Market retrospective - week of 10 July

Contents: Overview; Tea leaf readings; Economic reports; Perspective, “GM – Part 2”

"Generally speaking, investing in yourself is the best thing you can do. Anything that improves your own talents. Nobody can take it away from you. They can run up huge deficits, the dollar can become worth far less, you can have all kinds of things happen. But, if you've got talent yourself and you maximize your talent, you've got a terrific asset." - Warren Buffett, Investor, Omaha

Overview

We’re now off 5% in the markets over the past four weeks – just in a kind of drift mode until more corporate earnings begin to reveal themselves over the coming weeks. Oil is down 15% as talk of “controlling” speculators, high product inventories and a slow economy continue to push down the price of crude. Other commodity prices moved somewhat lower as well.

The neither unusual nor unanticipated summer weakness has us firmly in its grasp. To try and make sense of the markets when trading volume continues to be exceptionally weak/slow, is like trying to catch the wind. As has been seen over the recent trading sessions, there is very little price movement. The markets are at the “want to get started higher” stage. However, there needs to be a catalyst to set things off.

Analysts are estimating that profits at S&P 500 companies fell an average 34% in the second quarter compared with the year-age levels, according to data compiled by Bloomberg. The companies who beat their estimates and/or put forward favorable estimates will be well rewarded by nicely higher trades over the coming months.

Tea Leaf Readings
(I use this term to describe quotes from a number of opinion leaders about current market and economic events – what they see happening now and their expectations.)

“In a study of 401(k) plans, 3 million employees with 57 large US companies were interviewed. It was found that, regardless of their age or income, African-American and Hispanic workers have lower participation rates and contribute less to their retirement plans than white and Asian employees.

Asian employees contributed the most - an average of 9.4% of income, followed by white workers with 7.9%, Hispanics with 6.3% and African-Americans with 6%. The contribution and participation gaps led to smaller average account balances for Hispanics and blacks, a discrepancy that is compounded at higher pay rates.” - The study was conducted by the Ariel Education Initiative, the nonprofit associate of Ariel Investments and by Hewitt Associates.

“The economy is on its way to recovery, though some work still remains before a complete recovery will occur.” – James B. Lee, Jr., Vice Chairman, JP Morgan

"I find it shocking anyone would buy a 10-year Treasury yielding 3%. If you dilute the number of anything, its price has to go down. I don't know who has the confidence and comfortability in buying a 10-year Treasury yielding 3.4%, but I think it's absolutely insane.” - Michael Pento, chief economist, Delta Global Advisors (In reference to the 10 year US Treasury auction this past week.)

“Is there any example in the history of our global economy where a government pulled back their fiscal stimulus spending in time to avert price problems? I can't think of one.”…Andrew B. Busch, Global FX Strategist, BMO Capital Markets

“Big oil investors and Asia's central banks and sovereign wealth funds are poised to grow twice as fast as other institutional investors, underscoring how financial power is continuing to shift away from the West.” - Report from the McKinsey Global Institute

"I think this was a very positive report and consistent with the idea that the US recession will come to an end in the next few months." – Mark Zandi, chief economist, Moody's Economy.com (Concerning the widely lower than expected trade deficit.)

Economic reports from the past week (with occasional translations…)

“If you're trying to rebuild your portfolio of U.S. stocks, preliminaries show that growth funds--large-, mid- and small-cap - trounced value funds in the first half of 2009. The best-performing category was mid-cap growth, with the average fund gaining 13.01% from 1 Jan through 30 June. Small-cap growth funds follow closely, with an average six-month gain of 11.44%. Large-cap growth funds produced a total return, on average, of 10.92%.” – Lipper Analytical

“Even as federal debt issuance has ballooned, the government's interest payments have fallen. Despite record borrowing, US net interest payments are set to fall in 2009 to $170 billion from $253 billion in 2008, according to Congressional Budget Office projections. It expects those interest costs to remain flat in 2010, on the assumption that the Treasury will continue to issue large amounts of short-term debt at very low rates. In June 2009, the average cost of government debt fell to 2.69% from 4.04% a year earlier.” – Wall Street Journal

“High output from the first wells drilled at the Horn River basin shale-gas field in British Columbia, announced Thursday, suggests huge potential. Wood MacKenzie last year estimated the region might hold up to 47 trillion cubic feet of reserves. That would put it on a par with Texas' prolific Barnett Shale fields. Combined US and Canadian proved natural-gas reserves have jumped 29% in the past decade according to BP PLC.” - ExxonMobil release

“The US trade deficit unexpectedly narrowed in May to the lowest level in almost a decade, as exports jumped while imports of crude oil and auto parts declined. The gap between imports and exports decreased to $26 billion, the smallest deficit since November 1999, from a revised $28.8 billion in April that was lower than previously estimated. Imports fell while exports rose the most since July 2008.” – US Department of Commerce


Perspective

“GM – Part 2”

On Friday, General Motors Company rose from the bankrupt ashes of General Motors Corporation. Their CEO, Fritz Henderson, said that the new company - which is currently owned 61% by US taxpayers, 12% by Canadian taxpayers and 18% by the UAW – will repay its loans well ahead of the 2015 deadline. He also said that, “the new General Motors will be faster and more responsive to customers than the old one and it will make money and repay government loans faster than required.”

The company plans to keep its best assets and to be rid of an additional 6000 employees, along with 16 plants and related real estate in Delaware, Ohio, New York, Indiana, Pennsylvania, Virginia and, of course, Michigan. GM now consists of just four US brands and will only be offering Chevrolet, Buick, Cadillac and GMC trucks.

Over the past year or so, the US taxpayers have provided about $60 billion in financing, including $30 billion in bankruptcy financing. About $50 billion of the US government financing will be converted into stock in the new company.

An initial public offering that would take the newly private and reorganized GM back into public ownership could happen as soon as the first half of 2010, depending on the market conditions.

So now, all the “old” shares of GM Corporation are worthless as this new venture officially gets under way. After all the money that’s been spent, the lives negatively affected and the economic injury it has caused, it would be nice if all this works out in a positive manner. There definitely is a big pent-up demand for new vehicles – but will they be GM name plates? Simply changing the structure doesn’t bring in buyers. Their competition isn’t just watching all this time.

Among other things, GM is going to have to greatly improve designs, quality of product and be as responsive as the CEO has said they will. The bigger problem, in my opinion, is that the management and union people who brought them to this dismal point are still – to a major extent – in power.

I hope they can change their spots and actually revive a former icon and not just have it on life support for a time…

All my best,

Mike

509-747-3323

Closing values as of 10 July 2009: Dow Jones 8146 NASDAQ 1756 S&P500 879 Oil $59.86/bbl Gold $912.40/oz