AND THAT’S THE WEEK THAT WAS…

For the Week Ended July 1, 2011

 

Market Matters…         

                           

Market/Index	Year Close (2010)	Qtr Close (03/31/11)	Previous Week (06/24/11)	Current Week (07/01/11)	YTD Change
Dow Jones Industrial	11,577.51	12,319.73	11,934.58	12,582.77	8.68%
NASDAQ	2,652.87	2,781.07	2,652.89	2,816.03	6.15%
S&P 500	1,257.64	1,325.83	1,268.45	1,339.67	6.52%
Russell 2000	783.65	843.55	797.79	840.04	7.20%
Global Dow	2,087.44	2,186.41	2,041.17	2,156.11	3.29%
Fed Funds	0.25%	0.25%	0.25%	0.25%	0  bps
10 yr Treasury (Yield)	3.31%	3.45%	2.87%	3.20%	-11 bps

 

The July 4th fireworks came a bit early this year.  After a pretty “challenging” two months for equities, which saw the Dow and S&P 500 indexes decline for seven out of eight weeks, stocks rebounded in a big way and investors headed out for the long holiday weekend in pretty good spirits.  The Fed’s controversial QE2 program came to a close with little fanfare (a good thing); Greece moved a step closer to bailout (round 2) with few threats of contagion (for now); the recently down and out domestic manufacturing sector appeared primed for a rebound (for now); gas prices continued a daily retreat to more affordable levels (just in time for the holiday travel); politicos lashed out at each other over budget cuts and tax hikes, but analysts believe a deal to raise the debt ceiling is closer than they portray (bickering and grandstanding is simply more fun).  A quarter that just days ago looked sure to close on a somber note wound up far better than many investors could have projected.  The Dow actually ended the three-month period in positive territory and the other major indexes only suffered minor losses.   

 

Techs highlighted the (mostly positive) headlines of the week.  Microsoft unveiled Office 365 and its leap into “cloud” technology through this widely anticipated online application.  Analysts jumped on the LinkedIn bandwagon as the post-IPO quiet period ended with a series of “buy” and “outperform” recommendations.  Social networking game maker Zynga looked to follow in LinkedIn’s successful footsteps by announcing plans for an IPO that could reach $1 billion in size.  Financials were also in the news as the international regulators enhanced the oversight over “too big too fail” global banks, though investors felt that the new capital requirements were not as burdensome as feared.  On a down note, Bank of America became the latest institution to agree to a huge ($8.5 billion) settlement over prior mortgage-backed securities sales (how’s that Countrywide deal working out?).  Though auto sales rose a bit in June, primarily due to declining gas prices, GM actually lowered its forecast for the full year amid ongoing repercussions from the Japan earthquake as the domestic automakers deal with supply chain disruptions and car shortages.  Finally, the Los Angeles Dodgers filed for bankruptcy protection as the once storied franchise struggles with liquidity issues.  (Hope those “poor” players get paid.)   

 

Crude got a bit of a reprieve from the recent freefall in the aftermath of the Strategic Reserves news last week.  Oil rose to around $95/barrel throughout the week on a decline in supplies and hopes for a soon-to-be Greek crisis resolution.  Meanwhile, gas continued its downward slide and has now dropped about 25 cents since the Memorial Day holiday.  Demand at this week’s bond auctions was less than enthusiastic as treasury yields shot up as the end of QE2 brought newfound concerns that the days of historically low interest rates may soon be coming to a close.  The Fed will not be there to support the fixed income market to the same degree, and the private sector will have to pick up the slack for the prior stimulus buying (capitalism at its finest?).  Stocks enjoyed their best week in two years and the solid five day winning streak allowed investors to depart for the holidays with renewed confidence and optimism.  (Let’s hope it lasts.) 

Economic Calendar

Date	Release	Comments
June 27	Personal Income/Spending (05/11)	Sluggish spending, though incomes up
June 28	Consumer Confidence (06/11)	Fell to 7 month low
June 30	Jobless Claims (06/25/11)	Slight decline but still well above key 400k level
July 1	ISM – Manu (06/11)	Better than expected reading in manufacturing
	Construction Spending (05/11)	6th consecutive decline
The Week Ahead
July 5	Factory Orders (05/11)
July 6	ISM – Services (06/11)
July 7	Jobless Claims (07/02/11)
July 8	Unemployment Rate (06/11)
	Nonfarm Payroll (06/11)
	Consumer Credit (05/11)

 

Greek tragedy (part 2) averted (for now).  But not without the violent protests on the street, the endless regulatory bodies/central bank haggling, the vote of confidence, the austerity promises, and the German banking concessions.  During the week, the Greek parliament agreed to a $40 billion plan of spending cuts and tax hikes that set the stage for much-needed bailout funding to help the government avoid a country default.  Major banks throughout Europe (Germany and France)  had to put their stamps of approval on new terms for debt repayment (longer maturities) and the controversial five year plan now appears to be very close to reality.  Shifting global gears, the manufacturing sector in China grew at its slowest pace in over two years, sparking new concerns that the world’s second largest economy (that has led the recovery) may be experiencing a bit of a slowdown.  (Greece should experience such a slowdown.)

 

Closer to home, the domestic economy got some solid news from manufacturing after a few months of weaker data threatened the one sector that had been a consistent source of optimism  since the rebound began in 2009.  First, the Chicago purchasing managers survey rose more than expected and the ISM manufacturing index revealed the 23rd straight month of expansion.  While consumer spending remained relatively flat in May, personal incomes rose, hopefully a nice precursor for consumer activity later in the year.  Still, the confidence index fell to its lowest level in seven months as folks remain worried about the labor market and the ongoing housing woes. 

 

The Fed officially ended the controversial $600 billion bond buying program known as QE2, though the policymakers plan to continue reinvesting proceeds from maturing debt into new treasury purchases.  The jury will be out for some time as economists, Fed watchers, and politicos alike debate the merits of the recently ended stimulus.  On one hand, stocks and many commodities prices rose (some significantly) during the QE2 term, creating a much desired “wealth effect” for many Americans who were still struggling in the aftermath of the recession.  Corporations were able to access pretty inexpensive capital as they took advantage of the very low interest rate environment.  However, housing has never rebounded like many projected, despite the affordable mortgage rates, and the jobs market remains lackluster at best.  While Bernanke discounts the need for additional stimulus, the Fed is expected to keep rates at the near-zero level for “an extended period” (a policy many consider to be a stimulus in of itself).  

 

On the Horizon…So is QE3 in the works?  With treasury yields drifting higher as the stimulus ended, inquiring minds want to know how long Bernanke will let the private sector fend for itself before acting again (if ever).  The equity market got off to a stellar start for the third quarter, but earnings season is just around the corner and some analysts fear a setback as certain economic releases revealed weakness over the past few months.   All eyes will be on the unemployment and payroll data next week.  And now that the holiday travel is upon us, perhaps a trip to beautiful Greece should be warranted?.   Enjoy the long weekend (and the cheap gas).

 

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

713-962-9986 (Direct)

ron@ronbrounes.com

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