Market Week: May 21, 2012

The Markets

Greek tragedy: Equities' worst week of the year marked their third consecutive week of losses, which have cumulatively sliced more than eight percentage points off the S&P 500's year-to-date gains. The flow of euros out of Greek banks accelerated, raising concerns about a run on banks there and helping to increase demand for U.S. Treasuries. That left the 10-year yield approaching an all-time low, while an auction of 10-year Treasury Inflation-Protected Securities (TIPS) resulted in a negative yield for the fourth consecutive time. The euro fell to $1.27, and as the dollar strengthened, oil prices fell once again to end the week near $91 a barrel. Meanwhile, gold bounced up nearly $40 an ounce.

Last Week's Headlines

• Greece will schedule new elections for June to try to elect leaders who can form a coalition government; a caretaker government was named to keep the lights on until then. Meanwhile, Europe got a sliver of good news for a change as Germany's economy grew 0.5% during the first quarter--substantially better than the previous quarter's 0.2% contraction. Growth also was the focus of G8 leaders attending a Camp David summit over the weekend. Their joint statement said Greece should remain in the eurozone and that stimulating economic growth--not just austerity--is essential to the region's future.
• Spain's 10-year bond yield once again rose above 6%, roughly four times the yield on equivalent German debt, and Moody's downgraded the credit rating of a number of Spanish banks. There also were reports that euros were being withdrawn from Greek and some Spanish banks, potentially increasing the banks' difficulty in meeting capital requirements.
• In the United States, declines in energy costs in April helped offset increases in the cost of food, travel, shelter, cars/trucks, medical care, and clothes, leaving the Consumer Price Index flat for the month. The Bureau of Labor Statistics said that for the past year, consumer inflation was 2.3%, slightly higher than the 1.9% wholesale rate.
• Housing starts were up 2.6% in April and up 29.9% from last April. The Commerce Department also said that even though building permits were down 7% overall for the month, they were 23.7% higher than last year at this time, and single-family permits were up 1.9% from March.
• The Federal Reserve's Open Market Committee's minutes showed the Fed still sees moderate economic growth but is ready to take further measures to support the economy if the situation in Europe worsens or if fiscal and legislative policies increase the likelihood of renewed recession.
• Retail sales rose 0.1% in April, according to the Commerce Department, and were 6.4% higher than last April, though the figures aren't adjusted to reflect price increases. The increase is significantly less than those seen in February and March.
• Manufacturing reports were mixed. The Fed's Empire State survey of general business conditions for New York area companies rebounded strongly from last month's 6.6 reading, rising to 17.1, and industrial production was up 1.1%. However, the same survey by the Philadelphia Fed turned negative for the first time in eight months, declining from 8.5 to -5.8.
• Technology giveth and technology taketh away: Facebook's IPO, one of the largest on record, suffered from problems with Nasdaq's systems for processing trades Friday when the company debuted. Despite massive trading volume, the stock ended just 23 cents above its initial price.

Eye on the Week Ahead
Europe will likely continue to dominate traders' minds as Germany and Spain are both set to auction bonds. Skimpy domestic economic data will focus on housing.
Key dates and data releases: home resales (5/22); new home sales (5/23); durable goods orders (5/24).

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Data sources: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Market Week: May 14 2012

The Markets Once again, problems in Greece meant problems for equities. For a change, the small-cap Russell 2000 and the Nasdaq suffered the least, though both have now lost more than 6% since their late March high. Uncertainty about the future of the eurozone's financial compact helped push the yield on the 10-year U.S. Treasury note to levels last seen in January. Meanwhile, oil prices continued to sink toward $95 a barrel, while gold plunged below $1,600 an ounce.

Last Week's Headlines

• Neither far-right nor far-left parties, who gained power in Greece's recent elections because of opposition to austerity measures imposed by the country's European partners, were able to form a coalition government. As a result, the eurozone's bailout fund held back €1 billion of an aid package due last Thursday, though it agreed to pay out €4.2 billion so Greece could meet immediate obligations. The situation increased uncertainty about Greece's future in the eurozone if no coalition government is formed or if a new government rejects budget cuts needed to meet eurozone guidelines.
• Bankia, which is one of Spain's largest banks and has suffered from bad loans made to real estate developers, will receive a bailout from the Spanish government, much as banks in the United States did during the 2008 financial crisis. The government said it will take a 45% stake in the bank as part of its efforts to overhaul the country's overall banking system.
• The Federal Reserve said use of consumer credit increased 7.75% in the first quarter of the year. Almost all of the increase came in non-revolving debt such as loans for autos, education, boats, and mobile homes.
• Wholesale prices fell 0.2% in April, marking the seventh straight month in which price increases have slowed. The Bureau of Labor Statistics said that put the year-over-year wholesale inflation rate at 1.9%.
• Strong U.S. exports in March couldn't keep up with higher oil costs and imports of Chinese goods, according to the Bureau of Economic Analysis. As a result, the trade deficit saw a dramatic 14.1% increase in March as exports rose nearly 3% while imports were up more than 5%.
• The Treasury Department said a combination of higher tax receipts and less spending on Medicare, education, and defense led to the federal government's first monthly budget surplus since September 2008. Nevertheless, the Treasury still projects an annual deficit this fiscal year of more than $1 trillion.
• J.P. Morgan Chase announced that trading in credit derivatives that were intended to hedge the bank's investment risk had cost it roughly $2 billion in paper losses.

Eye on the Week Ahead

Greece's struggles to form a government will continue to command attention; a new election will be scheduled for June if no agreement is reached. Also on tap is a scheduled Tuesday meeting between newly elected French President François Hollande and German Chancellor Angela Merkel. European growth data is due Tuesday, while manufacturing and retail sales data throughout the week will suggest the state of the U.S. economy.

Key dates and data releases: consumer inflation, retail sales, international capital flows, business inventories, Empire State manufacturing survey (5/15); Federal Open Market Committee minutes, housing starts, industrial production (5/16); Philadelphia Fed manufacturing survey (5/17); options expiration (5/18).

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Data sources: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Market Week: May 7, 2012

The Markets The Dow hit its highest point in more than four years on Tuesday, but it was basically downhill for equities after that as investors decided to take some of their year-to-date profits off the table in advance of key European elections over the weekend. The S&P 500, Nasdaq, Russell 2000, and Global Dow all had their worst week of 2012, and the Dow's 168-point loss on Friday gave the industrials their second worst week of the year. The selling helped the 10-year Treasury yield hit its lowest level since early February as prices rose. Meanwhile, oil prices slid below $100 a barrel, while gold reversed the previous week's gains, falling almost $30 back to $1,634.

Last Week's Headlines

• Unemployment fell to 8.1% in April, according to the Bureau of Labor Statistics. However, that was not necessarily good news, as the drop was largely the result of people leaving the work force. The economy created only 115,000 new jobs; that's substantially lower than the 154,000 jobs added in March or the 252,000 monthly average between December and February.
• Off with his head: The frustration about Europe's finances that has previously brought down heads of state in Greece, Spain, and Italy took its toll on French President Nicolas Sarkozy. The election of François Hollande, who campaigned against the fiscal austerity and budgetary discipline measures supported by "Merkozy" (German Chancellor Angela Merkel and Sarkozy), creates uncertainty about the future of those measures.
• The political parties that comprise Greece's ruling coalition suffered losses in the country's parliamentary elections, raising questions about whether a reorganized government would support the austerity program required for future bailout assistance.
• Spain's gross domestic product contracted for the second quarter in a row. That officially put the financially troubled country into recession; coupled with Spain's struggle to implement austerity measures, a recession could make it more difficult for the eurozone's fourth largest economy to reduce its budget deficit and meet sovereign debt guidelines. The country also received a second piece of bad news when Standard & Poor's downgraded the credit ratings of 11 Spanish banks. Meanwhile, the European Central Bank kept its key interest rate unchanged at 1%.
• The Bureau of Economic Analysis said consumer spending rose 0.3% in March and incomes grew 0.4%, helping to nudge the savings rate up slightly to 3.8% of disposable income.
• The U.S. services sector grew in April, but the 53.5% reading by the Institute for Supply Management was 2.5% lower than the one in March. However, the ISM's manufacturing index was up 1.4% from March for a reading of 54.8% and a 33rd consecutive month of expansion.
• U.S. construction spending rose 0.1% in March despite a 1.1% decline in spending on public construction such as state and local highways and schools. According to the Department of Commerce, private construction was up 0.7% from the previous month, roughly evenly divided between residential and nonresidential projects.
• Fixed-rate mortgages have hit record lows once again, according to Freddie Mac. The 3.84% average rate for a 30-year fixed-rate mortgage was almost a percentage point lower than the 4.71% of a year ago, and 15-year mortgages were at 3.07% compared to 3.89% last year at this time.

Eye on the Week Ahead

In a week that's light on economic data, investors will attempt to gauge the impact of French and Greek elections on the eurozone's willingness and ability to enforce austerity measures and debt guidelines.

Key dates and data releases: international trade, import/export prices, U.S. Treasury budget (5/10); wholesale inflation (5/11).

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Data sources: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.