AND THAT’S THE WEEK THAT WAS…

For the Week Ended June 25, 2010

 

Market Matters…           

                           

Market/Index	Year Close (2009)	Qtr Close (03/31/10)	Previous Week (06/18/10)	Current Week (06/25/10)	YTD Change
Dow Jones Industrial	10,428.05	10,856.63	10,450.64	10,143.81	-2.73%
NASDAQ	2,269.15	2,397.96	2,309.80	2,223.48	-2.01%
S&P 500	1,115.10	1,169.43	1,117.51	1,076.76	-3.44%
Russell 2000	625.39	678.64	666.92	645.11	+3.15%
Global Dow	1,984.48	2,021.70	1,824.61	1,773.85	-10.61%
Fed Funds	0.25%	0.25%	0.25%	0.25%	0 bps
10 yr Treasury (Yield)	3.85%	3.83%	3.22%	3.11%	-74 bps

 

So let the reforming begin.  No one ever said financial reform in the aftermath of the latest debacle would be easy, especially in the partisan environment where politicos are more concerned  with reelection than passing any meaningful legislation.  Sure, Senator Lincoln (D - Ark) wants a provision to aid Arvest Bank, an Arkansas institution owned by the Walton (Wal-Mart) family.  Of course, NY Dems oppose anti-derivative measures that could hurt profits at money center banks.  Why shouldn’t Senator Brown (R-Mass) want to protect his state’s investment firms that have hedge fund and private equity divisions?   Despite very little Republican support, the revised bill is expected to pass both Houses and be signed by Prez O. in early July.  Consumers should enjoy greater protections; banks could be spinning off proprietary (and derivative) trading desks into separate entities; the SEC and CFTC will have enhanced powers over risk trading (hedge funds and derivatives), “too-big-to-fail” could become a thing of the past.  On the other hand, the Senate rejected a bill that would extend jobless benefits for over 1 million unemployed folks as Republicans  took a stand against free-spending Dems and clamped down on expensive stimulus programs to focus on deficit reduction much like their European counterparts.  (Stay tuned…)

 

BP stayed in the news as its oil spill-related costs reached $2 billion, while its stock plunged to a 14-year low, resulting in a market cap decline of over $100 billion (buying opportunity?).  While claims and lawsuits continue to emerge, the company looked to spread the liability to partners like Anadarko which maintains a 25% ownership in the well.  CEO Tony Hayward may be preparing for life after BP as he was recently spotted at a yacht race, though any “golden parachute” could include a $1.5 million payoff (one year’s salary) and an annual $900,000 pension distribution.  Meanwhile, O’s temporary moratorium on deepwater drilling was overturned by a Federal judge who claimed the Administration did not truly consider the impact of such a (political?) move on the domestic energy supply and the overall economy.  (Once again, stay tuned…)  In other corporate news, Nike, Bed Bath & Beyond, and Dell each warned of weaker quarters, causing analysts new angst about the upcoming earnings season.  Barnes & Noble and Amazon.com are locked in a pricing war over their respective e-readers (good news for consumers).  Apple’s iPad sales topped 3 million units and the company began selling the latest iPhone 4 to impatient consumers (no signs of sluggish activity in Cupertino, California). 

 

Equities struggled much of the week on the newfound earnings fears and a (perceived) less than enthusiastic statement from the Fed in the aftermath of its policy meeting (see below).  Despite an abundance of fresh supply, treasuries benefited from the flight-to-quality and the yield on the benchmark 10-year fell to its lowest level in a year.   (Given the euro-zone challenges, where else can China invest these days?)  Crude pushed up toward $80/barrel on new tropical storm concerns and gasoline rose (as always) in anticipation of the increased travel over the upcoming July 4th weekend.  AAA expects holiday driving to increase by 18% over last year’s depressed levels.  (After all, politicos need to head home to alert the people of their accomplishments.) 

Economic Calendar

Date	Release	Comments
June 22	Existing Homes Sales (05/10)	Surprising decline in sales
June 23	New Home Sales (05/10)	Greater than expected drop following end of tax rebate
	Fed Policy Meeting Statement	Rates to stay low for “extended period”
June 24	Durable Goods Orders (05/10)	Huge drop in aircraft orders follows big April rise
	Jobless Claims (06/19/10)	Lowest level in 6 weeks
June 25	GDP (1st qtr revised )	Growth rate revised downward to 2.7% (from 3%)
The Week Ahead
June 28	Personal Income/Spending (05/10)
June 29	Consumer Confidence (06/10)
July 1	Jobless Claims (06/26/10)
	Construction Spending (05/10)
	ISM – Manu (06/10)
July 2	Unemployment Rate (06/10)
	Nonfarm Payroll (06/10)
	Factory Orders (05/10)

 

Fed watchers eagerly anticipated the statement accompanying the recent policy meeting and mainly were interested to see if Bernanke and friends left in the phrase “extended period” as an indication that rates would NOT be heading higher any time soon.  What they weren’t expecting was the somewhat depressed assessment of the economy and new worries over the potential negative impact of the problems abroad.  "Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad."  Still, the Fed indicated that the domestic economy continued to strengthen, though the unsettling labor market was definitely having an effect on overall consumer activity.  As has become the norm, KC Fed Prez Hoenig opposed the “extended period” language as he fears that the historically low level of interest rates may prompt inflation to rear its ugly head sooner than later. 

 

Housing took a major step back this week as analysts got another look at how the sector would be impacted by ending the government homebuyers’ incentive.  Both existing (-2.2%) and new home sales (-32.7%) fell in May and prospects for the summer months suddenly look less promising.  On the other hand, mortgage rates dropped to the lowest level since 1971 (when records were first kept) so borrowers still have tremendous incentive to buy, despite the lack of government assistance.  (At some point, the economy must push forward without these stimulus plans.)   Durable goods orders declined in May, though virtually all of the decrease was the result of fewer aircraft purchases, a reversal of some pretty strong activity in the prior month.  In fact, once transportation was removed from the equation, orders rose 0.9%, another nice showing for manufacturing.  Though jobless claims fell by 19,000, many analysts still believe the level remains too high and is reflective of a sluggish labor market.  While some fear consumers may head back into hibernation as a result of these unemployment concerns, the most recent Thomson Reuters/U of Michigan sentiment index climbed to its highest level since early 2008. 

 

China recently announced its intent to allow its yuan (currency) to rise against the dollar, though its actions during the week reveal that any such move will be quite gradual.  The UK became the latest European country to announce cost-cuts and tax hikes in order to slash its ballooning deficit.  The Bank of England also left its short-term borrowing rate unchanged at 0.5% for the 15th month in a row.  And France’s BNP Paribas suffered a Fitch ratings downgrade.

 

On the Horizon…Obama heads to the G20 meeting, hoping to convince ministers that stimulus is a better global economic remedy than budget cuts.  He fears austerity measures, if enacted too soon, will restrict the recovery.  (Plenty in Congress disagree.)  Unemployment highlights a busy week on the calendar as investors hope for more workforce additions (besides census workers). 

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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