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…)

The sentencing of Bernard Madoff brings the Securities and Exchange Commission one step closer to closing the book on one of the largest Ponzi schemes ever perpetrated. While Madoff has garnered most of the headlines, numerous other fraudulent schemes of various magnitudes have come to light over the past six months.

The common thread between many of these schemes is quite simple. The criminal serves dual roles as investment manger and qualified custodian of the same assets. As investment manager, funds are accumulated, often under the guise of guaranteed high investment returns. Once in possession of the money, funds are transferred between accounts in order to meet withdrawal requirements. As custodian, fake account statements with bogus information are provided in order to create the illusion of a legitimate operation. If the money inflow from new clients offsets the outflow from withdrawals, the fraud may be perpetrated for a long time.

Hardesty Capital does not take custody of client assets. Independent third-party qualified custodians, such as banks and broker-dealers, are utilized for the vital function. Qualified custodians are subject to extensive regulation and oversight. Included in the oversight is a daily reconciliation conducted by our firm to assure the accuracy of custodial records.

In response to the financial schemes, the SEC has modified their registered investment adviser examination process. They will now perform a valid verification of assets by requesting independent confirmation of investor assets from various third parties, including custodians and advised clients. The SEC exam staff may ask clients to confirm that their account balances as of a specific date were consistent with their own records and that the contribution and withdrawals from their account were authorized.

—Eric Schopf

Though it was a short week due to the observation of Independence Day, it did not lack in the amount of economic data the market had to contemplate. The most important number was unemployment, which came out on 7/2. The numbers were very disappointing, and the market fell hard because of it. That drop put the domestic indexes, the Dow, the S&P and Nasdaq, unchanged for the week. Quarter-to-date, they all showed positive increases as well, at 11%, 15.2%, and 20%, respectively. The Dow continues to be negative year-to-date (-3.8%) while the S&P is positive at (1.8%) and the NASDAQ powers ahead of all of them with a strong year-to-date gain (16.4%).

The yield of the 10-year Treasury bond was up by 2 basis points from last week, and it was the best quarter for equities since the late nineties. But with the announcement of consumer confidence and unemployment numbers, both of which took a dip, there was a negative market reaction late Wednesday into Thursday. After the steady January-May decline in the number of jobs lost, that number rose in June, for the first time since 2008. The unemployment rate reached 9.5%. Figures, unfortunately, were worse than we had expected, but there may still be signs for a economic turnaround later in the year.

It was a flat week for the S&P 500, though the Dow dropped by 1.2%. Year-to-date, however, the S&P is positive (+1.7%) and the DJIA negative (-3.9%). The NASDAQ continues to soar above the other indexes, up 16.6% year-to-date. Foreign markets are also doing well, due to their connection to commodities and the dollar.

The bond market continues to be volatile as rates are moving down again. Treasury yields have dropped, as the Fed stays aggressive on inflation: the current yield of the 10-year Treasury bond is 3.50%, compared to the June 10th close at 3.98%. There is a real concern of an impending wave of inflation, as well as higher taxes, due to concerns about federal spending. These issues are driving the bond market’s volatility and will continue to do so for the coming weeks.

Investors face a shortened week due to the 4th of July holiday. It is not short on data, though — the big numbers we are watching are consumer confidence, due out Tuesday; ISM data, due Wednesday; and unemployment, out on Thursday. Each of these series is important to consumer spending and will certainly drive the markets in the short-term. We predict they will be better-than-expected.

At the close of Monday, June 22nd, the S&P 500 was down 1.1% year-to-date while the Dow Jones Industrial Average was down 5% year-to-date. So far this quarter, however, both reported positive increases: the S&P was up 11.9% and the DJIA 9.6%. The NASDAQ year-to-date showed an increase of 12%, down from last week’s 17.5%. After a very aggressive upward move off of the March 9th lows, the markets appear to be taking a breather. World-wide economic growth and recovery are currently being questioned.

While foreign markets are doing well, the current yield of 10-year Treasury bonds is 3.69, down significantly from the 3.98 we saw earlier this month. The prices of gold and oil are down as well, with oil dropping from the low 70s to the high 60s. But with the number of new home starts up and the number of weekly unemployment claims stabilizing, the economy seems to be showing signs of life.

At this point, we really need the government spending programs to actually kick in. Though the money has been appropriated, very little has been spent; for economic growth to really begin, this money needs to work its way into the economy. Until then, we should be in a trading range for stocks.