“Discipline is the soul of an army. It makes small numbers formidable; procures success to the weak, and esteem to all.” -George Washington
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Hindsight
Major market indices were lower last week. The DJIA lost 4.51%, the S&P 500 dropped 5.03%, and the Nasdaq decreased 5.92%. Growth stocks outperformed value stocks. And the small cap index fell 7.15%. The 10-Treasury yield lost 12 basis points on the week, closing at 2.97%.
The second quarter was one investors will want to forget. The Dow closed incurred a 10.4% loss for the quarter and its worst quarterly performance since the beginning of 2009. Nasdaq and S&P were down 12% and 11.9% for the quarter, respectively. The outlook for Q3 is shaky, as investors continue to worry about the global trifecta of economic, fiscal and regulatory issues. Everyone still too easily recalls the carnage of 2008 and 2009. So, they sell first, ask questions later and are content with earning 3% on 10-year Treasuries.
The last time we struggled under the weight of public debt taken on to stimulate demand after a private-sector credit collapse was during the Great Depression. Can the nation's debt-heavy balance sheet finance ongoing stimulus spending without triggering a US debt and currency crisis? The question is once again divided along ideological lines, just like 1937. Democrats and Republicans battled in the Senate last week over how to pay the $141 billion cost of new legislation that extends unemployment benefits to more than two million who remain unemployed a year after the recession ended.
Overseas, we continue to admire many of the emerging market nations. Not for their World Cup play, but for their low debt-GDP ratios. The EM nations have higher-than-average GDP growth and lower than average debt as a percentage of GDP. It is the developed nations that seem to be faring the worst in these categories. Specifically, Japan, the U.S. and England. And Jim Lowell at Dow Jones MarketWatch, shows that July tends to be a good month for emerging market equities. The sector's beta-weighted performance in July tops 2 percent on average, far greater than any other asset class he tracks.
European equities have held up well recently, with those markets also showing a pattern of higher highs and higher lows. With the dollar selling off, this trend is set to continue as hedge fund managers look to park capital in investments denominated in rising currencies. This could be good for foreign stocks, possibly kicking off a period of U.S. stock underperformance versus foreign equities.
Besides the technical justification, there are plenty of fundamental reasons emerging market economies should be more attractive to global investors right now (as mentioned above). They are growing faster. They don't have the debt troubles of Europe, Japan, or the United States. They aren't enacting fiscal austerity measures. And they don't have the West’s demographic problems -- that is, declining birth rates.
Back on the home front, Business Week recently reported the following: Borrowing costs have tumbled in the past two months as concern that a debt crisis in Europe may spread boosted demand for the safety of bonds including mortgage-backed securities. The lower rates have failed to lift housing demand, which has tumbled since a tax credit for first- time and certain other buyers expired at the end of April.
That point is driven home by the fact that the Pending Home Sales Index fell from 111 in April to just 77 in May. That's a huge drop, and really shows how soft the housing market has become in the wake of the homebuyer tax credit expiration. The housing market continues to worsen as the artificial stimulus of government tax credits are pulled off the table. Locally, we see sellers hesitating to put their homes on the market, and buyers slowing their efforts due to lack of inventory and conviction. Rather like the tail wagging the dog—bad news sometimes begets more bad news. And the residential real estate is the perfect case in point. Stay tuned…
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Economically Speaking
* Confidence among U.S. consumers declined in June more than forecast as Americans became pessimistic about the outlook for the labor market and the economy. The Conference Board’s confidence index slumped to 52.9 this month from a revised 62.7 in May. The median forecast called for a decline to 62.5, and the gauge was lower than all projections in a Bloomberg News survey of 71 economists.
* Employment fell in June for the first time this year, reflecting a drop in federal census workers and a smaller-than-forecast gain in private hiring. Payrolls declined by 125,000 last month as the government cut 225,000 temporary workers conducting the 2010 census, Labor Department figures showed. Economists projected a decline of 130,000 payrolls, according to the median forecast in a Bloomberg News survey. Employment at companies rose 83,000. The jobless rate fell to 9.5 percent from 9.7 percent as the labor force shrank. The so-called underemployment rate -- which includes part- time workers who’d prefer a full-time position and people who want work but have given up looking -- decreased to 16.5 percent from 16.6 percent. The number of temporary workers increased 20,500. Payrolls at temporary-help agencies often picks up before companies take on permanent staff.
* Senior delegates from China and Taiwan signed the historic Economic Cooperation Framework Agreement in the southwest Chinese city of Chongqing, AFP reported June 29.
* Japan's industrial production slipped in May, as did household spending, and the unemployment rate unexpectedly increased. The data points suggest Japan's economic recovery is slowing down, and may serve as a warning to politicians that it's too soon to tighten fiscal policy in favor of deficit reduction.
* The Turkish economy grew by 11.7 percent in constant prices in the first quarter compared to the same quarter of the previous year, TurkStat reported June 30.
* Congressional Democrats abandoned a controversial proposal in the financial reform bill that would have levied a $19B tax on the country's largest banks and hedge funds. Several Republicans who are crucial to the bill's passage were uncomfortable with the tax, which was added to the bill at the last minute. Instead, lawmakers will offset the bill's costs by winding down TARP early and assessing a $5.7B fee on banks through the FDIC.
* Foreclosed properties accounted for 31% of the U.S. home sales in Q1, according to a new report by RealtyTrac, and the average price for foreclosed properties was 27% below that of regular sales. "In a normal market, only 1 to 2 percent of home sales are foreclosures," explained Rick Sharga, senior vice president at RealtyTrac, "so this is certainly a significant level."
* Ireland's economy officially moved out of recession in the first quarter of 2010, BBC reported June 30, citing figures from Ireland's Central Statistics Office. Ireland's gross domestic product grew by 2.7 percent in the quarter compared to the last quarter of 2009.
* The World Trade Organization (WTO) made public June 30 a confidential ruling from nine months ago that found Airbus SAS had benefited from illegal European government subsidies, especially in the case of the A380 project, Bloomberg reported. The ruling supported U.S. assertions that loans by European governments constituted unfair aid given that interest rates on the loans were too low with repayment dependent on export performance. EU Trade Commissioner Karel De Gucht wants the case considered alongside an EU counter-case against Boeing, scheduled for a July 16 preliminary judgment. The French and British governments both said the ruling will not affect planned loans to Airbus.
* China increased the minimum wage by as much as 31 percent in 10 provinces and municipalities across the country, including Beijing, Shenzhen, and Shaanxi, Global Times reported July 1. The average increase was about 20 percent, which increased monthly wages in Beijing from 800 yuan ($117) to 960 yuan ($141). At least 100,000 low-income workers in the city are expected to receive the increase, according to the Beijing Human Resources Bureau. China's Henan province is raising its minimum monthly wage by 33 percent to 600 yuan ($88), according to a local government website.
* China revised up its 2009 GDP, to 9.1% from 8.7%. The revision was due to higher contributions from secondary and tertiary industries.
* Overall U.S. car sales fell in June from a month earlier, a signal that the auto industry's recovery is slipping. Though June's auto sales are often slightly lower than May's, a month that typically gets a boost from buyer incentives tied to Memorial Day weekend, automakers were left somewhat disappointed.
* U.S. factory activity slowed in June. The Institute for Supply Management index dropped to 56.2 from 59.7. This measure indicates that manufacturing activity was growing but at a slower pace. The ISM business barometer slipped to 59.1 in June from 59.7 in May.* U.S. President Barack Obama announced July 3 that nearly $2 billion would be awarded to two solar energy companies in an effort to boost employment and solar power in the United States, Xinhua reported. Abengoa Solar will build the "world's largest solar plant" in Arizona, creating about 1,600 construction jobs, while Abound Solar Manufacturing will build two new plants in Colorado and Indiana, creating more than 2,000 construction jobs and over 1,500 permanent jobs.
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Equity Markets Review
* Abbott Laboratories is looking to sell the flu-vaccine business it picked up in its 2009 purchase of Solvay's pharmaceutical unit. A sale could be worth as much as €500M ($619M) and would continue a recent wave of consolidation in the pharmaceutical industry. Potential bidders include such heavyweights as GlaxoSmithKline and AstraZeneca.
* Electric car maker Tesla priced shares above the expected range in its IPO last Monday, reported a market source, selling 13.3M shares at $17 each vs. initial plans of 11.1M shares at $14-16 each. Tesla CEO Elon Musk told investors the IPO was more of a technology play than a traditional car maker stock, saying "we are a Silicon Valley company. Closer to an Apple or Google than to a GM or Ford in the way we operate the company." However, analysts remain skeptical, and say shares of money-losing Tesla may not appreciate until the company rolls out its second car, the Model S, in 2012. Shares begin trading on the Nasdaq last Tuesday under the ticker TSLA.
* Wells Fargo and Co. and Wachovia -- bought by Wells Fargo and Co. in 2008 -- admitted in court they failed to monitor and report suspected money laundering by narcotics traffickers, including cash used to buy four planes that shipped a total of 22 tons of cocaine, Bloomberg Markets reported in its August 2010 issue.
* Celgene agreed to buy Abraxis BioScience in a cash-and-stock deal that values the firm at $2.9B. For Celgene, the purchase will provide access to Abraxis' oncology treatments, including Abraxane, for breast cancer patients. The deal is a 17% premium to Abraxis' closing price last Tuesday.
* Verizon Wireless will start selling the iPhone in January, sources said, bringing an end to AT&T's exclusive hold on the smartphone in the U.S. Apple and Verizon declined to comment, but the media reports were enough to push AT&T's shares down nearly 2% Tuesday.
* Google entered the online travel industry with a $700M purchase of travel technology group ITA Software. It's one of Google's largest acquisitions, and heats up the firm's battle with Microsoft (MSFT), which has been relatively successful with travel search. The antitrust review could take a "fair amount of time," said Google CEO Eric Schmidt, but the deal would likely be approved.
* Motorola is moving forward with its planned split-up, and said it has filed an initial Form 10 Registration Statement with the SEC. The separation of its mobile devices and home equipment businesses is on track for the first quarter of 2011, and will be called Motorola Mobility. The remaining company will change its name from Motorola to Motorola Solutions.
* General Mills reported a 41% decline in its fourth-quarter earnings, and its sales fell 2% from the year-earlier period, which included an extra week. However, excluding the extra week, earnings fell only 5%, and sales rose 4%.
Monsanto earnings fall
* Monsanto posted a 45% drop in its third-quarter profit, hurt by weed-killer competition and a backlash by farmers against high-priced genetically modified seeds. Sales fell 6.3% for the quarter.
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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… (5.62)%
Materials… (6.79)
Consumer Staples… (1.22)
Utilities… (2.34)
Consumer Discretionary… (5.61)
Financials… (7.59)
S&P 500… (5.03)
Industrials… (6.49)
Healthcare… (3.19)
Telecommunications… (1.31)
Energy… (5.46)
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Observe & Report – Crisis in the Gulf
The Federal Reserve Bank of New York has reportedly been examining major financial firms' exposure to BP to ensure that Wall Street and the global financial system won't be at risk in the event the oil giant buckles under the costs of the Gulf spill. Sources said the Fed found no systemic risk, and didn't ask banks to alter their credit relationships with BP. However, some banks, of their own initiatives, are changing the terms of their business with BP. Credit Suisse has reportedly lowered its collateral requirement threshold to $10M from $30M, while Bank of America has shortened the time frame of oil trades with BP to one year.
Recently, severe weather in the Gulf of Mexico has halted offshore oil cleanup efforts such as controlled burns of oil, flights spraying dispersant chemicals and booming operations, the U.S. Coast Guard said, Reuters reported June 29. Oil-capture and relief well drilling operations have not been halted.
The U.S. presidential commission investigating the Gulf of Mexico spill has decided to hold hearings in affected Gulf states, and will be calling upon top BP executives, including CEO Tony Hayward. While acknowledging concerns that the hearings, set to begin July 12 in a 500-seat venue, could turn into a public trial, commission members stressed the need for local residents to be heard. Meanwhile, BP is turning to banks for additional short-term loans to help cover its spill costs. BP raised $20B in cash and credit by the end of last week, but could raise another $5B now.
Observe & Report – Counterintelligence Breaks Up Russian Spy Ring
The Russian Foreign Ministry said the announcement of the arrests of 10 alleged Russian spies was in the spirit of Cold War-era "spy stories," AP reported June 29. The ministry said it was regrettable that the arrests occurred as U.S. President Barack Obama works toward improved Russian-U.S. ties. The Russian Foreign Ministry said in a June 29 statement that some of the individuals arrested and accused of being part of a spy ring operating in the United States are Russian citizens, but the accused did not commit any crimes against the United States. Russia said it expects "normal treatment" and consular access for the imprisoned Russians in accordance with current "positive" U.S.-Russian relations. The arrests of 11 alleged Russian spies will not hurt U.S.-Russia ties, White House Spokesman Robert Gibbs said, AP reported June 29. A suspect in an alleged Russian spy ring confessed and provided details of the operation of the spy ring, federal prosecutors said, AP reported July 1.
A suspect in an alleged Russian spy ring confessed and provided details of the operation of the spy ring, federal prosecutors said, AP reported July 1. The suspect, known as Juan Lazaro, although that is not his real name, revealed that his home in Yonkers was paid for by Russian intelligence and that Vicky Pelaez, his wife, had communicated with Russian intelligence on his behalf. Prosecutors also said that Lazaro will not reveal his true name.
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Sports, Culture & Politics
* A force of about 700 U.S. and Afghan troops launched a major assault along Afghanistan's border with Pakistan, according to senior U.S. Army officials, The Washington Post reported June 29. The U.S. and Afghan troops, flown in on helicopters, seized the mountainous high ground in Konar province's Marawara district in the pre-dawn hours on June 27 and were attacked by a force of about 200 insurgents. Two U.S. troops died in the assault, and an estimated 150 insurgent fighters were killed in what U.S. officials said was one of the most intense battles of the past year.
* U.S. President Barack Obama met with Saudi King Abdullah in Washington on June 29, AP reported. Obama said he discussed the Middle East peace process, the situation in Afghanistan and Pakistan, efforts to counter extremism and Iran's nuclear program with Abdullah in a private meeting.
* A man claiming to be Iranian nuclear scientist Shahram Amiri, in a video on Iranian state television, said he managed to escape U.S. intelligence agents in Virginia, AFP reported June 29. Iran has claimed that Amiri, who disappeared in June 2009 after arriving in Saudi Arabia for a pilgrimage, was captured by the United States. This is the second time Iranian media has allegedly shown Amiri in June.
* Israeli Prime Minister Benjamin Netanyahu invited Palestinian President Mahmoud Abbas to come to Jerusalem for direct peace talks and offered to go to Ramallah in exchange, AFP reported June 30. His invitation came after talks with U.S. Middle East envoy George Mitchell. Netanyahu also said he hoped that starting direct talks would be the focus of his conversations with U.S. President Barack Obama in Washington during the week of July 4.
* South Korea rejected North Korea's proposal for direct military talks on the sinking of a warship, saying the issue should be handled under the armistice that ended their 1950-53 war, AFP reported July 1. Seoul should focus on discussions at the U.N. Security Council, said South Korean Foreign Ministry spokesman Kim Young Sun. It is more appropriate to hold general-level talks between the United Nations Command and North Korea's military and address the issue within the framework of the armistice agreement, he said.
* Sen. Maria Cantwell said yesterday that she will support the financial reform bill, bringing Senate Democrats closer to the 60 votes they need. During the July 4 recess, business groups opposed to the legislation made a final lobbying push to derail the bill.
* The World Cup has its Final Four, with Uruguay taking on the Netherlands today, and Spain set to take on Germany in Wednesday’s semifinals match.
* After beating the Mets on Sunday, the Reds take a 2 game lead over the Cardinals in the NL Central, as their offensive prowess continues to impress and win close games.
The weekend’s top-five box office performers as reported by Variety were:
1) Twilight: Eclipse, Summit Entertainment, $82,500,000
2) The Last Airbender, Paramount, $53,300,000
3) Toy Story 3, Disney-Pixar, $42,200,000
4) Grown Ups, Sony Pictures, $25,900,000
5) Knight and Day, Twentieth Century Fox, $13,800,000