Weekly Recap - Week ending 30-Jul-10
What a difference a month makes -- or does it? The stock market took a bullish path through July, which seemed unlikely when June was coming to an end. Specifically, the S&P 500 increased 6.9%.
The great equalizer was a batch of stronger-than-expected earnings reports and generally reassuring guidance from U.S. companies. Still, in the week just concluded, it was evident that market participants are still not convinced that earnings growth rates in coming quarters are going to be met, which is no different from what was feared in June.
The clearest evidence of that concern could be found in the Treasury market, which had little problem digesting another $100 bln in new issuance across 2-year, 5-year, and 7-year maturities. Yields for each maturity ended the week lower than where they began; in fact, the 2-year note slipped to a record-low 0.546% on Friday. Separately, the yield on the 10-year note was slashed 9 basis points to 2.90%.
The bulk of the move in the 10-year came on Friday following the advance Q2 GDP report, which showed an annualized growth rate of 2.4% that was close to expectations and down from an upwardly revised 3.7% growth rate (from 2.7%) in the first quarter.
The change in private inventories contributed 1.05 percentage points to Q2 GDP while government spending contributed 0.88 percentage points. These contributions diminished the quality of Q2 GDP growth, especially the government contribution which substantiated the concerns that the economic recovery effort is not as self-sustaining as one would like to see at this juncture.
Annual benchmark revisions dating back to the first quarter 2007 accompanied the Q2 GDP report. The gist of the revisions is that personal spending has not been as strong as thought; that spending on equipment and software has been stronger than thought; and that the contraction from Q4 2007 to Q2 2009 was deeper than previously believed.
Another catalyst for the Treasury market this week was St. Louis Fed President Bullard who published a paper on Thursday that called attention to the risk of the U.S. facing a Japan-style type of deflation. To be clear, Mr. Bullard confirmed in a Friday interview on CNBC that higher inflation is still the greater threat, yet the attention he drew to the topic of deflation and the connection to Japan were enough to keep a bid in the Treasury market as stocks attempted to climb a wall of worry on relatively good earnings news.
Roughly two-thirds of the S&P 500 has reported results for the June quarter. By all accounts, the earnings growth for the second quarter has been quite strong. Thomson Reuters informs us that S&P 500 operating earnings are on track to increase 36% while revenues are on pace to increase 9% versus the year-ago period.
At the end of the week, the S&P 500 was little changed from where it began the week. That is not all that bad given the 3.6% gain in the prior week, but it did not go unnoticed that the S&P 500 was unable to hold a posture above its 200-day simple moving average, which it pierced on Monday. From its closing level on Monday to its closing level on Friday, the S&P 500 declined 1.2%.
Technical analysts are prone to call this week's action a consolidation phase after a strong run. That would seem to suggest that an upside resolution is still expected; however, a continued inability to clear resistance at the 200-day simple moving average (now 1114.39) will eventually be held out as a worrisome signal.
Earnings news and economic data will continue to move the market in the week ahead. Three Dow components -- Procter & Gamble (PG), Pfizer (PFE) and Kraft (KFT) -- are on the reporting docket. The biggest report of the week, though, will be deferred until Friday, which is when the July employment report will be released.
With a lot of expectations riding on the employment data, it would not be a surprise to see the market trade in a choppy manner leading up to its release.
Index Started Week Ended Week Change % Change YTD %
DJIA 10424.62 10471.85 47.23 0.5 0.4
Nasdaq 2269.47 2259.70 -9.77 -0.4 -0.4
S&P 500 1102.66 1103.34 0.68 0.1 -1.1
Russell 2000 650.65 652.55 1.90 0.3 4.3
09:36 am MEMC Elec upgraded to Hold at Ardour Capital: . Ardour Capital upgrades WFR to Hold from Reduce and lowers their tgt to $11 from $12 saying pricing trends in both semi and solar should be up in 3Q10, while volumes remain strong. They expect this dynamic to support margin and expansion. However, 2Q10 confirmed concerns that the SunEdison business brings lumpy revenue and high opex into the WFR story. They remain on the sidelines until the Company completes the integration of SunEdison and finishes restructuring activities in the semi segment. |
