012

Global leaders Meet in Davos for World Economic Forum gathering

This week, the World Economic Forum’s annual gathering in Davos, Switzerland (population 11,000) brings together a high profile mix of government leaders, business executives, philanthropists, religious leaders, celebrities and journalists.  German Chancellor Angela Merkel provides the opening presentation on Wednesday and this year’s theme is “The great transformation: shaping new models”.  A working group which includes International Monetary Fund  Managing Director Christine Lagarde, World Bank President Robert Zoellick and World Trade Organization Director General Pascal Lamy is setting the tone with a statement that:   “Entering 2012, we worry about decelerating global growth and rising uncertainty, high unemployment” and shared concerned that potential fiscal austerity initiatives could result in adverse economic results.

With many of these players already meeting almost weekly to address the broad set of global financial issues, as well as confronting unpredictable, but fast moving socio-economic events; let’s hope this gathering of leaders can move beyond the cynically held view that this: 1) is a great opportunity for group photos of world leaders, 2)  provides a solid infusion of capital into Davos’ tourism industry and 3) is an insular gathering of the economic “1%”.

As Earnings Season Provides Mixed Messages, Most Markets Move Higher

The second week of earnings season presented investors with more mixed views. Better than expected results came from firms such as Microsoft Corp.IBM Corp. and Intel Corp., while Google Inc., American Express Co. and General Electric Co provided disappointing results.  With 50 of the S&P 500 companies reporting fourth quarter results, average growth in revenue is 0.15% and earnings is  -10.21% (financial services providing the biggest drag on results ).   Global players reporting results this week include Apple Co., Caterpillar Inc., Chevron, Corp., ConocoPhillips, Corning Inc., Ford Motor Inc., Halliburton Co, McDonald’s Corp., Procter & Gamble Co., SAP AG and Starbucks Corp.

The Bulls suggest the global economy is “on the mend”, while the Bears have a long list of unresolved financial issues, such as the protracted debt negotiations in Greece, to consider.  With a combination of 1) low investor conviction, 2) light trading volumes and 3) swift moving markets; any sense of a problem could quickly reverse the current positive trend.  Stay tuned.

Sunday, January 15, 2012

Friday the 13th: Eurozone downgrades and a potential default

On Friday, Standard & Poor’s downgraded the credit rating of France and Austria by one notch, Italy and Spain by two notches and Portugal and Cyprus now join Greece with a junk bond rating.  Germany was unaffected and maintains its AAA rating.  Also on Friday, talks between Greek government official and bankers about how to restructure its sovereign debt were suspended - but a follow-up meeting is planned for Wednesday.

MY TAKE: These events are not new news (there have been months of speculation).  Market sentiment has improved in recent weeks, as Eurozone leaders continue their multi-year struggle to manage the region’s financial challenges that include 1) a recession, 2) the potential for more credit downgrades, 3) weakness across its banking sector and 4) a near-term Greece default.   Friday’s events suggest that the region’s political landscape remains fluid, and its economic framework remains fragile.  Sustaining market confidence, while managing several moving parts, is needed to support a “muddle along” recovery.   The margin for error seems small and mistakes would be felt beyond the Eurozone.

Some U.S. Economic Data and Corporate Earnings for Consideration

This past week in the U.S, 1) consumer confidence (based on the Thomson Reuters/University of Michigan index) increased to 74 from 69.9 at the end of December; 2) retailer sales (reported by the Commerce Department) rose less than projected in December suggesting a slowdown in consumer spending and 3) unemployment claims (reported by the Labor Department) increased by 24,000 to 399,000.  In addition, after the first week of earnings season, Alcoa Inc., JPMorgan Chase & Co, Infosys Ltd. and Tesco PLC provided mixed/poor earnings results and Chevron Corp. issued a profit warning.

Global markets have been resilient to negative and cautious news in recent weeks.  Interestingly, the U.S. dollar and equity markets have both moved higher in recent weeks (often they move in opposite directions); perhaps this is a flight to safety trade. Global players announcing earnings this week include Bank of America Corp., Coca-Cola Co., EBay Inc., General Electric Co., Google Inc., Goldman Sachs Group Inc., IBM Corp., Intel Corp., Microsoft Corp., Morgan Stanley, and Tata Consultancy Services Ltd.  The results from these companies and the forward outlook their managements provide will contribute to the next move in direction for global markets.

Sunday, January 8, 2012

Notes from Barranquilla, Colombia

The holiday season provided a great opportunity to catch up with family and friends in this Caribbean city, see the local soccer team, Atlético Junior, win another championship title and travel to Cartagena.  With a population of 1.4 million, the city is located in a coastal region that is a leader in Colombia’s economic growth. Notable personalities have included Edgar Renteria (2010 World Series Most Valuable Player - San Francisco Giants), Shakira (singer) and Sofía Vergara (actress – Modern Family) and its carnival festival is one of the biggest in the world.

While Colombia is often associated with drug cartels, paramilitary operatives and FARC leftist guerrillas, my visits since 1988 have provided insights into its positive economy development within Latin America.  Colombia’s political governance has improved, demand for its natural resources (including oil, natural gas and coal) has increased and tourism remains strong.  There is broad evidence of improved infrastructure (housing, transportation and telecommunication), better education and health services, and increased access to consumer goods (including malls, restaurants, etc.).  A recently signed Free Trade agreement with the U.S. may have a positive impact as well.  Amid the frequent discussions of BRIC (Brazil, Russia, India and China) investing, Colombia is among a broader set of developing countries which investors should become more familiar with.

2012: Is It Time for a New Playbook, or More of the Same?

After a volatile 2011 (the S&P 500 was flat and global equities were down about 16%), the New Year greeted investors with improving U.S. employment data, along with concerns the European financial system remains fragile.  Globally, the financial stability of many businesses seems solid, consumers are a mixed bag and many governments remain under stress. Notably on Thursday, aluminum producer Alcoa said it would cut production by 12% to address declining aluminum prices and manage its costs. As earnings season begins this week, investors will learn about business demand and the impact of a strengthening U.S dollar.

Headlines, actions and debates on monetary and fiscal policy will likely continue to drive the direction of global markets.  The continuing deleveraging process within the financial system will likely dampen economic growth in many regions – and limit the performance of risk assets such as equities.  The fourth quarter results and forward outlook from business executives, as they report earnings during the coming weeks, will determine the short-term direction of many markets. Expect a cautious tone.