A Mixed Bag of Business News

Farrar:  Brian Ford joins us now from RBC Wealth Management for his regular Monday morning analysis of business and financial news.  Good morning, Brian.

Ford:  How're you doing there, Wayne?

Farrar:  What a mixed bag of economic indicators in the business news.  Help us sort it all out, will you?

Ford:  I'll do the best I can.  Well, I do think it's fair to say, Wayne, it was another bad week.  I liken it to summer reruns on television, you know, you see the first few minutes and say to yourself, 'I've seen this show before,' then you kinda tune out.  Weak economic data, a Federal Reserve downgrade of economic conditions, declining stock prices, led to a fall of nearly 4%, just for the week.

Who knows?   Maybe Friday the 13th had something to do with the skittishness last week; the best performers were the heavy dividend payers such as utilities, telecommunications and consumer staples, but technology, transportation and banks did not do very well at all.  Bonds, which we'll talk about in a minute, and the U.S. dollar rose sharply as investors just sought to reduce risk across the board.

The big note, Wayne, is that earnings will cease to be a big news item this week and next; since almost 100% of the S&P 500 companies have reported, the results really were good for the second quarter.  Revenue growth over 9% year-over-year, the third quarter estimates for 2010 have kinda stayed in place.  Now with this news vacuum of the late summer and extremely low volume on the New York Stock Exchange, we're going to be more reliant on policy decisions from Washington, economic data and then technical movements in the market.

Farrar:  You mentioned the bond market.  I think the Treasury bonds are at their highest level in 1 1/2 years? 

Ford:  Yeah.

Farrar:  What does that indicate about confidence?

Ford:  I think it's important when we look at this, Wayne, let's look just a little further at the Treasury markets, not something we normally focus on, but I do think the recent actions bear further discussion; as you mentioned, with last week's sell-off in stocks, the 10-year U.S. Treasury bond saw its price go up and yield go down to the lowest level in nearly eighteen months.  Now remember that bond yields move inversely to their price, and the 10-year U.S. Treasury bond is sort of a bellweather for a lot of people who look at the bond market.

This is very significant, Wayne, because it relected generally, how many economists and money managers have shifted their outlook considerably from even a few months ago, when the prevailing opinion was that rates were going up and bond prices were going down; in fact, many money managers have actively shorted U.S. Treasury bonds because they are the ones that are most susceptible to interest rate increases.  But it was clear last week that with the Feds apparent likelihood of further, what they call quantitative easing policies, investors flocked to the security of U.S. government debt.

You know, other data points have contributed to the relative allure of very low-yielding U.S. Treasury bonds were worse-than-expected retail sales and higher-than-expected unemployment claims; now the buzz is the Federal Reserve may not raise short-term interest rates until late 2011, possibly even later than that.

Farrar:  We have about 2 1/2 minutes left.  General Motors much in the news just lately for various reasons, including they are issuing an IPO.

Ford:  How about that?  The IPO market is showing signs of life again, both in the U.S. and overseas, we've heard for several months about GM's post-bankruptcy plans to have a new offering of stock; GM, of course, has been jokingly referred to as 'Government Motors' ever since the U.S. government led a massive bailout and became the majority owner in the iconic carmaker.

GM has now reported two consecutive quarters of profits, with about a 1.3 billion dollar gain just in the previous quarter, just announced last week.  The timing of this offering and size keeps shifting, however; GM was originally planning to do the deal in early August, but has pushed it back several times, given a weak economic environment.  The timing also has political significance, as there is word from Washington that President Obama wants this done before the mid-term Congressional elections, so he can say he got it off the taxpayers' dime.

The other big IPO news is from where else?  China.  The Agricultural Bank of China, also called AGbank, is upsizing its current IPO to 22 billion dollars, making it the world's largest ever; it surpasses the Industrial Commercial Bank of China offering four years ago of just under 22 billion.  That listing is being done in Hong Kong and Shanghai and has seen heavy demand for its shares.

Farrar:  We have about a minute and twenty seconds left to go.  I want to ask you about Europe.  A few months ago, I guess, the consensus was that Europe was really in the dumpster, but there are signs that some countries may be coming back.

Ford:  Yeah, I mean, despite all the gloomy forecast, Europe is defying expectations, or should we say more precisely, northern Europe, like Germany and France; it's clear southern Europe, like Greece, Portugal and Spain are still dicey, and you're right, it was only a few months ago when the euro was cratering, that some people wrote off Europe entirely.  

Now Germany just reported its second quarter gross domestic product was well ahead of expectations, and their first quarter 2010 results were revised upward.  The good news is it's not just exports in the traditionally heavy-industrial Germany; they're seeing raw demand heat up from inside their own country.  Germany and France benefit from a weaker euro, as their goods are cheaper in global markets, but clearly, loose economic policy and low interest rates are keeping the titans of Europe on a pretty good path here currently.

Farrar:  Alright, Brian, thanks very much.  Our time's just about gone for today.

Ford:  Alright, well, have a good week, Wayne.

Farrar:  You, too.  We'll talk to you again next Monday morning.  Brian Ford at RBC Wealth Management.