This Report is for the trading days beginning
Wednesday, January 19, 2011, through Tuesday, January 25, 2011 (the
Report Period). For the
Period, the indices were mixed to down.
The Dow was up 1.1%, the S&P was down half a percent, the mid
indices were down four tenths of one percent and the small cap indices
were down eight tenths of one percent.
For the calendar week just passed all the indices dipped.
Earnings this week were mixed with the big news
being revenue misses in the consumer stocks led by Amazon.
Banks were mixed and the industrial concerns had good earnings
but not a lot of revenue growth.
During all this, the Federal Reserve has been pumping about $8
Bn a day into the markets.
In our estimation, this should have been enough to counteract
most of the domestic and earnings developments but the events in Egypt
seem to have swayed the balance.
We are not very conversant in Egyptian politics
but broadly speaking, the riots do not seem to be confined to
students, disadvantage youth, ethnic minorities or other disaffected
minority populations. The
ranks of the protestors seem swelled with middle age, middle income
Egyptians and that is especially dangerous.
We also believe that a good portion of the underlying anger is
based on food inflation rather than political causes.
Please recall that the Egyptian riots were preceded by overt
food riots in Algeria and then Tunisia with the riots in Tunisia
toppling the government.
In sum, anything could happen over there and to the degree it remains
unsettled that will affect the markets and if the rioting spreads to
Suez and shuts canal operations that would be a major disruptive
force.
The domestic news for the week was not so good.
Mortgage applications dropped 12.9% in December and refinance
applications dropped 15.9%.
The Case Shiller Housing Index for November declined 1.5%,
which was the fifth sequential decline in the index.
Wheat futures hit a 29-year high; Russia announced price caps
on "socially important" commodities as have Argentina, Brazil,
Indonesia and other venues.
Domestic food inflation in the US is running at about 6% but is
being masked by the manufacturers of processed foods reducing portions
sizes and keeping prices constant.
For example, the most recent issue of consumer reports details
many examples of the changes without presenting a food inflation
summary or argument just noting that a container of yogurt that used
to be six ounces is now four ounces and so on.
Also during the week, the Q-4 GDP numbers for Britain and the
US came in with the US economy growing 3.2% against expectations of
3.5% and the British economy contracting .5% in December on weather
related problems and an "inflationary surge."
Domestic initial jobless claims for the week were 454,000 as
161,913 people exhausted their extended benefits and were classified
as "discouraged." Inflows
into domestic equity funds totaled a strong $2,197 million for the
week; insider selling to inside buying was 2,842:1 on a total of two
insider purchases. Lastly,
the first CBO budget was released since the extension of the tax cuts
in January. Said budget
showed the baseline number will deteriorate this year to the where the
prior baseline had it at October 1, 2019.
This is because the prior baseline assumed that the tax cuts
would expire at the end of 2010.
The CBO budget also showed that new government borrowing in FY
2010 would be about $1.5 Tr up from the prior estimates of $900bn.
Meanwhile the politicians continue their kabuki
dance about how they might cut a million here or ten million there or
even a hundred million from defense and other fiscally immaterial
contributions when the current year deficit will be a one to one and a
half trillion. On the
bright side, or not, QE-3 and QE-4 appears to be more likely at this
point. As a consequence,
the market should continue to trade on Federal Reserve supplied
liquidity and share prices will likely slowly advance with the only
threats to the status quo being, time, inflation, international
upheaval and the expected funds flow problem between April and August
of this year.