• Let me start off by saying Facebook’s initial public offering (IPO) is one of the biggest distractions and possibly overhyped events of the year, let alone decade. I have read articles and heard many investment professionals comment on why it is not advisable to buy shares, unless you are allotted shares in the IPO (i.e. pre-market). For the average investor, you have about the same chance as winning the lottery, in my opinion. 

That being said, no matter how great a social vehicle Facebook is, insiders are selling a large number of shares when compared to other IPOs. In addition, the odds are great that anyone buying shares in the open market, on the first day, are not going to get a bargain and could incur losses if and when the buying frenzy subsides. 

• The minutes released this week from the last Federal Reserve meeting on April 24-25 show that the Fed is concerned about the strength of the economic recovery and more open to additional easing of interest rates. Whether this occurs or not is unknown; however, mortgage rates are hitting all time lows and refinancing should pick up, which will result in savings for homeowners. This combined with the recent decline in oil and gasoline prices is bringing some relief to consumers, which not only will help boost the economy, but also help offset some of the worries regarding Europe (see below).  Read more

Today the U.S. Department of Labor reported that the economy created a meager 115,000 jobs in April, but the unemployment rate fell to 8.1 percent. Though the headline number indicated job creation, the total employment level for the month actually fell 169,000. The disparity comes from a drop in the labor force participation rate, which represents the level of Americans actively looking for jobs or otherwise employed. The labor force participation rate declined from 63.8 percent to 63.6 percent, its lowest level since December 1981.

In the same vein, the amount of discouraged workers swelled from 865,000 to 968,000, an increase of 12 percent. Those working part-time for economic reasons surged 181,000 to more than 7.8 million.

“In the weakest recovery since the Great Depression, more than four-fifths of the reduction in unemployment has been accomplished by a dropping adult labor force participation rate — essentially persuading adults they don’t need a job, or the job they could find is not worth having,” said University of Maryland economist Peter Morici.

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In the past week, several large U.S. banks; Bank of America, Morgan Stanley, J.P. Morgan, Wells Fargo, Goldman Sachs, U.S. Bancorp and Citigroup reported overall favorable earnings, which has helped bring some relief to the stock market’s recent slide. 

In Europe though, concerns continue to mount regarding the lasting impact of the European Central Bank’s (ECB) rescue plan. Basically, the ECB (similar to our Federal Reserve) provided $1.31 trillion dollars of emergency loans to large European Banks. The banks in turn have used the funds to buy their respective government’s bonds, and resulted in interest rates declining and lower borrowing costs for these governments. This produced a sense of calm to the financial markets and translated into a nice boost to for European stock markets. 

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Both the central banks of Europe and the U.S. have indicated that they are hesitant to undertake any more monetary easing.  As a result, global stock markets have declined this week in response to this news and fresh concerns about the health of Europe’s weakest countries.  Specifically, yesterday’s auction of Spanish government bonds was met with surprisingly lackluster demand, which resulted in the bonds having to pay higher yields than in previous auctions to entice investors to take them. Interestingly, France has seen an uptick in the yield of its sovereign bonds, even though it is considered on much better financial footing than Spain.

Basically, Wall Street and global investors have become reliant on low interest rates and the central banks of various nations coming to the rescue anytime there was a hint of economic downturn or stock market declines over the last two years. However, this is no longer the case. Inflation is a concern, and as such, various central bankers are taking a pause from injecting any monetary easing. That being said, the central bankers are still sending the message that they are prepared to step in and not let things fall apart.

If central banks discontinue their respective sovereign bond buying programs, then the demand for new bonds will need to come from other buyers whom may require higher yields to purchase the bonds, which can lead to higher interest rates.

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It is an election year, and honestly, I am pretty sick of all the misinformation, distortions and outright disrespectful comments being doled out thicker than a farmer’s manure spreader. In spite of all the incendiary rhetoric, we have seen the following over the last several months: 

• Europe is no longer the daily headline due to temporarily containing their economic fires via a myriad of reforms which, may not meet their targets in the years, let alone months to come. Today the leaders of 25 European countries signed a new treaty designed to prevent the 17 members of the eurozone from living beyond their means and avoid a repeat of the region’s crippling debt crisis. Whether all members actually abide by the treaty is another issue. 
• The U.S. has seen improvement in almost every economic category, with the possible exclusion of housing and energy prices. 
• Yesterday’s rumor of a pipeline explosion in Saudi Arabia and the spike in oil prices is an example that concerns about global geo-political events are still simmering and can come to a boil very quickly. 
• U.S. and world stock prices have rebounded over the last several months.

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Bull markets usually end in periods of euphoria, when the vast majority of investors have fallen in love with equities and believe the only direction is up. The current bull market is certainly not threatened by euphoria, due to the fact that overall, investors are still skeptical – to say the least.  In addition, it is an election year and incumbents, of any party, want to paint as rosy of a picture as possible. As such, the real threat to this market is apathy. 

• Corporate profit margins could be peaking due to higher costs. With the possibility of higher taxes on the horizon combined with minimal wage increases, consumers will have less to spend as the result of prices increasing at a faster rate than their income. 
• There is an abundant supply of oil and natural gas on the market; however, tensions in the Middle East and Africa continue to threaten supplies and here in the U.S., at the current rate of exploration, cannot make up the slack if there were a disruption. Iran, Syria and Nigeria are just a few cast of characters whom can disrupt some of the world’s oil supply.  Realistically, I would hope and somewhat believe Iran may take a more conciliatory approach with the rest of the world in regards to their nuclear ambitions and threats of closing a huge oil shipping channel, the Strait of Hormuz. Otherwise, the alternatives would result in nasty global economic reverberations in the short-term and detrimental in the longer term to the Middle East. In addition, Syria’s oppressive leader is facing an overthrow at some point, based upon his brutal behavior toward his people. Finally, emerging oil producing countries like Nigeria are seeing their potential being squandered due to political turmoil.

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Factory activity rose in the U.S., China and Germany in January. However, Euro zone activity contracted for the sixth month, though the rate improved from December. Along this line, UPS noted that shipments in the U.S. are rising, but are sluggish if not weakening in Europe and Asia. 

It is being reported that Greece is nearing a long-delayed deal on its debt, and in this deal bondholders could see losses of 70%. Another EU member, Portugal, is next in line as it relates to debt fears. In the past week, Portuguese’ sovereign debt / government bonds were yielding over 21% and 16% for two and ten-year, respectively. So it is obvious that these fears are not unfounded, and EU members are becoming even more tightly intertwined economically and politically in their attempts to address these problems long-term.

The situation is becoming dire, and Ian Cheshire’s CEO of the U.K.-based Kingfisher PLC, the world’s third-largest home-improvement group, noted in the Wall Street Journal this week that it has come to the point that EU leaders / politicians need to fix Europe or else! Read more

Some positive underpinnings that may be helping the stock market’s uptrend thus far this year:

• The U.S. Labor Department announced this week that food and energy costs pushed down U.S. wholesale prices (the producer-price index, which measures what manufacturers and wholesalers pay for finished goods) in December, providing some relief for businesses hit by higher costs of other goods. In addition, there was a 0.4% rise in industrial production in December reflecting strength in manufacturing.
• Another positive is an article in today’s Wall Street Journal that spending on home maintenance by homeowners and landlords is forecasted to have increased in 2011 and will go up again in 2012. That would market the first year since 2006 that this has occurred.
• Right or wrong, the Federal Reserve appears to be ready to put additional steps in place to increase monetary easing in the upcoming months depending on several economic scenarios. As controversial as these steps have been, the stock market has reacted positively each time.
• Locally, I attended a bank advisory board meeting last evening. In attendance were several business owners of firms of various sizes. It was nice to hear one professional with a manufacturing firm state that his company is starting to see a pick up in orders. His customers are replenishing their inventory or are more confident about sales in the coming months.

In this same meeting, a local attorney, well-versed in mergers and acquisitions, stated that he has seen an increase in activity. And the bankers themselves had some positive comments regarding loan demand. Read more

No tabloid predictions here 

It’s the start of a new year and the best part of it has been the weather. It’s been in the 60s (degrees that is), which is extraordinarily balmy for the KC Metro area in January. 

Regarding the investment and economic climate, well that forecast is cloudier. It appears that optimism is trying to shine through in 2012. Unemployment is trending down and jobs are being created, even though both are lagging on a historical basis. 

On the other hand, this week, Alcoa, the world’s biggest aluminum company, announced that it is cutting its capacity by 12% due to economic slowdown and uncertainty around the globe. In addition, the Wall Street Journal reported that retail sales during the Christmas season were less robust than expected, and some analysts are forecasting less sluggish earnings in 2012 for companies in the S&P 500.  Read more

In 2011, global markets gyrated violently up and down based upon the news of the day.  That being said, overall U.S. stock markets have been relatively insulated compared to the rest of the world. 

Year-to-date, as of the market close yesterday, the combined average of the Dow Jones Industrials, S&P 500 and NASDAQ was down 1.933%.  This compares quite favorably to the Dow Jones Global Index, which is comprised of 50 countries (including the U.S), being down 12.90%, and the Dow Jones Global Index-ex U.S. (excluding the U.S.) down 18.9%, for the same time period. 

Another example of how the U.S. is not experiencing the same market traumas as other countries would be yesterday’s bond auctions.  The five-year Italian government bonds were issued at 6.47%, while 30-year U.S. government bonds were issued at 2.89%.  To put this into perspective, a 30-year $150,000 mortgage at the previously mentioned Italian bond rate would result in a monthly payment of $945.10 versus $623.50 at the U.S. rate.  Now you can see why high interest rates are crushing European governments’ finances, especially when they have to refinance hundreds of billions, if not trillions of debt each year.

To say that we in the U.S. have been sheltered from what is occurring in other parts of the world is an understatement.  Also, it is an omen of what fiscal steps we need to take here in the U.S. to avoid the same predicament.  Read more