Weekly Markets Review 06-01-2010

June 1, 2010

"To prohibit a great people... from making all they can of every part of their own produce, or from employing their stock and industry in the way that they judge most advantageous to themselves, is a manifest violation of the most sacred rights of mankind. Little else is required to carry a state to the highest degree of opulence but peace, easy taxes and a tolerable administration of justice." -- Adam Smith, The Wealth of Nations (1776)
Major market indices were mixed last week, with the DJIA down 0.56%, the S&P 500 gaining 0.16%, and the Nasdaq up 1.26%. Growth stocks outperformed value stocks. The small cap Russell 2000 index increased 1.90%. The 10-year Treasury bond yield closed at 3.29%, up 5 basis points on the week.
Across Europe, austerity measures and budget cuts dominate the headlines. Italy’s cabinet plans to cut government hiring and pay, delay retirements and cut funding to local governments. In the U.K, where the new government is endeavoring to maintain its AAA credit rating., the finance minister outlined $8 billion in spending cuts to curb budget deficits. And he alluded to bigger cuts in June.
Domestically, the U.S. economy is expanding at a higher than normal pace. Home prices data is positive. May payrolls estimates are improving, with Deutsche Bank reporting some really positive potential data for the June 4th announcement of U.S. payroll figures. Of the S&P 500 companies that have reported 1Q earnings, 78% have beat analyst expectations.
But, not all that glitters is gold. Following Friday’s setback, stocks markets closed out their worst May since WWII. At that time, Germany had just invaded the Netherlands and Belgium. Ten days later, the Nazis marched into Paris. We hope it is simple coincidence that global tempers seem to be flaring to such degrees right now.
The BP Oil Spill Debacle continues. With Top-Kill efforts failing, they’re now talking about a solution by August. What a disaster. The tab to clean this mess up will top the tens of billions range. Who will pick up that tab? Will it cut into the U.S. economic recovery? Is this President Obama’s Katrina?
While domestic stock indices are only nine percent off their highs, the global environment seems to be faltering. With foreign markets weakening, the U.S. resembles an island of stability amidst turbulent seas. U.S. corporate profits are up more than 30 percent year over year. But the U.S. markets cannot go it alone. And if Europe and Asia continue to flounder, we will be forced to change course. Stay tuned…
Equity Markets Review
* U.S. 1Q GDP was revised downward to 3%, less than the 3.2% reported earlier.
* Unemployment fell, but the drop was smaller than expected and did not signal any strong improvement in the labor market
* Sales of new homes soared 14.8% in April as buyers rushed to take advantage of the expiring government tax credit.
* The Organization for Economic Cooperation and Development raised its forecast for economic growth this year and next.
* Durable goods orders rose 2.9% in April, putting them 21.6% above the year-earlier levels—the biggest annual gain since 1976.
* Disney has formally ended talks to sell its struggling Miramax Films division back to Hollywood producers Harvey and Bob Weinstein. The Weinsteins, who sold the studio to Disney in 1993 for $80M, reportedly offered $625M for the studio and its library of more than 600 films, but negotiations collapsed because of the complicated acquisition structure proposed by the Weinsteins. Disney can now engage in talks with other bidders, potentially paving the way for another bid by billionaire brothers Tom and Alec Gores.
* Dell unveiled the Streak this morning, a tablet with a 5-inch screen based on Google's Android operating system. The tablet will go on sale in the U.K. in June, and in the U.S. later this summer, as Dell makes its assault on the iPad's newly carved-out territory.
* Apple surpassed Microsoft in market value on Wednesday, hitting $222.1 billion, $3 billion more than Microsoft. Apple has nearly doubled over the last year.
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… 0.83%
Materials… 1.22
Consumer Staples… (1.10)
Utilities… 0.25
Consumer Discretionary… 1.91
Financials… (0.55)
S&P 500… (0.16)
Industrials… 0.27
Healthcare… (0.01)
Telecommunications… (0.47)
Energy… (0.44)
Emerging Markets v. G7 Debt Levels
Bespoke Investments reports that the average level of public debt to GDP among G7 countries is 94 percent. Two countries, Japan and Italy, have levels of debt that are in excess of 100 percent of GDP. Compared to the other six countries on the list, the U.S. debt level of 52.9 percent seems downright thrifty. Meanwhile, the average level of debt in emerging market countries is just 37.4 percent. If concerns over debt are the major issue behind the correction, emerging market countries should thus rebound the strongest in any recovery.
Sports, Culture & Politics
* U.S. Treasury Secretary Timothy Geithner told future Chinese leaders that the Obama administration will cut its budget deficit once it is sure the economy is safely growing, Reuters reported May 25. In a speech to about 30 middle-aged cadres at the Central Party School, Geithner said Washington is aiming to steadily lower its deficit as a percentage of national output. The basic strategy is to make sure the U.S. economy is growing, then institute long-term reforms, and restore the basic discipline to the budget process that was abandoned in the previous decade, Geithner said.
* China and the United States launched an initiative aimed at allowing 100,000 Americans to study in China over the next four years and boosting other "people-to-people" exchanges, AFP reported May 25. Beijing will offer 10,000 scholarships for U.S. nationals wanting to pursue their studies in Mandarin. Washington will offer the same number of scholarships for Chinese students wishing to study in the United States. The relationship between the two countries will shape the 21st century, U.S. Secretary of State Hillary Clinton said, adding that it will be positive, cooperative and comprehensive.
* Yemeni tribal kidnappers May 24 handed over a U.S. couple and two Yemeni escorts, who were abducted early on the same day near Sanaa, to the local authorities, Xinhua reported, citing a Yemeni security official with the Interior Ministry. He said the tribesmen handed over the American couple after security forces arrested a number of tribesmen and held them as hostages to encourage the release of the abducted foreigners.
* The U.S. government has declared a "fishery disaster" in Louisiana, Mississippi and Alabama due to an oil spill in the Gulf of Mexico, Reuters reported May 24.
* Engineers have stopped the flow of oil and gas from a ruptured BP well into the Gulf of Mexico, U.S. Coast Guard Adm. Thad Allen said May 27, The Los Angeles Times reported. Allen said the method used to counter the spill, called "top kill," pumped drilling fluid into the well and said the pressure from the well is low but steady. Neither BP nor government officials have called the measure a success yet, as the leak still needs to be cemented and sealed.
* U.S. President Barack Obama is deploying up to 1,200 more National Guard troops to the U.S.-Mexican border and requesting $500 million from Congress to beef up border security, Politico reported May 25, citing an administration official. The official said the troops will provide training, intelligence analysis, surveillance, reconnaissance and counternarcotics enforcement support while the U.S. Border Patrol recruits and trains additional personnel to serve on the border.
* U.S. Secretary of State Hillary Clinton said North Korea's deadly sinking of a South Korean warship is "unacceptable" and the international community should not turn a blind eye to the provocation, Yonhap reported May 26. The international community has a responsibility and a duty to respond, Clinton told a joint news conference with South Korean Foreign Minister Yu Myung Hwan. She said the United States is reviewing additional options to hold North Korea accountable.
* The Israeli Navy Force has fired on a six-ship flotilla delivering aid to the Gaza Strip after the roughly 700 activists aboard the flotilla refused Israeli orders to turn back, according to Al Jazeera and Turkey's NTV network. These two media sources claim that the captain of a flotilla ship has been wounded and two people were killed by Israeli fire. Al Jazeera is also reporting Israeli commandos have boarded the ship. A spokesman for Israeli Prime Minister Benjamin Netanyahu said 10 people were killed in the Israeli raid on a Gaza-bound aid flotilla after attacking boarding soldiers, not 16 as previously reported, Turkey's NTV reported May 31. The Israeli Defense Forces said 10 soldiers had been injured, one seriously, in the raid, Israel National News reported. Israel has called on all Israeli nationals to leave Turkey immediately, Al Jazeera reported May 31.
* Al Qaeda announced the death of one of its senior leaders, Sheikh Said al-Masri, more commonly known as Mustafa Abu al-Yazid, according a statement posted to an Islamist forum and picked up by jihadist monitoring group SITE on May 31. Separately, Reuters quoted an unnamed U.S. intelligence official saying that Washington strongly believes that al-Masri, whom al Qaeda has identified as its regional leader in Afghanistan and Pakistan, was killed in a recent airstrike in the Pakistani tribal belt. U.S. intelligence is identifying al-Masri as al Qaeda's third-highest ranking member after Osama bin Laden and Ayman al-Zawahiri, and he is certainly among the top five leaders in the organization.
* The Boston Celtics finished off the Orlando Magic in the Eastern Conference Championships, setting the stage for a rematch of the 2008 NBA Finals in which the Celtics beach the Lakers.
* The Reds are 30-21, one game ahead of the St. Louis Cardinals. They are currently ranked 4th on ESPN’s MLB Power Rankings.
The weekend’s top-five box office performers as reported by The New York Times were:
1) Shrek Forever After, Paramount, $55,725,000
2) Prince of Persia: The Sands of Time, Walt Disney, $37,779,000
3) Sex and the City 2, Warner Bros., $37,145,000
4) Iron Man 2, Paramount, $20,600,000
5) Robin Hood, Universal, $13,576,325

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