Weekly Markets Review 07-12-2010

July 12, 2010

"Life shrinks or expands in proportion to one's courage." -Anais Nin
Major market indices were higher last week. The DJIA gained 5.28%, the S&P 500 added 5.41%, and the Nasdaq climbed 5.00%. Value stocks outperformed growth stocks. And the small cap index rose 5.09%. The 10-Treasury yield gained 9 basis points on the week, closing at 3.05%.
Business leaders are so frustrated at the Obama Administration that they're taking the rare step of going public with their views. Jeff Immelt of General Electric told an interviewer that "people are in a really bad mood" and that "government and entrepreneurs are not in synch." That was followed by a comment by Ivan Seidenberg, head of the Business Roundtable, stating that he believes "Obama is not a friend of the private sector."
The ISI Group figures that the leading economic indicators probably fell 0.3% last month, which would turn around the measure's recent upward tilt. Add to this the fading of last year's fiscal stimulus package, the failure to extend federal emergency programs for unemployment benefits, state and local government spending cuts and higher taxes and fees, and the likelihood of higher federal taxes next year once the Bush era cuts expire, and you can see that the train is running the wrong direction.
How can an administration with no room to lower interest rates, and little desire to spend more on stimulus continue to prime the economy? The Federal Reserve can go back to what it calls "quantitative easing" and what the rest of us call buying bonds. More creatively, ISI observes that Obama and Congress could delay next year's tax increases, reinstate homebuyer tax credits, try to extend unemployment benefits, renew the tax credit for new hiring and also revive the bonus depreciation for businesses. All of which will have positive, if short-term, effects.
That said, last Wednesday's 3% rally may also be significant-if but for the short term, according to analyst Jon Markman. He looked at the S&P 500 going back to 1938 when situations were similar to the present. The takeaway: History suggests stocks are headed higher over the next 6 to 12 months. When the S&P 500 has posted a one-day gain of more than 3% at a time that stocks were below both their 200-day and 50-day moving averages, the average return over the next six months was 6.5%. The average return over the next 12 months was 15%. Both measures were statistically significant at the 99% confidence level.
Bottom line? Growth is slowing, inflation is slowing and asset prices are down. But, short term, this market could be heading back to the top of its trading range. Stay tuned...
Economically Speaking
* U.S. retailers' sales are growing at the fastest pace in four years, a sign consumers may be overcoming concern about unemployment and depressed home values. Sales probably expanded at an average monthly rate of 4 percent in the first five months of the retail fiscal year that began Jan. 31, the biggest gain since 2006, the International Council of Shopping Centers trade group said in advance of its June report tomorrow. Nordstrom Inc. and Kohl's Corp. are among chains that will report June sales increases at stores open at least a year, according to analysts' estimates.
* The ISM Services Index reported a 53.8 print for June, lower than the 55.0 expected and the 55.4 recorded in May. This means service businesses are expanding, but not by much.
* German Chancellor Angela Merkel's Cabinet approved 81.6 billion euros ($103 billion) in budget cuts over a four-year period, Bloomberg reported July 7. Meeting in Berlin on July 7, the Cabinet moved on cuts to date from 2011-2014. The plan targets a financial-transaction tax on banks worth about 2 billion euros a year and a levy on nuclear-power plants totaling 2.3 billion euros per year in what Merkel has called unprecedented. Also in the plan are welfare reductions, defense spending cuts and a delay in the rebuilding of Berlin's royal palace.
* Eurostat released on July 7 its second estimates of eurozone gross domestic product (GDP) in the first quarter of 2010, remaining unchanged at an increase of 0.2 percent quarter-on-quarter and 0.6 percent year-on-year. Greece's GDP was revised down to 1.0 percent quarter-on-quarter and to 2.5 percent year-on-year, after initial estimates of a decrease of 0.8 percent and 2.3 percent, respectively. Portugal's GDP was revised up from 1.1 percent quarter-on-quarter and to 1.8 percent year-on-year (from an increase of 1.0 percent and 1.7 percent, respectively).
* The IMF predicted growth of 2.6 percent this year in advanced economies, more than the 2.3 percent seen in April, while emerging market will expand 6.8 percent, up from 6.3 percent, according to revisions to its World Economic Outlook.
* Jobless claims in the U.S. dropped by 21,000, providing some evidence that the jobs market may be on the verge of strengthening, but will take time to develop.
Equity Markets Review
* State Street Corp. the third-largest U.S. custody bank, rallied 8.2 percent Wednesday, after saying it swung to a second-quarter profit.
* Federal regulators approved Kohlberg Kravis Roberts & Co. to list its shares on the NYSE, marking the end of KKR's three-year campaign for a public listing. According to yesterday's securities filing, co-founders Henry Kravis and George Roberts each own a 13% stake worth a combined $1.65B, as measured by the price of KKR shares trading in Europe.
* Disney is close to a deal to sell Miramax to construction tycoon Ron Tutor and investment firm Colony Capital for up to $700M in cash.
* H-P was awarded a contract for continued U.S. Navy information technology support that could be worth as much as $3.4B if all the options are exercised. The initial award is for $27M, and work could potentially continue until July 2015.
* Insurance broker Aon agreed to buy human-resource consulting and outsourcing company Hewitt Associates in a cash-and-stock deal valued at $4.9B. The deal, which will nearly triple the size of Aon's consulting operations, marks a 41% premium over Hewitt's closing price on Friday.
* France's Total agreed to buy UTS energy for $1.42 billion as it sought to boost its Canadian oil sands portfolio.
* Merck will close eight research labs and eight manufacturing plants as part of a previously announced plan to reduce operations after it acquired Schering Plough. The cuts are part of a plan to reduce 15%, or 15,000 jobs, of the combined company's work force following the acquisition.
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... 5.58%
Materials... 8.03
Consumer Staples... 4.02
Utilities... 5.79
Consumer Discretionary... 4.58
Financials... 7.37
S&P 500... 5.41
Industrials... 5.89
Healthcare... 3.56
Telecommunications... 1.82
Energy... 6.16
Observe & Report – Russian Spy Ring
Russia wants to swap a scientist jailed on charges of spying for Britain for one of the suspected Russian agents detained in the United States last month, according to a lawyer for the scientist, Reuters reported July 7. Russia wants to exchange Igor Sutyagin for those accused of spying in the United States, Anna Stavitskaya, a lawyer acting for Sutyagin, said by telephone. She added that Russia wants the swap to take place July 8. She said she did not know for whom he would be exchanged. Stavitskaya said Sutyagin would be sent initially to Britain.
Events on the afternoon of July 8 have confirmed that a spy swap is in the works between the United States and Russia. The ten suspects accused by the United States of being unregistered agents of Russia pleaded guilty to the charge in a New York court July 8, and the presiding judge ordered that they all be immediately deported to Russia. At the same time, the U.S. Department of Justice confirmed that four individuals held in Russian custody for allegedly spying for Western intelligence agencies will be released. The exact identities of the four have not been confirmed but are believed to be Igor Sutyagin, a Russian disarmament researcher convicted of espionage in 2004; Sergei Skripal, a former colonel in Russia's Military Intelligence Directorate (GRU); Alexander Sypachev, a former colonel in Russia's Foreign Intelligence Service (SVR); and Alexander Zaporozhsky, another former SVR colonel. While the math of 10 Russian spies in exchange for four U.S. spies may seem fuzzy, the quality of intelligence provided may account for the difference. For example, Skripal is believed to have provided information on a number of Russian agents operating within MI6, the United Kingdom's foreign intelligence agency. Zaporozhsky is rumored to have exposed information leading to the capture of Robert Hanssen and Aldrich Ames, both extremely valuable double agents in the U.S. intelligence services. While the Russian agents recently arrested in the United States would provide serious long-term value, and possibly were more valuable then is publicly known, they did not have as much rank and access as the four expected to return from Russia. Forcing these 14 in from the cold may bring a close to the publicity on the issue, though counterintelligence investigations will continue, including one into the suspect operating under the identity of Christopher R. Mestos, whose whereabouts are still unknown after he made bail in Cyprus. (Source: Stratfor)
Sports, Culture & Politics
* The U.S. military is training 150 members of Mujahideen-e-Khalq (MeK) as spies and will send them into Iran to carry out terrorist acts, Iran's PressTV reported July 8, citing an anonymous source. The source said that the MeK members are being trained at Camp Taji in Anbar province.
* According to Stratfor, the U.N. Security Council on July 9 issued a statement condemning the March 26 sinking of the South Korean naval corvette ChonAn. The response, which did not blame North Korea but did acknowledge that the incident was an attack, is evidence that the involved players on the council -- the United States, China and Russia -- are shying away from further escalation of tensions in the region and are moving to restrain the actions of both Koreas.
* The al-Shabaab rebel group, a Somalia-based terrorist group with links to Al Qaeda, has taken credit for a bomb that went off in Ugandan restaurant where guests were watching the World Cup final on Sunday, killing 64 people.
* Spain won the World Cup yesterday, beating the Netherlands 1-0.
The weekend's top-five box office performers as reported by Variety:
1) Despicable Me, Universal, $56,397,125
2) Twilight: Eclipse, Summit Entertainment, $31,708,438
3) Predators, 20th Century Fox, 24,760,882
4) Toy Story 3, Disney-Pixar, $21,015,958
5) The Last Airbender, Paramount, $16,635,471

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