J.L. Davis Market Update 9/6/2010

QUOTE OF THE WEEK:
“It’s hard to beat a person who never gives up.” – Babe Ruth

THE MARKETS:

Imagine that you are driving to an important destination when you unexpectedly reach a crossroad. As you consult your map and look to the street signs for direction, you notice there is a conflict. Your map indicates that you should turn left, but the signs indicate that you should turn right. Which is the proper course to take?

In many ways, this scenario illustrates the challenge facing investors today. There are signs pointing in the direction of a deteriorating economy, and there are signs pointing in the direction of a stabilizing and steadily growing economy. To make matters even more complicated, the signs seem to change every week. Good news – bad news. Bad news – good news. The result is that many people are nervously holding onto their cash. According to Schaeffer's Investment Research, Americans are currently sitting on $9.4 trillion in cash, which is 27% more than in 2007. This, in turn, contributes toward low trading volume and increased volatility in the stock market, which further scares investors away. In a way, it is a self-perpetuating cycle. So what happened last week?

Good news: The Labor department reported that hiring is picking up. Businesses added 67,000 jobs to their payrolls in August, marking the eighth straight month of job growth, following nearly two straight years of job losses. Nonfarm payrolls only fell by 54,000 last month, roughly half the decline that had been feared. Unfortunately, the unemployment rate rose from 9.5% to 9.6% because the number of job seekers was still greater than the number of job openings. So while this report shows that things are headed in the right direction, it also shows that the labor market is still soft.

More Good news: The ISM (Institute for Supply Management) manufacturing index hit 56.3 in August, up from July and significantly ahead of expectations. Any reading above 50 is considered a sign of growth, while a drop below 41.2 is associated with a recession in the broader economy. Good news also came out of the housing sector as marked by an unexpected increase in pending sales of used homes.

How did this dose of positive economic news affect the stock market? The Dow kicked off September with its best three days at the start of a month since March 2009, and its best pre Labor Day week since 1990. Echoing how many investors feel, Phil Orlando, an equity strategist at Federated Investors was interviewed by MarketWatch on Friday and quoted as saying, “In the last two weeks or so, things have been starting to firm up, and today's jobs numbers really put an exclamation mark on that. We're feeling a lot more comfortable about our view, than those thinking about a double dip. If you had a bearish bent in the middle of August when you went on vacation, the story seems different today – it seems constructive."

Little economic news is anticipated in the holiday shortened week ahead, and trading volume is expected to remain light as vacationers return home from their travels. Eyes will undoubtedly be fixed on the President Wednesday as he outlines his administration’s plans to spark the economy. Let’s hope the upcoming “street signs” offer clear direction.

Key things to watch this week:
Wednesday – Consumer Credit
Thursday – Jobless Claims, International Trade

HEADLINES:

According to a CNN/Opinion Research Corporation survey released Sunday, 81% of the public rated the country's economic conditions as poor, with 18% describing the economy as good. 44% of people questioned described economic conditions as very poor, up seven points from July.

President Obama is scheduled to lay out a new plan for the economy this Wednesday. Administration officials previously told CNN that the president is considering a payroll tax holiday as well as new infrastructure spending, among several proposals his economic team has been weighing.

According to Schaeffer's Investment Research, the Dow is on pace to register 90 days this year with swings of 100 points or more – more than twice as many as in any of the three years leading up to the crash.

Burger King said Thursday that it has agreed to be acquired by investment firm 3G Capital in a deal valued at $4 billion. The New York-based firm will buy the fast food chain for $24 a share. That marks a 46% premium over Burger King's closing price of $16.45 on Tuesday, the day before news reports said the company was up for sale.

The nation's top automakers reported disappointing sales Wednesday, resulting in the worst August for industry wide auto sales in 27 years. According to sales tracker Autodata, U.S. new vehicle sales fell just short of 1 million vehicles, a drop of 21% from a year ago.

Sources:
Marketwatch
The Wall Street Journal Online
Barrons
CNN Money
http://money.cnn.com/2010/09/05/news/economy/economy_poll_cnn/index.htm http://www.cnn.com/2010/POLITICS/09/05/obama.economy/index.html http://finance.yahoo.com/news/Despite-hiring-US-apf-780694354.html?x=0&sec=topStories&pos=5&asset=&ccode= http://finance.yahoo.com/career-work/article/110373/the-worlds-greatest-investors?mod=career-leadership http://money.cnn.com/2010/09/02/news/companies/burger_king/index.htm http://money.cnn.com/2010/09/01/news/companies/august_auto_sales/index.htm

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