Weekly Markets Review 02-01-2010

February 1, 2010

"Serendipity is looking in a haystack for a needle and discovering a farmer's daughter." – Julius Comroe
Major market indices were lower last week, with the DJIA, S&P 500 and Nasdaq dropping 1.04%, 1.64% and 2.63%, respectively. Value outperformed growth, which has become a trend, reversing last year’s record of growth’s outperformance. The small cap index lost 2.44%. The 10-year treasury yield closed at 3.60%, down 2 basis points.
All sectors of the U.S. economy were down. Financials performed best, losing only 0.1%. Market strength came in the photographic products group, up 39% on Eastman Kodak’s 4Q earnings. Homebuilders and auto makers also did well. Steel, home furnishings and communications equipment underperformed.
The market, in our estimation, has entered a consolidation period. We have seen a substantial pullback from the January highs led by China and the emerging markets. We expect the S&P 500, which is oversold, to rebound to roughly 1,120, at which point it would not surprise us to see the S&P decline over the following six to eight months back to its breakout levels of last July (roughly 950). At that point, we feel the bull market could resume, with moves back to last month’s levels and beyond.
Bottom line? We are near-term bullish, mid-term bearish, and long-term bullish.
The Fed's policy-making committee (FOMC) met on Wednesday. Following the meeting, members stated that they have concluded the economy is strengthening and employment is improving. The committee also said it would keep interest low for an "extended period" as "substantial resource slack" (high unemployment and low factory utilization), restrain inflationary pressures. Stay tuned…
Equity Markets Review
* The British economy grew in the fourth quarter of 2009, emerging from a deep recession that began in the second quarter of 2008, The Wall Street Journal reported Jan. 26.
* Earlier this morning, S&P revised its outlook on Japan to "negative" from "stable," potentially putting at risk Japan's AA long-term rating. The ratings firm cited concerns over "the Japanese government's diminishing economic policy flexibility" and over growing "fiscal and deflationary pressures." Japan's government debt is already among the highest for rated sovereigns, and S&P thinks the debt burden will continue to rise, peaking at 115% of GDP over the next few years.
* Existing Home Sales fell 16.7% to 5.45M in December, vs. expectations of 5.78M. The supply of homes rose to 7.2 months.
* Several confidence indicators were released yesterday. The Conference Board's Consumer Confidence Index registered a small gain in January, coming in at 55.9 vs. 54 expected and 53.6 in December. Although "consumers were less dire about their income prospects than in December, the number of pessimists continues to outnumber the optimists."
* Durable goods orders minus transportation rose 0.9%, reports the Commerce Department. Total orders rose 0.3%, less than forecast, based on depressed demand for commercial aircraft.
* Unemployment fell, with initial jobless applications totaling 470,000 this week, compared to 478,000 last week. Bloomberg further reports that initial jobless claims fell to the lowest level in a year.
* Federal Open Market Committee kept rates at 0-0.25%, as expected, and said it anticipates "exceptionally low levels of the federal funds rate for an extended period.”
* Europe's seasonally adjusted unemployment rate was 10.0 percent in December 2009, compared with 9.9 percent in November and 8.2 percent in December 2008, Eurostat reported Jan. 29.
* Bernanke won a second term as Fed Chairman in a 70-30 vote, but his fight isn't over. With another four years as chief, Bernanke must now defend the central bank itself as lawmakers consider opening up the Fed to congressional audits and stripping it of bank-supervision powers.
* The Chicago Purchasing Managers Index increased to 61.5 in January, higher than the consensus estimate of 57.2. This was the highest level since November 2005.
* The United States' gross domestic product (GDP) rose 5.7 percent in the fourth quarter, the best figure since the third quarter in 2003, Bloomberg reported Jan. 29, citing the U.S. Commerce Department. Consumer spending, which makes up about 70 percent of the GDP, rose by 2 percent, more than anticipated and following a 2.8 percent increase in the previous three months.
* Ford Motor showed its first yearly net profit since 2005. Ford’s fourth-quarter net income was $868 million, compared with a loss of $5.98 billion a year earlier. For the year, Ford posted a $2.7 billion profit versus a loss of $14.7 billion in 2008.
* AT&T’s fourth-quarter earnings increased 25% as it profited from its exclusive service agreement with Apple’s popular iPhone.
* Nokia’s fourth-quarter net profit soared 65% on the Finnish firm’s expanded market share and improved profit margins.
* The Justice Department approved the merger of Live Nation and Ticketmaster on the condition that Ticketmaster sells its Paciolan unit to a unit of Comcast, that the combined company licenses its primary ticketing software and that it doesn't retaliate against venues that use another provider. The new Live Nation Entertainment will own more than 140 concert venues across the world, and will sell roughly 140M tickets per year to 22,000 concerts.
* Apple posted better-than-expected quarterly results (see details below), buoyed by strong sales across most of its product lines. However, Apple's results were also helped by new accounting rules allowing the firm to recognize all the revenue for iPhone sales at the time the devices are sold, rather than having to defer that revenue over 24 months.
* Retention packages have big impact at Morgan Stanley Smith Barney… Link to http://www.fa-mag.com/fa-news/5113-retention-packages-have-big-impact-at-morgan-stanley.html
* German engineering conglomerate Siemens announced that it would cut all future trade ties with Iran, although the company intends to maintain existing contracts, Haaretz reported Jan. 27.
* In an unprecedented move, Toyota has halted U.S. production and sales of eight models, including its top-selling Camry and Corolla models, on mounting concerns that defects might cause the cars to accelerate unintentionally. The eight models represented 57% of Toyota's 2009 sales.
* Berkshire Hathaway will be added to the S&P 500 index, replacing Burlington Northern, the railroad operator it's acquiring.
* Procter & Gamble posted a profit of $1.49 per share, but saw profits shrink 7% in its second quarter, the consumer goods giant grew its sales 6% to more than $21 billion.
* Shares of UBS fell to their lowest level since July in Swiss trading after Switzerland's justice minister outlined the risk to the Swiss economy should UBS' deal with U.S. tax authorities fall apart. If UBS fails as a result of losing its U.S. license, "the Swiss economy and the job market would suffer on a major scale," said Justice Minister Eveline Widmer-Schlumpf. Shares were down 0.9% to 13.89 Swiss francs.
Weekly Sector Review
The sectors of the U.S. economy, as well as the S&P 500, have performed as follows:
Last Week's Returns:
Information Technology… (3.68)%
Materials… (4.35)
Consumer Staples… (0.16)
Utilities… (1.26)
Consumer Discretionary… (0.42)
Financials… (0.01)
S&P 500… (1.64)
Industrials… (1.63)
Healthcare… (1.07)
Telecommunications… (1.13)
Energy… (2.84)
State Of The Union Address Summary
* President Obama pledged to implement the changes he campaigned on. He spoke about job creation and touched on financial reform but didn't try to assign blame for the crisis, telling Americans "I am not interested in punishing banks, I'm interested in protecting our economy." Other topics in his speech included the need for deficit reduction, and the importance of healthcare reform, though Obama signaled it would no longer be the center of his legislative agenda.
* In his State of the Union address on Jan. 27, U.S. President Barack Obama said his most urgent task upon taking office was to shore up the banks that helped cause the financial crisis. He said the financial rescue program his administration created has stabilized the markets and recovered most of the money spent on the banks. To recover the remaining amount, he proposed imposing a fee on the biggest banks to pay back the taxpayers.
* President Barack Obama proposed taking $30 billion of the money Wall Street banks have repaid and use it to help community banks give small businesses needed credit. He also proposed a new small business tax credit that will go to over one million small businesses that hire new workers or raise wages, and suggested eliminating all capital gains taxes on small business investment.
* President Barack Obama stressed putting Americans to work now to build the infrastructure of the future. He proposed building clean energy facilities, encouraging these and other businesses to stay in the United States, cutting tax breaks for companies that ship job overseas and giving those breaks to companies that create jobs for Americans. Obama added that China, Germany and India are rebuilding their infrastructure and investing in clean energy.
* The president said the United States needs to build a new generation of safe, clean nuclear power plants, continue investing in advanced biofuels and clean coal technologies and pass a comprehensive energy and climate bill with incentives to make clean energy profitable. He said the nation that leads the clean energy economy will lead the global economy, and that the United States must be that nation.
* The President said that the United States will seek to double its exports over the next five years. Obama said the United States will launch a "National Export Initiative" aimed at creating two million jobs and helping farmers and small businesses increase their exports. He also said new markets must be sought aggressively, but that existing trade regulations must be enforced. Obama said the United States will continue to shape the Doha trade agreement, and improve trade relations in Asia and specifically with South Korea, Colombia and Panama.
* The President said that the United States will enact a freeze on discretionary spending starting in 2011 to deal with the country's growing budget deficit. Obama said that national security programs, Medicare, Medicaid and Social Security will not be affected. Obama said middle-class tax cuts will be extended, but that the United States cannot afford to extend tax cuts for oil companies, investment fund managers and individuals making more than $250,000 per year.
* Analysts at Stratfor said the following: President Obama presented the nation with his first ever State of the Union address on Wednesday. The speech focused almost entirely on domestic affairs, revealing the world's sole superpower to be wholly engrossed in domestic politics and economic concerns. Barely one out of the approximately 16 and a half pages of the address looked beyond U.S. shores. There were no profound challenges to U.S. rivals as we have seen in previous speeches.
* Geopolitically speaking, a global hegemon preoccupied with domestic concerns is significant in and of itself. Simply put, it means that its challengers can take note of the acrimonious political debates on the home front and hope to catch America distracted on a number of global issues. One such front is Iran, where the United States is engaged with its Western allies in trying to prevent Tehran from developing a nuclear weapon. There was barely a mention of Iran in Obama's State of the Union, aside from a fleeting reference to "growing consequences." But this does not mean that Wednesday carried no developments on the issue of Iranian nuclear ambition; it just means that they did not occur in Washington.
On Government Profligacy
“America’s most vibrant political force at the moment is the anti-tax Tea Party movement. Even in leftish Massachusetts, people are worried that Mr. Obama’s spending splurge, notably his still unpassed health care bill, will send the deficit soaring. In Britain, where elections are usually spending competitions, the contest this year will be fought about where to cut. Even in regions as historically statist as Scandinavia and southern Europe, debates are beginning to emerge about the size and effectiveness of government.” (source: The Economist)
Sports, Culture & Politics
* A senior official said U.S. President Barack Obama will unveil a plan for a three-year freeze on optional, non-security government spending, taking aim at the huge deficit in a bid to save $250 billion over 10 years, AFP reported Jan. 26. The official said Obama will make the announcement in his Jan. 27 State of the Union address.
* Senior U.S. administration officials said U.S. military teams and intelligence agencies are deeply involved in secret joint operations with Yemeni troops who in the past six weeks have killed six of 15 top leaders of AQAP -- a regional al Qaeda affiliate, The Washington Post reported Jan. 27. U.S. advisers do not take part in raids in Yemen, but help plan missions, develop tactics and provide U.S. weapons and munitions.
* Iran hung two people until death for their participation in recent anti-government protests, reported Bloomberg. Nine others were also sentenced to death for seeking to overthrow the Islamic Republic.
* Venezuelans took to the streets for the fourth day in a row Tuesday in the wake of a controversial government decision to shut down a handful of cable TV stations, among them the now-infamous Radio Caracas Television (RCTV), which had been booted off public airwaves and onto cable in 2007. Amid banners reading, "The first time was insanity, the second time is dictatorship," a wave of mostly student protesters blocked streets and engaged in violent confrontations with Venezuelan police for three days. The protests began with a general demonstration on Saturday that had been planned in advance to oppose the country's economic decline.
* U.S. Secretary of State Hillary Clinton said she would not serve a full eight years if President Barack Obama wins another term, AFP reported Jan. 28. Clinton said she enjoys her job as the top U.S. diplomat but found it physically grueling. Clinton repeated that she would not run again for president, adding that she wanted a private life.
* The U.S. Senate voted 70-30 to appoint Ben Bernanke to a second four-year term as Federal Reserve chairman, the Wall Street Journal reported Jan. 28.
* Chairman of the Expediency Council Ayatollah Ali Akbar Hashemi Rafsanjani said the Iranian nuclear program is irreversible, IRNA reported Jan. 30. Rafsanjani, who made the remarks in a meeting of the Expediency Council, said the nuclear powers should understand that the Iranian nuclear program symbolizes Iranian resolve. He added that global arrogance, that of the United States in particular, has masterminded new propaganda campaigns against Iran.
* Up to 10,000 people rallied for the resignation of Prime Minister Vladimir Putin over living costs and unemployment in Kaliningrad on Jan. 30, Reuters reported. A leader of Solidarity, an opposition movement, said people were protesting high unemployment and a 25 to 30 percent utility rate hike. Political parties, including the Communists, organized the rally.
* China is suspending military exchanges with the U.S. and has threatened to impose sanctions against U.S. companies, following a $6.4B U.S. arms sale to Taiwan. Companies that are likely targets of the potential sanctions include Boeing, Lockheed Martin Raytheon and United Technologies.
* Does the government plan to co-opt your retirement savings? Link to http://moneymorning.com/2010/01/27/retirement-plans/
The weekend’s top-five box office performers as reported by The New York Times were:
1) Avatar, Twentieth Century Fox, $30,000,000
2) Edge Of Darkness, Warner Bros., $17,120,000
3) When in Rome, Walt Disney Studios, $12,065,000
4) Tooth Fairy, Twentieth Century Fox, $10,000,000
5) The Book of Eli, Warner Bros., $8,770,000

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