Weekly Markets Review 03-15-2010

March 15, 2010

"Opportunities multiply as they are seized." - Sun Tzu
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Hindsight
Major market indices were higher last week. The DJIA, S&P 500 and Nasdaq rose 0.55%, 0.99% and 1.78%, respectively. Growth outperformed value. Small cap stocks gained 1.59%. And the 10-year Treasury yield closed at 3.70%, up 1 basis point for the week.
It was a year ago that stocks reached their nadir and began climbing. The broad market is up 70% since then. And while we feel that, at some point soon, stocks will likely consolidate, bulls continue to leverage positive 4Q earnings and the nascent economic recovery to outflank bears, who are still focused on the negative news within international credit markets.
Markets will continue to benefit by tax refunds, continuing recoveries in overseas markets, improving durable goods orders and corporate profits. But all is not well. Existing home sales and mortgage applications fell to record lows last week. Further, some economists project that the “shadow housing market,” or the growing backlog of homes in foreclosure, or about to be foreclosed, could be as high as 5-7 million. Economists say it could take up to three years for these homes to be put back on the market and purchased. This could undercut home prices, which have appreciated since December. So, do not expect these markets to continue their rise in an unabated fashion. Bears will have plenty to growl about. Stay tuned…
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Equity Markets Review
* In light of Athens' ambitious consolidation measures, Stratfor expects Greek gross domestic product (GDP) to contract by 2.0 percent, larger than the Greek finance ministry's forecast of a 0.2 percent contraction. Athens is attempting to trim its budget deficit from 12.7 percent of GDP in 2009 to 8.7 percent in 2010 by cutting expenditure and raising taxes, but one of the unavoidable consequences of Athens' belt-tightening is that the measures will depress consumption and weigh on GDP growth. European finance ministers are still hoping that a bailout of Greece will be unnecessary, and are meeting today to work on plans to help Greece push past its debt crisis. Any aid would likely be through either loan guarantees or bilateral loans. Meanwhile, the main sales tax in Greece is rising to 21% from 19% as of today, increasing the cost of fuel and most consumer goods and services.
* Yi Gang, head of China's State Administration of Foreign Exchange (SAFE), said the U.S. Treasury market is the world's largest government bond market, Reuters reported March 9. Yi stated that China's foreign exchange reserves are "huge," making the U.S. Treasury market important to Beijing. Yi expressed hope that China's presence in the U.S. Treasury market would not become a political football. China, he stressed, was not in the game of short-term currency speculation, adding that it is market investment behavior, and shouldn't be politicized. Yi said China is a responsible investor and can surely achieve a win-win result in the process of investing.
* China's inflation reached a 16-month high, rising 2.7% in February from a year earlier. Production rose 20.7% in the first two months of 2010. The rapid growth in China's bank lending and investment spending slowed in February. That slowing is seen as a sign that the government's gradual withdrawal of stimulus policies in recent months is starting to have an effect on the real economy.
* A Japanese Foreign Ministry panel concluded that secret pacts on nuclear arms and other issues were reached by Japan and the United States in the Cold War era, AP reported March 9. Among the secret pacts acknowledged by the expert panel was "a tacit agreement" that emerged during the revision of the Japan-U.S security treaty in 1960, which led to Japan effectively allowing port calls by U.S. vessels carrying nuclear weapons without prior consultation.
* Brazil will raise tariffs on 102 U.S. exports and break patents worth $238M in an attempt to force the U.S. to end its cotton subsidies. The WTO had ruled in August that Brazil could impose annual sanctions in this case because the U.S.'s cotton subsidies violate trade regulations. Exports that will be most affected include wheat, cotton, chemicals and auto parts.
* Sen. Chris Dodd, the chairman of the Senate Banking Committee, will unveil a draft bill for financial reform Monday that will, among other points, consolidate banking regulators, create a systemic risk council and place a new consumer watchdog agency in the Federal Reserve. Despite the fact that Republicans view it as "a much better bill" than the one introduced in November, Republican lawmakers say it's still too far to the left and they can't support it without amendments that will push it back to the middle.
* Clothing conglomerate Phillips-Van Heusen is reportedly close to buying Tommy Hilfiger Corp. for around €2.2B ($3B) in cash and stock. Phillips-Van Heusen, which owns brands like Calvin Klein and Kenneth Cole, is hoping to use Hilfiger's strong European distribution channels for its own products. Though talks are ongoing, sources said a deal is possible as soon as this morning.
* The four large countries with triple-A credit ratings - the U.K., the U.S., France and Germany - all face "an increasingly delicate balancing act," said Moody's, as they consider ways to reduce government debt. None of the four countries are in immediate risk of a downgrade, but their "'distance-to-downgrade' has in all cases substantially diminished." Since much of the global rebound seems to have bypassed the four countries, there is "substantial execution risk" in the countries' efforts to cut spending without derailing a recovery.
* Brazil's gross domestic product (GDP) in 2009 fell to $1.77 trillion, a 0.2 percent drop – the first annual GDP contraction since 1992 -- the Brazilian Institute of Geography and Statistics reported March 11.
* U.S. President Barack Obama said March 11 that China's moving to "a more market-oriented exchange rate" would make an essential contribution to a "global rebalancing effort," Reuters reported. Obama also said all countries need to "rebalance." He added, "Countries with external deficits need to save and export more. Countries with external surpluses need to boost consumption and domestic demand."
* Japan's economy expanded an annualized real 3.8 percent in the October-December quarter, revised down from an initially reported 4.6 percent growth, AP reported March 11.
* The U.S. may sell its stake in Citigroup sooner rather than later, with media reports pegging a possible sale as soon as this spring. Federal officials had said they plan to unload the government's 27% stake in Citigroup over the next year, but hadn't indicated it could happen on such an accelerated timetable.
* Promising to "forever change the Internet," Cisco introduced a new kind of router yesterday that triples its predecessor's capacity to 322 terabits/second. To put that in perspective, the router has the capacity to stream every movie ever created in less than four minutes. But many felt Cisco failed to live up to the weeks of hype it had created, as consumers won't experience anything near that speed. Even Cisco CEO John Chambers admitted the technology "may not be exciting for the average consumer." Shares were unchanged at the end of trading yesterday.
* In its annual report, released Monday, UBS expressed confidence about its ability to stage a turnaround this year, noting that "more favorable market conditions in January and February 2010 have benefited most of our businesses." For 2009, the company had a net loss of 2.74B Swiss francs ($2.6B), better than the year-earlier loss of 21.3B francs. Executive board members earned 68.7M francs in 2009.
* Google is '99.9%' certain that it will shut down its search engine in China, sources say, and has drawn up detailed plans about how to wind down its search operations there. The company is likely to take action within weeks, leaving the growing Chinese internet market dominated almost entirely by local companies. Meanwhile, Chinese authorities have warned major partners of Google's China-based search engine that they must adhere to local censorship laws even if Google does not.
* BP announced on Thursday that it would pay Devon $7 billion in cash for its assets in Brazil, Azerbaijan, and the deep-water part of the Gulf of Mexico. It also will sell Devon a 50% stake in its Kirby oil-sands interests in Alberta, Canada, for $500 million. The two companies will form a joint venture to develop the property.
* BMW reported a 36% increase in 2009 net profit but said it is cautiously optimistic for 2010. That increase came in a year when luxury carmakers experienced a steep downturn.
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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… 1.95%
Materials… 0.35
Consumer Staples… (0.66)
Utilities… (0.67)
Consumer Discretionary… 1.40
Financials… 2.06
S&P 500… 0.99
Industrials… 1.71
Healthcare… (0.44)
Telecommunications… 2.49
Energy… (0.45)
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Recovery Continuing
In looking at today’s economic recovery, we’ve had two quarters of positive GDP growth: Q3 came in at 2.2% and Q4 was revised to 5.9%. Average the two numbers and you have an annualized growth rate of approximately 4%. It’s worth noting that roughly three quarters of that growth has come from our key cyclical areas of the economy—home building, vehicle sales, inventories, and equipment spending. It is also worth noting that a rebound in these four sectors is boosting manufacturing employment. (source: JP Morgan Asset Management)
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Sports, Culture & Politics
* During a trip to Afghanistan, Iranian President Mahmoud Ahmadinejad said the United States is "playing a double game," AP reported March 10. He said the United States "created the terrorists" and now they are fighting them. Ahmadinejad criticized foreign forces and the amount of money being spent on troops, money that he said would have been better spent on irrigation and other development projects. Afghan President Hamid Karzai said Iran was a "brother nation" that is assisting Afghanistan with reconstruction projects, improving education and helping provide electricity.
* Victims of Madoff's Ponzi scheme are teaming up with victims of Allen Stanford's scam to lobby Congress for a law forcing Wall Street firms to pay billions of dollars to cover some of the victims' losses. The groups want brokerage firms to pay an extra $4B to the SIPC fund, and for the SIPC to then compensate each of the victims for up to $500,000 in losses. Separately, Madoff victims unhappy with how a judge ruled on loss calculations will be allowed to turn directly to a federal appeals court.
* The NCAA selection committee announced the brackets for it men’s basketball tournament. The number one seeds are as follows: 1) Midwest, Kansas; 2) West, Syracuse; 3) East, Kentucky; 4) South, Duke.
* Xavier University drew a six seed and will play its first-round game against 11-seed Minnesota on Friday.
The weekend’s top-five box office performers as reported by The New York Times were:
1) Alice In Wonderland, Disney, $62,000,000
2) Green Zone, Universal, $14,534,000
3) She’s Out of My League, Paramount, $9,600,000
4) Remember Me, Summit, $8,282,000
5) Shutter Island, Paramount, $8,140,000

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