Parts of the U.S. $819 billion stimulus bill that would require infrastructure projects to use American steel are causing concerns of a new global trade war. The “Buy American” clause would prohibit the use of most foreign iron and steel from infrastructure projects funded under the stimulus bill, which passed the U.S. House of Representatives mid-week. For those who studied the 1930s Great Depression, protectionist measures turned what would have been a 1 to 2 year recession into a depression. Wealth and prosperity is the result of open trade. The Obama Administration needs to remember the lessons of history.
Amazon’s Q4 results were better than expected in terms of top end and bottom end results. The largest online retailer expanded into new product categories and are taking business away from their main competitor EBay. The chart is showing that AMZN was trading above its 50 day moving average. Resistance is around the $60 level. If this level breaks, the next level is the 200 day moving average around $68. The stock is up almost $9 this morning on their strong results. Accumulate this stock on weakness.
Yesterday, Total Petroleum made an unsolicited offer to buy UTS Energy for $1.30 per share. The French oil company is seeking to establish a greater presence in the oil sands of Alberta. This province within Canada holds oil reserves second only to those of Saudi Arabia. Because it is costly to extract oil from sand, production costs for these projects range from $30 to $90 per barrel. Given the current price of oil, many of these oil sands operators are unprofitable. Longer term, these companies are good investments. Opportunistic energy companies are looking to make bids for some of these oil sands players due to their attractive share prices. Companies that are considered potential takeover targets include Canadian Natural Resources, Canadian Oil Sands Trust and Encana.
SBUX first quarter results dropped 70% from a year ago, more than what analysts had expected. To combat declining revenues, they will slash 6,700 jobs and close 300 more stores. The goal is to lower costs by $500 million for this year. On the charts, SBUX looks to be facing resistance around the low $10 area. The key to whether the stock is preparing for a move up is if it can successfully hold above its 50 day moving average. MacDonald’s lower priced premium coffees and more pleasant restaurants are no doubt hurting their operations. The challenge for SBUX is whether they can make strong profits in a price sensitive environment. The stock is looking to build a base and will likely trade in a range.
The U.S. government and the Fed are doing whatever it takes to pull the world’s largest economy out of a slump. There is talk a special bank might be created in order to relieve the banks of their toxic assets. The aim is to get these financial institutions to start lending again. With Democrats firmly in control, the $825 billion stimulus spending package will likely pass. On top of that, the Fed will be printing more money to buy treasuries. Deflation is the greater threat than inflation thanks to the credit crisis. The global economic slowdown began with the US and hopefully they will pull the rest of the world back up again.
Yesterday, Iceland’s government collapsed, forcing the Prime Minister to resign. The country’s political turmoil was prompted by the global financial crisis. Iceland’s banking system collapsed last year, causing a major economic crisis and an outpouring of anti-government sentiment by the public. No government wants to be the next Iceland. Investors will continue to see governments printing mass amounts of money to support their banking system and key industries. With credit at a standstill, it will be up to the world’s governments to business activity going again. Infrastructure spending anyone?
In an environment of mass layoffs, huge profit drops and ongoing uncertainty, the S&P 500 is acting quite well. The 52 week range is 741.02 - 1,440.24. The low was reached in November of last year. The index is currently around 830. For the bulls, the index is in a bottoming process despite the wave of bad news. This suggests that much of the selling is already done. With all the negativity in the media, the smart investor realizes that is now time to put money back into the markets. To verify the upward bias, 800 needs to hold.
As we start a new week, corporations are announcing more job cuts. Caterpillar is cutting 20,000 jobs, Sprint Nextel is slashing 8,000 jobs and Pfizer, after buying Wyeth, will cut 10% of jobs. Because the US is in a severe recession, companies are cutting back in order to align costs with lower revenues. As a result, many economists are predicitng that the unemployment rate could hit 10%. Given that the credit freeze is slowly thawing, more government stimulus is needed. Doing nothing is not an option.
The recent news about former Merrill Lynch CEO John Thain’s actions gave justification to the public outrage about the actions of Wall Street. In face of a $15 billion loss, Thain signed off on close to $4 billion in bonuses for top executives on the eve of the brokerage’s merger with Bank of America earlier this month. On top of that, Merrill’s former board approved the payment of 35 cent-a-share dividend to all common stockholders, draining another $565 million from the piggy bank. Rather than preserving much needed cash in the face of massive losses, Wall Street executives chose to line their own pockets than doing what is best for their shareholders. Greed still dominates.
Unlike previous economic cycles, the tech sector was not spared from cutbacks in corporate spending. Tech giants such as Intel, Microsoft and Oracle were not spared the carnage in the economy. Their shares are trading near 10 year lows. Once the economy recovers, Intel is well positioned to profit. They are cutting costs and barriers to entry are very high. Unlike software, users still need to buy the actual chips and cannot download it for free off the Internet. The stock is near its 52 week low of $12.06, trading around 13. Given the current momentum, the stock could still go lower.
