SFM OBSERVER August 2010
S F MOBSERVER AUGUST 2010
SWEENEY FINANCIAL MANAGEMENT LLC
A CONCISE REVIEW OF THE MONTH IN THE INVESTMENT MARKETS
The Dow closed the month at 10,014 for a drop of 451 points or -4.3%. A tough month as we again drop down to the lower level of the trading range this year. The reason this month was terrible numbers coming out of the housing market. Existing home sales dropped -27% to an annual rate of 3.8 million homes and new home sales dropped to a 276,000 unit annual rate. To give you some perspective, in 2006 DR Horton alonebuilt and sold 53,000 homes. 276,000 homes for the entire homebuilding industry (which includes all of those local builders in your area) is an incredibly low number. This number has to go up dramatically at some point as household formation and population growth continue. With mortgage rates at 50 year lows it is hard to forecast the housing market getting worse. We are due for a turn in this market.
Some of the important events from the month just passed:
- The Federal Open Market Committee (FOMC) met this month and stated that the recovery has slowed in recent months. They also forecast the pace of economic growth will remain modest over the next period of months. Reasons given include high unemployment, lower housing wealth, tight credit and low income growth. The Fed also noted that construction spending remains weak.
- Russiais suffering from a drought that has severely hurt their wheat harvest this year. As a result, they suspended wheat exports which has thrown the commodity market into a frenzy as wheat users rush to lock in some supply. US farmers will likely be the winners here as we have a good harvest coming and prices are soaring.
- Johnson and Johnson sold $1.1 billion of bonds at the lowest rates ever recorded for corporate debt issuance. The ten year bonds were sold with a yield of 2.95% and the thirty year bonds went off with a yield of 4.5%. If you are going out to buy a business with an internal rate of return of 10%, you can make a lot of money with a 3% cost of funds.
- Chinais expected to surpass Japan this year as the second largest economy after the United States. At some point in the future, they might dethrone us as well.
- Merger and acquisition activity is heating up and that is a positive harbinger for the economic outlook. BHP offered $39 billion for Potash, HP is paying a huge price for a small tech company called 3Par, Genzyme is in play and Barnes & Noble has put them self up for sale. Putting money in motion and moving it out of savings helps promote further economic activity.
- Look for a new car to hit the streets of America. Chrysler has developed plans to start selling Fiat’s in the US again after a long period of being absent. Fiat will sell subcompact and sports cars here in an effort to cater to the higher fuel economy standards being proposed and to compete with hybrid vehicles.
If you have any questions or comments concerning the above, please feel free to call us or send a reply.
Labor Day is just around the corner. Another summer goes into the history books. Hope you all had a good time.
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