AND THAT’S THE WEEK THAT WAS…

For the Week Ended May 7, 2010

 

Market Matters…         

                           

Market/Index	Year Close (2009)	Qtr Close (03/31/10)	Previous Week (04/30/10)	Current Week (05/07/10)	YTD Change
Dow Jones Industrial	10,428.05	10,856.63	11,008.61	10,380.43	-0.46%
NASDAQ	2,269.15	2,397.96	2,461.19	2,265.64	-0.15%
S&P 500	1,115.10	1,169.43	1,186.69	1,110.88	-0.38%
Russell 2000	625.39	678.64	716.60	653.00	+4.41%
Global Dow	1,984.48	2,021.70	1,992.64	1,823.64	-8.10%
Fed Funds	0.25%	0.25%	0.25%	0.25%	0 bps
10 yr Treasury (Yield)	3.85%	3.83%	3.66%	3.43%	-42 bps

 

What are a few billion shares between friends?  Who says computers contribute to more efficient trading?  Whatever the cause of the dramatic pullback in equities Thursday p.m., investors once again have that nervous familiar feeling of late ’08/early ’09; the Dow plunged 9.2% or 998 points, much of it in less than an hours’ time, before rebounding significantly by market close.  (A 347 point drop never looked so good.)  Did a “fat finger” accidentally push “b” instead of “m” and sell billions more shares of Procter & Gamble, causing its price to freefall 37% and the Dow to instantly tumble 150 points?  Did computer algorithms get out of whack as companies like Accenture and Exelon dropped into penny stock territory?  By Friday morning, over 4,000 trades had already been reversed as “clearly erroneous,” though investors remained concerned about a litany of issues: euro sovereign debt, Goldman Sachs, financial regs, and now trading glitches. 

 

Much of the week’s news was actually positive (unless you live in Greece) so the markets seem to have taken on lives of their own.  From an economic standpoint, manufacturing continues to lead the recovery and even labor produced some surprisingly strong (though contradictory) results (see below).  The boardroom was buzzing as Continental and UAL joined forces to become the largest airline in the world, and Blackstone Group eyed Fidelity National Information in what would be the highest valued LBO in almost three years.  Pfizer posted a sizable increase in quarterly revenue.  AIG, the prior villain of the past few years, (make room for Goldman) returned to profitability (though still owes the gov a shekel or two).  Domestic auto sales climbed by 20% in April (even Toyota joined the parade), and Apple passed the 1 million mark in iPad unit sales, just a month after its official launch (and faces a patent infringement suit from Nokia).  Goldman took steps to settle its fraud suit with the SEC and CEO Blankfein promised to rebuild the firm’s reputation (and, at least, one shareholder named Buffett remains in his corner).  The Senate continued to hash out financial reform by eliminating “too big, too fail,” haggling over consumer protection and derivatives, and giving the Fed a pass on congressional audits.   

 

The sovereign debt “challenges” across the pond have put pressure on the euro which dropped to its lowest level vs. the dollar in 14-months (and may have been behind much of the equity market decline).  Likewise, oil took cues from the dollar’s strength and went on a freefall of its own, plunging from a 18-month high of $87/barrel early in the week to an 11-week low around $75/barrel late.  While the Greek crisis and fears of a contagion have been blamed for much of the recent market woes, analysts point out that equities were overdue a correction and technical factors have been pointing to a pullback for several weeks now.  Fundamentals (economic and corporate) continue to improve, but many believe the rally had moved “too far, too fast” and prices are trading based on future expectations as opposed to current activities.  Whatever the cause, equity indexes gave back much of the year’s gains this week (sans small-cap) and fixed income was the main beneficiary of the newfound risk aversion.  In the meantime, maybe those technical glitches can be remedied since investors have enough to worry about already. 

Economic Calendar

Date	Release	Comments
May 3	Personal Income/Spending (3/10)	Spending outpaced income by 2-1 margin
	Construction Spending (3/10)	Unexpected increase through residential activity down
	ISM – Manu (4/10)	Solid growth from manufacturing sector
May 4	Factory Orders (03/10)	11th increase over past 12 months
May 5	ISM – Services (03/10)	Unchanged from March
May 6	Jobless Claims (05/01/10)	Decline in both initial claims and 4-week average
May 7	Unemployment Rate (04/10)	Unexpectedly rose to 9.9%
	Nonfarm Payroll (04/10)	Best showing in 4 years and upward revision in March
	Consumer Credit (03/10)	Only the second gain in the last 14 months
The Week Ahead
May 12	Balance of Trade (03/10)
May 13	Jobless Claims (05/08/10)
May 14	Retail Sales (04/10)
	Industrial Production (04/10)

 

For a pretty small country, Greece has surely become a royal pain-in-the-you-know-what.  The EU and IMF finally agreed on a $147 billion (or is it million?) bailout package and German lawmakers approved their share late in the week after a highly contentious debate.  The Greek legislature then passed a $38 billion austerity package, complete with wage cuts, pension freezes, tax hikes, and labor law revisions.  Unwilling to give up their governmental entitlements, public workers and private citizens took to the streets and unfortunately the initial peaceful protests turned violent (with fatalities).  Moody’s put Portugal on credit watch for a possible bond ratings downgrade and investors have become increasingly concerned about a domino bailout effect throughout the PIIGS countries (Portugal, Italy, Ireland, Greece, Spain). 

 

The economic calendar was relatively hectic and data from most sectors reflected signs of  recovery.  Manufacturing grew again according to managers surveyed by the ISM and March factory orders increased for the 11th month out of the past 12.  Construction spending rose for the first time since last October though residential activity continued to decline.  Even the labor numbers were promising as the economy added 290,000 jobs to the workforce in April and March’s nonfarm payroll was revised upward as well.  The additions marked the fastest rate of labor growth since March 2006 and, for the year, the economy now has averaged 143,000 newly created jobs per month.  Seemingly contradicting the payroll data, the April unemployment rate surprisingly rose to 9.9% (from 9.7% in March).  Though the data of each release is derived from separate sources, the bottom line remains…labor is improving, but still has a way to go. 

 

Dr. Bernanke watched the Senate’s debate over financial reform with much interest as several legislators attempted to add a provision that would allow Congress to audit the Federal Reserve and its monetary policy decisions.  Dr. B. argued that such congressional oversight would limit the Fed’s independence and potentially politicize the whole process.  After some administrative arm-twisting, the provision seems to have become DOA, though the policymakers may have to share more insight into their lending activities of the past few years.   The Fed also may be moving closer to selling a portion of its $1.1 trillion mortgage-backed securities portfolio, though some governors want to wait for even stronger signs of recovery, particularly within housing. 

 

On the Horizon…Too far, too fast?  Technical glitches?  Euro concerns?  Financial reform?  Whatever the underlying reasons, equities try to renew their upward momentum after a miserable week that saw the prior 2010 gains virtually vanish.  Retailers take center stage in the earnings game (Macy’s, Kohls, Nordstrom, JC Penney) and April sales data also will be released.  As Greece moves closer to its May 19th debt payment, all eyes will be on Spain and Portugal to see if they plan (are forced) to follow the same course.  Remember…one bad week is not a trend. 

Brounes & Associates is a Houston-based consulting/marketing firm that performs research, marketing, and education projects for financial services companies and other professionals.  “And That’s the Week That Was” is a weekly market/economic commentary that is distributed each Friday afternoon.  Any financial professionals who have interest in rebranding the piece and sending to their investors should inquire to:

Ron Brounes

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ron@ronbrounes.com

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