Sep 30, 2011

Goodbye (and Good Riddance) to Q3

September 30, 2011

Today is quarter end, and what a wild quarter it has been. The S&P 500 is down over 12% for the quarter while the Russell 2000 small cap index is down 20% for the quarter! The quarter has featured a near government shutdown, a looming financial crisis in Europe along with stagflation, Operation Twist, an early start to the 2012 election season with 40% of the President’s term left to serve, and of course an economy that is grinding lower. As a result of the macro uncertainty, we have witnessed extreme market volatility. The chart below shows the VIX over the past 10 years, and as you can see the volatility is as high as at any point over that time period, with the exception of the peak of the financial crisis.

Amazon (AMZN)announced the Kindle Fire, a new tablet designed to integrate with AMZN’s commerce site and their Prime Service. The device utilizes an Android web browser running on Amazon’s EC2 cloud computing engine, AMZN’s Android app store, and their Prime Service to streamline commerce and the viewing/purchasing of digital content. Unlike the iPad, the device doesn’t have a camera, microphone, or 3G option. Similar to how Amazon approaches most markets, this is the Wal-Mart approach to tablets-price it low, drive prices lower. Not only is this a direct competitor to Apple, especially given its $199 price target, but it also takes a bite out of a struggling NetFlix, whose stock is down 64% from its July high.

Speaking of Amazon and NetFlix, both CEO’s own significant stakes in their companies. During the quarter Amazon’s Jeff Bezos saw his stock rise by 8%, and the value of his stock soar to $19.1 billion! Reed Hastings, the CEO of NetFlix, saw the value of his stake fall to $273 million. Personally, I’d rather be in Bezos’ position, not because of the obviously larger stake, but because he seems to be having a lot of fun these days. When I met him back in 1997, he didn’t seem to be enjoying his role like he is today.

As fuel efficiency soars and both federal and state gasoline tax revenues decline, various proposals have been floated to implement a mileage tax. This tax would charge users on a per mile basis. Owners of electric and hybrid vehicles are bristling at the suggestion after paying a premium for their vehicles in exchange for lower fuel costs. Supporters say that not only will it stabilize tax revenues from motor vehicles, it will ensure that alternative fuel owners are “paying their fair share” of taxes to support the highway infrastructure.

From a Paul Volcker letter Sept 18 to the NY Times:

“The siren song of inflation is both alluring and predictable. After all, if 1 or 2 percent has not raised inflationary expectations-as the Fed and most central banks believe-why not 3 or 4 or even more? Let’s try to get business to jump the gun and invest now in the expectation of higher prices later…and maybe wages will follow. Well, good luck! Some mathematical models spawned in academic seminars might support this scenario. But all of our economic history says it won’t work that way. I thought we learned that lesson in the 1970’s…What we know, or should know, from the past is that once inflation becomes anticipated and ingrained, as it eventually would, then the stimulating effects are lost. Once an independent central bank does not simply tolerate a low level of inflation as consistent with “stability”, but invokes inflation as a policy, it becomes difficult to eliminate.”

Federal Reserve Chairman Ben Bernanke called long-term unemployment in the U.S. a "national crisis" and called on Congress to take action to fight it. About 45% of the jobless have been unemployed six months or more, Bernanke said. "This is unheard of," he said. "This has never happened in the post-war period in the United States." Duh!!

Japan’s factory production has almost recovered to pre-earthquake levels, according to the Ministry of Economy, Trade and Industry. Industrial output rose by 0.8% from July to August, the 5th consecutive monthly increase. Unemployment fell to 4.3%.

BofA (BAC) and other US banks are expected to implement a new fee on debit card transactions. Additionally, many free services (including free checking) are expected to disappear as the Durbin amendment to Dodd Frank, which limited credit card fees charged to retailers, begins to impact bank earnings.

On the economic front Personal Income came in softer than expected, declining by 0.1% vs. an expected increase of 0.1%. Personal spending was in line, rising 0.2%. the Chicago Purchasing Manager’s index rose to 60.4 vs. expectations of 55.0, and the University of Michigan Consumer Confidence index rose to 59.4 vs. expectations of 57.8.

Unfortunately the markets don’t close for a day at the end of each quarter (they should), and I’ve always felt they should close the last two weeks of the year to allow investors time to regroup. Alas, the drumbeat continues and we’ll be back at it Monday as another earnings season approaches. My anticipation is that pre-announcement activity will be more significant this quarter than we have seen in the past.

Stay tuned and have a great weekend.


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