Market Week: June 7, 2010

The Markets

Slip-sliding away: From the oil disaster in the Gulf to disappointing unemployment numbers to Korean tensions to Hungary’s talk of sovereign default–it all combined to blow a hole out of the bottom of the stock market on Friday. After a short but hardly sweet week of vacillation, the U.S. equities indexes lost more than 3% in a single day (5% for the Russell 2000, which barely hung on to a small gain for the year). Oil prices also plummeted as a result of the economic jitters, and the euro continued its slide against the dollar.

Short term we remain cautious as market action is weak. Gold, Treasury Bond Futures, and long US Dollar positions continue to act as a hedge against inflation and anemic growth. Consumer Staples stocks (e.g. General Mills, Sara Lee) are also acting well as investors flee to safer securities. Longer term the market seems fairly priced if not undervalued; however, the interim volatility is extreme by any measure. We recommend investors continue with a defensive position in their portfolios focusing on high relative strength, high dividend, and low beta securities.

Market/Index	2009 Close	Prior Week	As of 6/4	Week Change	YTD Change
DJIA	10428.05	10136.63	9931.97	-2.02%	-4.76%
NASDAQ	2269.15	2257.04	2219.17	-1.68%	-2.20%
S&P 500	1115.10	1089.41	1064.88	-2.25%	-4.50%
Russell 2000	625.39	661.61	633.97	-4.18%	1.37%
Global Dow	1984.48	1780.31	1741.90	-2.16%	-12.22%
Fed. Funds	.25%	.25%	.25%	0 bps	0 bps
10-year Treasuries	3.85%	3.31%	3.20%	-11 bps	-65 bps

Last Week’s Headlines

• Unemployment fell from 9.9% to 9.7% in May, and the economy created 431,000 jobs. Good news? Not really. It wasn’t the economy but the Census Bureau that created all but 20,000 of those jobs, and those temp jobs will end over the summer. Also, according to the Census Bureau, part of the drop in unemployment resulted from 322,000 people leaving the pool of potential workers.
• U.S. manufacturing continued to expand. The Institute for Supply Management (ISM) said May was the 10th month of expansion in a row, with almost all industries reporting growth (the only area reporting contraction was petroleum/coal). The services sector also saw its fifth straight month of expansion; the ISM’s index stood at 55.4%, the same level as the previous two months (a number over 50 indicates growth).
• Hungary became the latest country to rattle global investors. Government officials spent much of their weekend backtracking from statements on Friday indicating the country could be on the brink of default because of debt problems that could be twice as bad as anticipated.
• Construction spending was up 2.7% in April, according to the Census Bureau. That was reportedly the biggest monthly increase in almost 10 years, though it’s still 10.5% lower than last year’s April figure.
• Residential construction rose 4.4%, while public construction was up 2.4%.

Eye on the Week Ahead

Oil and European sovereign debt problems aren’t going away as investors continue to assess the economic impact of the Gulf oil spill and banks’ exposure to the threat of default.

Key data releases: Consumer credit (6/7); balance of trade, Treasury budget (6/10); retail sales (6/11).

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