AND THAT’S THE WEEK THAT WAS…

For the Week Ended December 24, 2010

 

Market Matters…         

                           

Market/Index	Year Close (2009)	Qtr Close (09/30/10)	Previous Week (12/17/10)	Current Week (12/24/2010)	YTD Change
Dow Jones Industrial	10,428.05	10,788.05	11,491.91	11,573.49	+10.98%
NASDAQ	2,269.15	2,368.62	2,642.97	2,665.60	+17.47%
S&P 500	1,115.10	1,141.20	1,243.91	1,256.77	+12.70%
Russell 2000	625.39	676.14	779.52	788.96	+26.15%
Global Dow	1,984.48	1,947.85	2,056.15	2,077.24	+4.67%
Fed Funds	0.25%	0.25%	0.25%	0.25%	0 bps
10 yr Treasury (Yield)	3.85%	2.52%	3.33%	3.39%	-46 bps

 

One week and counting…While the final trading week of 2010 will bring plenty of key headlines (limited economic releases, euro sovereign debt scares, political grandstanding, the latest financial investigation, perhaps a transaction or two), those investors not on vacation will monitor the daily activity to see if the major indexes can hold onto their double-digit gains for the year.  Of course, volume should be light and market movements may be exaggerated one way or the other as portfolio managers take profits, while positioning their funds for the new year.  While many analysts remain concerned about the current high unemployment rate and the Fed takes non-traditional actions to keep the “sluggish” recovery on its growth path, investors generally seem pleased with the year’s results and hope for more of the same in 2011.  In fact, Goldman Sach’s Jim O’Neill forecasts that equities could jump another 20% next year as labor improves and the US joins China and the emerging markets as a “bright spot” in the global economy.  He went so far as to dub 2011 as “The Year of the USA.”  (That has a nice ring to it.)

 

Transactions and investigations have dominated the press and some analysts expect both trends to continue in the coming year.  Cash remains king and companies with strong liquidity positions have been able to take advantage of certain perceived values among equities.  Of note, foreign companies have had their eyes on their US counterparts (and vice versa).  Toronto-Dominion Bank is looking to buy Chrysler Financial Corp. for $6.3 billion.  Chemical giant Royal DSM (Netherlands) is interested in domestic biotech firm Martek to the tune of $1.09 billion.  While the European Commission gave the green light to News Corp to buy the outstanding shares of British Sky Broadcasting Group for $12.1 billion, plenty of regulatory hurdles remain. 

 

Shifting to the dark side, NY Attorney General Cuomo filed fraud charges against Ernst & Young, Lehman’s  auditors for helping shield the dire financial conditions from investors.  (If you can’t trust the accountant, who can you trust?)   Meanwhile, the SEC is still trying to make up for lost ground and missed opportunities (remember Madoff?) as the Commission is now investigating HP’s former CEO Hurd over potential insider trades. The SEC is also looking into  fraudulent activities involving Chinese companies attempting to get listed on US exchanges. 

 

While volume remained light throughout the week (and should for the remainder of the year), stocks continued flirting with two-year highs as investors seem to like the overall direction of the economy and hope the latest trend in mergers and activities continues well into the new year.  Likewise oil jumped beyond $91/barrel amid shrinking supplies and has climbed about 13% since mid-November to reach its highest level in two years.  (Can $100/barrel be far behind?  What about inflation?)  For now, investors are looking to end the year on high notes and put talks of “double-dips” and “artificial recovery” in the rearview mirror.  While naysayers will always remain, the overall returns of the year reveal that the bulls emerged victorious (for now) and the current “trend is definitely our friend.”  (And that’s a pretty nice gift for the holiday season.) 

Economic Calendar

Date	Release	Comments
December 22	GDP – 3rd quarter revised	Revised higher but consumer spending lower
	Existing Home Sales (11/10)	Lower than expected sales
December 23	Personal Income/Spending (11/10)	Moderate spending in November
	Durable Goods Orders (11/10)	Bigger decline on slump in airplane sales
	Jobless Claims (12/18/10)	Slight decline though moving average rose a bit
	New Home Sales (11/10)	Rebounded from dramatic drop in October
December 24	Christmas Eve	Markets closed
The Week Ahead
December 28	Consumer Confidence (12/10)
December 30	Jobless Claims (12/25/10)

 

Thus far, retailers seem to be enjoying a very merry holiday season (and, it’s not over just yet).  On the Saturday before Christmas alone, procrastinators took to the malls in droves and sales that day were up some 15% above last year’s levels, according to researcher ShopperTrak.  Likewise, the International Council of Shopping Centers predicts that plenty of last-minute shoppers remain and 23 million of them will be seeking those hard to find special items as the clock ticks down to Christmas Eve.  (Keep the eggnog chilled for those stragglers.) 

 

So why hasn’t the enhanced activity translated into new hires and better labor statistics?  While sales (+5.5%) and profits (+7.5%) both surged during the 12-months ended September 2010, retailers hesitated to add staff as only 80,000 new jobs were created during the period.  By contrast, over 1.2 million employees lost their retail-related jobs from December 2007 through October 2009, the time lovingly known as the “recession.”  While some additions should occur if demand continues to increase into 2011, few expect the pace to pick up dramatically as retailers have learned to function with more limited staff.  (Online retailers don’t need to employ a whole heck of a lot of sales folks).  UPS, on the other hand, did its part to solve the labor crisis (at least temporarily) as the international shipping giant hired 37,5000 temps to help with deliveries from Thanksgiving through Christmas as volume increases dramatically during these weeks. 

 

Turning to the numbers, domestic GDP was revised upward in the third quarter to +2.6% as many companies finally started increasing inventories, though the initial projection for consumer spending was lowered for the three month period.  Based on the reports of the holiday season, analysts do not seem overly concerned with a lack of consumer activity in the current quarter.   The remaining data from manufacturing and housing showed continued signs of recovery. 

 

Looking abroad, Portugal appears to be the next euro country to feel the wrath of the ratings agencies (where were these guys before the downturn hit?) as Moody’s may be forced to lower its credit due to ongoing financial concerns (while Fitch took aim on Hungary).  The Federal Reserved is intent to do its part to help the European trading partners as the policymakers extended a program to continue lending to its central bank counterparts.  China’s Vice Premier also expressed his country’s support for the actions taken thus far in Europe to right the sinking ship of sovereign debt.  (Perhaps this globalization thing may actually work after all?) 

 

On the Horizon…A slow week on the economic calendar lets investors focus on their portfolios without much distraction as they close out the books on 2010 and look forward to the new year.  Traditional window-dressing may bring some unexpected volatility though any exaggerations in price movements should be corrected in the weeks ahead as trading desks get back to full staff.  Mainly investors want to see some continued momentum heading into 2011, while hoping that Goldman’s O’Neill is accurate in his assessment.  Double-digit gains in equities would represent an outstanding year, but once the calendar turns to 2011, the battle-cry becomes “what have you done for me lately?”  Enjoy the season.

 

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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