AND THAT’S THE WEEK THAT WAS…

For the Week Ended July 2, 2010

 

Market Matters…         

                           

Market/Index	Year Close (2009)	Qtr Close (06/30/10)	Previous Week (06/25/10)	Current Week (07/02/2010)	YTD Change
Dow Jones Industrial	10,428.05	9,774.02	10,143.81	9,686.48	-7.11%
NASDAQ	2,269.15	2,109.24	2,223.48	2,091.79	-7.82%
S&P 500	1,115.10	1,030.71	1,076.76	1,022.58	-8.30%
Russell 2000	625.39	609.49	645.11	598.97	-4.22%
Global Dow	1,984.48	1,710.71	1,773.85	1,702.93	-14.19%
Fed Funds	0.25%	0.25%	0.25%	0.25%	0 bps
10 yr Treasury (Yield)	3.85%	2.95%	3.11%	2.98%	-87 bps

 

Goodbye and good riddance second quarter (though the new one is not starting any better).  A steady dose of BP and European debt concerns (with “flash trading” thrown in for good measure) was enough to derail equities in the quarter for the first time since early 2009.  Domestic indexes suffered double-digits losses and many global markets fared even worse.  The eternal optimists pointed out that fund managers tend to rebalance their portfolios into less risky assets prior to quarter-end and such last minute “window dressing” may prove temporary as they reposition into equities in the early days of the new period.  Thus far, such “favorable” moves have yet to occur. 

 

With so much global uncertainty in the air, analysts are looking to earnings season for a solid indication of the state of Corporate America.  Thomson Reuters expects S&P companies to reap an average gain of 27% in their quarterly earnings, a nice pace though considerably down from the 55% growth rate experienced in the initial three-month period.  Fewer companies than normal have warned that upcoming earnings will be worse-than-expected so investors could be in for some welcome relief from the recent bearishness (though a slew of negative surprises would prove even more devastating).  Alcoa kicks off the season on July 12 so mark those calendars. 

 

With Congress adjourning from their recent “grandstanding” efforts, the powers-that-be left plenty of key issues unresolved.  They failed to extend unemployment benefits leaving 1.7 million folks in the cold for the holidays.  The struggled with last-minutes changes to the financial reform legislation as the derivative and bank tax provisions continue to conjure much debate and frustration (among key lobbyists).  They did extend the deadline for homebuyers to close on their purchases (until September 30) adding one more band-aid to the struggling housing sector.  Though mortgage rates have tumbled to their lowest levels in over 50 years, home sales have fallen dramatically as the government incentive program came to an end.  (To take advantage of the date extension, would-be-buyers must have purchase contracts already in place.) 

 

In corporate news, Apple is having signal strength issues with its new iPhone; Google is set to enter the online travel biz with the purchase of ITA Software whose tools aid passengers with flight information; ratings agency S&P placed competitor Moody’s on review for possible downgrade due to the growing potential for lawsuits (a move that seems counterintuitive for its own future).  BP fell victim to weather delays (Hurricane Alex) in efforts to contain the spill.  Oil plunged to its lowest level in a month as weak economic data raised new worries about demand issues.  The decline in gas prices, however, should be a welcomed sign for drivers heading into the long holiday weekend.  Investors were unable to shake off fears about the economy and “doom and gloom” spreading from abroad.  New concerns out of China (see below) contributed to a devastating week in equities as major indexes fell each day and plunged through key levels; the yield on the 10-year dropped below 3% for the first time since April 2009.  With little in the way of optimism, let’s hope the earnings reports bring some nice surprises.  Happy 4th anyway. 

Economic Calendar

Date	Release	Comments
June 28	Personal Income/Spending (05/10)	Higher incomes though consumers remain cautious
June 29	Consumer Confidence (06/10)	Biggest decline since February 2010
July 1	Jobless Claims (06/26/10)	Surprising increase in claims
	Construction Spending (05/10)	Lower than expected decline
	ISM – Manu (06/10)	Activity slowed, but sector still in growth mode
July 2	Unemployment Rate (06/10)	Lowest level in a year
	Nonfarm Payroll (06/10)	Jobs contraction for first time this year
	Factory Orders (05/10)	1st decline in 10 months
The Week Ahead
July 6	ISM – Services (06/10)
July 8	Jobless Claims (07/03/10)
	Consumer Credit (05/10)

 

With China primed to assume the role of economic superpower and lead the global economy into recovery, this week found some unsettling news that raised eyebrows about its ability to perform such a monumental task.  Its manufacturing sector slowed in June for the second straight month and its index of leading economic indicators was revised sharply lower in what appeared to be a correction from a previously erroneous computation.  Other emerging markets like Taiwan, S. Korea, and India also reported weaker-than-expected manufacturing data, adding more fuel to the already pessimistic fire.  Elsewhere overseas, the European Central Bank took measures to end a lending program that has helped banks stay afloat and the G20 countries voted to reduce their respective deficits by 50% by 2013, despite the US’s view that such actions could prove devastating to global economic growth.  Germany reported that its unemployment rate fell to 7.5% and the country expects its export-driven economy to benefit from the decline of the euro. 

 

Shifting gear to domestic news, the hectic calendar did not provide much cause for investor optimism.  The Institute for Supply Management (ISM) reported that the pace of US manufacturing activity actually slowed in June, though the survey still revealed sector growth (but at a declining rate).  Likewise factory orders fell after nine straight months of increasing activity.  Retailers suffered a setback as well as consumer confidence experienced its first decline since February and workers seem likely to hold off on major purchases (or anything but necessities) in light of the weak labor market.  Speaking of…though the unemployment rate dropped expectedly (from 9.7% to 9.5%) in June, analysts pointed out that the overall workforce actually declined as many workers have simply given up on job searches for now.  Even more alarming, the economy lost 125,000 nonfarm payroll (mainly government census workers) last month as companies remained hesitant to hire in this uncertain environment.  (Seemingly giddy) Republicans took aim at Obama’s economic policies and Fed officials commented that the ongoing weakness would allow policymakers even greater leeway to keep rates at low levels. 

 

On the Horizon…The long holiday weekend gives investors the opportunity to clear their heads, reexamine current headlines across the globe, and make some rebalancing decisions about their portfolios moving forward.  Clearly the naysayers have won the most recent sentiment battle as renewed talks of “double-dip recession” and “retesting 2009 lows” have reentered the water cooler banter.  The news out of Europe continues to be troublesome, but their politicos seem poised to initiate some difficult (but necessary) budgetary moves, despite the loud and vocal protests from their voting constituents (taking note, Congress?).  While China received surprising news about its economy, many analysts actually have expressed recent concerns about potential overheating and future bubbles so a bit of a slowdown may be just what the doctor ordered (as long as it is short-lived and minor).  As the past few months has shown, investors can be a fickle bunch and sentiment can shift on a dime.  The second quarter has ended as have the daily surprises from Europe and BP (and circuit breakers have been installed).  Bring back those bulls!

 

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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