Market Week: May 24, 2010

The Markets

If it’s not one thing it’s another: Between worries about Eurozone problems and an increase in weekly initial jobless claims here, investors were not in a happy mood last week. Volatility reigned as the Dow and S&P 500 joined the Nasdaq in correction territory on Thursday, when they fell to within shouting distance of their lowest levels on May 6 before recuperating a bit on Friday. The Nasdaq is now down almost 12% from its late April high, while the Dow and S&P were down roughly 9% and 11% respectively. The small-cap Russell also took a hit, but its lead throughout the rally left it the only domestic index still in positive territory for 2010, while the Global Dow has lost 15% since mid-April. The dollar continued to strengthen as investors fled the euro, which at one point sank to its lowest level in four years. Oil also fell below $70 a barrel for the first time since last winter.

We remain cautious on the equity markets in the near term. The recent price action is highly negative and demonstrates investors’ hesitation to put capital to work. We suspect a short term rally will be forthcoming but may not be lasting. Despite the market weakness, however, Automotive Retailing, Precious Metals, and the Mining sectors continue to exhibit relative strength and make new highs.

Market/Index	2009 Close	Prior Week	As of 5/21	Week Change	YTD Change
DJIA	10428.05	10620.16	10193.39	-4.02%	-2.25%
NASDAQ	2269.15	2346.85	2229.04	-5.02%	-1.77%
S&P 500	1115.10	1135.68	1087.69	-4.23%	-2.46%
Russell 2000	625.39	693.98	649.29	-6.44%	3.82%
Global Dow	1984.48	1852.23	1770.00	-4.44%	-10.81%
Fed. Funds	.25%	.25%	.25%	0 bps	0 bps
10-year Treasuries	3.85%	3.44%	3.20%	-24 bps	-65 bps

Last Week’s Headlines

• The Senate passed its version of financial regulatory reform legislation, which will have to be reconciled with the House version. The bill calls for reining in derivatives trading, putting the Federal Reserve in charge of supervising the biggest financial companies and overseeing a new consumer protection agency, setting up a body to monitor “systemic risk” in the financial system, and creating a process for liquidating a major financial institution.
• Though consumer food prices are up, falling gasoline and natural gas costs led to a 0.1% drop in overall consumer prices in April. The decline, the first since March of last year, put the annual inflation rate at 2.2%. And despite higher prices for raw materials, prices at the wholesale level also fell 0.1% (though apart from food and energy, wholesale prices were up 0.2%).
• Germany banned so-called naked short selling (selling an asset without having owned or borrowed that asset) of Eurozone bonds, credit default swaps, and the stock of several large German banks through March 31, 2011, and called for adoption of the ban throughout the Eurozone (naked short selling is also illegal in the U.S.). The move contributed to the continued slide of the euro despite Greece’s payment of €8.5 billion of debt. European finance ministers also agreed to impose tighter restrictions on hedge funds operating there.
• The Securities and Exchange Commission (SEC) proposed halting for five minutes all trading in individual stocks whose prices move 10% or more in a five-minute period. The new circuit breaker pilot program, to be applied across all exchanges, would begin in mid-June after a period of public comment and be reviewed after December 10. The SEC also is considering modification of existing market-wide circuit breakers, which were not tripped during the May 6 chaos. The SEC’s preliminary report on the “flash crash” outlined several potential causes that are being investigated, but came to no conclusion about precisely how it happened.
• Ten months after the federal government helped GM emerge from bankruptcy, the company reported its first quarterly profit since 2007. That could move the automaker one step closer to eventually issuing an initial public offering (IPO) to repay its debt to the government.
• The Mortgage Bankers Association said the pace of home foreclosures showed signs of leveling off in the first quarter. Serious delinquencies–at least 90 days overdue or in the foreclosure process–were down from the previous quarter, though the association said it was unclear whether that represented genuine improvement or a seasonal phenomenon. The percentage of loans in foreclosure was at a record high of 4.63%.
• The Conference Board’s Index of Leading Economic Indicators fell for the first time in more than a year. It was down 0.1% in April, though the measure of current economic activity was up 0.3%.

Eye on the Week Ahead

As traders assess whether last week’s tumble was a sign of things to come or a buying opportunity after a year-long rally, international developments will likely continue to affect trading. Economic data may suggest the extent to which the domestic recovery is surviving the global anxiety.

Key data releases: Home resales (5/24); home prices (5/25); durable goods orders, new home sales (5/26); revised gross domestic product (GDP) (5/27); personal income/spending (5/28).

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