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Sunday, January 3, 2010
New year arrives, but old worries for US stocks NEW YORK: US stocks closed out 2009 with the best performance in six years, but monthly employment figures in the first week of the new year will keep investors focused on what is likely to be 2010’s reality-the economy’s struggle to recover. On the data front, the main event will be Friday’s report from the Labor Department on US non-farm payrolls in December. Economists polled by Reuters have forecast that payrolls shed 20,000 jobs in the final month of 2009, compared with just 11,000 lost in November. The Institute for Supply Management’s report on manufacturing, due on Monday, is expected to show the ailing sector was still slow to expand in December, while a projected drop in November pending home sales, due on Tuesday, will underscore the housing market’s shaky recovery. Major factors in the stock market’s 2009 rally have been ultra-low interest rates and the Federal Reserve’s purchases of securities. A repeat of November’s much betterthan-expected unemployment report could cause investors to worry that the Fed will increase borrowing costs sooner than previously thought. Thomas Wilson, managing director of institutional investments at Brinker Capital in Berwyn, Pennsylvania, said the unwinding of the fiscal and monetary stimulus, possibly in the second half of 2010, will be a “delicate and deliberate process” that could ruffle markets. Expectations that interest rates may rise sooner than expected have been helping the US dollar recently, which could make a sustained move higher-if expectations for higher
WALL STREET WEEKLY OUTLOOK
rates increase further. The stock market moved inversely to the dollar through most of 2009. A continued bounce in the greenback in 2010 could hurt stocks. “The mar-
ket’s reaction to the generally stronger dollar is going to dictate a lot of the investment themes for the first half of 2010 and maybe the year at large,” said Bruce Zaro, chief tech-
nical strategist at Delta Global Advisors in Boston. Despite a 65 percent gain in the S&P 500 from its 12-year closing low in early March, stock investors have
lost money this decade when total returns are taken into account. Few will be overwhelmed with the longterm performance of their portfolios. As 2009 ended, Wall Street capped its first-ever negative decade on a total return basis, even with dividends reinvested. Nevertheless, investors will remember 2009 as the year that the US stock market made a substantial turnaround from its plunge in 2008 when fallout from the implosion of subprime mortgages and the credit crisis forced Lehman Brothers into bankruptcy-changing the landscape of Wall Street forever. For 2009, the Dow Jones industrial average climbed 18.8 percent, the S&P 500 shot up 23.5 percent and the Nasdaq surged 43.9 percent. Friday’s non-farm payroll report is expected to confirm that US job losses continued to bottom out in December. The data is also likely to reinforce expectations that the US unemployment rate will peak in the first half of next year. The US unemployment rate is expected to edge up to 10.1 percent in December after it unexpectedly fell to 10 percent the month before. In December, the Fed stuck to its commitment to keep interest rates close to zero for an “extended period.” Some investors took November’s unemployment number as a sign that rates may need to rise faster. That debate could start again if Friday’s number is better than expected. Better economic data “will raise concerns about the possibility the Fed will tighten earlier than most investors anticipate, but given what we’re hearing from the Federal
Reserve, it seems unlikely,” said Carmine Grigoli, chief US investment strategist at Mizuho Securities, in New York. Most economists in a Reuters poll said they do not expect the Fed to raise interest rates before the end of the first quarter of 2011. Many analysts are expecting the fledgling recovery in the US housing market to be bumpy. An index of pending home sales is seen dropping 2.1 percent in November after hitting a 3-1/2-year high the month before-the culmination of nine straight months of gains. That data is due on Tuesday. The housing recovery is being supported by an $8,000 tax credit for the first-time home buyer. Originally due to expire at the end of November, it was extended to the end of April. The possible removal of that support remains a wild card for financial markets. If the tax credit doesn’t get extended again, “that will certainly be a negative on the housing front, plus if we see mortgage rates rising as well in 2010, a combination of those two would be a negative for the housing market,” Wilson said. Mortgage rates generally follow the yield on the 10-year US Treasury note, which rose to 3.8 percent on Thursday, the last day of 2009, from 3.2 percent at the end of November. So far, stock investors have looked past that as they focus on signs of an improving economy. On Monday, the ISM’s manufacturing index could have the potential to surprise on the upside after the ISM-Chicago regional survey showed manufacturing in the US Midwest expanded more than expected in December. Economists polled by
Reuters expect the ISM’s manufacturing index to rise to 54 in December after edging lower to 53.6 in November. A reading over 50 indicates economic expansion. “The equity market is going to continue to focus on improving economic prospects, assuming that the economic data next week continues along the path that we’ve seen,” Grigoli said. Two days later, on Wednesday, the ISM’s snapshot of the US services sector, which is the largest segment of the US economy, will be released. The Reuters forecast for the ISM non-manufacturing index calls for an increase in December to 50.0, which signals expansion, from November’s reading of 48.7. As for the nation’s gross domestic product, which measures the economy in terms of all goods and services produced within US borders, economists polled by Reuters expect that GDP will grow at an annual rate of 2.8 percent in 2010. The US economy returned to growth in the third quarter of 2009 following a prolonged slump tied to a recession that began in December 2007. Factory orders are pegged to rise 0.5 percent in November when the data is released on Tuesday. Betterthan-expected data in October showed inventories at US factories increased for the first time in more than a year-a sign that manufacturers are ramping up production. Reports on December sales from US automakers, also due out on Tuesday, will give yet another reading on the economy and manufacturing. Total vehicle sales are expected to rise to 11 million units in December after edging up last month. — Reuters
Oil dominated the decade
A string of investment bubbles ruled 2000-09 NEW YORK: A string of exploding investment bubbles that started with the dot-coms and ended with mortgages and oil dominated the years from 2000 to 2009. And it looks like the next decade will be no different. It doesn’t seem to matter to many hedge fund traders and other professional investors that the Standard & Poor’s 500 index has turned in its first losing performance A mix of investor hubris, ignorance and piles of easy money created the bubbles. New ideas about where to invest seemed foolproof and greed crowded out doubts. Many investors looking for the best returns failed to see the potential problems with an Internet business that had no sales plan, or that thousands of expensive homes bought with no down payment might end up in foreclosure. Now, these investors who fled the last blowups risk running smack into others. The Federal Reserve is keeping borrowing costs low to help revive the economy, and that means there’s still plenty of easy money around, helping traders to inflate the price of everything from stocks to commodities such as gold. “They’ve put out the biggest punch bowl in US history and people are guzzling from it,” said Haag Sherman, chief investment officer at Salient Partners in Houston. It begs several questions: What will be the next bubble? Or is it already here? And, how do individual investors protect their savings? Some analysts have already been asking if the stock market formed a bubble with its huge rebound this year. The S&P 500 is up 68.9 percent from the 12year trading low of 666.79, its best performance since the 1930s. Gold is also suspect. It’s above $1,098 an ounce and up 24 percent in 2009. Other possi-
over the course of a decade, having fallen 23 percent from 1,469.25 at the start of 2000 to its current 1,126.20. Or that they or other investors helped create and then destroy the bubbles that left stocks worth $2.5 trillion less today than when the decade began — and that’s before adding in the effects of inflation.
NEW YORK: Specialist Garet Boehning works at his post on the floor of the New York Stock Exchange. A string of exploding investment bubbles that started with the dot-coms and ended with mortgages and oil dominated the years from 2000 to 2009. And it looks like the next decade will be no different. — AP ble sources of bubbles include stocks in emerging markets
Weak food service sales hurt Cal-Main 2Q results JACKSON, Missouri: Cal-Maine Foods Inc, which produces and sells eggs, said its fiscal secondquarter profit fell 41 percent as food service and restaurant sales remained weak. Profit for the quarter ended Nov. 28 fell to $16.1 million, or 67 cents per share, from $27.2 million, or $1.14 per share, last year. Analysts polled by Thomson Reuters, on average, predicted a smaller profit of 66 cents per share. Revenue fell 4 percent to $229.2 million from $238.3 million last year. Analysts expected revenue of $233.7 million. CEO Fred Adams Jr. said supply and demand for eggs were well balanced and food costs were down. “However, food service and restaurant sales continued to be slow, reflecting economic trends, and egg product sales were down about 2 percent,” he said.
such as China, where the Shanghai index is up 76.4 per-
cent this year. Analysts say it’s in the DNA of markets to let ambition cloud good judgment and that even when investors learn or relearn a lesson about excess, many still forget it. Moreover, investors still have $3.2 trillion in money market mutual funds that’s waiting to be invested, according to iMoneyNet Inc. With so much cash available and investors hankering after big returns, analysts warn that bubbles may be inevitable. The signs of effervescence can be hard to spot. “Pets.com was going to have a market cap larger than Exxon Mobil,” said David Darst, chief investment strategist for Morgan Stanley Smith Barney in New York, referring to the Web site that collapsed in November 2000, nine months after raising $82.5 million from investors. He says investors will keep getting tripped up as they find new ways to invest. “Human nature doesn’t change,” Darst said. “Market mechanisms change but human fear, human greed will be like this decades and centuries hence.” The numbers from this decade tell a stunning story: * The Nasdaq composite index, powered by the dot-com buying that began in the late 1990s, went all the way up to 5,048.62 in March 2000, then crashed down to 1,114.11 at the depths of the 2002 bear market. It rose as high as 2,859.12 in October 2007, but no one
expects it to return to its loftiest levels. And the indexes don’t reflect inflation, taxes and fees, which take the value of an investment down further. Thornburg Investment Management, which analyzed the value of investments beyond the decade, said $100 invested in 1978 would have been worth only $376 thirty years later after accounting for inflation, expenses and taxes. * Crude oil, sparked by a weaker dollar and worries that oil producers would soon be unable to meet global demand, rose 71 percent in just six months to a high of $147.27 in July 2008. Prices then crashed down to $33.87 in just five months. The plunge was so precipitous that it destroyed several hedge funds that had bet oil would just keep soaring. * Low borrowing rates and insatiable demand for mortgage debt by investors made it easy to get loans. That helped prop up housing prices and fuel speculation on securities based on those risky mortgages. The peak came in April 2006; after that, home prices fell 31.9 percent to a low in May 2009, according to the S&P/CaseShiller 20-city index. Along the way, two investment banks that bought mortgage-backed securities collapsed and the government spent hundreds of billions of dollars to prop up many commercial banks. — AP
Mauritius banks on tourism, real estate PORT LOUIS: A resurgence in the hotel and restaurant, construction and financial intermediation sectors will drive economic growth, forecast at 4.3 percent in Mauritius next year, official data showed Friday. Observers say the Indian Ocean island’s open economy, consistently one of Africa’s strongest performers, has weathered the worldwide economic storm better than expected and should bounce back in 2010. Growth in the almost $10 billion economy is expected to slow to a forecast 2.8 percent this year - from 5 percent or above over the last three years-after the country’s tourism and leading export sectors bore the brunt of the global slowdown. “Hotels and restaurants (expect) growth of around 5.0 percent based on a forecast of 900,000 tourist arrivals compared to 860,000 in 2009,”
the Central Statistics Office (CSO) said in a statement. “(This assumes) some recovery in our main markets and positive effects of the holding of the world football competition in the region,” it added. For 2009, the CSO predicted a less severe than expected contraction in the hotel and restaurant sector of negative 6.4 percent, down on earlier forecasts of negative 8.8 percent. Meanwhile, the statistics office said the construction sector would grow by 8 percent next year compared with 2009’s 3 percent. This is mainly due to the frontloading of public sector investment projects, it said. Finance Minister Ramakrishna Sithanen said in his 2010 budget speech in November that public sector investment would hit over $800 million next year to help cement the Mauritius’ economic recovery before
exiting a $340 million stimulus program. The island’s sugarcane and sugar milling sector is seen growing by 1.1 percent in 2010 compared with 21.1 percent this year, the CSO said its endof-year national accounts report. The sector’s expected contraction is due to an expected fall in sugar prices and an end to a deal with the European Union for African, Carribean and Pacific Countries, which had guaranteed a raw sugar price of over 523.70 euros per ton. In the 2009-2010 harvest, Mauritius will export refined sugar in place of raw sugar to German giant Sudzucker, ending a long-standing relationship with the UK’s Tate & Lyle. “Exclusive of sugar, the (economic) growth rate would be around 4.4 percent compared to 2.4 percent in 2009,” the CSO said. — Reuters
BEIJING: Families play on the icy surface of a frozen lake during the New Year’s day public holiday in Beijing Friday. China is expected to grow by about 9.5 percent in 2010, state media quoted a government think tank as saying, exceeding forecasts made by outside experts for the new year. — AFP
British house prices up, credit conditions thaw LONDON: British house prices rose for an eighth month running in December and credit conditions look to set to loosen further at the start of the new year, surveys showed. But analysts cautioned the banking sector was far from functioning normally and Britain’s recovery from an 18-month long recession could be a stuttering one. Britons’ willingness to spend will be tested when value-added tax rises back to 17.5 percent at the start of 2010 and record government borrowing means public spending will need to be reined in sharply. The Bank of England’s quarterly credit conditions survey showed homeowners and businesses found it easier to borrow in the fourth quarter of this year, and lenders expected this trend to continue into 2010. A brightening economic outlook was cited as the main reason for the improvement although lenders expected default rates on mortgage lending-which have so far been modest-to rise. “Overall, this was an encouraging report,” said Alan Clarke, UK economist at BNP Paribas. “Defaults are down, credit availability is increasing and there are signs that markets are functioning better which has enabled firms to
source finances directly from the market and bypass the banking system.” One reason homebuyers are finding it easier to get funds is that mortgage defaults have been far lower than banks had feared. Not only is unemployment rising more slowly than expected but house prices have stage a remarkable recovery from their early 2009 lows. Figures from Britain’s biggest building society, the Nationwide, showed house prices ended 2009 nearly 6 percent higher than they started it. However, the monthly rise of 0.4 percent was the smallest since April and Martin Gahbauer, Nationwide’s chief economist, said the outlook for 2010 remained uncertain. “House price increases toward the end of the year moderated in comparison to those seen in the summer,” he said, pointing to a slowdown in the three-month on threemonth rate of growth, considered a smoother indicator of the near-term price trend. At 162,103 pounds ($257,700), the value of the average British property remains 12.2 percent below its cyclical peak in October 2007 but has rebounded by 8.9 percent since February. — Reuters
Fed’s balance-sheet shrinks marginally NEW YORK: The US Federal Reserve’s balance-sheet shrank slightly in the latest week on a small dip in its holdings of agency mortgage-backed securities, Fed data released showed. The Fed’s balance sheet-a broad gauge of its lending to the financial system-slipped to $2.219 trillion in the week ended December 30 from $2.221 trillion in the prior week. The previous week had marked the highest balance-sheet liabilities total since the first week of 2009, when the financial crisis was still relatively fresh. After declining early this year, the balance sheet generally has been accumulating mass amid the Fed’s asset-buying program, in which the central bank’s holdings of agency debt and mortgage-backed securities have grown to more than $1 trillion. In the latest week, the
Fed’s holdings of agency mortgage-backed securities slipped to $908.26 billion from $910.43 billion in the previous week. The Fed’s holdings of agency debt remained steady at $159.88 billion. Both of these figures are
expected to resume their rise early next year, however. By the end of March, the Fed plans to have bought $1.25 trillion worth of mortgage-backed securities and about $175 billion worth of agency debt. — Reuters