By William Patalon III
Money Morning/The Money Map Report
Investors and analysts return from the long holiday weekend only to face a rather light week on the economic calendar – except for the earliest stages of what's expected to be yet another dismal earnings season for U.S. companies.
Aluminum giant Alcoa Inc. (NYSE: AA) reports on Wednesday, with analysts expecting a second-quarter loss of 34 cents a share, compared with a profit of 66 cents a year ago. The ongoing worldwide financial crisis has caused demand for its product to collapse, which in turn has caused prices (and the company's revenue and profits) to do the same. Analysts polled by Thomson Reuters , with revenue expected to be nearly halved.
While Thomson Reuters expects another dismal quarterly showing (down about 20% overall), its analysts are forecasting that strong earnings growth will reappear in the fourth quarter. Investors are trying to make heads or tails of the recent economic data and future earnings reports as they map out the next direction for the markets. Although many believe the euphoric rally of the past quarter ended in recent weeks, some prognosticators remain torn between a retest of the March lows or sideways trading for the foreseeable future (until the "real" recovery emerges).
As Money Morning reported late last week as part of its current "Mid-Year Forecast Series," the U.S. high-tech sector figures to play a major role in the hoped-for rebound.
A federal court judge last week threw the proverbial book at Wall Street swindler Bernard Madoff by sentencing him to 150 years in prison and seizing much of his (and his wife's) personal wealth. The verdict could have sent a message to "greedy" Wall Street to reinvent itself, but a few firms apparently never saw the memo. Analysts predict that per-employee compensation at Goldman Sachs Group Inc. (NYSE: GS) will average $700,000 in 2009, while those at Morgan Stanley (NYSE: MS) will top $350,000, levels that far exceed their 2008 pay structures and that are more in line with those of pre-crisis 2007.
The second quarter came to a close and equity indexes enjoyed their best results since 2003: The Dow Jones Industrial Average was up 11%, the tech-laden Nasdaq Composite Index up 20%, and the Standard & Poor's Index up 15%.
While investors went bottom-fishing for bargains, the euphoria fizzled out over the past few weeks as many began to sense that the rally had moved too much too quickly (and the economy still has many issues yet to resolve). Financials, energy, and basic material stocks led the upward surge last quarter, while emerging markets like India and China benefited greatly from the rise in commodities prices. As investors increased their appetites for risk, government securities were among the big losers, though corporate bonds (both high quality and high yield) performed well within the fixed income asset class.
While the U.S. Treasury prepared to launch its Public-Private Investment Program (PPIP) to remove toxic assets from the books of troubled institutions, its magnitude seems likely to be scaled back dramatically. In the early stage of development, U.S. Treasury Secretary Timothy F. Geithner spoke of providing $50 billion in government funds so approved investment firms could purchase these assets. Now the program seems to have dwindled down to about $20 billion and some believe the "thawing" of the equity and credit markets has negated the need for such massive government participation.
In another "ailing" industry – the U.S. auto market – Ford Motor Co. (NYSE: F) announced a smaller-than-expected decline in June domestic sales as the (non-bankrupt) automaker continued to take advantage of the hardships of its main rivals. Even Japanese heavyweight Toyota Motor Co. (NYSE ADR: TM) saw its monthly activity fall by 32% – losing out to Ford in total vehicles sold for the third consecutive month.
Weaker-than-expected releases (see below) sent equities into a tailspin and left the indexes down big for the week. Oil fell below the $67 a barrel level as traders perceived the expected post-recession increase in demand will not occur overnight. While fixed income seemed primed to benefit from a "flight-to-quality," some investors held off as they await the $136 billion in new U.S. Treasury debt.
Year Close (2008)
Qtr Close (06/30/09)
Dow Jones Industrial
10 yr Treasury (Yield)
A heavy week on the economic calendar kept investors from taking off early in observance of Independence Day (though many probably got a nice head start). Most of the releases of the week offered some surprises; unfortunately, few were positive. Consumer confidence dropped in June as folks continued to fear for their jobs – and rightfully so, as the odds of a "jobless recovery" seem to grow almost daily.
While the past few months offered a bit of optimism that the consumer was back to lead the economy into recovery, the recent data revealed that pessimism lingers. Still, the Conference Board Consumer Confidence Index has risen dramatically since the historic lows experienced in February 2009. Construction spending surprisingly fell in May to its lowest level in more than five years, despite the expected boost (or lack thereof) from the economic stimulus package. While manufacturing showed some signs of improvement, the data indicated that any real sector growth is still a few months away.
Finally, the labor market proved again that it will remain a huge thorn in the side of the economy and the primary reason any recovery will be slow to develop. The unemployment rate pushed closer to the dreaded 10% level, and now stands at 9.5%, its highest level in almost 26 years. More than 465,000 jobs were eliminated from the economy in June. All told, more than 6.5 million employees have moved to the ranks of the unemployed since the recession officially began in December 2007. In the "misery-loves-company" category, the 16-country euro zone also reported a jobless rate of 9.5% in May, its worst showing in more than 10 years. Additionally, the British economy posted its weakest quarter in terms of growth (contraction) since 1958.
Even before the dire labor picture was revealed, San Francisco Fed Chair Janet Yellen painted a negative outlook for the economy, stating that the pending recovery will be "frustratingly slow," while also noting that the U.S. Federal Reserve is likely to leave the benchmark Federal Funds Rate at its current level (of around 0.00%) for some time. Across the pond, the European Central Bank (ECB) held its primary rate steady at 1.0% and indicated that its gradual recovery should include a return to positive growth by mid-2010.
Weekly Economic Calendar
Consumer Confidence (06/09)
Surprising decline in confidence level
Construction Spending (05/09)
Worse level of activity in over 5 years
ISM –Manu (06/09)
Sector improving, but still not in growth mode
Initial Jobless Claims (06/27/09)
Decline in both new and continuing claims
Unemployment Rate (06/09)
Highest level in 26 years
Non-farm Payroll (06/09)
Larger than expected cut in jobs
Factory Orders (05/09)
Strongest increase since last June 2008
July 4th Holiday Observed
The Week Ahead
ISM – Services (06/09)
Consumer Credit (05/09)
Initial Jobless Claims (07/04)
Balance of Trade (05/09)
News and Related Story Links:
- Globe and Mail:
Alcoa Reports on Second Quarter Wednesday.
- Dow Jones Newswires:
- Money Morning Mid-year Forecast Series:
Rebounding Tech Sector Stars Could Play Key Role in U.S. Economy's Second-Half Rebound.
- Denver Post:
Madoff Sentenced to 150 Years.
- Money Morning Market Analysis:
- History Hints that Current Stock Market Rally May Be the Leading Edge of a New Bull Market.
- Money Morning News Analysis:
Oil Prices Plummet Nearly 4% on Bigger-Than-Expected U.S. Job Cuts.
- Money Morning "Jobless Recovery" Story Category:
- Money Morning News Analysis:
Unemployment Rises, Payroll Losses Far Exceed Analysts' Estimates.
- The Conference Board:
The Conference Board Consumer Confidence Index Retreats
- Money Morning:
Chinese, Indian Manufacturing Expands While Rest of World Tries to Catch Up
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.