Weekly Markets Review 07-14-2010

July 14, 2010

“He who works with his hands is a laborer. He who works with his hands and his head is a craftsman. He who works with his hands and his head and his heart is an artist.” --St Francis of Assisi

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Hindsight
Major market indices were up last week. The DJIA gained 2.81%, the S&P 500 rose 2.51%, and the Nasdaq climbed 1.10%. Growth stocks outperformed value stocks. And the small cap index added 2.37%. The 10-Treasury yield added 3 basis points on the week, closing at 3.23%.
The oil leak in the Gulf. Afghanistan. European debt. U.S. economic growth. Jobs. China. The prospective collapse of the Big 12. Just a few of the weighty issues being considered by investors that will, until the upcoming 2Q earnings period, likely keep stocks range-bound between 1,040 and 1,150. There appears to be no other short-term catalyst for sending stocks above that level, nor were bears able to drag stocks below that technically significant 1,040 line in the sand.
Not that all the news is bad. Consumers continue to deleverage. Gasoline prices will likely be down this month. And manufacturing output should be up around 1 percent in June. But, following the expiration of the housing tax credit in April, mortgage applications have dropped 40% -- signaling continuing weakness in housing markets. And businesses' cash hoards now account for 7% of assets, the highest level since 1963, according to the Fed. When companies hoard cash instead of expending it, they're worried about the immediate future. Stay tuned…
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Equity Markets Review
*After tense weekend negotiations, G-20 finance ministers agreed to drop the idea of a global bank tax, bowing to pressure from Canada and other critics of the levy. Officials reported progress on tightening global banking standards, but the requirement for banks to increase their capital cushions could take years to implement because it conflicts with the current goal of increasing lending. Conflicts also abounded over prescriptions for growth, with European nations pushing for lower budget deficits and the U.S. warning against relying on exports instead of domestic demand.
*European Union countries thrashed out ways to toughen oversight of their finances to prevent a repeat of the debt crisis that is forcing many nations to make huge and painful budget cuts, AP reported June 8. EU Economy Commissioner Olli Rehn said he expected the 27-nation bloc would move “fast forward” on reinforcing economic governance. Rehn praised Germany’s moves to reduce spending, saying all others should follow suit no later than 2011.
*The Federal Reserve said the U.S. economy, driven partly by consumer and business spending, strengthened in all 12 of the central bank’s regions in April and May, while noting growth in many districts was subdued. Fed Chairman Ben Bernanke said in congressional testimony that the recovery, while sustained by private demand, isn’t as strong as he prefers and faces risks from Europe’s debt crisis that may require further Fed action. Policy makers, who next meet June 22-23, committed in April to keep borrowing costs near zero for an “extended period.”
*Gold reached a new high yesterday, with contracts for June delivery closing at $1,244 per troy ounce. Gold also hit an intraday record of $1,252.10. The recent surge in the metal has prompted speculation that central banks are increasing their gold purchases, partly as a diversification away from the euro.
* Moody’s Investors Service downgraded Greece government bond ratings by four notches to Ba1, putting the bonds into junk status, Reuters reported June 14. Moody’s cited risks in the Euro zone rescue package as the reason for the downgrade.
*The airline industry will post a $2.5B profit this year thanks to a rebounding economy, according to the IATA, reversing a recent prediction of a $2.8B deficit. A profit would be the industry’s first since 2007, and only its third profitable year in a decade as airlines struggled with the fallout from terrorist attacks and the financial crisis, among other problems. The IATA expects it will now take two years, not three, for sales to rebound to peak levels.
* Cablevision announced it will buy Bresnan Communications for $1.36B. Bresnan, which is majority-owned by private equity firm Providence Equity Partners, was put on the market following last year's death of founder William Bresnan.
* In its latest update, BP said its clean up and containment costs have risen to $1.6B so far, reiterating that "it is too early to quantify other potential costs and liabilities associated with the incident." The White House plans to ask BP to put "substantial" funds into an escrow account to cover claims by local businesses and residents, effectively taking some of the compensation decisions out of the company's hands. In a further sign that the government is trying to take a stronger stance on the spill, industry and regulatory analysts believe BP may lose control of its U.S. wells and be barred from doing business with the federal government as a punishment for the worst oil spill in U.S. history.
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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… 0.89%
Materials… 5.25
Consumer Staples… 1.38
Utilities… 3.85
Consumer Discretionary… 2.30
Financials… 2.65
S&P 500… 2.51
Industrials… 2.27
Healthcare… 2.40
Telecommunications… 4.34
Energy… 5.14
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Observe & Report
A popular sentiment among the "double-dip" camp has been that consumer deleveraging will restrict the ability of consumption to drive economic growth. While it's still early in the recovery, there is an interesting dynamic between consumption growth and consumer credit. Despite a negative retail sales report last Friday, consumer spending remains on track to grow at a rate of about 3% in 2Q. However, this has happened in the face of the most significant contraction in consumer credit since the 1930s, as credit has contracted some $143 billion since July 2008. Job growth will play an important role going forward, and we'll be watching to see if the American consumer can continue to spend despite credit conditions. (source: JPMorgan Asset Management)
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Sports, Culture & Politics
*Israel approached the United States with new requests for security-related purchases, including Joint Direct Attack Munition (JDAM) bombs for the Israeli air force, as well as a significant expansion of the emergency stores held by the U.S. Army in Israel, Haaretz reported June 8.
*Iranian President Mahmoud Ahmadinejad said a nuclear swap deal brokered by Turkey and Brazil is a one-time opportunity that should not be missed, AP reported June 8. He stated that new sanctions would be a big mistake and that U.S. President Barack Obama stands to lose unless he changes his policies toward Iran. IRINN reported that Ahmadinejad said Iran and Russia are neighbors and should cooperate. He said there is no special problem, but reminded Iran’s neighbor to be attentive and not side with Iran’s enemies. Ahmadinejad added that the choice is with Russian officials.
*The United Nations Security Council on June 9 passed sanctions against Iran over its uranium enrichment program, The Wall Street Journal reported. The resolution passed by a 12-2 vote, with Brazil and Turkey opposed and Lebanon abstaining.
*During her visit to Beijing last month, U.S. Secretary of State Hillary Clinton urged Chinese leaders to accept the findings of an international investigation and join efforts to impose sanctions on North Korea, the JoongAng Daily cited a diplomatic source as saying, AP reported June 9. Chinese leaders said North Korean leader Kim Jong Il told Chinese leader Hu Jintao the North was not involved in the ChonAn sinking. The response prompted Clinton to say China’s attitude is like China having a “big liar” as its ally, the daily said.
*Israeli Foreign Minister Avigdor Lieberman told the Conference of Presidents of Major American Jewish Organizations in New York that it was a “mistake” to think that it was possible to change Turkey’s attitude toward Israel through any gesture or efforts, The Jerusalem Post reported June 9. Lieberman said the negative change in Ankara reflected a strategic change by the Turkish leadership stemming from deep shifts in Turkish society.
*The United States and other countries with military presence in Afghanistan need to show their people by the end of this year that the current strategy for the war is working, U.S. Secretary of Defense Robert Gates said June 8 before meetings with NATO allies, AP reported. Gates said the public will not support a stalemate war that is costing lives.
* The Boston Celtics won game five and took a 3-2 series lead as the NBA Championship heads back to L.A. for games five and six.
* The NCAA’s Big 12 Conference appears on the verge of implosion as the Pac-10 has raided its top teams, offering a potentially more lucrative television deal for each school. The story continues to unfold.
The weekend’s top-five box office performers as reported by The New York Times were:
1) The Karate Kid, Sony Pictures, $56,000,000
2) The A-Team, Twentieth Century Fox, $26,000,000
3) Shrek Forever After, Paramount, $15,800,000
4) Get Him To The Greek, Universal, $10,078,460
5) Killers, Lionsgate, $8,000,000

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