Weekly Markets Review 06-17-2010

June 17, 2010

"A time comes when you need to stop waiting for the man you want to become and start being the man you want to be.” –Bruce Springsteen
Major market indices were up last week. The DJIA gained 2.31%, the S&P 500 rose 2.23%, and the Nasdaq gained 3.58%. Growth stocks outperformed value stocks. And the small cap index jumped 6.28%. The 10-Treasury yield was up 3 basis point on the week, closing at 3.46%.
Following the European Union's Hail Mary Pass last week, Europe lived to fight another day. The European Union proffered a bailout worth enough to buy all of the projected debt of Spain, Portugal and Greece for three years. Basically, European leaders walked over to the abyss, looked over, and—deciding it was too far to fall—did an about-face. It was no small move, placing almost $1 trillion onto the table in an "all-in" bet.
Bailing out Greece is very unpopular in Germany. So why did Chancellor Merkel agree to do so? This is the story that has come out in the last few days. "French President Nicolas Sarkozy threatened to pull out of the euro unless German Chancellor Angela Merkel agreed to back the European Union bailout plan at a summit last week in Brussels, El Pais newspaper said.
Despite the recent volatility and Europe’s issues, things continue to look up here at home. Iron Man 2 made $134 million in its initial weekend. And ISI Group reported that commercial real estate sales surged last week at the greatest week-over-week rate in the past seven years, in large part because of a big increase in retail and restaurant leasing. Credit card, furniture, retailers, airlines and catalog companies all showed similar big jumps in executive confidence and sales. Wine and spirits sales are also increasing dramatically, which is usually a powerful indicator of improved restaurant sales. Add it all up and it looks like the month of May will record a solid number for retail sales (some of which was likely driven by the expiring home tax credit).
Much of this is a result of the recent increase in employment. As employment increases, wages are increasing, the average work week is increasing, spending is increasing, and banks are more willing to lend. This is how the government stimulus feeds back into the system.
So, despite setbacks in the Europe, and the pullback in the markets, the fundamentals of the U.S. economy are improving. That will translate into earnings growth, which may help U.S. stocks trend upward. There will be ups and downs. But it is the primary trend that is important. Stay tuned…
Equity Markets Review
* The number of Americans filing claims for jobless benefits dropped for the fourth week in a row as the economy expanded and employers retain more workers. Claims fell by a more-than-expected 4,000, to 444,000, for the week ended May 8.
* The U.S. trade gap widened 2.5% to $40 billion in March from February. The deficit hit its highest level since December 2008 as both imports and exports surged. Also during March, exports rose 3.2% to a seasonally adjusted $147.9 billion, while imports increased 3.1% to $188.3 billion.
* The global economy may be slowing down, said the OECD on Monday, amid early signs that a surge in growth in China and Brazil is coming to an end. "In most OECD countries signs of slowing growth are tentative, but stronger signals have appeared in France and Italy, and some evidence of a potential halt in expansion is emerging in China and Brazil."
* China returned to a trade surplus in April after posting a deficit in March, but the surplus is down 87% from the year before as imports grew faster than exports.
* By an overwhelming majority and with strong bipartisan support, the Senate voted in favor of a measure that would require the government to conduct an unprecedented one-time audit of the Federal Reserve. The 96-0 vote was meant to make "it clear that the Fed can no longer operate under the kind of secrecy it has been operating under," said Sen. Bernie Sanders, the measure's author. The Fed will also be required to release the names of institutions which received in total more than $2T in loans during the financial crisis.
* The number of households facing foreclosure fell 2% in April from the year before, marking the first annual decline in five years, reported RealtyTrac Inc. However, despite initial signs that the foreclosure crisis is starting to subside, banks still seized a record 92,000 homes last month, and nearly 12% of all households with a mortgage were at least one month behind on payments or were in foreclosure as of March.
* By a 64-35 margin, the Senate approved the creation of a clearinghouse intermediary to select credit rating agencies for financial institutions on a semi-random basis. The Credit Rating Agency Board will be set up by the SEC and composed of both investors and independent regulators, with the goal of ending the practice of "ratings shopping." In a 61-38 vote, lawmakers approved a measure that would require federal regulators to develop their own metrics for measuring credit-worthiness rather than relying exclusively on rating agencies.
* In addition to curbing rating agencies, the Senate unanimously adopted a measure yesterday that would require large financial firms to raise their capital levels as the firms grow larger or employ riskier lending practices. Lawmakers also voted to limit fees charged on credit and debit card transactions. Though there are several major issues still pending, final approval of the Senate bill is expected this week, and will mark the most significant overhaul of financial regulation since the Great Depression.
* Following a similar announcement from Spain earlier in the week, Portugal announced new austerity measures, including higher taxes and a wage cut for government employees. However, the eurozone's stability plan still faces challenges: A lack of growth is making it difficult for many countries, particularly Italy, to escape their huge debts; the possibility of rising inflation rates could become a problem; many industry players still doubt that Greece will be able to repay its debt; and, former Fed Chairman Paul Volcker said yesterday that the current fiscal crisis carries the risk of a "potential disintegration of the euro."
* China will decide on its policies toward the yuan based on its own needs and assessment of the domestic and global economy, said Ministry of Commerce spokesman Yao Jian, Bloomberg reported May 17. China’s exchange-rate policy is its own business and shouldn’t be politicized, he said. A consensus was reached in academic and industrial circles that the yuan is not the cause of the Sino-U.S. and global trade imbalances, Yao said.
* The euro fell to the lowest level against the dollar in more than four years as concerns over European debt and the region's economic health continue to plague the currency. The euro's decline will likely continue through the week, as both long-term and short-term players move to offload the euro. The currency dropped as low as $1.2234 this morning, but could touch $1.2000 in the next few days.
* Fannie Mae reported an $11.5B Q1 loss yesterday, and asked the government for another $8.4B in aid to compensate for its net worth deficit. More worryingly, yesterday's filing suggested hidden balance sheet weaknesses that could prompt the mortgage giant, whose combined losses are already approaching $145B, to ask for significantly more future aid.
* Singapore's Temasek and Beijing-based Hopu Investment Management will spend around $1B to acquire a stake in Chesapeake Energy. The move gives the Asian firms a piece of the growing U.S. shale gas business, and is part of Chesapeake's plan to raise up to $5B to pay down debt and "increase its investment in liquids-rich plays."
* SAP AG announced late yesterday that it will acquire Sybase for $65 per share, or about $5.8B. The price is a 56% premium to Sybase's shares before news of the negotiations became public. SAP is trying to beat out Oracle on software for wireless internet transactions, and is hoping to reverse a sales slump via acquisitions.
* New York Attorney General Andrew Cuomo subpoenaed Goldman Sachs Group Inc., Morgan Stanley, UBS AG and five other banks on Thursday to determine if they misled credit-rating services about mortgage- backed securities, according to a person familiar with the investigation. U.S. prosecutors and the Securities and Exchange Commission are cooperating in a preliminary criminal probe into mortgage-bond deals, the Wall Street Journal reported.
* Cisco posted a 63% jump in quarterly profit. The earnings report sparked a rally among tech stocks amid evidence of a rebound in corporate technology spending.
* International Business Machines issued an upbeat profit forecast for the coming years.
* Intel said sales of chips would double over the next few years.
* Disney's profit rose 55% on fewer restructuring charges and ticket sales of Alice in Wonderland, which has grossed $962 million world-wide. The outlook for the company's theme park business remained weak.
* Toyota announced a surprise fiscal fourth-quarter profit and forecast a 48% earnings increase for the current fiscal year as it attempts to boost sales in Asia and cut costs. The gains come as a surprise after the company posted a net loss in the same period a year earlier. The forecast is seen as a sign that Toyota's recall of more than 8.5 million vehicles is not likely to stunt its recovery.
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… 3.21%
Materials… 1.62
Consumer Staples… 1.94
Utilities… 2.62
Consumer Discretionary… 2.67
Financials… 1.63
S&P 500… 2.23
Industrials… 3.77
Healthcare… 0.68
Telecommunications… 2.33
Energy… 1.59
Return of the Consumer
While three quarters of solid growth have helped to convert some bears to bulls, perhaps the central plank in the bear case for a double-dip recession is the idea that the consumer will not be ready, willing or able to sustain the recovery. However, retail sales, consumer spending and employment data have all been better than expected early on. 76% of last quarter’s GDP growth was driven by consumption, a shift that could help the economy move from a cyclical recovery to a self-sustaining expansion. (source: JP Morgan Asset Management)
Sports, Culture & Politics
* U.S. Secretary of State Hillary Clinton has said that some Pakistani officials are more knowledgeable about al Qaeda and the Taliban than they admit, The Times of India reported May 10. While not saying the officials are at the top levels of the government, she said she believes there are officials who know where al Qaeda leader Osama bin Laden and Taliban leader Mullah Omar are.
* The primary spokesman for the Pakistani Taliban, Azam Tariq, has accepted responsibility of the May 1 Times Square bombing attempt of which naturalized U.S. citizen Faisal Shazhad has been accused, STRATFOR sources in Peshawar said on May 11. Tariq had previously denied responsibility. Meanwhile, the Pakistani government arrested a suspect with connections to a Pakistani militant group who said he acted as an accomplice to the man accused of trying to bomb Times Square, according to U.S. officials, The Washington Post reported May 14. The suspect, whose arrest was not previously disclosed, provided an "independent stream" of evidence that the Pakistani Taliban were behind the attempt and admitted to helping Faisal Shahzad, the main suspect, travel into Pakistan's tribal belt for bomb training.
* The drawdown of U.S. troops in Iraq from their current level of 98,000 to around 50,000 -- scheduled to begin in mid-May -- may be delayed until at least June, according to unnamed U.S. military sources in Baghdad and Washington, AP reported May 11. Iraq's delicate sectarian balance remains precarious as coalition negotiations continue following the March 7 elections, and much is riding on the formation of a power-sharing deal and the redistribution of control over Iraq's security forces.
* Afghan President Hamid Karzai said May 13 that after speaking with U.S. President Barack Obama about Karzai's half-brother, he believed all concerns had been resolved, Reuters reported. Karzai's brother is allegedly involved in the drug trade, has intimidated rivals and has ties to the CIA.
* The U.S. Coast Guard has estimated that 5,000 barrels of oil per day are pouring out of the Gulf of Mexico leak, but scientists and environmentalists believe the actual spillage could be as much as 20 times higher. Analysis of a video of the leak suggests the rate is closer to 70,000 barrels per day, and potentially as high as 100,000 bpd, which would mean this spill is already worse than the Exxon Valdez spill. Under mounting pressure, BP CEO Tony Hayward admitted the firm could have done more to prepare for a deepwater oil leak.
* A nuclear fuel swap deal has been signed by Turkish Foreign Minister Ahmet Davutoglu, Iranian Foreign Minister Manouchehr Mottaki and Brazilian Foreign Minister Celso Amorim in a ceremony in Tehran where Turkish Prime Minister Tayyip Erdogan, Iranian President Mahmoud Ahmadinejad and Brazilian President Lula da Silva were also present, CNNTurk reported May 17. Under the agreement, Iran will send its 1,200 kg of low enriched uranium (LEU) to Turkey within one month to be exchanged with 20 percent enriched uranium in one year. But the agreement will have effect only if the International Atomic Energy Agency (IAEA) and the United States, Russia and France agree with its terms. Therefore it is too early to say that the Iranian nuclear standoff has ended as Mottaki also said that should commitments of the agreement not be fulfilled, Turkey will have to send LEU back to Iran "swiftly and unconditionally." The key to watch now is the reactions of the United States and Russia, which will be decisive for the implementation of the nuclear swap agreement. (Stratfor)
* The mothers of three American hikers will visit Tehran on May 18 to appeal for the release of their children from prison, AP reported May 17. Cindy Hickey, Nora Shourd, and Laura Fattal are in New York after receiving visas during the week of May 9. The mothers expressed gratitude to the Iranian government for issuing the documents and said they are encouraged by the new development, but said they do not think they will be able to return home with their children.
* Lebron James and the Cleveland Cavaliers were improbably beaten in game six of their second-round playoff series, so ending the series, and possibly James’ career in Cleveland. James is a free agent and will be the most sought-after prize in this year’s NBA free agent dealings. Speculation of his departure for Brooklyn, where a Russian billionaire and new owner of the New Jersey Nets will soon set up shop, has been rampant.
* The Reds took two of three against division leading St. Louis. Bronson Arroyo threw a complete game and former Cardinal Scott Rolen homered and drove in three runs. The Reds edged past St. Louis for the lead in the NL Central. ESPN reports that the Reds have outscored opponents 49-15 in their last eight games, winning seven during that span.
The weekend’s top-five box office performers as reported by The New York Times were:
1) Iron Man 2, Paramount, $53,000,000
2) Robin Hood, Universal, $37,114,285
3) Letters To Juliet, Summit Entertainment, $13,750,000
4) Just Wright, Fox Searchlight, $8,500,000
5) How To Train Your Dragon, Paramount, $5,120,000

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