Weekly Markets Review 03-22-2010

March 22, 2010

"Continuous effort -- not strength or intelligence -- is the key to unlocking our potential." - Sir Winston Churchill
Major market indices were higher last week. The DJIA, S&P 500 and Nasdaq rose 1.10%, 0.86% and 0.29%, respectively. Value outperformed growth, while the small-cap index lost 0.40%. Emerging markets were largely up. And the yield of the 10-year Treasury bond lost 1 basis point, at 3.69%.
The best performing sector was telecom services, up 2.4%. Industrials and staples also did well. Energy, materials and technology underperformed on the week.
The top performing group was construction materials, up 7%, led by its single member, Vulcan Materials. This on the Senate approval of a jobs bill that provided $28 billion in funding for states’ highway building projects.
Investors watched this week as central banks and governments around the world attempt to craft exit strategies from massive stimulus measures now that the global economy has begun to expand. The U.S. Federal Reserve Board's commitment to keep rates low for the foreseeable future and Japan’s move to expand its liquidity provisioning helped bolster risk appetite this week. Concerns that a European bailout of Greece may fall apart pressured markets.
Meanwhile, the nation waits with bated breath as healthcare reform hangs in the balance. We are not sure how to interpret everything. It seems the majority of the conversation focused on a few key pages of a much larger bill. And the CBO projections mean little, as I don’t think the Budget Office would have forecast the current $60 trillion dollar deficits for Social Security and Medicare. I did have a client in the office this morning. A doctor. And when discussing the reform bill he told me that, as he made $248,000 last year, he’s likely to work a little less in 2010. Why? To stay below the higher Medicare taxes to be imposed at $250,000. Ouch… Doctor?
There have been a slew of acquisitions, offers and buy outs, as of late. And it makes sense. While corporations remain flush with liquidity, we think there may still be opportunities to gain by mergers and acquisitions activity throughout the rest of 2010. Stay tuned…
Equity Markets Review
* In a 219-212 vote late yesterday, the House of Representatives approved the largest healthcare overhaul in four decades. The bill, which failed to garner a single Republican vote, will be signed into law by Obama, who called it "a victory for the American people." All told, the healthcare measures will cost $940B over ten years and cover 32M uninsured Americans. The bill is a mixed bag for insurers, who stand to gain over 20M new customers but are unhappy the bill doesn't substantially address the problem of rising healthcare costs and further reduces government subsidies to the industry. Pharmaceutical companies, on the other hand, emerge as clear winners from the bill, while large businesses are worried about higher costs and stricter coverage rules.
* IMF official John Lipsky issued a grim prognosis for the world's wealthiest nations yesterday, warning the debt-to-GDP ratio for five of the G-7 countries (not Germany or Canada) will approach or exceed 100% by 2014. If left unaddressed, the rising debt "could undermine confidence in the economic recovery." For the U.S. specifically, Lipsky said a higher public savings rate will be necessary to ensure long-term fiscal sustainability.
* For first time since the 2003 U.S. invasion, Iraq produced enough fuel to meet all its domestic needs, Azzaman.com reported March 20, citing Iraq's Oil Ministry. The ministry's statement said Iraq has reached a state of self-sufficiency in fuel products, adding that no fuel products were imported in the last three weeks.
* The NAHB Housing Market Index dipped down 2 points to 15, matching a nine-month low. The current sales conditions also fell 2 points to 15, while expectations for the next six months dropped 3 points to 24 and prospective buyer traffic dipped 2 points to 10.
ABC’s Consumer Comfort Index rose an out-of-the-ordinary 6 points to -43. Despite the relatively large increase, 90% of Americans still rate the economy negatively, 54% are negative on their personal finances and 71% say it’s a bad time to spend money.
* Greek Prime Minister George Papandreou told a committee at the European Parliament on March 18 that Greece will not be able to continue its budget austerity measures if it has to keep borrowing at “high rates.” Papandreou essentially continued to lobby the European Union and specifically Germany for a formal bailout plan that would allow Greece to “borrow at rates that are normal.” This came as the Dow Jones Newswires reported an anonymous Greek official—the latest of many—who said that if the European Union did not come out with a detailed bailout plan soon, Athens would be forced to turn to the International Monetary Fund. This is also intended to pressure the European Union and Germany to bail out Greece, since it is assumed that Berlin and Brussels would not want a Washington-influenced institution bailing out a eurozone member. The problem for Greece is that the market price for its debt is falling as investors price in the rising possibility of a default, forcing Athens to offer higher yields to investors. (Stratfor)
* Greece's budget deficit in the first two months of 2010 plunged more than 77 percent, RTE reported March 22, citing the Greek Finance Ministry. The news comes as the debt-strapped country attempts to put its public finances in order. Government receipts rose 13.2 percent to €8.75 billion ($11.8 billion) while spending was cut 9.6 percent to €8.99 billion ($12.1 billion), leaving a public deficit of €904 million ($1219 million) compared with a €3.99 billion ($5.38 billion) shortfall the same time last year.
* The advance figure for seasonally adjusted initial unemployment claims in the United States stood at 457,000 for the week ending on March 13, down by 5,000 from the previous week’s unrevised figure, the U.S. Labor Department announced. The four-week moving average was 471,250, down by 4,250 from the previous week’s unrevised average.
* Chinese Premier Wen Jiabao told the 2010 China Development Forum that China would increase imports of American goods, according to Sina.com on March 22. Referring to the rising trade and economic disagreements between the countries, Wen said he was aware that the United States was suffering from high unemployment, but called attention to China's own unemployment problems. He also said that China does not "blindly" pursue trade surpluses but rather seeks balance with international partners. Wen's comments appear conciliatory to the United States in offering to import more U.S. goods at a time when Washington is criticizing China heavily for domestic policies (notably, its fixed exchange rate) that it claims worsen the U.S. trade deficit with China.
* Lehman Brothers filed a plan in bankruptcy court yesterday to wind down its operations, and to create a new business called LAMCO which would manage Lehman’s remaining assets. The plan also addresses payments for the roughly 65,000 creditors demanding around $875B from the bank. Lehman will contest some of the claims, but on the whole will pay creditors in cash as part of a “fair economic resolution.” The amount creditors can expect to recover wasn’t clear from the court filings.
*Deutsche Bank confirmed 2009 net income of €5B ($6.9B) and said it expects the banking sector to slowly progress toward “a new form of normality” over this year and next. The current year will see improvements but remain difficult, while 2011 could see €10B in pretax profit from core businesses. The bank also confirmed earlier estimates that 2009 revenue more than doubled to €28B.
In a 10-K filing Tuesday, Blockbuster said it may have to file for bankruptcy as part of a debt exchange, and may pledge Canadian assets as collateral for accounts payable to studios. CEO James Keyes said bankruptcy is unlikely, and the company has been discussing new deals with studios to increase studio revenue share while cutting Blockbuster’s DVD costs.
* Shares of Harley-Davidson rose 7% Tuesday on speculation the motorcycle maker may be the target of a leveraged buyout, as traders cited chatter that private-equity firm KKR is a potential bidder.
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… 0.24%
Materials… 0.21
Consumer Staples… 1.62
Utilities… 1.24
Consumer Discretionary… 0.60
Financials… 1.08
S&P 500… 0.86
Industrials… 2.17
Healthcare… 1.49
Telecommunications… 2.39
Energy… (1.12)
When Rates Rise, Watch Your Bonds
Last week the FOMC reiterated its decision to keeps short rates low for an extended period. However, an eventual move toward tighter monetary policy warrants a look at historical tightening cycles. Since the FOMC started targeting the Fed funds rate in the mid 80s there have been four tightening cycles, lasting just over two years on average. Interest rates across the board have historically moved up during the tightening schedule, but a sharper move in short-term rates has helped to flatten the yield curve. In all these cycles, however, bond investors have experienced lackluster or negative returns, all the more reason investors should be wary of any overweight towards bonds. (source: JP Morgan Asset Management)
Sports, Culture & Politics
* Link to New Health Care Taxes Help Obama “Spread the Wealth Around.”
* Chinese State Councilor Dai Bingguo met with former U.S. Secretary of State Henry Kissinger in Beijing on March 15 to discuss Chinese-U.S. relations and issues of common concern, the Chinese Foreign Ministry announced on March 16, reported Xinhua. Kissinger was invited by the Chinese People’s Institute of Foreign Affairs.
* U.S. Gen. David Petraeus said March 16 that Iran’s efforts to develop a nuclear weapon seem to have been delayed “a bit,” Reuters reported. Petraeus told a Senate panel he did not think Iran will have a bomb in 2010. He also said that while U.S. President Barack Obama has said the military option remains on the table, the administration is focused on using sanctions to change Tehran’s behavior.
* Russian Foreign Minister Sergei Lavrov said the United States is "no longer an enemy, but also not yet a friend" before talks with U.S. Secretary of State Hillary Clinton, DPA reported, citing Interfax. Lavrov said Iran has a history of cooperation with Russia, politically, economically and militarily and that his country is against isolating Tehran. However, Lavrov also said Russia was "unsettled" about Iran's refusal to work with the International Atomic Energy Agency.
* EU foreign ministers encouraged Iran to stop blocking foreign information and censoring European news sites, RIO Novosti reported March 22, citing the United Nations. The European Union is determined to put an end to this situation, and European ministers said they may discontinue the sale of equipment to Iran for intercepting private conversations and censoring the Internet.
* U.S. CIA Director Leon Panetta said aggressive attacks against al Qaeda in Pakistan's tribal region drove Osama bin Laden and his top deputies deeper into hiding and disrupted their ability to plan sophisticated operations, The Washington Post reported March 18. Panetta credited improved coordination with Pakistan's government and what he called "the most aggressive CIA operation that CIA in history." Panetta stated that operations are seriously disrupting al Qaeda, adding that leaders are on the run and scrambling for command and control. He said improved relations and coordination with Pakistanis enabled the capture of Mullah Abdul Ghani Baradar.
* The first and second rounds of the NCAA Basketball Tournament concluded on Sunday, with Xavier University winning both rounds against Minnesota and Pittsburgh. Overall top-seed Kansas was shown the exit by Northern Iowa, while Ivy League upstart Cornell trounced Temple and Wisconsin. The Sweet 16 begins Thursday night.
The weekend’s top-five box office performers as reported by The New York Times were:
1) Alice In Wonderland, Disney, $34,509,000
2) Diary of a Wimpy Kid, Twentieth Century Fox, $21,800,000
3) The Bounty Hunter, Sony, $21,000,000
4) Repo Men, Universal, $6,151,000
5) She’s Out of My League, Paramount, $6,015,000

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