Market Week: July 19, 2010

The Markets

After inching forward most of the week, domestic equities were felled Friday by a combination of options expirations, a surprisingly negative consumer sentiment report, and lackluster economic data.

As earnings season gets underway, companies are reporting weak top line growth disappointing investors’ expectations. Earnings forecasts for the remainder of the year are foggy at best adding to already elevated levels of uncertainty. The overall market remains in a downtrend and we believe persistent caution is warranted. We favor the consumer goods and technology sectors, specifically Sara Lee (SLE), Broadcom (BRCM) and Qwest (Q). In addition, precious metals (Gold and Silver) and treasury bonds (10 & 30yr) continue to appreciate and act as safe havens.

Market/Index	2009 Close	Prior Week	As of 7/16	Week Change	YTD Change
DJIA	10428.05	10198.03	10097.90	-.98%	-3.17%
NASDAQ	2269.15	2196.45	2179.05	-.79%	-3.97%
S&P 500	1115.10	1077.96	1064.88	-1.21%	-4.50%
Russell 2000	625.39	629.43	610.39	-3.02%	-2.40%
Global Dow	1984.48	1794.46	1788.16	-.35%	-9.89%
Fed. Funds	.25%	.25%	.25%	0 bps	0 bps
10-year Treasuries	3.85%	3.07%	2.96%	-11 bps	-89 bps

Last Week’s Headlines

• The devil is in the details: Congress gave final approval to what is being called the most sweeping financial reform legislation since the Great Depression. The legislation is designed to help prevent problems that led to the 2008 financial crisis from recurring. However, much of its impact will be determined by regulations that will be developed over the next year or so.
• Consumer inflation fell 0.1% in June, putting the annual inflation rate at 1.1%. The Bureau of Labor Statistics said energy costs, which fell 2.9%, were responsible for most of the decline.
• Inflation at the wholesale level also fell in June, for the third straight month, according to the Bureau of Labor Statistics. The drop of 0.5% followed declines of 0.3% and 0.1% in May and April respectively. Prices for raw materials fell the most, by 2.4%. Most of the 0.5% decline in finished products resulted from a drop in consumer food costs, which fell 2.2%.
• Despite falling oil prices, the U.S. trade deficit grew almost 5% in May, according to the Census Bureau. Increased imports from China accounted for a large part of that; the deficit with China alone rose more than 15% from April’s figure. Though exports rose, imports rose even more.
• Retail sales were down for the second month in a row in June, according to the Commerce Department. However, if auto and gas sales are excluded from the total, sales actually rose 0.1% instead of falling 0.5%.
• The Federal Reserve Board lowered slightly its estimate of U.S. growth for the rest of the year to 3%-3.5% instead of the previous 3.5%-3.7%. Translation: don’t look for higher interest rates in the near future.
• The Thomson Reuters/University of Michigan index of consumer sentiment fell dramatically in July, from 76 in June to 66.5. That’s the lowest level since last August.
• Goldman Sachs agreed to pay $550 million to settle civil charges of fraud filed by the SEC. The company, which reported net earnings of $3.46 billion in Q1 2010, admitted its marketing materials for the securities in question “contained incomplete information.” According to the terms of the settlement, $250 million will go to injured investors and $300 million to the U.S. Treasury. Goldman also agreed to review its business practices and training of employees.

Eye on the Week Ahead

Housing data will indicate the extent to which the first-time homebuyer’s tax credit accelerated purchases. Second-quarter earnings reports from several consumer and tech bellwethers also are on deck, as are the results of the stress tests on European banks, scheduled to be released Friday. Finally, Fed Chairman Ben Bernanke will testify before Congress about the state of the economy.

Key data releases: Housing starts (7/20); home resales, leading economic indicators (7/22).

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