August 26, 2011: Market Updtae

Bernanke in the “Hole”

This summer has been anything but boring and this week was no exception.  There was the resignation of Steve Jobs as CEO of Apple, a 5.9 magnitude earthquake on the East coast, the Jackson Hole summit, a $5 billion surprise investment in Bank of America by Berkshire Hathaway and a host of economic data with varying degrees of “could be better”.  Yet despite all the drama, the market managed to finish the week higher suggesting that it had become oversold over the past couple of weeks.

Where to start?  Perhaps the most important news this week was today at the Jackson Hole summit.  Many people were hoping that Federal Reserve Chairman Bernanke would introduce another round of quantitative easing in the form of QE3.  That didn’t happen.  While he didn’t rule it out, he quite clearly stated that fiscal policy is what needs to take the lead now.  Yet, he did say that the next FOMC meeting in late September was being extended to two days so the board of governors would have more time to hash out potential responses in the event the economy deteriorates further.  Among the many ideas being bandied about are:

1. Making long-term interest rates lower (even though they’re already quite low), perhaps through some sort of “twist” operation that also removes shorter-term liquidity.
2. Add liquidity through asset purchases (aka TARP pt. 3) although there is already plenty of liquidity in the system.
3. “Encourage” banks to lend more money by eliminating interest on excess reserves held at the Fed, even though banks are struggling with insufficient loan demand.

We’ll know in about a month what direction the Fed will take.  For now we’ll have to be patient with the can being kicked down the road.

In company news, we learned that Steve Jobs, the CEO of Apple, has resigned due to his long-term battle with pancreatic cancer.  He will take over the role of chairman of the board but has relieved himself of the day-to-day duties of running Apple.  Investors seem to have taken this in stride given that it was a long time coming.  At the very least, Job’s legacy will continue in the near-term as there is likely a year’s worth of new products and ideas in the pipeline.  In other news, Caterpillar announced it will be opening up a new manufacturing facility in China to more directly compete in their largest market.  And finally, Berkshire Hathaway announced it is making a $5 billion investment in Bank of America (BAC).  BAC will sell 50,000 shares of cumulative perpetual preferred stock with a liquidation value of $100,000 per share carrying a 6% dividend yield.  In the very first day after the deal was announced it had an unrealized gain of $700 million.

I won’t sugarcoat the economic news this week.  It could have been better.  It many ways, it confirmed what the market has been saying for the past few weeks.  Q2 GDP came in at 1% (annualized) which was below the 1.3% estimated last month.  Remember it wasn’t long ago that Q1 GDP was revised down to 0.4%.  But as mentioned above, much of this news was already priced into the market.  Some economists had estimated Q2 GDP would fall to 0.7%.  The fact that it came in at 1% actually sent the market higher confounding common sense.  This is just another example of the market expecting the worst and being pleasantly surprised when the news is only bad.  Clearly there is no disputing that we’re in an economic slowdown.  The million dollar question is whether this turns into another recession or whether it remains a period of slow growth.  We’d prefer slow growth.

Due to the drama in the markets, we didn’t bring you a story of the week these past couple of weeks.  However, we have one for you this week and it is thought provoking.  It turns out that it may not pay to be nice in the workplace.  A recent study discovered that mean people earn more.  It found that men who measured below average on “agreeableness” earned about 18% more – or $10,000 more annually in their sample – than nicer guys.  Ruder women, meanwhile, earned about 5% or $2,000 more than their agreeable counterparts.  The researchers’ analyzed data collected over twenty years with a sample size of 10,000 workers comprising a wide range of professions, salaries and ages.  The researchers speculate that men being agreeable may not conform to expectations of masculine behavior.  In addition, people who are more agreeable were less willing to assert themselves in salary negotiations.  Any thoughts?

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