The U. S. Commerce Department announced today that after-tax corporate profits for the first quarter of this year fell at a rate of 0.9 percent, after rising at a 3.3 percent pace in the fourth quarter of last year. Separately, the Labor Department noted that unemployment claims last week rose.
Many economists are calling for a rebound in the second half of the year for the U.S. economy. I certainly welcome this; however, I just spoke with a local veterinarian yesterday and he noted that his business is starting to slow down for the first time in the last several years. Basically, it is his belief that the recession was not nearly as impactful on individuals’ spending habits, especially on their pets, as the recent high gasoline prices. He may be right. Higher gasoline and grocery prices (see Coffee drinkers and chocolate lovers beware), may put a damper on economic growth, which would make for a lackluster stock market. I hope I am wrong, but it is something to consider.
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I hope you find the following comments informative, enlightening and maybe even humorous.
“Across Europe just now men who thought their title was “minister of finance” have woken up to the idea that their job is actually government bond salesman.”
Michael Lewis, Vanity Fair, March 2011
“Ten years ago at the top of the dot-com bubble, public companies reported huge earnings, but they were hemorrhaging cash at a rate of $125 billion annually. Today U.S. companies are generating gross cash of $250 billion—the most recent 2009 figures. With so much free cash flow, companies are better able to return money to shareholders via dividends or share buybacks.”
Charles Clough, Barron’s, January 29, 2011
“Since 1928, the average bull market has lasted 57 months providing a 164% gain. Our current “baby” bull has furnished investors with a 91% price return in a mere 23 months. The data are similarly as compelling if one looks at the duration of economic expansions. Our current recovery has been underway for 20 months while the average duration has been 45 months over the last 110 years.”
Jason Trennert, Investment Strategy Viewpoint, February 4, 2011
“If you look at how equities have performed lately, there’s an argument to be made that, early in 2011, there’s been some kind of global disconnect going on. The S&P 500 is up nearly 6% this year. The MSCI Emerging Market ETF, which outdistanced U.S. equities last year, is down nearly 4% for 2011.”
Bob O’Brien, Barron’s, February 12, 2011
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As I am writing this, U.S. stocks are declining as falling commodity prices prompted an unwinding of bets on risky assets and raised questions about the strength of the economic recovery. In the prior months, the stock market showed ample strength in the face of higher commodity prices, because it was a sign of global economic growth / demand. However, valid concerns were raised that higher commodity prices would hurt corporate profits and consumers’ wallets. Now we are seeing lower oil and other commodity prices; which is a savings for both corporations and consumers, but raises a concern that we are seeing signs of slowing global growth and the stock market reacted negatively.
I find this reaction quite ironic. The stock market reacted favorably to higher commodity prices and just the opposite when they decline. The market movements in the short-term (daily or weekly) seem to be driven more by traders (i.e., large institutional investors and hedge funds) trying to make a quick buck on daily market sentiment versus long-term investors like IRA and 401(k) account owners.
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Today the Labor Department said that first-time claims for unemployment benefits rose last week to the highest level in eight months. The report raised concerns about tomorrow’s monthly jobs report. This has resulted in a pull back in stock prices today, May 5, 2011.
In last week’s commentary I specifically noted that analysts and others believed that commodity prices and specifically, silver, were ready for a correction. Well, guess what. Silver is down over 25% since its peak last week and other commodities such as oil, cocoa among others are down from their recent peaks as well.
Many commodities have had a huge run up over the last year and especially in the last several months. The majority of the reason was increasing global demand, especially from emerging economies. However, the Wall Street Journal reported today that a portion of the price run up was due to a huge boom in computerized, high-speed trading. High-frequency traders now account for 28% of the total volume in the futures markets, which include commodities and currencies. Read more
