Weekly Markets Review 07-19-2010

July 19, 2010

"Cowards die many times before their deaths; the valiant never taste of death but once." -William Shakespeare

Major market indices were lower last week. The DJIA fell 0.98%, the S&P 500 declined 1.21%, and the Nasdaq gave up 0.79%. Growth stocks outperformed value stocks. And the small cap index fell 3.02%. The 10-Treasury yield lost 13 basis points on the week, closing at 2.93%.
In Europe, the recent 10 percent rebound in the Euro may dissolve rumors of the currencies breakup, but it will not do much for the weaker European economies which hoped a weaker Euro would help their export data in the months to come.
Back home, Goldman Sachs settled its fraud case with the SEC. The Wall Street titan will pay a $550 million fine, the largest fine/settlement in the history of the SEC. While many observers (most of them not currently employed in Goldman's neighborhood in the Manhattan's financial district) bemoaned the firm's seemingly light penalty, and the fact that the firm did not admit to breaking any securities laws, Goldman was penalized. The firm was forced to admit to material omissions and misstatements in its marketing materials, disgorged profits, and made-up investor losses. Further, the firm will face the risk of future litigation. Perhaps most importantly, the shareholders have lost $15 billion in market cap as the firms share price went from $180 to its current price of $146.
Further, the financial reform bill is now just one step away from becoming law, after Democrats managed to pull together the 60 votes they needed (the bill passed 60-39). All that remains is for Obama to sign the bill into law, ushering in major changes for financial firms and marking the biggest expansion of government power over banks and markets since the Great Depression. The focus now shifts to 10 regulatory agencies which will be tasked with writing hundreds of rules that govern finance under the new law, and will determine just how strict the new measures will be. Stay tuned...
Economically Speaking
* U.S. Interior Secretary Kenneth Salazar issued a new offshore-oil-drilling moratorium that may allow new wells if the industry demonstrates higher safety standards, Bloomberg reported July 12. The Interior Department said the ban will no longer be based on water depths and will end November 30 or sooner, Reuters reported.
* The Thomson Reuters/University of Michigan preliminary index of consumer sentiment fell more than expected in July as it reached the lowest level in a year. A lack of confidence could further restrain consumer spending, which accounts for 70% of the economy, and limit the speed of the economic recovery.
* Retail sales fell in June, one month after businesses began increasing inventories to put more products on their shelves. Typically inventories grow during a recovery as businesses prepare for more sales.
* The recovery in U.S. manufacturing lost momentum in July, according to various surveys. The news intensified fears about the health of the U.S. economy. The Philadelphia Fed index of manufacturing fell, as did the New York Fed's Empire State index. The data suggest that manufacturing is still growing but not fast enough to create many jobs. That being said, the number of people filing for unemployment insurance fell by a seasonally adjusted 29,000 to 429,000 for the week ended July 10.
* May's trade balance came in at $42.3B, wider than both the $38.9B expected and the $40.3B recorded in April. It's the widest trade deficit in a year and a half, and prompted some economists to downgrade their estimates for Q2 economic growth. Others, including Morgan Stanley economists, took a more positive view, pointing to the hefty gain in imports as a sign that business and consumer spending is picking up and that the economy in Q2 was the healthiest in four years: "With much of the upside surprise in imports in a surge in capital goods, the outlook for domestic investment looks even stronger."
* China's annual gross domestic product growth slowed to 10.3 percent from 11.9 percent in the first quarter, the National Bureau of Statistics announced July 15, Reuters reported. Consumer price inflation fell to 2.9 percent in the year to June from 3.1 percent in May, year-to-date investment in fixed-assets slowed, increasing 25.5 percent compared to a year ago after a 25.9 percent increase in May. The producer price index was up 6.4 percent in the first six months, while retail sales were up 18.2 percent. Fixed asset investment was at 25 percent and industrial value-added output was up 17.6 percent.
* The FOMC comments released last Wednesday showed a sanguine reaction to a slowdown, as officials saw no immediate need for more easing. The minutes hinted at a little more division, with some pushing for earlier asset sales, though hawkish Hoenig remained the only dissenting voice on the zero-interest policy statement. None of the participants see another dip into recession, though they moderated growth forecasts. Overall, the panel reduced its inflation forecast some, but it hasn't gone all in for deflation: Inflation expectations were seen as well anchored. Slightly higher unemployment is seen coming in 2011.
Equity Markets Review
* BP announced that a new cap will be attached to the ruptured oil pipe in the Gulf of Mexico by the end of the day on July 12, AFP reported. After the cap is latched, integrity tests will be able to begin and should last between six and 48 hours. BP Chief Operating Officer Doug Suttles said in the best-case scenario, pressure will rise to anticipated levels and the well will stay closed off. Suttles said BP and the government should be able to tell if the well will stay shut by July 15 at the latest.
* Alcoa reported earnings of 13 cents per share, beating the consensus estimate by a penny. Revenue increased 22% over the same period last year. More importantly, management painted an optimistic picture for the future. Current quarter results were driven by improvement in the commercial transportation and packaging industries, which are leading indicators of economic strength. These results help push the specter of a double*dip recession away a touch more.
* CSX also reported better-than-expected earnings of $1.07 per share against the 98 cents analysts expected. Revenue increased 22%.
* Halliburton's profits doubled last quarter.
* Carlyle Group and TPG Capital agreed to buy Australia's Healthscope Ltd. for A$2 billion ($1.7 billion), gaining the second*biggest hospital operator in a market where health spending is rising about 11 percent annually. Healthscope rallied 10 percent.
* Department of Transportation has analyzed dozens of data recorders from Toyota vehicles supposedly involved in sudden acceleration accidents, and has found that in many cases the throttles were wide open and the brakes were not engaged. In other words, some drivers who blamed their accidents on sudden acceleration problems were actually flooring the gas instead of stepping on the brake. Though the not-yet-released findings don't exonerate Toyota, they do lend credence to the firm's claims that after investigating nearly 2,000 sudden acceleration accidents, there have been no electronic glitches found in the computer-controlled throttle system.
* Intel handily beat analysts' earnings estimates prompting the company to call Q2 the "best quarter in the company's 42-year history."
* Siemens has signed deals worth several billion euros with Russia to modernize the Russian railway system and install wind turbines across the country, EUbusiness reported July 15, citing a statement from Siemens. The memorandums of understanding were signed by Siemens CEO Peter Loescher during a summit between German Chancellor Angela Merkel and Russian President Dmitri Medvedev. Under the deals, Siemens will renovate 22 Russian rail switching yards by 2026 and provide Russian Railways with 240 regional trains through 2020. Siemens will also install wind turbines with a capacity of 1.25 gigawatts by 2015. The specific value of the deals was not disclosed.
* Penthouse owner FriendFinder Networks announced an offer for Playboy: $210M, though CEO Marc Bell said he'll need help for that offer and tried to sweeten the deal by adding that Hugh Hefner can retain editorial control of Playboy magazine and continue to live at the $40M Playboy Mansion. Hefner (whose offer to go private is valued at around $184M) said the company is not in play.
* Nokia Siemens Network agreed to buy most of Motorola's wireless network infrastructure assets for $1.2B in cash. The sale will help fund Motorola's plans to spin off its cell phone and cable set*top box divisions into a separate company early next year, while giving Nokia Siemens a long*coveted foothold in Japanese and U.S. markets.
* Several aircraft orders have been announced at the Farnborough International Air Show. Among the highlights so far, Emirates Airline ordered 30 Boeing 777 jets in a purchase worth $9.1B, and Air Lease Corp. placed an order for 51 Airbus aircraft with a list price of $4.4B.
* Bank of America beat estimates as pressure from overdue loans abated and the company benefited from lower credit costs and the sale of noncore assets. Profits increased 3.1% for the quarter even as revenues declined.
* Citigroup's profit dropped 38% as stock and bond trading revenue fell but still beat analysts' estimates.
* GE ends nine-quarter losing streak as profits rose 14% in the April-to-June period, ending a nine*quarter losing streak. The company benefited from the stabilization of its GE Capital unit and improvements in its health care division.
* Mattel's profits more than doubled as sales and margins improved, but the toy company's results still fell short of expectations.
* Google's earnings missed estimates even though its profits and revenues increased amid a broad recovery in online advertising. However, its search business showed signs of slowing growth.
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... 0.02%
Materials... (1.87)
Consumer Staples... 0.10
Utilities... (0.30)
Consumer Discretionary... (1.17)
Financials... (2.86)
S&P 500... 1.21
Industrials... (1.94)
Healthcare... (1.33)
Telecommunications... (0.21)
Energy... (1.82)
Observe & Report – Crisis in the Gulf
Cautious optimism greeted weekend reports that BP may have succeeded in halting the flow of oil into the Gulf of Mexico after nearly three months of incessant spillage. A more tightly fitting cap has managed to cut the flow, but only a relief well being dug by BP will provide the long-term solution.
The Obama administration cautions against becoming too optimistic, telling reporters that "We won't be done until we actually know that we've killed the well and that we have a permanent solution in place."
The Wall Street Journal reports that there are lingering concerns that the new cap could make the spill worse by creating countless fresh leaks in the sea floor.
BP says its relief well should intersect the broken well in mid-August. Engineers will then pump heavy drilling mud into the well to kill it and plug it with cement.
Observe & Report – Iran’s Missing Nuclear Scientist
Iranian nuclear scientist Shahram Amiri, who is reportedly in the Pakistani Embassy in Washington, had resided in the United States of his own free will but now wants to return home, Reuters reported July 13, citing an unnamed U.S. official. The official added that Amiri's case is different from the three U.S. hikers in Iranian custody, who should be released forthwith. These remarks follow a report by Iran's semi-official Mehr News Agency that U.S. authorities handed over Amiri to the Iranian interests section in the face of persistent media pressure drummed up by the Islamic republic. The disappearance and re-appearance of Amiri still remains murky despite the recent report. The incident has come to a head a time when both Washington and Tehran are engaged in public efforts to weaken one another's bargaining position while continuing with back-channel conversations on how to reach an understanding on Iraq and the nuclear issue. Amiri left the U.S. for Iran on Wednesday, July 14.
In another strange twist, Amiri was paid more than $5 million by the CIA for information on Tehran's nuclear program, The Washington Post reported July 14, citing U.S. officials. One unnamed official said Amiri no longer has access to the money because of sanctions on his country. "We have his information, and the Iranians have him," the official said. The money was designed to support Amiri throughout his life in the United States, and was placed in accounts and investments.
Sports, Culture & Politics
* Senate Republicans continue to hold up extending benefits for unemployed Americans, insisting that their Democratic colleagues cut spending elsewhere in order to prevent further increases in the dederal budget deficit, and adding to the $13.2 trillion federal debt. Republicans want to pay for the extension with unspent federal stimulus money. Democrats say extending unemployment insurance is traditionally an emergency priority that can be financed by adding to the deficit.
* Turkey has agreed not to get involved in efforts to pressure Iran about its nuclear program, AP reported July 13, citing a highly placed U.S. official. U.S. Secretary of State Hillary Clinton reportedly asked Turkish Foreign Minister Ahmet Davutoglu in a 45*minute conversation on July 12 to allow the U.N. Security Council and the International Atomic Energy Agency to handle the issue.
* North Korea and the U.S.*led United Nations Command in South Korea are due to hold talks July 15 to discuss the ChonAn, the U.N. Command said, Kyodo reported. To be held at the level of colonel, the talks will include representatives from the North Korean People's Army and U.N. Command's Military Armistice Commission, and will be held in Panmunjeom at 10 a.m. local time.
* The U.S. combat mission in Iraq is on schedule to conclude in August, and will not be delayed if Iraq has not formed a new governing coalition before the deadline, U.S. Vice President Joe Biden said July 18 in an interview with ABC News. Biden said Iraq currently has a transitional government in place, and Iraqis are providing security in the country with U.S. assistance. He added that 50,000 U.S. troops will remain in a non*combat role, and that the reduction of forces will not affect Iraq's stability.
* The United States will send 1,200 National Guard troops to states along the U.S.*Mexico border to assist with border protection, CNN reported July 19, citing Customs and Border Protection Commissioner Alan Bersin, who said 300 additional Customs and Border Protection (CBP) agents, technology and six aircraft will also be added. National Guard Bureau Chief Gen. Craig McKinley said the Guard will aid in criminal and intelligence analysis and entry identification, Fox News reported July 19. He said the Guard will be in placed in Texas, New Mexico, Arizona and California by September. Unnamed officials described the deployment as a "bridge" to keep border security strong while 1,000 CBP agents are added over the next year.
* George Steinbrenner, who owned and ran the Yankees with an iron fist for 37 years, died of a heart attack on Tuesday, July 13, 2010.
* Louis Oosthuizen, a 27-year old South African, won this year's British Open at St. Andrews.
The weekend’s top-five box office performers as reported by Variety were:
1) Inception, Warner Bros., $60,400,000
2) Despicable Me, Universal, $32,734,350
3) Sorcerer's Apprentice, Disney, $17,373,000
4) Twilight: Eclipse, Summit Entertainment, $13,497,000
5) Toy Story 3, Disney-Pixar, $11,472,000

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