September 17, 2021 4:03 am

Gauging the Pulse of the Market

From time to time, it’s good to take the pulse of the economy across different sectors so we can make an educated guess on market direction. Let’s look at four relevant “pulse points”.

Interest Rates

Recently, the minutes of the Federal Reserve Board’s April 2011 meeting revealed that the Fed was in no immediate rush to raise interest rates in order to encourage business investment, and to foster economic growth.

U.S.businesses are well-aware of this incredible window of opportunity to raise cash at rather low interest rates,   because they know that this will soon give way to higher borrowing costs. As a result, many cash strapped and cash rich firms are rushing to raise capital.

Even Google – with a cash hoard of $36.7 billion – decided to get in on the action. In May 2011, it announced a public issue of corporate debt with three interest rates 1.25% notes due 2014, 2.125% notes due 2016 and 3.625% notes due 2021. What Google will do with that extra cash on top of its existing stash, no one really knows. My guess is they’ll invest it, make more than the interest due, and juice profits further even though they state that the cash will be used “to repay outstanding commercial paper and for general corporate purposes”. Yaa, right!

LinkedIn’s IPO Surge Sets Stage for More Internet IPOs

It’s not 1999, but May 2011 almost felt like it – with Microsoft buying Skype for $8.5 billion and LinkedIn shares surging on its Initial Public Offering. LinkedIn’s IPO was a major test of investor demand for a new wave of fast-growing social Web companies. And investors passed the test with flying colors!

Professional networking firm LinkedIn went public in May 2011 and on the first day of trading, its shares opened at near double their offering price of $45, giving the company a market capitalization of almost $9 billion – 584 times fiscal 2010 earnings and 37 times fiscal 2010 revenue.

“If LinkedIn is worth $10 billion, you got to think, what is Facebook worth?” remarked Peter Falvey, a managing director at Morgan Keegan.

How LinkedIn will grow to justify this super-lofty valuation, God only knows. Can it achieve such super-charged growth and profitability as it faces competition from and Time will tell, but I somehow doubt it.

While the strong pop in shares is great for LinkedIn shareholders, it could ultimately be an albatross for the company and for investors that bought-in at lofty valuations.

Non-distressed homes… signs of moderate recovery?

According to Citigroup’s May 2011 report, the prices of homes in certain non-distressed sectors may actually be rising. Citi divided the market into two categories: distressed and non- distressed.

Aggregate prices for all houses sold dropped about 1½% in March 2011. However, prices of non-distressed properties actually increased by about 1%. Citi further states that its analysis does not support bearish predictions that housing could drop another 10% to 20%.

So things may well be looking up on the housing front.


May 2011 has oil is trading at $100 per barrel, 13% below year-to-date highs. Cheaper oil should lower business expenses and lead to better profitability, and hopefully more hiring and fewer jobless claims.

In other commodity news, banks in Hong Kong were asked to increase capital reserves, a step seen as China’s attempt to dampen access to easy funding, cool economic growth and curtail inflation. In response, Copper – an indispensible metal for industrial growth – fell for the first time according to Bloomberg. Copper futures are now down 10% year to date and off 13.5% from earlier highs.

What does this all mean…

– low interest rates √ CHECK

– bullish IPO response √ CHECK

– positive signs in housing √ CHECK

– dropping commodity prices √ CHECK

A continuing low interest rate environment is good for business. LinkedIn’s enthusiastically received IPO suggests investor willingness to re-embrace risk. Housing seems to be doing okay in non-distressed sectors that were not subject to builder excesses.

At the same time, commodities suggest moderation from the rapid economic growth rates in China, India and other emerging economies – a controlled slowdown is always better than a blowout at high speed.

So broadly speaking, the news is reasonably positive.

Now… one should buy when the news is awful (as it was in 2008) and refrain from buying when the news is good, ironic as it sounds.

So perhaps, for the moment anyway, investors should avoid getting in to the market at this ‘good news’ inflection point. It’s better to wait and see whether the good news is a short-term blip or the beginning of a new trend.

Always intellectually challenging… that’s why this business is so much fun. If you choose to sit it out for now.

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Steven L. Pomeranz, CFP is a 29 year investment management veteran and host of “On The Money!” which airs on NPR station, WXEL in South Florida. He concentrates on serving high net-worth individuals and has been named one of the Top 100 Wealth Advisors 2007, by Worth magazine (October 2007 Issue), honoring America’s premier financial and wealth strategists

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