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Market Commentary
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Weekly
Commentary
August
30, 2010
The Markets
Has
corporate America lost its gumption?
Three
of the things that have made the United States so great are the determination,
fearlessness, and entrepreneurial spirit of our people. Unfortunately, that
seems to be a bit lacking right now with the leaders of some of our country's
largest companies.
For
more than two years now, corporate America has been on a belt-tightening,
cost-cutting push that has helped contribute to our high unemployment rate.
While that has been bad for employees, it has sparked a significant revival in
corporate profits. For example, according to a New York Times article based on data from the Bureau of Economic
Analysis, second quarter corporate profits were within 4% of their pre-recession
peak. And, by another measure, Barron's
magazine pointed out that corporate profits as a percentage of gross domestic products
are near 40-year highs.
So,
if corporate America is doing so well, why aren't they hiring and why is the
stock market stuck in neutral?
In
a word -- uncertainty.
Even
top Federal Reserve officials are having a hard time agreeing on what to do
next to help the economy. On August 10, 17 of them met and, according to an
August 24 Wall Street Journal
article, at least seven of them spoke against or expressed reservations about
the ultimate decision Chairman Bernanke made to keep the Fed's balance sheet
from shrinking. Toss in government regulation, an upcoming mid-term election,
tax policy uncertainty, a deflation/inflation debate, and stubbornly high
unemployment, and there's plenty to muddy up the waters.
Corporate
America is reacting to this uncertainty by conserving cash and keeping a lid on
hiring. However, this will eventually change, and, on a positive note, we may
be starting to see that happen as corporate acquisitions are on the rise. The
current bidding war between two blue-chip technology companies for an obscure
data-storage company may be one example of gumption returning to the boardroom...
and that's good!
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Data as of
8/27/10
|
1-Week
|
Y-T-D
|
1-Year
|
3-Year
|
5-Year
|
10-Year
| |
Standard & Poor's 500
(Domestic Stocks)
|
-0.7%
|
-4.5%
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3.5%
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-10.1%
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-2.6%
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-3.5%
| |
DJ Global ex US (Foreign
Stocks)
|
-0.5
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-6.0
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2.6
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-10.0
|
1.4
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0.7
| |
10-year Treasury Note
(Yield Only)
|
2.7
|
N/A
|
3.5
|
4.6
|
4.2
|
5.8
| |
Gold (per ounce)
|
0.9
|
11.9
|
31.0
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22.9
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23.5
|
16.3
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DJ-UBS Commodity Index
|
0.1
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-5.5
|
3.8
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-7.1
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-4.8
|
2.1
| |
DJ Equity All REIT TR
Index
|
1.8
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14.0
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31.5
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-5.1
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1.8
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10.5
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Notes: S&P 500, DJ
Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends
(gold does not pay a dividend) and the three-, five-, and 10-year returns are
annualized; the DJ Equity All REIT TR Index does include reinvested dividends
and the three-, five-, and 10-year returns are annualized; and the 10-year
Treasury Note is simply the yield at the close of the day on each of the
historical time periods.
Sources: Yahoo! Finance,
Barron's, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future
results. Indices are unmanaged and
cannot be invested into directly. N/A
means not applicable or not available.
WHO HAS A WORSE
DEBT BURDEN, countries in developed markets or countries in emerging markets? Well,
by at least one measure, developed countries are in worse shape.
According
to the August 2010 newsletter from Research Affiliates, LLC, "Developed markets
account for 62% of the world's GDP and owes 90% of the world's sovereign bond
debt. The emerging markets collectively produce 38% of the world's GDP and owe
just 10% of world sovereign bond debt." In other words, relative to the size of
its economies, developed market countries (like the U.S.) have a much higher
debt burden.
This
debt level is problematic because it hampers a country's ability to grow.
On
the flip side, emerging market countries that are not swimming in debt are some
of the fastest growing in the world. China is a good example. Its breakneck
growth has led to a 60-mile long traffic jam on a main highway leading into
Beijing that is still unfolding, according to The New York Times. The culprit? A parade of coal trucks trying to
supply the rapidly growing energy needs of Beijing.
Over
time, as the developed world tries to pare its debt through austerity programs,
sluggish growth may result. World leaders are banking on emerging countries
like China to help pickup the economic slack. The extent to which these
emerging countries can do that may have a big impact on how long the U.S. stays
stuck in neutral.
Weekly Focus - Think
About It
"Don't
waste life in doubts and fears; spend yourself on the work before you, well
assured that the right performance of this hour's duties will be the best
preparation for the hours and ages that will follow it."
--Ralph
Waldo Emerson
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