The market rallied on Thursday, June 9, 2011, from a six-day losing streak as a result of poor economic data the prior week indicating that the recovery was losing steam. The Federal Reserve Chairman, Ben Bernanke, confirmed the pullback, but has not yet confirmed or denied a third quantitative easing program. In brighter news, our trade deficit narrowed for the month of April, even though oil prices remained high for the month. Higher exports will help drive the recovery.
Implications of the Dodd-Frank Act are starting to rear their head, which could cause some market uncertainty, as new financial regulations are written and implemented.
Economic Data
- The market had the longest losing streak since February of 2009, down for six consecutive days before rallying.
- Manufacturing and construction shed 10,000 jobs.
- Trade deficit declined in the month of April, despite high crude prices;
- Exports were up, and the deficit narrowed from -$46.8 billion in March to -$43.7 billion in April, and
- We believe increasing exports will help drive the recovery throughout the second quarter.
- Interest Rates continue to slide:
- The two-year Treasury yield fell 0.39%, from the 0.80% seen as recently as April;
- The five-year Treasury yield plunged 10 basis points to 1.50%, more than 0.75% lower than early April’s rates;
- The 10-year Treasury rate dropped to 2.92%, marking a second consecutive week below 3%, and
- The 30-year Treasury yield also fell 6.5 basis points to 4.16%, as it continues its steady march toward 4% from the 4.75% rate seen in early February.
- The Federal Reserve Chairman, Ben Bernanke, spoke this week in Atlanta.
- The Fed agrees that the economy has slowed, as high prices for oil and other commodities eat into household purchasing power, and
- Speculation about a third quantitative easing program abounds.
- The Fed has not ruled out such action.
Implications of Dodd-Frank Bill are finally being felt in the market
- The Senate refused to delay the debit card transaction fees from being implemented.
- The Tester amendment, so named for its sponsor Jon Tester, would have pushed back the vote on rules that limit the amount banks can charge merchants for processing debit card payments by six months to a year.
- Currently, the rule is expected to cut more than $15 billion a year in revenue for the banking and credit card industry by slashing fees from $0.44 to $0.12 per transaction.
- While we believe this will hurt the banks, we are not as concerned about the effects on Visa, Inc. (NYSE: V) or MasterCard, Inc. (NYSE: MA).
- We think that the card processors have pricing power because they have the largest networks.
- Many thought the new rules would take away the exclusivity language that state MasterCard or Visa could force a company to use their networks only; however that is not the case yet.
- We believe MasterCard has room to grow.
- The only recourse for banks and credit unions will be to raise fees for other transactions and services to recoup the estimated $15 billion in lost revenue.
- Uncertainty will continue in some markets, as rules and regulations are written and implemented.
- We believe the “swipe fees” are minor in the full scope of the Dodd-Frank act.
- We believe that Congress has not dealt with the total business implications that could result from the rules in this act.
- We think there will be huge pressure to pull some of the rules from the table by the enactment deadline of July 21st.
- We think that these regulations may hurt the consumer and small banks.
- We suspect the banks will find a way to get the money back, i.e., fees and cutting reward programs.
- Large retailers are the only winners as the fees were a negative for their profit margins.
Company News
- Brown-Forman Corporation (NYSE:BF.B) had a remarkable quarter due to increased alcohol sales amid the economic turmoil.
- Brown-Forman produces several major alcohol brands, including Jack Daniel’s, Southern Comfort, Finlandia, Fetzer, el Jimador and a few others.
- The spirit maker posted high earnings after nearly doubling net income over last year from $72.7 million, or $0.49 a share, to $165.4 million or, $1.13 a share.
- Sales increased from $733 million to $791.3 million;
- Revenue rose to $3.4 billion from $3.23 billion, and
- 2012’s earnings per share are expected to fall in the $3.45–$3.85 range.
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.
