Weekly Recap - September 28, 2008

Motto: ““IF you can keep your head when all about you are losing their” … then you may not fully understand the problem.
Oh, the uncertainty! The promise is still there. The bailout, on the other hand, isn’t. What we get is promises, promises! The bailout was supposed to be finalized this past Thursday, then Friday, and now it’s Monday. You wanna bet? Why do we care when the $700 billion proposal comes? Because the markets will salute it with an upside swing. After that, more likely the markets will still display a healthy pessimism going into October. The signs of this week still show weakness in the economy: a rise in weekly jobless claims to a seven-year high near 500,000; a sharper-than-expected 4.5% drop in big-ticket items ordered; an uptick in the 30-year mortgage rates. On the bright side, there is a sense that the bottom is drawing closer. The investor sentiment could not be worse. The panicked flight from private-sector assets into Treasury bonds has at least given the government more ammunition to fight the credit crunch. Analysts’ revisions are about to capitulate. The ratio of analyst upgrades has fallen to just 34% of total estimate changes, the lowest since mid-2002. A rally is in the cards when the analysts are revising down their estimates.
All major indices ended the week lower.
The Dow Jones (DJIA) ended at 11,143.13, down 2.15% for the week. The NASDAQ ended at 2,183.34, down 3.98% for the week, and the S&P 500 ended at 1,213.27, or -3.13%.

Other news:
- Washington Mutual (WM) is the latest victim on the financials front. The company was seized by the federal regulators and its assets sold to JP Morgan Chase (JPM)
- Wachovia’s (WB) shares took a dive of 27% on Friday during regular business hours, and another 10% in after-trading hours, on concerns about another big mortgage-related write-down.
- Microsoft (MSFT) authorized a $40B stock buyback over the next five years, the largest ever. The new program replaces the a previous one, now completed. Hewlett –Packard (HPQ) follows suit with $8B stock repurchase program, in addition to the last year’s $8B, of which there is $3B remaining. Nike (NKE) also announced a $5B stock buyback program.

US Dollar and The Financial Crisis - by Rob Booker, IBFX

US Dollar and The Financial Crisis The Three Factors that Influence the Currency Markets Right Now by Rob Booker

As fear grips the financial markets and investors panic worldwide, what are consequences for the US Dollar? How do turmoil in the credit markets, the failure of major US investment banks and insurance companies, and sharp declines in stock market indexes affect the value of the world's major currencies? Despite the fact that discussion of the currency markets has taken a back seat to the rest of the issues surrounding the current credit crunch, the value of the US Dollar and other major currencies have been, and will continue to be, heavily influenced by what is happening in the world of investment banking, the stock market, and especially the bond market. The first major influence on the currency markets is uncertainty about the quality of US and European investments - primarly the stock market. The second influence is speculation about what the US Federal Reserve and the European Central Bank will do next. The third influence is all about whether the world begins to look at the Euro as the world's reserve currency. US Dollar Scenario Number One: US Dollar Gains Here's the bottom line: when investor confidence crumbles, they start buying US government debt. The dollar benefits because what do investors need in order to buy US Treasurys? They need dollars. The world financial markets are complex but they depend on one major characteristic: investor confidence. At present, major banks, central bankers, hedge funds, and home-based investors share one common emotion: uncertainty. Generally, when traders worldwide feel unsure about market direction, they sell off their riskier assets -- like real estate, stocks, corporate bonds, and complex financial instruments called derivatives -- and they buy safer investments. This is why you've been hearing about a "flight to safety" on television, radio, and financial press. What this means is that global investors are buying US Treasurys, which are viewed as safe investments (because they are backed by the US Government, which can tax its population or print money in order to pay back its debt; don't you wish you could print money or tax the government to pay off your own debts?). Here is a chart that shows the price on the 2-year Treasury note and the US Dollar Index. You'll notice that as the price of the Treasury increased in the last 60 days, the value of the dollar increased. he demand for "safe" US Government debt is so high that the Wall Street Journal reported on Thursday, September 17: "The desperation was especially striking in the market for U.S. government debt, long considered the safest of investments. At one point during the day, investors were willing to pay more for one-month Treasurys than they could expect to get back when the bonds matured. Some investors, in essence, had decided that a small but known loss was better than the uncertainty connected to any other type of investment." Summary of Scenario One: As global investors sell stocks, bonds, and anything else (denominated in their local currency), they can force up the value of the US Dollar as they buy US government debt. If this continues to happen, the greenback could continue to rise against the Euro, the Pound, and other currencies. What to Watch: Watch for news about the US Treasury market. Remember that Treasury prices increase as their interest rate decreases -- if you hear that Treasury prices are decreasing, or that Treasury yields are decreasing, that is a sign that investors are actually buying more Treasurys. US Dollar Scenario Number Two: The US Dollar Neutral The bottom line: The European Central Bank and the US Federal Reserve could make moves which essentially cancel each other's effect on the US Dollar. First, let's get a basic principle out of the way. Generally speaking, a nation with a higher interest rate will attract more investment into its currency than a nation with a lower interest rate. The currency of the nation with the increased investment can rise in value as the demand for that currency increases. Central banks generally have two competing purposes: to fight inflation and to maintain stable economic growth. Although some central banks favor one mission over the other, it is unusual for a central bank to ignore rampant inflation or an exploding economy in order to focus on some other purpose. Right now, the European Central Bank is wildly regarded as focusing much more on inflation than on the economy. In the midst of a world economic slowdown, the ECB has repeatedly stood firm and refused to lower its base interest rate. But what if the ECB buckles under the pressure to lower interest rates and provide some relief to its economy? Such a move would include statements (as we have heard recently from the Bank of England) about weakness in the European economy; such statements plus any rate cuts tend to drive down the value of a nation's currency. We've already seen this effect recently as the Euro has fallen against the Dollar in the last 60 days. Essentially, the currency markets are betting that the ECB is going to have to eventually move to lower interest rates to spur economic activity. If the ECB actually does this, the Euro could fall significantly lower. However, at the same time, the US Federal Reserve refused this week to lower the Fed Funds Rate -- which signaled to the marke that the Fed might be done lowering its rate. Summary for US Dollar Scenario Two: If, as we discussed, the interest rates are correlated to the value of the Euro and the Dollar, then we could see a stalemate. A US Fed which refuses to lower rates (and may increase rates in the next 6-12 months) may cancel any move that the ECB makes to lower rates. In this scenario, the EUR/USD, for example, would not trend as much and would begin to trade in a range. What to Watch: Be ready for the next European Central Bank interest rate decision, on October 2. Be aware that often the comments made by ECB President Jean-Claude Trichet are generally more influential than the actual decision itself. And then next decision of the US Federal Reserve, on October 29. US Dollar Scenario Number Three: The US Dollar Losses Does the US Government really have a "strong dollary policy?" The last scenario is that the US economy gets so bad, so fast, that the value of the US dollar declines regardless of any other news. Quoting the Wall Street Journal from Thursday, Septemer 18 again: "[a member of the US Congress] said recurring federal budget deficits already have raised alarms with foreign investors." In the past two years there has been talk that eventually the Euro could replace the US dollar as the world's reserve currency. We have heard that oil producing countries might start asking for payment in Euros, or that central banks in Asia will begin to diversify their holdings to reduce exposure to the US dollar (remember that China and Japan combined hold over $1.5 trillion in US dollar-denominated securities and investments). Summary for Scenario Number Three: If confidence in the US economy falters further, we could see another wave of dollar losses across the board, and in particular against the Euro, which is largely viewed to be the next most stable currency (whether it really is or not is a discussion for another time!). What to Watch: Pay attention to news about central banks diversifying their holdings. You'll hear things about diversification into "currency baskets." Also, you might want to follow any news related to oil, US budget deficits, or statements by central banks about their holdings of US dollars. Conclusion: Volatile Times Call for Responsible Traders More importantly than any of the above, it's time to remember that valid arguments, reasoned analysis, or historically successful trading systems all fail miserably when combined with poor risk management. If the recent failures of banks worldwide have proved anything, they have demonstrated that excessive risk leads eventually to excessive losses. If you trade currency, or anything else, realize that risk management isn't optional; it's critically important that you know how much you stand to lose on any given trade, and that you seek independent financial advice before you make your decisions. The problems on Wall Street today are really problems of leverage. It's the Great Margin Call of 2008, if you think about it: Bear Stearns, Lehman Brothers, and AIG all suffered the consequences of trading on leverage and then betting big. When the markets tumbled, they didn't have the capital to ride out the losses. These types of losses are the great equalizers of traders: retail traders like you and me and seasoned Wall Street traders both realize that "worst case scenarios" sometimes do happen, that excessive leverage can lead to total loss, and most of all, the markets are bigger than all of us.

Company of the Week - September 8, 2008

The Company of the Week: Merit Medical System (ticker: MMSI)
The company makes and sells proprietary disposable devices used mainly in cardiology and radiology procedures. The doctors’ and patients’ needs are changing every year, so the company is keeping up their innovative flame. Merit’s main products include inflation devices used in procedures such as angioplasty, where a catheter-guided balloon is used to open a narrowed coronary artery; catheters for diagnosis and treatment; and guide wires used to place balloons angioplasty catheters within a patient’s coronary arteries. The company also offers basic items, like needles and trays. It takes suggestions from the hospital members working with its products in cardiology and radiology. Five new products will be introduced over the next few months. One new offering is Slip-Not, which will hit the market this month. The Slip-Not is a device for use in securing sutures and controlling bleeding after a variety of clinical procedures. Among the company’s key products are inflation devices, large, specialized syringes used in catheterization procedures.

Like its peers in the medical product space, Merit is reaping the benefits of an aging population. As baby boomers age, demand is rising for medical products and technologies to treat and diagnose cardiac problems and other ailments.

On the financial front, Merit is faring very well. For four straight quarters, earnings have grown by at least 25%. Earnings climbed 62% in the second quarter vs. a year ago to 21 cents per share. Sales rose 11% to $57.4 million. Catheter sales rose the most, 20%. Sales of stand-alone devices, such as fluid management products, grew 14%. Inflation device sales rose by 8%. Custom kit and tray sales increased 7%.
Gross margin was 47.7% of sales, up from 37.7% the previous year.

Analysts expect Merit to stay on fast track. Full year 2008 earnings are expected to rise 33% to 73 cents per share, then 19% in 2009. The company is also looking for acquisitions, having done seven buys in the past.

Weekly Recap - September 8, 2008

September started in a sour note. After the holiday-curtailed week, the stocks have tested the July lows, but the bottom seems to hold for now. The economic news was mostly bad. U.S. August retail sales were lackluster. Friday the Labor Department said payrolls shrank by 84,000 last month, more than expected, and down for the eight straight month. The jobless rate rose to a 5-year high of 6.1% from 5.7%.
Dow Jones Industrials was down 2.8% for the week, to close at 11,220.96. There was a nearly 345-point drop on Thursday in anticipation of grim employment data.
The Standard & Poor’s 500-stock index was down 3.2% for the week, to close at 1,242.31.
The Nasdaq Composite Index was off 4.7% for the week, to close at 2,255.88. Tech stocks have been hit hard lately by expectations that the global economic slowdown will cut spending on new technology.
Monday could see a rebound following a Wall Street Journal report that the Treasury was close to concluding a plan to inject capital into troubled mortgage giants Fannie Mae (ticker: FNM) and Freddie Mac (ticker: FRE). U.S. federal regulators outlined their bailout for Fannie Mae and Freddie Mac, including a takeover of the firms by their regulator and a Treasury Department purchase of the firms' senior preferred stock. The bailout also includes a plan for the Treasury to purchase mortgage-backed securities from the firms in the open market, and a lending facility through the Treasury from its general fund held at the Federal Reserve Bank of New York.
What else?
- Oil dips as dollar climbs. Oil swung widely amid threats of hurricanes Gustav, Hanna, and Ike, rising as high as $118 and falling as low as $105 a barrel. It settled near the low-end of the range at $106.23, down 8% for the week. Natural gas futures slid 6%, their lowest weekly close since December. The dollar gained in 10 of the past 11 sessions, pushing the U.S. Dollar Index up 2%.
- Warnings hit Nokia, Ciena. Shares of No. 1 cell phone maker Nokia tumbled 7.6% to 20.62 after it warned that its Q3 market share will drop because it said it will not match rivals’ price cut. Network gear maker Ciena plunged 25% Thursday after it said its telecom customers are delaying orders. The report helped fuel fears of a broadening tech sector slump
- Mortgage woes increase. Home loan delinquencies in Q2 rose to a record 6.41% from Q1’s 6.35% and a year-earlier 5.12%. Subprime delinquencies actually fell, but higher-quality prime mortgages – especially those with adjustable rates – rose. The new foreclosure rate hit a new high of 1.19%.
- U.S. economy in neutral. ISM’s manufacturing index fell to 49.9 in August, just below July’s break-even 50. ISM’s service-sector gauge rose to 50.6 from 49.5. Export orders picked up on the factory side, but slowed for service firms. The Fed’s beige book report said economic activity has been “slow”.