Weekly Markets Review 08-30-2010

August 30, 2010

“Adventure is not outside the man; it is within.” –George Elliot
Major market indices were mixed last week. The DJIA fell 0.62%, the S&P 500 declined 0.66%, and the Nasdaq lost 1.20%. Value stocks outperformed growth stocks. And the small cap index rose 0.98%. The 10-Treasury yield gained 7 basis points on the week, closing at 2.64%.
Despite signs that the economy is improving, it is more slog than sprint. Initial unemployment claims and the four-week moving average both rose to their highest levels since late 2009. Meanwhile, producer prices and industrial production both rose to their highest levels since late 2009.
But, it’s no wonder we have such a mixed bag. According to an AP Report last week entitled, “Figures on Government Spending and Debt,” the current per capita U.S. debt totals $44,000 per citizen. Wow. That’s more than my three- and seven-year old sons can afford.
During such sober times, how come my government is spending like a drunken sailor? All this Keynesian talk of more stimulus, and priming the pump, when does it end? We’ve spent close to $1 trillion to no avail. $2 trillion? $3 trillion? How many trillions translate to ineffective?
After a solid 2Q earnings season, and a solid bounce of the economic bottom, I cannot help but feel that much of the market unease is simply being driven by the indecision emanating from the nation’s capital. Stay tuned…
Economically Speaking
- Fed Chairman Ben Bernanke said that the central bank will “do all it can” to ensure that the economic recovery continues.
- GDP grew more slowly than initially estimated in the 2Q at 1.6%, after a 3.7% 1Q expansion.
- Sales of existing houses plunged by a record 27 percent in July as the effects of a government tax credit waned, showing a lack of jobs threatens to undermine the U.S. economic recovery. Purchases plummeted to a 3.83 million annual pace, the lowest in a decade of record keeping and worse than the most pessimistic forecast of economists surveyed by Bloomberg News, figures from the National Association of Realtors showed today in Washington. Demand for single-family houses dropped to a 15- year low and the number of homes on the market swelled.
- As card holders continue to pay off balances, the amount of credit card debt dipped to its lowest level in eight years during the second quarter. The average combined debt for bank-issued credit cards fell to $4,951 in the second quarter, down more than 13% from $5,719 in the same period a year ago, according to TransUnion, which tracks consumer debt.
- Applications for jobless benefits fell more than forecast last week, easing concern American employers are again slashing payrolls as the economy slows. Claims dropped by 31,000, the first decline in a month, to 473,000 in the week ended Aug. 21, Labor Department figures showed today in Washington. The total number of people receiving government payments exceeded 10 million for the first time in four months, reflecting an increase in those getting extended benefits. The average number of claims over the past month climbed to the highest level since November even as the latest reading provided some relief to the drumbeat of negative economic data in recent weeks. Employers have delayed hiring plans and some have renewed firings as the year-old recovery shows signs of petering out, raising the risk consumer spending will weaken further.
- Durable goods orders were weak, rising only 0.3% in July.
Foreign Observations
- The Royal Canadian Mounted Police broke up a militant cell in Ottawa, arresting three men suspected of having ties to al Qaeda, the National Post reported Aug. 25. The men are thought to have been preparing an attack targeting Canada, although the plot was described as not well-defined. The arrests occurred because one of the suspects was preparing to travel abroad. The cell's leader allegedly attended training camps in Afghanistan and Pakistan. The men possessed schematics, bomb parts and jihadist literature, Canada's National Post reported Aug. 26. More than 50 circuit boards were found in the possession of Havi Mohammad Alizadeh, 30, and Misbahuddin Ahmed, 36, and Khurram Syed Sher, 28, who are charged with conspiring with others in Canada, Iran, Afghanistan, Dubai and Pakistan to facilitate a "terrorist activity" between February 2008 and August 2010.
- The United States will supply relatively low-grade radar equipment to Taiwan's air force, U.S. State Department spokesman Philip Crowley said on Aug. 25, AP reported. The sale includes defense services, technical data, and defense articles for Taiwan's air defense system, and radar equipment for Taiwan's Indigenous Defense Fighter jets, Crowley stated. China opposed on Aug. 27 a U.S. plan to supply radar equipment to Taiwan's air force, AP reported. A Chinese Foreign Ministry spokeswoman said her country opposes the sale of weapons and technical assistance from Washington to Taiwan. She said military ties to Taiwan should cease or there is a renewed risk of harm to Sino-American relations.
- The credit rating on Ireland's government debt was cut one notch by S&P to AA- from AA. The ratings agency cited the projected cost of propping up the country's financial sector, as the key reason behind the downgrade. S&P said its new projections suggest that Ireland's net general government debt will rise toward 113% of gross domestic product in 2012. That is more than 1.5 times the average of other eurozone nations and well above that of similarly rated countries.
- The Japanese Foreign Ministry has created a unit to enhance ties with emerging nations, Japanese Foreign Minister Katsuya Okada said Aug. 25, Kyodo reported. Emerging nations have been gaining influence in the global economy and international politics, and Japan should adapt to such power shifts, Okada said at the Foreign Correspondents' Club of Japan in Tokyo. In the next three to five years, about 100 Japanese diplomats based in developed countries will be relocated to emerging nations, Okada said.
- Iran has stockpiled three tons of low-enriched uranium (LEU), enough for one or two nuclear weapons, former top U.N. nuclear official for Iran Olli Heinonen told Le Monde newspaper, Reuters reported Aug. 26. The U.S. calculation that Iran would need a year to convert its low-enriched uranium to higher-grade material is "not a bad estimate," he stated.
- The West's confrontation with Iran will continue for at least three to five years, Iranian Expediency Council Secretary Mohsen Rezaie said in a memorandum Aug. 26, Mehr news agency reported. The memorandum, entitled "Ramadan, Politics and Life," suggests that Iran develop a five-year plan to counter economic sanctions, military threats, and large-scale negative propaganda, while waging a cultural, economic and social fight. To overcome this new wave of confrontation, Iran needs a jihadist, fraternal and cooperative spirit in the country, according to the memorandum. Although the memorandum said Iran's enemies use sanctions to undermine the government, Rezaie said the sanctions may be useful in helping Iran lessen its economic dependence on state and oil enterprises.
- The United States is expected to announce fresh sanctions against North Korea early next week hoping to dry up cash sources for the funding of the communist regime's nuclear weapons programs, Yonhap News reported Aug. 28. An unnamed diplomatic source said the U.S. government plans to announce a list of those subject to the sanctions early next week. The list will reportedly include North Korean entities and people who have secured foreign currencies by selling conventional weapons overseas and purchasing luxury goods for North Korea's elite.
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... (2.06)%
Materials... (0.20)
Consumer Staples... (0.06)
Utilities... 2.02
Consumer Discretionary... (0.75)
Financials... (0.60)
S&P 500... (0.66)
Industrials... (1.47)
Healthcare... (0.61)
Telecommunications... 1.23
Energy... 0.16
Equity Markets Review
- Apple is in talks with Disney and other network owners that would allow the computer company to offer television episodes for sale on iTunes. It is close to gaining access to ABC shows from Disney, but the proposal is facing at least some resistance from other TV companies, including CBS, General Electric's NBC Universal, News Corp., and Viacom. The shows would cost $0.99 and would be available for 48 hours after purchase. Apple is also working on a device that would allow users to stream video directly to their television sets, which could be announced as early as next month.
- Dell unveiled its first smartphone for the U.S. market Tuesday, entering into an increasingly crowded arena with a product that uses the Android operating system from Google. The new phone, called the Aero, will sell for $99 with a contract from AT&T, and $299 without one. Dell says it is the lightest of the phones available that use Android.
- Goldman Sachs is slipping in one area that has usually been a strength of the Wall Street leader: underwriting corporate bonds. As Goldman seeks to put a run-in with the SEC behind it, it is now losing market share in bond underwriting to its rivals. The profitable Wall Street firm has slipped to 10th in helping the world's companies raise debt, down from ninth last year and as high as third place in 2003. JPMorgan, the second-biggest U.S. bank, is leading global underwriting for the third straight year, while Deutsche Bank, Germany's biggest lender, is ranked second.
- Intel agreed to buy Infineon's wireless unit for $1.4B in cash. The deal will significantly strengthen Intel in cell phone chips, an area in which it has met with limited success in the past, and marks the company's second acquisition in as many weeks.
- Toyota will recall 1.13 million Corollas and Matrix cars based upon an engine defect.
-GM will recall 200,000 of the Pontiac Vibe, which was designed and engineered by Toyota at a joint manufacturing plant in California.
- Johnson & Johnson will pull two hip-repair replacements off the market due to quality problems.
- Diageo reported a 1.5% rise in net profits for the year ended in June.
Observe & Report – Big Brokerages Created Fake Demand for CDOs
ProPublica has a devastating takedown of some of the self-inflicted wounds the big bailed out banks caused, all in the pursuit of bigger bonuses. Merrill Lynch, Citigroup, UBS, Goldman Sachs all come in for scathing criticism for their circular CDO sales to themselves:
“Over the last two years of the housing bubble, Wall Street bankers perpetrated one of the greatest episodes of self-dealing in financial history.
Faced with increasing difficulty in selling the mortgage-backed securities that had been among their most lucrative products, the banks hit on a solution that preserved their quarterly earnings and huge bonuses: They created fake demand.
A ProPublica analysis shows for the first time the extent to which banks — primarily Merrill Lynch, but also Citigroup, UBS and others — bought their own products and cranked up an assembly line that otherwise should have flagged. The products they were buying and selling were at the heart of the 2008 meltdown — collections of mortgage bonds known as collateralized debt obligations, or CDOs. “
This is a very clear (written for a non-technical audience) and focused article. ProPublica doesn’t claim they are the first to report this (“Individual instances of these questionable trades have been reported before”). But ProPublica’s investigation (in partnership with NPR’s PlanetMoney), is comprehensive and written for the layperson.
Kudos to Jesse Eisinger and Jake Bernstein. (source: ritholtz.com/blog)
Sports, Culture & Politics
- Islamic militants attached a hotel near the presidential palace in Somalia, killing at least 31.
- The number of American soldiers in Iraq has dropped below 50,000, the U.S. military stated on Aug. 24, AFP reported. U.S. military forces will transition to Operation New Dawn, effective on Sept. 1, according to the statement.
The weekend’s top-five box office performers as reported by Variety were:
1) The Last Exorcism, Lionsgate, $21,300,000
2) Takers, Sony Pictures, $21,000,000
3) The Expendables, Lionsgate, $9,500,000
4) Eat Pray Love, Sony Pictures, $7,000,000
5) The Other Guys, Sony Pictures, $10,100,000

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