And That's the Week That Was

Market Matters…

Keep your friends close, but your enemies closer. With sequester entering its second week and no sign of compromise in sight, Prez O chose to wine (whine?) and dine several Republican Senators and attempt to make headway in the budget negotiations. While both sides acknowledge the economic challenges that could follow (and Dr. Bernanke reminds them often), Obama took the opportunity to preach the advantages of new revenues (buzz for taxes) to a group of conservatives deemed friendlier than House Republicans. For good measure, he also lunched with head budget honcho and former R Veep candidate Paul Ryan with the same goal in mind. (Ryan most likely went along with the photo-op for the free meal and to come up with White House decoration tips for 2016.)

Keep your friends close, but your enemies closer (part 2). With the Dell $24+ billion privatization deal now in jeopardy, a new potential suitor emerged in the form of rival HP (though the track record of the company’s recent acquisitions remains iffy at best). Investor Carl Icahn also has been speculated as having interest in pursuing a deal for Dell and rumors claim his offer would beat the current one before shareholders. In other corporate news, Microsoft may need to put its part of the Dell transaction on the backburner as it faces a $732 million fine from the European Union over broken promises concerning Windows and browser options. Bank got some good news as 17 of the 18 largest domestic institutions passed a so-called stress test that shows they should withstand a deep economic decline. Only Bank of America failed the test as the Fed believes it would suffer dramatically in a downturn.

Hugo Chavez’s death casted some uncertainty over the future of global energy prices as Venezuela has the world’s largest oil reserves, yet socialist policies have chased the likes of Exxon Mobil and ConocoPhillips out of the country and production has plummeted during the prior regime. Unfortunately, most analysts do not expect any political changes that impact output in the immediate future and the Venezuelan economy should remain in disarray for an extended period. For now, oil continues to take its cues from economic data and sits at just over $90/barrel.

After plunging to 6547 in March 2007, few thought the Dow (and other indexes) would test prior highs for years/decades/centuries/ever. This week, the Blue Chips set an all-time high and followed that milestone with even higher settlements over the next few days. In fact, as equities skyrocketed (and home prices rebounded as well), the net worth of American families jumped by $1.17 trillion by late 2012 to its highest level ever. Not everyone is convinced the rally will continue as bearish fund managers question the longevity of the bull market given the potential shift in Fed (bond buying) policy and the ongoing struggles in Europe. They point to changing tax policy (that could get worse if O gets his way) and spending cuts that could hurt whatever “moderate” economic growth currently exists. For now, investors continue to see positive signs coming from labor and the consumer remains relatively active despite the payroll tax increase and the US budget uncertainties. (Any more dinner invitations, Mr. Prez?)

Economic Calendar

A hectic week on the economic calendar brought solid signs across the board. The non-manufacturing or services sector grew at its fastest pace in a year according to the Institute of Supply Management and orders for non-defense capital goods surged by over seven percent. The domestic trade deficit jumped by just under 20% as demand for industrial machinery and computers climbed and the data implied more strength in the US economy. Consumers continued borrowing at a record pace as auto sales led an increase in credit to its highest level ever recorded. The labor market also brought more encouraging signs as the four-week moving average of jobless claims dropped to its lowest level since March 2008 and the ADP/Moody’s private employment numbers depicted growth that exceeded expectations. That release served as a precursor for a stronger-than-expected nonfarm payroll number which showed solid jobs growth. Meanwhile, the unemployment rate dropped to 7.7%, its lowest level since late 2008.

The Fed Beige Book reported “modest” or “moderate” growth in 12 of the 14 districts with solid signs from labor and consumer activity. Still, Fed Chair Bernanke continued to warn about the sequester and its impact on hiring and other economists believe that the payroll tax increase will ultimately take a toll on spending. Vice Chair Yellen spoke out in favor of continuing the bond buying program and claimed that there is “no pervasive evidence” that investor risk-taking is out of control. (Wasn’t Maestro Greenspan saying the same thing back in 2007?) Bernanke’s counterpart in Europe (Mario Draghi) stated that the European Central Bank debated a rate cut at its recent policy meeting, but consensus among the officials was to leave rates unchanged. Investors took his remarks as a favorable sign that the powers-that-be see a recovery brewing in the months to come. (Haven’t we heard that before?) Meanwhile, China’s gov proposed moves to counter the impact of rising home prices by requiring higher down payments and charging a capital gains tax on sales of existing homes. The Shanghai stock market plunged on the news, but rebounded when China announced a solid expected growth target of 7.5% for 2013.

On the Horizon… Does Boehner feel snubbed by his exclusion from the White House dining lists? Will Ryan begin to rethink some of his budget ideals? Will certain R Senators cave because of a few free meals? For now, sequester continues, but, at least, some key folks are talking (or eating). According to Ned Davis Research, after the Dow hits a new high, the index still has gains of 28% remaining which would translate into Dow 18k. Inflows generally rise in a big way after the initial milestone is achieved and last for the next six months. Venezuela does not appear to be making any concessions to the US over energy policy, though optimists remains hopeful that ultimate change is on its way (though not for the foreseeable future). Will Dell investors have to settle for Michael’s deal or will HP or Carl prove to be a White Knight? Should Americans be more worried about China’s policy slowing growth or Europe policy’s preventing growth? So many questions? In uncertain times, be sure and keep your friends close.

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