Weekly Markets Review 03-26-2010

March 26, 2010

"To trace something unknown back to something known is alleviating, soothing, gratifying and gives moreover a feeling of power. Danger, disquiet, anxiety attend the unknown - the first instinct is to eliminate these distressing states. First principle: any explanation is better than none... The cause-creating drive is thus conditioned and excited by the feeling of fear..." --Friedrich Nietzsche
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Hindsight
Major market indices finished higher last week. The DJIA rose 1.01%, and S&P 500 rose 0.58%, and the Nasdaq rose 0.87%. Value outperformed growth and the small cap index gained 0.75%. The 10-Treasury yield gained 20 basis points on the week, closing at 3.85%.
The healthcare bill signed last week incited strong opinions from both sides. The healthcare sector itself reacted positively at first, but by week’s end it had fallen 1%.
Managed-care companies were hit especially hard, falling more than 3%. While the new law extends coverage to 32 million uninsured, these new customers may come with added costs, like those with pre-existing conditions.
The law’s biggest beneficiaries may be the hospitals, as they will gain many paying customers and will likely reduce bad debts. The pharmaceuticals industry may also benefit by an increased customer base.
Concerns remain that the legislation will hurt margins and stifle innovation. But, after a decade of compressed valuations, the contrarian in us says that an opportunity in health care may be at hand. Stay tuned…
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Equity Markets Review
* Obama signed the healthcare bill into law yesterday morning, prompting 14 state attorneys general to file suit against the departments of Health and Human Services, Treasury and Labor to challenge the law as unconstitutional.
* Credit rating agency Fitch on March 24 downgraded Portugal's credit rating from AA to AA-. The news comes as eurozone heads of government are set to announce on March 25 an IMF-led plan to rescue Greece from its debt crisis and could signify a shift in the focus of the crisis from Athens to Lisbon. One immediate difference between Portugal and Greece is that Portugal has considerably lower debt financing needs in 2010.
* The advance figure for seasonally adjusted initial unemployment claims in the United States stood at 442,000 for the week ended March 20, down by 14,000 from the previous week’s unrevised figure, the U.S. Labor Department announced March 25. The four-week moving average was 453,750, down by 11,000 from the previous week’s unrevised average.
* U.S. real gross domestic product (GDP) grew at an annual rate of 5.6 percent in the fourth quarter of 2009, according to the final estimate from the U.S. Bureau of Economic analysis released March 26. The increase mainly reflected positive contributions from private investment, exports, personal consumption expenditures and nonresidential fixed investment.
* Eurozone countries agreed on a bailout plan for Greece that would be two-thirds funded by government loans and one-third funded by the IMF, and would only be initiated as a last resort. European Central Bank President Jean-Claude Trichet initially called the proposed IMF involvement "very, very bad," but later endorsed the plan and said what he had meant earlier was that he "wanted to preserve the responsibility of the governments of the euro area."
* Chinese state media cited Premier Wen Jiabao stating that Beijing will probably run a trade deficit of more than $8 billion in March, Reuters reported March 23.
* Toshiba confirmed that it may team up with Bill Gates and his company TerraPower to develop an advanced nuclear reactor. According to media reports, the new reactor would be able to operate for up to 100 years without refueling, as opposed to current light-water reactors which must be refueled every few years.
* Berkshire Hathaway agreed to buy Kahn Ventures Inc, a wholesale distributor of distilled spirits, wine and beer in Georgia and North Carolina, just weeks after completing a $26.5B takeover of railroad company Burlington Northern Santa Fe. Berkshire expects the acquisition will "provide us with a solid platform for potentially acquiring other similar high quality wholesale distributors."
* Time Warner, Lions Gate Entertainment and Access Industries reportedly placed bids for studio Metro-Goldwyn-Mayer. Time Warner's bid is said to be the highest of the three, which all fell in the $1.2B-$1.5B range, far short of the $2B MGM had hoped for. MGM confirmed it "received a number of bids" which it will review over the next "several weeks."
* The World Trade Organization (WTO) decided March 23 that European airplane maker Airbus received illegal subsidies for the $13 million A380 super jumbo jet and several other planes, hurting U.S. rival Boeing, The New York Times reported, citing U.S. and European officials.
* MF Global rallied 12% in after hours trading following the announcement that Jon Corzine would take over as chairman and CEO, effective immediately. Corzine, who was a former chairman at Goldman Sachs and a former governor of New Jersey, plans to expand the company beyond its futures brokerage, and MF Global has applied to become a primary dealer of U.S. government securities.
* U.S.-based Ford Motor Co. will sell its Volvo brand to China's Zhejiang Geely Holding Group Co. for $1.8 billion, FOX News reported March 28. Banks in China, Europe and the United States have provided financing for the deal, and low-interest loans were provided by the governments of Belgium and Sweden.
* Struggling bond insurer Ambac plunged nearly 17% Thursday, following its announcement that it's open to a prepackaged bankruptcy and is handing over control of troubled mortgage contracts totaling around $35B to its state regulator. The Wisconsin regulator said clients with claims on the home-loan bonds should get around 25 cents on the dollar, noting its actions are meant to protect muni bondholders and to encourage hedge funds, pension plans and other investors to negotiate.
* Private equity firm The Gores Group is said to be considering a merger of its Siemens Enterprise Communications unit with videoconferencing firm Polycom. After talks between Polycom and Apax Partners fell through earlier this week, Gores CEO Robert Hagerty reportedly sent a letter asking for a meeting to discuss a potential merger.
* Three initial public offerings, one for a bank holding company and two for telecom equipment makers, blew past expectations yesterday, raising hopes for the IPO market. Bob Greifeld, CEO of Nasdaq OMX Group, said he's seeing an increase in both the number of IPOs and the "types of companies that are worthy of that investment."
* Daddy Group, a company that sells domain names on the internet, has declared it will stop registering new Web site names in China, according to an executive speaking to the U.S. Congress on March 24 about the controversy over Google's operations in China. Go Daddy has sold domain names in China since 2005 but pointed to recent measures adopted by the Chinese government to tighten regulations on new Web site registration as well as to gather more information about website operators. With Google having switched away from its China-based search engine, moving it to Hong Kong to avoid censorship, the question has arisen whether other US companies will seek to withdraw from the Chinese market.
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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… 1.31%
Materials… 1.03
Consumer Staples… 0.35
Utilities… (1.71)
Consumer Discretionary… 2.36
Financials… 2.07
S&P 500… 0.58
Industrials…0.86
Healthcare… (1.08)
Telecommunications…(0.16)
Energy… (1.94)
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College Pays
This week marks the peak of the college application season when millions of fortunate young Americans will find out where they are spending their next four years and millions of parents will agonize about how to pay for it. However, while college costs are formidable, so are the benefits. In 2008, the average person with a bachelor’s degree earned $28,000 more than a high school grad, while adding a maser’s, Ph.D. or professional degree boosted earnings by another $22,000. Over a 40-year work life, the earnings gap between those armed with a high school diploma and those holding an advanced degree amounts to roughly $2,000,000. For those paying for education, it’s nice to know that education pays. (source: JP Morgan Asset Management)
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Sports, Culture & Politics
* Attorneys general from 13 U.S. states sued the federal government over the recently signed health care law, AP reported March 23. The lawsuit, filed in Florida and joined by Alabama, Colorado, Idaho, Louisiana, Michigan, Nebraska, Pennsylvania, South Carolina, South Dakota, Texas, Utah, and Washington, claims the law is unconstitutional. Virginia filed a separate suit March 23, as well.
* The United States has stressed that it highly values a comprehensive and cooperative relationship with China and respects the one-China policy and Beijing's stance on Tibet, Xinhua reported on March 24, citing a Chinese Foreign Ministry statement. The comments reportedly were made recently to Chinese Vice Foreign Minister Cui Tiankai during a visit in Washington with senior U.S. officials.
* A South Korean presidential spokesman said North Korea did not cause the sinking of the South Korean vessel Cho An. Even though lack of subsequent military conflict shows that the incident has now become a political event, the maritime boundary of the Korean Peninsula should be watched closely in the coming days to see how the incident fits within Pyongyang's attempts to hold its own as it approaches the resumption of international negotiations and an important leadership transition.
* Explosions were reported Monday morning at two metro stations in Moscow. Suicide attacks are suspected. At least 25 people reportedly have been killed.
* Al Qaeda chief Osama bin Laden has threatened to have U.S. soldiers killed if Khalid Sheikh Mohammed, a reputed mastermind behind the 9/11 attacks, is executed, Al Jazeera reported March 25, citing an audio recording broadcast on March 24. Bin Laden said U.S. President Barack Obama was following the policies of former U.S. President George W. Bush, citing support of Israel. The most recent recording of bin Laden dates to Jan. 24.
* The NCAA Men’s Final Four was finalized over the weekend. Duke is the sole remaining number one seed and will face West Virginia. While Butler and Michigan State will square off, as well.
The weekend’s top-five box office performers as reported by The New York Times were:
1) How To Train Your Dragon, Paramount, $43,300,000
2) Diary Alice In Wonderland, Disney, $17,284,000
3) Hot Tub Time Machine, MGM, $13,650,000
4) The Bounty Hunter, Sony, $12,400,000
5) Diary of a Wimpy Kid, Twentieth Century Fox, $10,000,000

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