Market Week: May 3, 2010

The Markets

Standard & Poor’s downgrade of various European countries’ sovereign debt (see below) rivaled Goldman Sachs’ Senate testimony for center stage Tuesday, sending the euro tumbling to a 12-month low against the dollar. Though a string of positive earnings reports prompted a midweek rebound that helped the Dow hang onto the 11,000 level by week’s end, the S&P lost its grip on 1,200. Meanwhile, nervous investors sent 10-year Treasury prices up and yields down.

Despite Friday’s selloff, we think stocks are poised to continue higher for the immediate future. Earnings have mostly been better than expected across the board, however, a healthy amount of skepticism can act as fuel to push markets higher. Industry Groups exhibiting relative strength include Basic Materials, Homebuilders, Technology, and Industrials.

In commodities, Crude Oil, Heating Oil, and Gold look attractive as they are in the process of breaking out to new multi month highs. In addition. a number of attractive opportunities are in the Foreign Exchange markets such as short Euro/Dollar, long Dollar/Yen, and long Dollar/Swiss Franc.

Market/Index	2009 Close	Prior Week	As of 4/30	Week Change	YTD Change
DJIA	10428.05	11204.28	11008.61	-1.75%	5.57%
NASDAQ	2269.15	2530.15	2461.19	-2.73%	8.46%
S&P 500	1115.10	1217.28	1186.68	-2.51%	6.42%
Russell 2000	625.39	741.92	716.60	-3.41%	14.58%
Global Dow	1984.48	2037.28	1992.64	-2.19%	.41%
Fed. Funds	.25%	.25%	.25%	0 bps	0 bps
10-year Treasuries	3.85%	3.84%	3.69%	-15 bps	-16 bps

Last Week’s Headlines

• Greece was the word after Standard & Poor’s downgraded Greek government bonds to junk status. S&P also planted Portugal and Spain on a slippery slope by downgrading sovereign debt there, though their bonds are still investment grade.
• The nation’s economy grew at an annual rate of 3.2% in the first three months of 2010, according to the Bureau of Economic Analysis. That’s slower than the 5.6% gross domestic product (GDP) of the previous quarter, but still faster than any quarter since fall 2007. Consumer spending on durable goods and business purchases of equipment and software saw the biggest increases.
• Goldman Sachs executives and senators investigating the causes of the financial crisis seemed to be speaking two different languages during last week’s acrimonious hearings. News reports that federal prosecutors are looking at whether criminal securities fraud charges are justified against Goldman contributed to Friday’s drop in stock prices.
• Same old same old: The Fed reiterated its belief that low interest rates will be warranted for an extended period.
• What a difference a year makes: Even though February home prices were 0.9% lower than in January, they were still 0.6% higher than a year earlier. It’s the first time since 2006 that the S&P/Case-Shiller price index’s year-over-year figure has been positive. And even a 0.6% increase is welcome compared to the same time last year, when prices were 24% lower than February 2008.

Eye on the Week Ahead

Prospects for financial reform legislation and a Greek bailout in advance of the May 19 deadline for massive debt repayment will continue to capture traders’ attention, though unemployment data on Friday will also be key.

Key data releases: Personal income/spending, manufacturing, construction spending (5/3); auto sales, pending home sales (5/4); productivity (5/6); unemployment/payrolls (5/7).

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