Welcome Relief: Markets Continued Their Upward Trend

For the week of October 10, 2011 through Friday, October 14, 2011

• Standard & Poor’s 500 Index: 5.98%
• Dow Jones Industrial Average: 4.88%
• NASDAQ Composite: 7.60%

Following last week’s rally, the markets closed higher for a second straight week with the Dow Jones Industrial Average and the NASDAQ Composite turning positive for the year. The Eurozone Rescue package likely drove the markets higher. Starting with Europe, the 17 countries of the Eurozone have all approved allowing the European Financial Stability Facility (EFSF) to expand its balance sheet. This should prevent a liquidity crisis when Greece defaults on its outstanding debt and should contain the crisis. France and Germany are expected to announce their “comprehensive package” to address the crisis, including the recapitalization of banks by the end of the month. Earnings season opened with a disappointment on Tuesday when Alcoa reported worse numbers than expected. Despite the earnings miss, the markets continued to rally, as 20 of the first 23 S&P companies reporting stated positive earnings growth.

Economic Data

• European Financial Crisis
  • The Eurozone rescue package was finally approved this week.
  • Euro members will allow the EFSF to expand its balance sheet to contain the debt crisis to Greece.
  • Germany and France are developing a rescue package to avoid a financial crisis and recapitalize banks before Greece defaults.
    • This includes deciding how much of a write-down to take on outstanding Greek debt.
  • Spanish debt was downgraded by S&P, bringing it in-line with Moody’s rating of AA-.

• International Trade-Deficit
  • The trade deficit decline in July held for the month of August.
  • Imported goods rose while there was a surplus of services.
  • Net exports should contribute to third-quarter GDP growth.

• Harrisburg, Pennsylvania Declares Bankruptcy
  • On Wednesday, Harrisburg, Pa. filed for bankruptcy protection.
    • A portion of the city council rejected a plan to pay off debt by selling or leasing assets.
  • There was little impact to the municipal bond market.
  • For municipalities facing budget shortfalls and trouble negotiating labor costs, this should serve as a warning to unions that won’t negotiate with cities, since labor agreements are void after bankruptcy.

• Trouble for Wal-Mart in China
  • The Chinese government has forced Wal-Mart Stores Inc. (NYSE: WMT) to close 12 stores after the retailer was accused of mislabeling pork as organic when it was not the premium meat.
  • The closures are due to sensitivity to high inflation of food prices in China.
  • In August, prices rose 13.4% from last year with pork jumping as much as 50%.
  • This is in addition to the 20 other times Wal-Mart has been punished for alleged violations since entering China in 2006.

• Federal Open Market Committee Minutes
  • Notes from the September meeting show that the near-term economic forecast has been downgraded.
    • The downgrade is due to weak consumer and business confidence and high unemployment.
  • “Operation Twist” was initiated, shifting the Fed’s balance sheet to longer term securities.
  • There is now more dissent among the members than in the past.

• Jobless Claims
  • Initial claims fell 1,000 from to 404,000 from 405,000.
  • Claims from two weeks ago were revised higher from 401,000 to 405,000.
  • The employment market has not shown any significant signs of improvement as employers remain hesitant about the pace of the economic recovery.

Company Earnings

• Alcoa, Inc. (NYSE:AA)
  • Alcoa started earnings season with a bust with income failing to meet expectations.
  • Aluminum prices fell 12% over fears of a global economic slowdown hurting their results.
  • Net income was $172 million or $0.15/share, which was weaker than expectations of $0.22/share, even after analysts lowered forecasts close to 25% due to declining aluminum prices.
  • Revenue rose to $6.42 billion, up 21%, beating expectations of $6.24 billion.
  • AA shares fell 2.4% on the news.

• Cargill Incorporated
  • While a private company, the agribusiness giant is the largest private corporation in the U.S., has operations in about 70 countries.
  • Cargill’s profit plummeted 66% in the quarter while revenue grew 34% due to extremely volatile markets to mark the second straight quarter Cargill has posted a decline.
    • Profit fell from $693 million last year to $234 million this year.
    • Revenue rose to $34.6 billion, a 34% rise.
  • Wild swings in commodity markets coupled with rapid currency fluctuations have pushed investors into and out of commodities.
  • Some of the decline was due to costs related to flooding and acquisition costs.

• PepsiCo, Inc.
  • Shares of PepsiCo (NYSE: PEP) rose almost 3% after reporting earnings for the quarter.
  • PepsiCo grew earnings from $1.92 billion to $2 billion, or $1.25 per share.
    • Excluding certain one-time charges and acquisition costs, PepsiCo earned $1.31 per share beating expectations.
  • Revenue beat expectations of $17.11 billion at $17.58 billion.
    • The largest revenue gains came from overseas in Europe and emerging markets.
  • News over the possible spin off of certain food divisions have remained hushed.

Interest Rates

• The two-year Treasury dipped to 0.28%, but has almost doubling in past few weeks.
• The five-year Treasury climbed four basis points to 1.12%, up roughly 30 basis points in the last two weeks.
• The 10-year Treasury rose 12 basis points to 2.20% rising steadily close to 50 basis points since the end of September.
• The 30-year Treasury yield leapt up 17 basis points to 3.18%, another almost 50 basis point-gain since September.

Disclosures:

This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.