Weekly Markets Review 06-03-2010

June 3, 2010

“The whole secret of existence is to have no fear. Never fear what will become of you, depend on no one. Only the moment you reject all help are you freed.” -G. Siddharta, Founder of Buddhism
Major market indices finished lower last week. The DJIA fell 1.75%, and S&P 500 lost 2.51%, and the Nasdaq lost 2.73%. Value stocks outperformed growth stocks. And the small cap index dropped 3.41%. The 10-Treasury yield gave up 15 basis point on the week, closing at 3.66%.
Trim Tabs Investment Research announced on Monday that it had turned fully bullish from cautiously bullish on U.S. equities. The widely respected firm boosted its recommended equity exposure to 100% long from 50% long. Trim Tabs' unique blend of macroeconomic data shows the U.S. economy making a gradual recovery, corporate buybacks are picking up during earning season, and demand indicators are increasingly bullish.
Their point of view:
-Income tax withholdings are up 3.4% year over year in the past month. That suggests wages and salaries are rising sequentially, which is something we've talked a lot about in the past month.
-Their proprietary measure of online job postings is up 33% year over year, which is the best reading of the past year.
-Companies are feeling more confident about their business and in many cases instead of just adding new production lines in their factories they are investing in their own stock. When companies take stock out of circulation via buybacks, their earnings per share naturally rise -- making their valuation lower, which in turn attracts more open-market purchases from third parties. Public companies are also buying other public companies at an increasingly rapid rate, which has the effect of taking more stock out of circulation.
-Investment demand trends are very favorable. They measure this in two ways, one conventional and one original. The first combines price, volume and breadth to determine the extent to which demand is exceeding supply; it's much like the method that Lowry's Reports uses to construct their Buying Power and Selling Pressure indexes. The more interesting second approach determines the balance of fear and greed by looking at the cash balance of equity funds, excess margin debt, ETF fund flows and retail money market fund assets. That second measure is super-bullish, says Trim Tabs, for this reason: Despite the continuing rally off the March 2009 and February 2010 lows, investors pulled $2 billion out of U.S. equity funds in April, bringing the year-to-date outflow to $6.6 billion. ETF investors tend to buy high and sell low. Trim Tabs says that makes ETF investors' actions one of the best contrary indicators in their data sets. In short, the more ETF investors hate stocks, the more Trim Tabs likes them.
-The public has still not bought into this bull market yet. Retail investors will, you can be sure, but it will take a while before they are comfortable with the idea of even starting the task. After that, the inflows will likely swell over a period of years, not months, much as occurred in the 1990s.
So, could this market resume its upward trajectory amidst last week’s public flogging of Goldman Sachs, and the fears of Mediterranean debt contagion? Stay tuned…
Equity Markets Review
* Greece's debt woes and fears of contagion rocked financial markets around the world this week. Markets first sold off after Standard & Poor's cut Greece's debt rating by three levels to junk status, while slashing the ratings on debt in Spain and Portugal. Yields on emerging market debt soared, with their spread to U.S. Treasuries rising to the highest level in a year. As contagion appeared to have become reality, European leaders and the International Monetary Fund picked up the pace in agreeing to an aid package to help Greece avoid default. By week's end, some of the frenzy abated after Greece agreed to an austerity package in return for the multibillion euro loan from eurozone countries and the International Monetary Fund.
* German Chancellor Angela Merkel said her nation will provide 22.4 billion euros ($29.6 billion) to help bail out Greece over a three-year period, The Washington Post reported May 3. Speaking to reporters, she said the move will stabilize the euro and help the German people.
* In the week ending April 24, the advance figure for the United States' seasonally adjusted initial unemployment claims was 448,000, a decrease of 11,000 from the previous week's revised figure, the U.S. Labor Department reported April 29. The four-week moving average was 462,500, an increase of 1,500 from the previous week's revised average.
* The U.S. economy grew at a 3.2% pace in the first quarter as consumer spending rose the most in three years, according to a report released today by the U.S. Department of Commerce. The same report showed that the U.S. Federal Reserve Board's preferred measure of inflation climbed at the slowest pace on record. Tame inflation led the Fed this week to keep interest rates unchanged and to reaffirm its intention to keep interest rates near zero for an extended period. The central bank also moderately upgraded its assessment of the economy.
* The U.S. economy grew at a 3.2% pace in the first quarter as consumer spending rose the most in three years, according to a report released today by the U.S. Department of Commerce. The same report showed that the U.S. Federal Reserve Board's preferred measure of inflation climbed at the slowest pace on record. Tame inflation led the Fed this week to keep interest rates unchanged and to reaffirm its intention to keep interest rates near zero for an extended period. The central bank also moderately upgraded its assessment of the economy.
* The Conference Board's consumer confidence index rose to 57.9 for April, from 52.3 in March, an increase that brought it to the highest level since September 2008. The index still remains well below pre-recession levels.
* At Berkshire Hathaway's annual meeting on Saturday, Warren Buffett stood firmly behind Goldman Sachs, saying he doesn't believe Goldman acted improperly and that the Abacus deal involved sophisticated investors who should be held accountable for their own bad decisions. Buffett shared Berkshire's preliminary Q1 results ahead of Friday's official release: Q1 net earnings were $3.63B, marking a nice return to profit from a $1.5B net loss in the year-earlier period. Berkshire had a $1.4B gain on derivatives and investments as compared to a $3.2B loss the year before.
* In a high-profile hearing Tuesday, Goldman Sachs CEO Lloyd Blankfein and trader Fabrice Tourre appeared before a Senate subcommittee, both standing their ground against a slew of angry accusations. Lawmakers called Goldman's behavior "unethical" and repeatedly criticized the firm and its executives. Blankfein and Tourre denied wrongdoing, and refused to apologize for their actions or admit that Goldman helped push the country into recession.
* The Supreme Court ruled unanimously that securities lawsuits against Merck can move forward. The suits allege that Merck misled shareholders over the dangers of painkiller Vioxx, which was removed from the market in 2004. Merck claimed investors should have known the drug was dangerous in 2001 and therefore the deadline for filing the suit had already passed.
* Hewlett-Packard agreed to buy Palm in a $1.2B deal, saying Palm's webOS operating system will help it compete in the smartphone market. Palm shareholders who watched the beleaguered stock rollercoaster in recent weeks will receive $5.70 in cash for each share of common stock, a 23% premium over Palm's share price before the deal was announced.
* The Commodity Futures Trading Commission assessed $39M of fines on Morgan Stanley and hedge fund Moore Capital yesterday for allegedly breaching rules in the precious metals and oil markets. The fines are among the largest ever levied by the CFTC.
* Exxon Mobil posted a smaller-than-expected gain in the first quarter after health care legislation increased costs and U.S. refineries operated at a loss. Corporate expenses rose by $364 million from a year earlier because of higher health-care costs stemming from U.S. reform legislation passed last month. Net income rose 38%.
* Ford Motor reported a better-than-expected $2.1 billion profit for the first quarter, fueled by the firm's rising U.S. sales and market share.
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… (3.22)%
Materials… (2.94)
Consumer Staples… (1.46)
Utilities… (0.75)
Consumer Discretionary… (2.62)
Financials… (3.84)
S&P 500… (2.51)
Industrials… (1.65)
Healthcare… (1.48)
Telecommunications… (0.88)
Energy… (2.92)
The financial stability of countries running large budget deficits has been on the minds of investors lately and was crystallized by the recent ratings downgrades of Spain, Portugal and Greece. Debt to GDP ratios are a common way to gauge a country’s fiscal situation, and much of that debt will mature in 2010. While Greek finances have been in the spotlight lately, it is important to realize that most developed countries will need to roll over similar proportions of their debt this year, suggesting this is a system-wide issue, not a country specific one. (source: JP Morgan Asset Management)
Sports, Culture & Politics
* New York City Police Commissioner Raymond Kelly said May 2 that the vehicle found in Times Square contained two five-gallon gasoline canisters, three propane tanks, fireworks, a large locked metal box resembling a gun locker, electrical wires, a clock and other components. Kelly said the bomb squad had removed all the components. The vehicle was found parked with its engine running and hazard lights flashing near the corner of 45th street outside a Bank of America branch. White smoke was seen emanating from the vehicle, and the individual to whom the license plates on the car belonged has been contacted. Authorities are reporting possible links to foreign sources, with most of this story still developing. The Tehrik-i-Taliban Pakistan has claimed credit for the attempted car-bombing in New York City's Times Square on May 1 in a statement posted to the Internet May 2, Al Jazeera reported. The group said the attempted attack was staged to avenge the deaths of two al Qaeda-linked militants in Iraq, Abu Omar al-Baghdadi and Abu Ayub al-Masri. The authenticity of the claim has not yet been verified.
* Venezuela's President Hugo Chavez said a U.S. report was "absolutely false" that Iranian special forces had an increasing presence in his South American nation, Reuters reported April 27. During a ceremony carried on live television, Chavez stated that if the United States applies sanctions to Iran, these forces that are here -- "something that is absolutely false" -- could then attack U.S. territory or U.S. interests with terrorist acts. This is an open threat by the U.S. government against Venezuela, he said, once again using "infamy and lies."
* China and the United States will meet for a second round of strategic and economic talks in Beijing in late May, the Chinese Foreign Ministry said April 27, Xinhua reported. U.S. Secretary of State Hillary Clinton will join the talks on issues of common concern.
* Actress Lynn Redgrave died of breast cancer. She was 67.
* Jockey Calvin Borel rode Super Saver into the winner’s circle at this year’s Kentucky Derby, gaining his third Derby victory in four years. Borel went on to say that he plans to win the Triple Crown, last accomplished 32 years ago.
The weekend’s top-five box office performers as reported by The New York Times were:
1) A Nightmare on Elm Street, Warner Bros., $32,205,000
2) How To Train Your Dragon, Paramount, $10,852,000
3) Date Night, Twentieth Century Fox, $7,600,000
4) The Back-Up Plan, CBS Films, $7,240,000
5) Furry Vengeance, Summit Entertainment, $6,500,000

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