Archives For Todd Burkhalter

Weekly Update – September 10, 2012

The major indices closed out last week in positive territory despite a disappointing jobs report as investors’ disappointment vied with renewed hope that the Fed could take action as early as next week’s FOMC meeting. The S&P gained 2.23%, the Dow gained 1.13%, and the Nasdaq closed up 2.26%.[i]


In light of the sustained rally, we want to discuss some of the forces at work right now and take a look at both the bull and the bear case for coming weeks.


Headwinds could trigger a market decline:


The market run-up puts the S&P trading at 13.3 times forward earnings estimates, meaning that investors are paying just over $13 for each dollar of expected corporate earnings. Given the insipid corporate performance of the second quarter, and reduced expectations for the year, most analysts don’t believe that markets will move significantly higher.[ii] Weak economic fundamentals may be a drag on market movements as we get closer to the end of the year. Last week’s disappointing jobs report underscored just how far the economy still has to go before it can be considered healthy. Although the overall unemployment rate fell to 8.1%, that decline can be largely ascribed to discouraged Americans dropping out of the job search.[iii]

Chronic troubles in Europe and Asia may continue to dominate headlines and provoke concern among investors about possible contagion. National elections in the Netherlands and a German ruling on the legality of Europe’s major bailout fund could severely hamper efforts to knit Eurozone countries more closely together. Domestically, presidential elections have often produced a great deal of uncertainty in markets. With January’s fiscal cliff looming, investors will look to politicians to provide leadership, potentially creating market turbulence as the parties duke it out.


Tailwinds could push equities higher:


There are important events coming down the pike that could lengthen the rally such as additional quantitative easing by the Federal Reserve. This is the big payoff traders have been waiting for all summer, and one of the major factors in the rally. Quantitative easing is getting so much attention because monetary policy is pretty much the only game in town for improving the economy right now, given the political impasse in Congress.[iv] It’s hard to know when the Fed will implement further easing, although many expect it to happen this year.


Activity by foreign central banks in Europe and Asia could also give stocks a bump. Last week’s bond-buying announcement by the European Central Bank did a great deal to reassure investors that Eurozone bankers and politicians have the backbone to push through much-needed changes to fiscal and monetary policy. The plan is Europe’s most ambitious yet and will be able to buy unlimited amounts of government bonds to stabilize the debt of struggling countries.[v]


In short, there are a great number of conflicting factors at play right now that could push equities higher or pull markets down. Regardless of how things move, we are committed to keeping you informed and to guiding you as you make investment decisions.



Tuesday: International Trade

Wednesday: Import and Export Prices, EIA Petroleum Status Report

Thursday: Jobless Claims, Producer Price Index, FOMC Meeting Announcement, FOMC Forecasts, Treasury Budget, Chairman Press Conference

Friday: Consumer Price Index, Retail Sales, Industrial Production, Consumer Sentiment, Business Inventories


Data as of   9/7/2012


Since   1/1/2012




Standard & Poor’s 500























10-year Treasury Note (Yield Only)






Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized.
Sources: Yahoo! Finance, MSCI Barra. Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. N/A means not available.


U.S. worker productivity grew in second quarter. Despite slower hiring, companies were able to get more from their workers this spring. Productivity, measured as the amount of output per hour, grew 2.2%, beating the consensus estimate of 1.6%. While this may have a positive effect on corporate earnings, it may mean companies will need to hire fewer workers.[vi]

U.S. economy loses global competitiveness. According to a recent World Economic Forum report, the U.S. economy has become less competitive, slipping two places to become the world’s 7th most-competitive economy, just behind Germany and the Netherlands. Economists cited concerns over fiscal health and macroeconomic stability as reasons for the decline.[vii]

China urges greater economic cooperation. While announcing a new government infrastructure fund designed to boost internal spending, Chinese president Hu Jintao expressed concern over the slowing global economy and urged greater cooperation between Asian-Pacific countries. Such an announcement could presage a move to coordinate further monetary policy easing.[viii]

Silver lining: Small businesses added 99,000 new jobs in August. Despite an overall disappointing jobs report, many sectors showed improvement in August. Small and medium-sized businesses added a combined total of 185,000 new jobs in August, compared with 16,000 jobs added by large companies. The service and construction sectors also added significant jobs, indicating that some areas of the economy are doing well.[ix]


“It’s not the will to win that matters—everyone has that. It’s the will to prepare to win that matters.” – Paul “Bear” Bryant

Easing Ahead?

September 4, 2012 — Leave a comment

Weekly Update – September 4, 2012


Markets stayed fairly flat last week ahead of Friday’s highly anticipated speech by Ben Bernanke but stumbled on news that the Fed wasn’t going to immediately roll out another round of quantitative easing. The S&P fell 0.32%, the Dow lost 0.51% and the Nasdaq lost 0.09% for the week.[i]


Bernanke spoke during the Jackson Hole Economic Symposium, an annual meeting of elite economists and central bankers. His speech highlighted that the stagnant job market was of “grave concern” to central bankers and emphasized that the Fed remains ready to take action should economic conditions worsen. Although his language reiterated the Fed’s commitment to further quantitative easing, he stopped short of announcing the timing or structure of any further action. Many analysts don’t believe the Fed will make any major moves before November, preferring to remain apolitical during the hotly contested election. However, if next week’s jobs report disappoints, there is a chance that the FOMC could vote at its mid-September meeting to buy more Treasury bonds or government mortgage-backed securities to lower long-term interest rates and ignite economic activity.[ii]


Many analysts suspect the next round of quantitative easing (QE3) will arrive as a coordinated blitz between the Fed, European Central Bank, and other central banks around the world who hope to sort out the economic doldrums in one fell swoop. There’s been a lot of talk by central bankers at the Fed, ECB, People’s Bank of China, and the Bank of England about the need for further easing, and it makes sense for bankers to coordinate their actions to get the biggest bang for their buck. This wouldn’t be the first time central banks have worked together; the PCOB, ECB, and BOE lowered rates in tandem as recently as July 2012.[iii]


With a crucial ECB meeting this week and a ruling on the legality of Europe’s permanent rescue fund later this month, September is crunch time for the Eurozone. In order to satisfy markets, the ECB will have to announce very detailed and very aggressive plans to buy up Spanish debt. At this point, anything less would be a tacit affirmation that the Eurozone crisis is beyond central banker control.


Though September is notoriously the worst month of the year for stocks, a combination of important economic meetings and the remaining bullish exuberance of investors could mean this month won’t fit the mold. [iv] Despite the mild retreat last week, markets are still hovering close to highs not seen since 2007/2008, when markets reached their peak. Only time will tell what is ahead as traders assimilate additional economic reports and the Fed finally shows its hand.






Monday: Markets closed for Labor Day holiday


Tuesday: Motor Vehicle Sales, ISM Mfg. Index, Construction Spending


Wednesday: Productivity and Costs


Thursday: ADP Employment Report, Jobless Claims, ISM Non-Mfg. Index, EIA Petroleum Status Report


Friday: Employment Situation


Weekly Update – August 27, 2012

After another slow trading week, markets closed slightly down, with the S&P losing 0.50%, the Dow dropping 0.88%, and the Nasdaq losing 0.22%.[i] With the S&P 500 edging close to another record high, you might be wondering how much higher markets can go in this ‘sugar high’ rally. We’ve been asking this question too, and while we typically dislike getting too much into technical analysis, we want to discuss a technical indicator that could shed some light on the answer.


When determining whether equities are approaching a peak or floor, many analysts turn to the Chicago Board Options Exchange Market Volatility Index (VIX), a measure of the volatility of S&P 500. Historically, the VIX has been an uncanny forecaster of market tops and bottoms; whenever volatility (as measured by the VIX) is low, the S&P has reached a decisive peak, and then fallen. Last week, the VIX hit a multi-year low of 13.45 (anything under 20 is considered low), and we believe that given the lack of economic support for further gains, equities could be poised for a pullback.[ii] Cutbacks in business spending, pressure on food prices, and a weak manufacturing sector mean that the domestic recovery is anything but guaranteed. Weak numbers from China and Europe indicate that our trading partners will be dealing with their own economic troubles for months or years to come. This leads us to believe that the summer rally is fundamentally driven by trader expectations around further global quantitative easing. Recent jawboning by Fed officials, European leaders, and EU central bankers is largely to blame for the recent rally.


So if there is a pullback, what could it mean? How much equities retreat and when they do so will depend on a number of factors, such as the murky global economic outlook, September Federal Reserve meeting, and upcoming elections. In terms of headwinds, we can expect the continued contraction of the European markets to present further challenges, as will a potential hard landing in China. On the flip side, investors could see a boost after the next FOMC meeting, as it looks increasingly likely that the Fed will undertake further quantitative easing. Much will also depend on what action legislators take to address the fiscal cliff. Although it is reasonable to expect an end to our summer market romance, we believe there will be many opportunities for growth further down the road.


To wrap it all up, please remember that short-term gyrations in the market are expected and usually have had little relevance to long-term investment performance. When markets pull back, it can sometimes feel like riding an elevator to the basement, but market losses are rarely evenly dispersed across all sectors. In every market environment there are investment opportunities to be had, and we strive to find those opportunities and putting them to work in our clients’ portfolios.