We have been saying that the market is politically driven for quite some time, and we believe it will remain that way until the November elections. However, we are looking forward to a good old-fashioned dogfight between the Democrats and the Republicans. Locally, we want to extend our congratulations to former U.S. Congressman Nathan Deal for securing the GOP nomination for Georgia’s gubernatorial race.
This week, in technical terms, the market sucked. Wednesday’s sell-off of near 3% was due to disappointing world economic news just as much as it was to Tuesday’s Fed announcement that they would be keeping interest rates low. The Fed—seemingly half-heartedly—also announced they would be reinvesting funds from maturing mortgage-backed securities into Treasuries. As we expected, Treasury rates declined since that announcement, with 30-year Treasuries dipping below 4% and the 10-year Treasury down to 2.71%. Investors are still drawn to what is perceived as safe.
The week was also drawn down by economic reports out of China, such as retail sales and industrial output, signaling the country’s growth is slowing; the U.S. trade deficit unexpectedly widened by a record $7.9 billion in June as imports rose and shipments abroad declined, and the Bank of England said the United Kingdom’s growth will be weaker than previously forecast.
Unemployment claims were up by nearly 8,000 last week and shockingly, productivity numbers were down following five consecutive quarters of strong growth. While most economists are mixed on the productivity news, we see this in a positive light. To us, this indicates that companies have maxed out efficiency with current employees, and now it is time to begin hiring.
As for companies, Walt Disney Corp (NYSE: DIS) reported profits were through the roof, up 40% based on the success of box-office hits “Toy Story 3,” “Iron Man 2” and “Alice in Wonderland.” All segments were healthy, but the stock still dropped 2.5% during the week compared to the market’s overall drop of around 3%. Cisco Systems, Inc. (NASDAQ: CSCO) reported income skyrocketed 79%, but weak guidance from CEO John Chambers sent shares down about 10% after the report. We see this happen time and time again with Cisco. Chambers never pounds the table. He provides soft forecasts and drives the company’s prices down and creates poor sentiment in the market. We feel he should concentrate more on earnings and let the stock take care of itself.
In our opinion, investors should not be making economic decisions on speculation of deflation. It might look as if the economy is slowing down, but companies can, and often do, operate more efficiently, which can increase earnings even while revenue falls. Most of the S&P companies are doing fine in this environment. We feel the mid-week sell-off was mainly based on rumors. The Fed buying Treasuries is seen as a protectionism move from our government. One fact to keep in mind is that many people on Wall Street are still on vacation. Their children do not return to school until after Labor Day, so many people and families are still traveling. The market’s volume is still in the doldrums of summer. With such low volume, the minute investors get wind of a rumor, the market swings, creating the volatility we have seen all summer.
There was an interesting opinion article in The Wall Street Journal this week, “Why I’m Not Hiring.” An employer explains why companies are sitting on their cash and not hiring. It cost a company nearly $74,000 for an employee who takes home around $44,000 after taxes. For this particular employer, the state and federal governments impose nearly a 33% surtax on one single job. Until companies and employers have a solid view of future business, they are simply not willing to increase their obligations to the government. Right now companies and businesses are looking at a wide range of unknowns from the effects of the financial regulation bill and the health care reform bill. The truth is while both of these monumental pieces of legislation passed, no one knows what affect they will have. With financial regulation, the government has not formed the commissions that will oversee the derivatives markets. In health care, no one knows how it will be enforced. It could be two years before we see how these laws pan out.
Meanwhile, we have “Helicopter Ben” Bernanke watching for signs of deflation. Bernanke studied the Depression and understands the need for some inflation. Critics will also say it is all about jobs. “Why are we not creating stimulus plans that create jobs?”
We feel the economy is moving along much better than what is being reported. If you ask corporations how they are doing, you will hear earnings are great. How will next quarter be? “Even better.” Are you hiring? “Yes.” What companies are facing is a shortage of qualified help. The bottom line is there are jobs available. As an example, the stimulus plan created several construction projects. Those in the construction industry will tell you they have two highly skilled union workers for every job opening they have, but then there are other industries that cannot find the skilled labor they need. That is a transition that goes on all the time.
What would be helpful, if the government wanted to spend money, would be a retraining program, where in order to receive unemployment benefits, people would be required to learn a useful skill. It has been proven time and again people will live on unemployment as long as it is handed out. Why would someone take a job below their qualifications that only pays $600 a week if they could do nothing and receive $450 a week? We also do not buy into the excuse that people cannot afford to move because they are underwater in their home values. If you want to work, you will find a way to live in an area that has job opportunities. Mental attitude is all the power in the world.
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.
