Weekly Markets Review 09-20-2010

September 20, 2010

“A mind always employed is always happy. This is the true secret, the grand recipe, for felicity." -Thomas Jefferson

Major market indices were mostly higher last week. The DJIA gained 0.14%, the S&P 500 added 0.46%, and the Nasdaq climbed 0.39%. Growth stocks outperformed value stocks. And the small cap index lost 1.07%. The 10-Treasury yield gained 8 basis points on the week, closing at 2.79%.
Stocks rallied back into positive territory, erasing the 2010 loss posted thus far. Further, the emerging markets index of 21 developing nations rallied 1.8%, extending gains from its 2010 low to 20%, the threshold for a bull market. This supports our thesis that emerging markets will lead the way out of the current equity malaise.
We feel that the U.S. economy will continue to see slower growth in the year ahead—but it will still represent growth, as opposed to contraction. Still better growth and balance sheets can be had in select emerging markets, and we continue to selectively target those regions.
Speaking of emerging markets, China will bring out its 12th Five-Year Plan next month, and Credit Suisse offers an early peek at some of what it expects to see:
-Wage increases to help the consumer sector become a bigger part of the economy;
-New rules to make it easier for rural residents to move to cities in search of opportunity;
-More emphasis on public housing for low-income Chinese;
-Increased investment in alternative energy and incentives to reduce carbon emissions;
-Efforts to diversify the country’s financial sector away from a small number of institutions
The emerging markets growth story being led by China and India remains intact. Both countries continue to focus on infrastructure and to enhancing quality of life now while also laying the groundwork for a future of social stability and job opportunities.
India’s GDP accelerated in the second quarter, and China has been performing better than most predicted. These two countries represent nearly 40 percent of the world’s population, and they are growing at a much stronger pace than the U.S. or Europe. Add a few other EM nations we feel offer solid growth-to-risk ratios, and you have a number of possibilities in which to invest, regardless of whether western markets can sustain this current uptick. Stay tuned…
Economically Speaking
- Initial jobless claims were better than expected, at 451k vs the forecast of 470k and down from 478k last week (revised up by 6k).
- Regulators determined that banks would have to double capital requirements in order to better endure future crises, but gave those banks up to eight years to meet the enhanced requirements at the weekend’s Basel Committee on Banking Supervision.
- The U.S. slipped two places to fourth in an annual ranking of business competitiveness by Geneva-based World Economic Forum. The U.S. fell behind Sweden and Singapore due to huge deficits and pessimism about government, the global economic group said in its report. Switzerland kept the top spot for a second year in a row. The rankings are based on economic data and a survey of more than 13,500 business executives.
- The U.S. trade deficit fell 14% in July, according the U.S. Department of Commerce.
- The Fed reports that credit card debt fell $4.4 billion from June to July, a decline of 15% from the August 2008 peak.
- The Fed Beige Book survey of economic conditions shows that the recovery is occurring unevenly throughout the nation, where regions dependent on manufacturing and farming were making progress, and those regions dependent upon housing were struggling. While the nation continues its expansion, five of the 12 districts experience mixed conditions or a deceleration.
Foreign Observations
- Iranian Foreign Minister Manouchehr Mottaki met with Afghan President Hamid Karzai on Sept. 8 to discuss bilateral issues, IRNA reported. Mottaki reiterated Iran’s support for holding the second Afghan parliamentary elections. Karzai said he appreciated Iran’s help with Afghanistan’s reconstruction.
- China is realistic about the current condition of the international monetary system and recognizes that the dollar is at its center, Chinese Commerce Minister Chen Deming said on Sept. 8, Reuters reported. China lacks experience and human capital in terms of currency internationalization and will push the yuan forward prudently, he stated, adding there is no stronger currency than the dollar for supporting world economic activities. No signals suggest major fluctuations or volatility in the yuan value and market forces determine the exchange rate, he said, adding China’s trade surplus is larger than expected due partly to falling commodity prices. Also, China is revising its foreign investment catalog to expand the number of sectors where foreign investment is encouraged or permitted, the Ministry of Commerce Foreign Investment Department Director-General Liu Yajun said Sept. 13, Reuters reported. Liu told a conference in Shanghai that China's stance of opening to foreign investment would not change, but that such investment needed to be mutually beneficial to be sustainable.
- Japan and India agreed Sept. 9 to establish a bilateral free trade agreement, Japanese Foreign Minister Katsuya Okada said, Kyodo reported. The agreement was reached during sub-Cabinet-level talks in Tokyo, and comes ahead of Indian Prime Minister Manmohan Singh’s planned visit in late October.
- China's industrial value-added output growth accelerated to 13.9 percent year on year in August from July's 13.4 percent growth, Xinhua reported Sept. 11, citing National Bureau of Statistics data. Retail sales growth accelerated to 18.4 percent in August while urban fixed asset investment also maintained a strong growth in the first eight months, up 24.8 percent from a year earlier. Food prices rose 7.5 percent year on year in August and the pace of growth quickened from the 6.8 percent rise in July and 5.7 percent growth in June.
- Europe’s economy may growth nearly twice as fast as previously forecast, the European Commission said. GDP will likely increase 1.7% instead of the 0.9% previously projected in May.
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... (0.27)%
Materials... 0.21
Consumer Staples... 0.89
Utilities... (0.74)
Consumer Discretionary... 0.02
Financials... (0.05)
S&P 500... 0.46
Industrials... 0.96
Healthcare... 1.99
Telecommunications... 1.57
Energy... 0.43
Equity Markets Review
- Nokia announced that a new CEO has been named and will take charge effective Sept. 21. The new CEO will be Canada-born Stephen Elop, currently the head of Microsoft's business division.
- Hewlett-Packard disclosed that a probe by U.S. authorities of possible bribes the company paid in Russia is now wider than previously reported. The disclosure, in an SEC filing, pertains to a long-running German investigation of allegations that H-P, through a German subsidiary, paid bribes in Russia to secure a contract valued at €35M, or about $44.5M; The disclosure itself is a sign the investigation has entered a new phase.
- Bristol-Myers Squibb announced its purchase of biotech firm ZymoGenetics for $9.75/share in cash, buying itself "full ownership of a promising investigational biologic that strengthens our very diversified hepatitis C portfolio." The total purchase price is $885M, or about $735M net of cash acquired.
- BP will release its internal report Thursday on the Deepwater Horizon disaster that led to the worst oil spill in U.S. history. Sources say BP shoulders some of the blame in the report, but it's unclear just how much; assuming too much blame potentially exposes the company to greater legal liability, while taking too little responsibility will prompt critics to accuse the company of shirking its responsibilities. BP has tried to position the report as an objective analysis of the events leading up to the spill.
- McDonald’s same-store sales rose 4.9% in August from the previous year, falling just short of analyst expectations.
Sports, Culture & Politics
- U.S. Marines from the 15th Marine Expeditionary Unit’s Maritime Raid Force took control early Sept. 9 of a German-owned commercial vessel that had been captured by pirates, Fox News reported. It was not known where the German vessel was recovered. After an hour-long mission, the Marines retook the M/V Magellan Star, which was seized by pirates on Sept. 8. Nine pirates are on the ship awaiting transfer. No shots were fired, and there were no reported injuries when the Marines took the ship, according to Fox.
- Based on the strength of South Korean and U.S. troops in a potential all-out attack, North Korea is focused on building up special operations forces, missile technology and nuclear weapons, U.S. Forces Korea commander Gen. Walter Sharp said, Yonhap reported Sept. 9. As shown by the North’s deadly torpedo attack on a South Korean warship in late March, future provocations from Pyongyang would be carried out with unconventional armed capabilities, or “asymmetric warfare,” Sharp said.
- The pastor of a small Florida church has canceled his plan to burn copies of the Koran in response to the proposed mosque and cultural center near the site of the World Trade Center, BBC reported Sept. 9. Pastor Terry Jones said he canceled the plan after speaking with the leader of the proposed mosque, who he said had agreed to relocate the mosque site during their conversation.
- Muslim nations will not remain silent during U.S. burnings of the Koran, speaker of Iran's parliament Ali Larijani said Sept. 13, DPA reported. Iran insisted the U.S. government was responsible for the burnings, saying President Barack Obama did not explicitly condemn the plan when he said such a move would endanger the lives of U.S. soldiers in Afghanistan and Iraq. Iran warned Washington to drop support for this unprecedented crime and savage act or await a resolute reply by world Muslims, Larijani stated. Students plan to protest in front of the U.S. interest section of the Swiss Embassy in northern Tehran.
- Iran has canceled plans to release one of the American hikers detained in Tehran for more than a year after judicial officials cited unresolved legal issues, VOA News reported Sept. 11. The status of Sarah Shourd remained in doubt Sept. 11 after chief prosecutor Jafari Dolatabadi said judicial procedures in her case have not been finished. The IRNA state news agency said the cancellation was also confirmed by a spokesman for President Mahmoud Ahmadinejad, who said details would be announced later.
- The Ohio State Buckeyes beat the Miami Hurricanes on Saturday, 36-24, going to 2-0 and remaining at number two in the polls. Also winning on Saturday were Alabama, Texas, Nebraska, Oregon, Florida, Oklahoma, Iowa and Wisconsin. Penn State and Virginia Tech were losers.
The weekend’s top-five box office performers as reported by Variety were:
1) Resident Evil: Afterlife, Sony Pictures, $27,700,000
2) Takers, Sony Pictures, $13,500,000
3) The American, Focus Features, $5,895,806
4) Machete, 20th Century Fox, $4,200,000
5) Going the Distance, Warner Bros., $3,835,000

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