azeisler's  Instablog

General Comments: US and UK equities faltered at the end of last week, with concerns about the Greek bailout. Luckily, a decision was met early Saturday morning, as Papademos won cabinet approval to secure a second Greek bailout (of 130 bn Euros).[1] Papademos said that the "rejection of the deal today would lead to "uncontrollable economic chaos and social explosion."[2]

Executive remuneration continues to be a hot topic. This week, Barclays capped cash bonuses for investment bankers at 65,000 GBP and announced a 32% cut to the bonus pool at Barclays Capital. This move comes after Barclay's reported weak earnings. In general, this reflects "public mood" about big bonuses, which have continued to get attention since the 2008 crises.[3] It does not seem to reflect the sentiment of senior level staff, however. Christopher Bones, professor at Henley Business School, calls the current crop of senior staff the 'L'Oreal generation' as they feel they "have the right to sizeable salaries 'because they're worth it.'"[4]

Company News: As earnings reports come in, it seems that luxury good producers have been doing particularly well. This reflects a strong demand for high-end fashion even with confusing economic times. For instance, Hugo Boss reported better-than-expected fourth-quarter earnings and annual sales rose 19%. LVMH, the world's largest luxury group (which owns Louis Vuitton, Dom Pérignon Champagne, Dior, and has a stake in or owns many other high end brands), grew net profit approximately 1% last year and a 21% increase in final-quarter sales compared with the previous year. Other brands, like Richemon (maker of Cartier jewellery and Jaeger-LeCoutre watches), and Burberry, the British luxury-clothing brand also reported fourth quarter sales increase around 20%.[5] While this is reflective of increasing demand in the BRIC markets, it seems that sales in North American regions have also been increasing. This earnings trend is especially interesting as "mainstream retailers such as Target, Gap Inc., TJ Maxx, Dillard's, J.C. Penney and Kohl's saw small or declining growth in 2011."[6]

Based on stock performance after earnings reports, it seems that 2011 earnings expectations were already built into share price. Companies that have beaten analyst expectation have risen, on average, 2.5% in the five days following reports. On the other hand, those that have not met expectations have fallen 3.1% on average.

North American Markets: Markets were sluggish this week, with few companies beating earnings expectations and worried about Greek debt. The Dow and S&P 500 both fell 0.5% last week. Friday had the most significant losses, across all industries. In fact, every stock in the Dow moved down. That being said, for the year, the Dow is up4.7% and the S&P is up 6.8%.

What to keep your eye on next week:

Keep your eye out for #fedvalentines. Economists, analysts and even state reserves are getting into the Valentine's day spirit, posting one liners on twitter. Some of the best are: "Like fiat money, our love is built on trust," "I'm going to extraordinary measures to increase your stimulus," and "My love is elastic, my commitment too big to fail." The first one from economist Justin Wolfers, while the San Francisco Fed posted the latter two.

General Comments: Based on last night's Superbowl, we can expect a 0.5% loss in the S&P. The good news, though, is that the S&P has historically lost 2.1% when the Patriots win. While based on limited information (there have only been 46 Superbowls), there are several interesting correlations between the game and market behaviour. For instance, "in a year when there's a Super Bowl rematch, the S&P 500 has risen, on average, 19 per cent," which is good news as the Patriots and Giants played each other in 2008.[1] Even without a rematch, the index has gained 13 per cent, on average, when a previous winner plays in the Superbowl again.

Company News: As expected, Facebook filed for its IPO on Wednesday. An interesting outcome of this was a positive impact on other social media websites. LinkedIn, Zynga, Groupon all increased in share price Thursday. At their IPOs in 2011, these companies were considered "warm up" acts for Facebook. Their increase Thursday speaks to several points, including (1) the sector's integration. For instance, much of Facebook's revenue actually comes from Zynga and (2) Customers switching allegiance from Facebook to other companies. This last point may be especially true when considering Facebook's growth potential (which some analysts are questioning).

Potential problems for Facebook:

(1) Much of the company's revenue comes from advertisements. Unfortunately, users are increasingly switching to phone applications, and Facebook does not have an add strategy for this medium.

(2) China continues to block Facebook and other Chinese Social Media websites are filling this market niche.

(3) The company is not particularly diversified in its revenue streams.

(4) Over 800 million people already use Facebook. While market penetration is not complete in all countries, this could pose a problem.

(5) Mark Zuckerberg continues to have complete control.

North American Markets: As per usual, North American markets closely followed European economic news last week, moving up as agreements were reached between European leaders, and down when it looked like talks were falling through. As many analysts consider January markets indicative of the rest of the year, confusion remains. What was especially interesting throughout January is which stocks did well and which did not. One analyst commented, "January's winners are last year's losers."[2] For instance, Bank of America and Netflix both did particularly well in January, but were considered "losers" in 2011.

That being said, January ended up (even if the markets did not on Tuesday). February also started strong, as encouraging news from the manufacturing sector in US, Europe and China buoyed markets Wednesday. The TSX closed up 0.5%, the Dow closed up 0.7% and the S&P rose 0.9% on Wednesday. Better than expected US labour news pushed markets up on Friday as the US labour market revealed that 243,000 jobs had been added last month. This was double the expected number and led to a 2% drop in the US unemployment rate. As a result, US markets did extremely well; the Dow reached a new four-year high 3 while the NASDAQ reached an 11-year high. [3] If unemployment results like this continue, questions concerning monetary policy and further QE by the Fed will gain traction.

Going forward, we continue to watch the three elephants in the room:

1) Europe's debt problems

2) China's growth problems

3) America's budgetary problems

It is shaping up to be a very interesting year.

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[1] http://www.theglobeandmail.com/globe-investor/markets/markets-blog/super-bowl-rematch-huge-for-stocks/article2322849/

[2] http://www.theglobeandmail.com/globe-investor/markets/markets-blog/januarys-winners-are-last-years-losers/article2321391/

[3] http://www.theglobeandmail.com/globe-investor/markets/markets-blog/us-economy-is-cranking-out-jobs/article2325273/

General Comments: After several weeks out of the News, Greece has made it to the forefront once again. A bond payment is due March 20, and if not paid likelihood of disorderly default is quite high (with potential ramifications for the rest of the Eurozone). Eurozone countries are hesitant to loan to Greece, after the country did not follow through on certain contractual obligations of previous loans. Therefor, Greece is working to make arrangement with "the "troika" of its official lenders - the European Commission, European Central Bank and International Monetary Fund" and with private creditors simultaneously.[1] Even If these are met, the economist magazine remains pessimistic about the future of Greece, which "will need propping up for a long time." The magazine stated "virtually no progress has been made in overhauling the economy. Although wages have fallen slightly, the country remains chronically uncompetitive. Greece's rescuers bear some blame: they focused too much on raising taxes and too little on reforming the state and freeing up the economy. But the real culprit is the Greek government, which has proved singularly incapable of implementing the reforms needed to allow the economy to grow."[2]

North American Markets: Research in Motion was in the forefront this week after the company's co-founders and co-CEOs stepped down to be replaced by chief operating officer Thorsten Heins. RIM was trading significantly higher in premarket it did not translate into real gains. The lack of a strong statement of direction from the new CEO likely contributed and while Canadian markets ended higher (up 1%) on Monday RIM was left out of the rally. RIM did have a gain of 3.1% Friday, after Prem Watsa's Fairfax Financial Holdings Ltd. disclosed that bought additional stake in RIM and now owns 5.12% of the company.

Tuesday's markets' did not fair as well as Monday's, with the TSX losing the 1% it had gained the day before, the Dow down 0.3% and the S&P down 0.1%. Apple, however, revealed exceptional earnings. Revenues were US $7.3 Billion above expectations ($46.3B), and Apple produced earnings of US $13.87 per share. Apple's stock price soared Wednesday with analysts giving new valuations of $570 per share (share price is a reflection of expected future earnings of the company over your investment horizon). Last year Apple became the largest company in the world. This year analysts remain particularly bullish (with 50 "buy" ratings out of 51).[3]

On Wednesday the Fed revealed plans to keep US interest rates low into 2014, citing a depressed housing market, continuously high unemployment and slowdown in global growth. Previous plans were to increase rates in 2013. While this move reflects the Fed's pessimism for future economic growth, low interest rates are linked to increased investment and growth and this plan led to a market turnaround Wednesday. The TSX gained 1.2%, the Dow up 0.7% and the S&P up 0.9%. North American Markets closed down Thursday, and were relatively unchanged Friday.

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[1] http://www.reuters.com/article/2012/01/28/greece-idUSL5E8CS06020120128

[2] http://www.economist.com/node/21543536

[3] http://www.theglobeandmail.com/globe-investor/markets/markets-blog/on-apple-investors-remain-cautious/article2314467/