Market Week: June 28, 2010

The Markets

Domestic equities saw their second straight week of starting strong and then trailing downward by week’s end, depressed in part by weak housing statistics. The decline left the indexes (with the exception of the small-cap Russell 2000) back in the red for the year and investors seeking reassurance from bonds, which helped push down Treasury yields.

Markets remain weak as fears over a European debt crisis and weakening growth in China take center stage. Consumer confidence weakened this morning as Americans become more distressed over the outlook for jobs. We continue to favor safe havens in equities, specifically General Mills (GIS) and Sara Lee (SLE). In commodities, Gold and Silver remain strong. In addition, the 10yr (TYU0) and 30yr (USU0) Treasury Bond Futures continue to exhibit relative strength and act as a market hedge.

Market/Index	2009 Close	Prior Week	As of 6/25	Week Change	YTD Change
DJIA	10428.05	10450.64	10143.81	-2.94%	-2.73%
NASDAQ	2269.15	2309.80	2223.48	-3.74%	-2.01%
S&P 500	1115.10	1117.51	1076.76	-3.65%	-3.44%
Russell 2000	625.39	666.92	645.11	-3.27%	3.15%
Global Dow	1984.48	1824.61	1773.85	-2.78%	-10.61%
Fed. Funds	.25%	.25%	.25%	0 bps	0 bps
10-year Treasuries	3.85%	3.24%	3.12%	-12 bps	-73 bps

Last Week’s Headlines

• Congressional leaders agreed on a financial reform package that reconciles the House and Senate versions. Among the provisions of the Dodd-Frank bill are measures that require banks to hold additional capital to cover potential losses and set up separate operations to handle risky derivative trades such as swaps. The so-called “Volcker rule” also would restrict proprietary trading by banks. Derivatives would be regulated for the first time; routine derivatives would be traded on exchanges and nonstandard derivatives would be reported to a central authority. The bill also creates a consumer financial protection bureau, under the authority of the Federal Reserve, to oversee financial products. A federal agency would have the authority to step in and manage the dismantling of a failing bank. Hedge funds would be required to register with the SEC and credit rating firms would be subject to additional federal supervision. The amount of FDIC insurance for bank accounts, which was increased to $250,000 in the wake of the financial crisis, would remain at that level permanently. It also requires mortgage lenders to verify that a borrower’s income, credit history, and employment record indicate the ability to repay the loan. Public companies would have to allow shareholders a nonbinding vote on executive compensation. Large banks would pay a fee to help cover the costs of implementing the bill’s provisions.
• The Federal Reserve issued a slightly more downbeat assessment of the U.S. economy’s prospect, saying Europe’s problems have created conditions that are “less supportive of economic growth” here. That makes it even more likely that today’s rock-bottom interest rates will continue for some time.
• Existing home sales fell 2.2% in May, according to the National Association of Realtors, though they were up 19% from last May. The report covers completed sales, which would have been initiated before the April 30 contract signing deadline for qualifying for the federal first-time homebuyer tax credit. Meanwhile, according to the Census Bureau, new single-family home sales plummeted 32.7% in May to 300,000, despite mortgage rates that Freddie Mac said were at record lows.
• A drop in orders for civilian aircraft and other transportation-related items cut durable goods orders 1.1% in May, the Census Bureau said. However, excluding transportation, orders for such items as machinery and computer equipment rose 0.9%.
• The G-20 countries agreed to slash their budget deficits in half by 2013, but each will address its spending and revenue dilemmas in its own way.
• The Bureau of Economic Analysis’ estimate of first quarter Gross Domestic Product (GDP) was revised downward once again, from 3% to 2.7%.

Eye on the Week Ahead

As the second quarter comes to an end, the fate of the financial reform package will be of interest as leaders try to bring it to a vote in the House this week. And as always, Friday’s unemployment numbers will be closely watched.

Key data releases: Personal income/spending (6/28); home prices (6/29); auto sales, manufacturing, construction spending, pending home sales (7/1); unemployment (7/2).

Recommendations are not suitable for all clients. Please contact us to discuss specific investments mentioned in this report.