Weekly Markets Review 06-07-2010

June 7, 2010

“It is not the business of government to make men virtuous or religious, or to preserve the fool from the consequences of his own folly. Government should be repressive no further than is necessary to secure liberty by protecting the equal rights of each from aggression on the part of others, and the moment governmental prohibitions extend beyond this line they are in danger of defeating the very ends they are intended to serve.” - Henry George
Major market indices finished down. The DJIA lost 2.02%, the S&P 500 declined 2.25%, and the Nasdaq fell 1.68%. Growth stocks outperformed value stocks. And the small cap index fell 4.18%. The 10-Treasury yield was down 11 basis point on the week, closing at 3.20%.
A U.S. equity strategy report from J.P. Morgan cites some interesting statistics and probabilities with positive implications for stocks over the next two months. Their report shows the 7.9 percent decline in the Dow Jones Industrial Average in May was the 6th worst May decline in history. The 10-worst May declines were followed by an average 9.4 percent gain from June 1 to July 31st. Their report also shows that, on average for those 10 occasions, stocks historically troughed 8 days into June. In summary, the “Miserable May bodes well for June-July.”
On the positive side, durable goods orders, rail car loadings, hotel occupancy, apartment rentals and wages and salaries are all up, and credit card delinquencies are down. Consumer spending and nominal GDP in the first quarter also moved above their 2008 peaks, which means it is actually now expanding and not just recovering. Also, corporate profits in the first quarter were up 31% year over year, and durable goods orders in April alone were up 19% year over year. These are not the marks of an economy in distress.
On the negative side, consumers are becoming a little less optimistic about the future, unemployment claims are flattening (not falling), consumer spending is flattening, leading economic indicators are flattening, earnings revisions are flattening, DRAM prices are softening, mortgage applications are falling and home prices are not rising as much as they were earlier in the year. Junk bond spreads have moderately widened, bond issuance has fallen and stock markets are down.
ISI added it all up, ran the numbers through its regression models, and decided to reduce its 2010 GDP forecast for Europe to -1% from 0%. Main reason, as foreshadowed here Tuesday, is the storm of restrictive fiscal policies, such as Spain's decision to cut wages and budget cuts in Italy and Germany. Moreover Spain has suspended all publicly founded construction projects not already 30% completed.
Bottom line: The global recovery is maturing. In Europe it's a bit off track, but in the United States a very exciting and upbeat vibe has moderated a touch. This is a less than awesome but it's not a disaster, so there is really no reason to expect all the gains of the past year to be erased. There continues to be a massive tug-o-war between Bulls and Bears. And while the Bulls are winning--in the current secular market, that could soon be in question. We could continue to see consolidation and upheaval in the months to come. Stay tuned…
Equity Markets Review
* Employers in the U.S. hired fewer workers in May than forecast and Americans dropped out of the labor force. Payrolls rose by 431,000 last month, including a 411,000 jump in government hiring of temporary workers for the 2010 census, Labor Department figures in Washington showed today. Economists projected a 536,000 gain, according to a Bloomberg News survey. Private payrolls rose a less-than-forecast 41,000. The jobless rate fell to 9.7 percent.
* Testifying before the Financial Crisis Inquiry Commission yesterday, Warren Buffett warned lawmakers not to single out the ratings agencies for criticism or to enact overly reactive reforms. Moody's managers "made a mistake that 300 million other Americans made" in overestimating housing-related assets, said Buffett, who has held a stake in Moody's since 2000. Moody's CEO Raymond McDaniel also testified, calling his company's inaccurate ratings of mortgage-related investments "deeply disappointing." FCIC Chairman Phil Angelides slammed the ratings service as a "triple-A factory."
* Hoping to prevent a flash crash repeat, the Nasdaq stock market said it will launch its own circuit breaker system to halt trading when markets crash.
* McDonald's recalled 12M "Shrek"-themed drinking glasses after discovering the cups contain the toxic metal cadmium. Cadmium is a known carcinogen that can cause bone softening and severe kidney problems.
* Auto sales in May rose for the seventh month in a row.
* Fitch and Moody’s downgraded BP, warning that further downgrades are possible.
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… (2.25)
Industrials… 0.27
Healthcare… (0.01)
Telecommunications… (0.47)
Energy… (0.44)
Observe & Report
In the 17th month of the Obama administration. And the President has his work cut out for him. The world’s issues are many. Our young, brilliant, but experientially unproven President has a lot of weighty matters with which to contend. Much of which will have to compete with the growing list of items on his domestic agenda.
Some of the troubling issues are:
-The BP Oil Catastrophe seems to have no immediate solution and livelihoods are in jeopardy across the Gulf of Mexico.
-Last week’s jobs reports was extremely low, missing expectations by a wide margin. This after the President himself touted the upside possibilities all week.
-The issues in the Korean peninsula seem to be subsiding, after the North sank the South’s ChongAng with a Sub-born torpedo, but they are by no means gone.
-Afghanistan appears to have worsening, with Al Qaeda fighting tooth and nail, and Karzai’s hold on the country still tenuous.
-Iran remains intransigent, positing some bogus uranium enrichment deal with Turkey that is not even a decent ruse.
-Israel, having raided a Turkish-aid flotilla during which nine Turks were killed, sits surrounded by her enemies, having lost relations with its best Muslim ally, guns drawn, waiting for someone to blink.
-The contentious immigration issue, having become more front page by the decision in Arizona to enforce the standing immigration and naturalization laws.
Unfortunately, the plus side does not merit as much space at this time:
-Iraq seems to remain stable, with recent elections having come of successfully.
-The administration passed the biggest ever healthcare overhaul, though the Presidents’ critics would argue that this legislation is anything but a positive.
-Formerly harsh global opinions of the U.S. have softened, but has that come at a cost?
It is always difficult to judge, especially at this early stage, such a monumentally complex job. That said, while I would not grade the here-to-now effort an F, nor would I grade it an A. The reality rests somewhere in the middle.
Sports, Culture & Politics
* The U.N. Human Rights Council adopted a resolution to condemn the Israeli assault on a Gaza-bound flotilla and voted to send an independent international fact-finding mission to look into possible violations of international law, the Office of the U.N. High Commissioner for Human Rights announced June 2. The United States voted against the resolution. A U.S. citizen was shot and killed during the raid on a Gaza-bound aid flotilla, a U.S. State Department spokesman said June 3. The spokesman identified the victim as 19-year-old Furkan Dogan, who had both U.S. and Turkish citizenship, but declined to comment further.
* Hussein Musavian has requested asylum in the United States, Saudi news agency Al Jazirah reported June 3. Musavian was an aide to the former chief of Iran's nuclear dossier, Hasan Rowhani, during the presidency of Mohammed Khatami. Iranian President Mahmoud Ahmadinejad had Musavian arrested on accusations of passing information regarding Iran's nuclear program to the United Kingdom and the United States; however, Musavian was released per Iranian Expediency Council Chairman Ali Akbar Hashemi Rafsanjani's support.
* The United States urged China on June 5 to restore military ties despite discord over U.S. arms sales to Taiwan, Reuters reported. U.S. Defense Secretary Robert Gates said China's decision to sever military-to-military contacts between the Pacific powers earlier this year could undermine regional stability, and called for Beijing to accept the "reality" that Washington is committed to arming Taiwan.
* The United States said June 5 it is weighing new options beyond the United Nations to deal with North Korea, which South Korea blames for the sinking of a warship, Reuters reported. At a meeting with his South Korean and Japanese counterparts, U.S. Defense Secretary Robert Gates said doing nothing would set the wrong precedent. Pentagon Press Secretary Geoff Morrell said Gates told the ministers it was critical to show a "united front to deter further provocations" by the North
* Veteran White House press reporter Helen Thomas has come under fire for publicly stating that “The Jews should get the hell out of Palestine.”
* Naoto Kan took over as Japan’s prime minister this week.
The weekend’s top-five box office performers as reported by The New York Times were:
1) Shrek Forever After, Paramount, $25,300,000
2) Get Him To the Greek, Universal, $17,422,620
3) Killers, Lionsgate, $16,100,000
4) Prince of Persia, Walt Disney Studios, $13,854,000
5) Sex and the City 2, Warner Bros., $12,650,000

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