After a rollercoaster ride of a week, the markets ended down, owing to a big final dip on Friday.  For the week, the Dow was down .2%, the S&P.7%, and the NASDAQ .7%. Sadly, we again dropped below 10,000 before the week was out.

The dip on Tuesday might be blamed on the housing numbers for last month, which showed 590,000 starts, compared with the 610,000 that were expected.  On Thursday, initial jobless claims were  announced.  The figures were higher than many expected, up 11,00 from last week to 531,000, after a trail of consecutive decreases.   Earnings figures helped propel stocks through the week, with many earnings results even better than we had hoped.  However, the boost was evidently not enough.

There continues to be net flow of cash out of equities.  As we are known to advise, investors help us know what’s right by doing what’s wrong.

Next week, we look toward durable orders numbers for a picture of the manufacturing sector.  Durable orders are considered a leading indicator, so they may show us what’s coming next in manufacturing activity.  Also next week we will see consumer confidence data.  We hope the figures will have improved- all the talk of an immediate recovery should have helped to loosen purse strings a bit.

Stocks had another nice set of gains this week, despite a loss Friday.   We also briefly crossed the much-coveted 10,000 mark in the Dow, though it is a psychological mark only.  The Dow was up 1.33%, the S&P 1.51%, and the Nasdaq .82%.  For the year, we are now up 14%, 21%, and 37%, respectively.

Retail sales fell 1.5% last month, versus an expected 2.1% loss. We are in the undesirable position of celebrating a mere 1.5% loss in retail sales.  Initial jobless claims, too, fell to lower levels, now at their lowest since January.  Again, we celebrate a paltry half-million people filing their initial jobless claims. We look back at 2007, when 350,000 was considered very high.

The S&P 500 index is now trading at about 15 times 2010 earnings.  Under normal circumstances, this would be a clear sign of undervalued stocks, and we would expect to see a quick return to a 20-times level, given where we are in the economic cycle.  However, with unemployment reaching 10% and interest rates at or near 0%, the economic environment is anything but “normal.”  We expect to see a return to historic valuation levels- but not before these other wrinkles are ironed out.

Money continues to flow into bonds, while money market funds and equities continue to have negative flows.  This is surprising, as we believe we are primed for a correction in the bond markets.  It is predominantly professionals coming out of money market funds, while mutual funds are dominated by individual investors. The “average investor” can, as usual, be relied upon to show us what the wrong move to take is.

Next week is a relatively light one in economic news; the main focus is housing numbers that will be released.  Of course, we will also have an update in weekly claims.  Earnings reports will take the main stage, and will certainly drive the market next week.  For those companies reporting, we expect generally positive results.

Our hopes at the end of last week were realized as the markets had a nice bounce this week.  The Dow was up 3.98%, the S&P 4.5%, and the NASDAQ 4.45%.  The earnings season is upon us- and so far, things are looking good.  Both Chevron and Alcoa posted good numbers.  The dollar gained somewhat on Friday, but stocks seemed unruffled and continued their upward march.   Jobless claims were down more than expected as well—to 521,000 from a revised 554,000 last week.   Wholesale inventories were down more than expected, potentially forecasting gains for retailers as well.

Next week we will focus on retails sales numbers, and of course, initial jobless claims.  We hope for a continuation of the downward trend for weekly claims. Although this week’s numbers were a step in the right direction, the overall number of jobless claims is still uncomfortably high.

When valuing an asset, one assesses the present value of the future returns that asset will bring.  The present value, PV, of a future cash flow, C, is calculated using the number of years in the future that the flow will be received, t, and the interest rate, i. Specifically, PV= C/(1+i)^t.  The important thing to note from this equation is that the interest rate i is in the denominator of the equation— as it rises, the value, PV, falls.  To say it another way, lower interest rates generally mean higher values of current assets and thus, higher stock prices.  Thus, high interest rates portend lower stock prices.

With this in mind, keeping interest rates low should bolster stock prices.  Jim Hardesty has prognosticated that interest rates will remain low, and we will see no major changes in the Fed’s strategy in the next 18 months.

The  importance of the upcoming earnings announcements cannot be underestimated.  As we enter the earnings-reporting season, we are confident that the numbers released by many companies will be stronger than anticipated.  This development will be a sure sign that we are well on our way to an economic recovery.

The domestic economy most likely turned up in the third quarter of 2009, abating fears of a major economic depression. Seven of the ten leading indicators are now positively contributing to the Index of Leading Economic Indicators. The economic dislocations of 2007 and 2008 are receding. One of the leading indicators, the S&P 500 Index, delivered another very strong quarter, making it two consecutive double-digit percentage increases. The S&P rose 15.6%, the Dow was up 15.7% and the NASDAQ jumped 15.7%. Last quarter, these indexes increased 15.9%, 11.9% and 20.0%, respectively. These results are the best quarterly returns in a decade. Even after this tremendous run, the S&P 500 is still almost 15% below the level experienced when Lehman Brothers declared bankruptcy on September 15, 2008. (more…)

Hardesty Horizons is now in its 10th year of publication, which means there have been roughly 40 opportunities to face a blank palette and put words to paper. That large sigh of relief resulting from the completion of another communiqué, is quickly followed by the fear and trepidation of what to come up with next. Unlike the other entries which appear, The French Quarter is not a ”set” piece, nor was it ever intended as such… the raison d’etre—as the ”sales & marketing arm” of Hardesty Capital Management, so to speak—is nothing more than a ”shout out,” as the au courant phrase goes, an attempt to avoid being ”outta sight, outta mind.” And implicit therein, the goal might be to provoke or entertain, not leave indifferent (b/t/w, for those keeping count, the French tongue has been employed three times so far, justifying the byline…). (more…)

This week saw another disappointment in the markets, with each index down about 1.5%.  Traders reacted poorly to news on Thursday of a decline in manufacturing data a  fear there might be more job losses than expected Friday, challenging some hopes of a speedier recovery.   On Friday, the fears were realized, as the jobs reported indicated 551,000 initial jobless claims, up 17,000 from last week, and significantly higher than the expected 535,000.  The quarter still ended strong, however, despite this week’s numbers.  This week’s slide may be a recognition by the markets that the recovery might still take some time, and the losses are a correction of previous high hopes.

Next week, we look to initial claims to see if this week’s dip can be corrected.  Also, we will be looking at wholesale inventory numbers.  Until now, much of the recovery can be attributed to restocking of inventories.  The numbers next Thursday will give some insight into the status of these inventories- if there is some natural demand returning there, it would suggest some movement toward recovery.

This week saw a slight pullback in the markets.  The Dow was down 1.6%, the S&P 2.2%, and the NASDAQ 2%.  The transport sector, generally considered a leading indicator, took a particular beating this week, ending down about 3%.  Despite the week’s losses, the markets are still on firm footing. Quarter-to-date, we are hovering around a 15% gain.  Year-to-date, the markets are up about 18%. With three business days to go in the month, it seems we may have dodged the “September Curse.”

We saw the economic indicators mixed this week.  There was a brief upward spike in stock prices Wednesday after the Fed’s announcement that although the economy was improving, interest rates would stay low.   This spike changed quickly to a dip, illustrating the maxim that traders “buy the rumor and sell the news.”  Once the announcement was made, it was already old news, and those who saw gains from the announcement sold their stocks to cash in.  Sounds a little like the old days!

Gold seems to be the topic du jour.  Investors view gold as a hedge against inflation, which some are predicting to be a result of the Fed’s monetary policies.  Gold is showing signs of speculative investment as money has recently poured into the gold ETFs.  Gold ETFs must buy gold when people buy shares, driving up its price.

Next week is a very heavy week for economic data.  We will get unemployment numbers for August, the Institute for Supply Management figures for manufacturing and Consumer Confidence, to name a few.  We are also in the earnings pre-announcement season which may bring some positive surprises.

This week saw another set of impressive returns in the markets. The Dow finished the week +2.2%, the S&P +2.45% and the NASDAQ  +2.5%. Our fears of a correction in September are abating, and we remain hopeful that the month can finish strong.

Housing starts for August were up 1.5% since July, more evidence that the  housing market’s worst is past.  Jobless claims fell to 545,000 last week from 550,000 the week before. Inflation was up .4%.  We do not like inflation, of course, but a small dose of inflation is certainly preferable to deflation- the specter that has haunted us these past months. The Federal Reserve released its industrial production numbers, which were up 2.08% on a month-to-month basis.  The bump may be largely attributable to the “cash for clunkers” program.  We look forward to untainted-but-still-improving numbers for these figures next month.

Next week, the Treasury is issuing a record $112 billion in notes in 2-, 5-, and 7-year bonds. In anticipation, prices have inched up a bit. The Treasury is not, to date, having any trouble selling these bonds to investors.  Build America Bonds are driving down competing municipal bond yields, causing problems for income investors.  The supply of tax-exempt municipals is down and demand for them is still high.

We remain disappointed that nothing has changed in financial regulation, despite the chaos in the markets made clear by our recession.  Firms are borrowing short and lending long- leaving themselves open to problems covering their obligations yet again.

Next week, we will be watching the reports on Leading Indicators, Initial Claims, and Durable Orders.

This week, Friday tied up another week of gains in the market. The Dow was up 1.74%, the S&P 2.6%, and the NASDAQ  3.1% for the week. The only exception was Friday itself, where stocks retreated less than one quarter of one percent. There has been a lot of talk about a correction this month, but stocks seem to be resisting that notion. If stocks continue on this trend for the rest of the month, we will see another great quarter for stocks with a rise of about 15% – making a much-needed two in a row.

New consumer confidence numbers were released Friday morning, though stocks seemed largely to ignore the good news.  The numbers were up more than expected, preliminarily at 70.2, from 65.7 in August.  This figure contrasts with the expected rise to 67.5.  Also good news were the weekly jobless claims, which dropped 26,000 to 550,000, better than expected.  The economy appears to be moving in the right direction.

Next week, we will be watching several key economic data points.  Most important are the housing numbers due out Thursday. This is not to discount inflation, industrial production and jobless claims figures, which will also impact markets next week.

This week, the major indices suffered a hit of about 2% on Tuesday. On Friday, they attempted to regain some lost ground, but ended with a weekly loss of about .7%.  The unemployment rate rose more than expected to 9.7%, but job cuts were down to 216,000 last month compared to July’s 276,000. The mixed report reflects that while there is continued improvement, we are not out of the woods yet.

In recent months, there has been significant movement of money into bonds.  Part of this increase in demand owes to the general belief that the Federal Reserve will successfully maintain inflation at currently low levels.  However, we find this idea to be misguided.  We expect inflation to return to more “normal” levels in the next few years.  Similarly, interest rates will increase, and those who have purchased bonds will be stuck with their bonds, unable to take advantage of new, higher rates.

Highlights next week include consumer confidence and, as always, weekly claims.

Last week tied up a respectable 38-point gain in the Dow, with similar percentage gains in the S&P and NASDAQ. While the Dow ended the week on a flat note, one day does not a trend make.

In the second quarter, the S&P returned 15%.  This quarter looks to have a similar result if the recent leanings toward growth continue.  Despite these gains, we are still well under the old peaks in the market, giving plenty of room into which to grow. As the market continues to be stable, one may reason that all those who got out of the market will get back in, as there is still a lot of money that was taken out and has not come back in.  Only 15% of investors are fully back into the market.  Bringing in the rest should drive up demand and, inevitably, prices.

However, only 20% of current investment letters are bearish. It can be argued that all money that is going to return to the market is back already, and we should not count an influx of money to bolster stock values. We continue to go forward with caution, but continue to look for opportunities to take advantage of the current market trends.

There was an impressive boost in the markets last week, with the Dow Jones up 181 points, or 2%, over the course of the week. Many investors seem to be willing to reintroduce risk to their portfolios, moving away from money market fund investments in search of higher returns.  Despite the good news, the lack of any movement in raising rates from the Fed comes as no surprise as they are cautious in instigating any sort of decline.

As stocks lead the general economy, we expect other economic indicators to pick up in kind in the coming months.  An area of concern is “long-tailed” businesses.  Developers of commercial real estate, for example, must plan their projects months or years before they are to be completed.  If one of these companies planned a project in 2007, it may be just now nearing completion. Since the company likely would not have made any plans in mid-2008, there is nothing “on deck” to begin this year or next.  This may lead to a lag in such businesses during the rest of the economy’s recovery.  However, such businesses will begin planning new projects along with others, though there may be some delay in their coming to fruition.

The market appears fairly valued. We do not anticipate the market will continue to rise at the same pace. However, it is not out of the question that the market will move higher.

There was another pullback this week (the fourth consecutive), after a relatively steady, significant increase from the March 10th lows. The Dow was down 1.6%, the S&P 500 1.9%, and the NASDAQ 2.3%. Year-to-date, the Dow and S&P are still negative, down 7.2% and 2.7%, respectively, and the NASDAQ remains positive with an 11.4% year-to-date gain.

In commodities, the price of gold has decreased, down to a little over $900 per ounce. Oil prices have also decreased to $60, back down to where they should be — between $45-65 a barrel. The federal funds rate has also dropped to 0.16%, down more than 10 basis points from just two weeks ago.  The market is no longer pricing in a rate increase.

After reading William Cohan’s book “House of Cards,” I was taken aback by the level of greed that has tarnished respected financial institutions. Greed turned them into financial casinos where executive compensation levels became an overriding corporate objective. This excess is wrong and, just as the excesses of Drexel Burnham in the late 1980’s were corrected, today’s unwarranted and unnecessary compensation levels will eventually return to some form of sanity and normalcy.

Greed was not restricted to the corporate suites of managements across the country. Unfortunately, more financial thievery was exposed this quarter as the public confidence in the U. S. financial markets had to withstand another indictment. Just as the Madoff case came to an end with a 150 year sentence, Mr. R. Allen Stanford, a Houston based financier, who operated significant offshore tax havens, was indicted. To our delight, the sheriff is here, and hopefully those that have abused the financial structure of our economy will be awarded a full measure of the prison sentences and fines they deserve. This is a precondition for restoring investor confidence, which should result in more normal equity valuations. “Normalcy” could equate to more than 50% above current stock prices. (See the Schopf Stop for more on this.) (more…)