Financial Market UpdateStrategicPoint of View®
May 10, 2010
Welcome to the StrategicPoint of View -- a market and economic overview of what occurred last week, what's up for this week, and our commentary on the economy and current market activity in general for “Making Money” listeners.
LAST WEEK
It didn’t matter that the economic data was almost uniformly positive last week; all eyes were on the markets. We should note that personal income and spending rose comfortably, factory orders were strong, pending home sales increased and the jobs number surprised to the upside.
S&P 500: 1111 (down 6.32% for the week and down 6.32% on the year)
Dow: 10,379 (down 5.71% for the week and down 0.47% on the year)
NASDAQ: 2266 (down 7.92% for the week and down 0.13% on the year)
10-year: 3.81% (from 3.65% last week)
Crude Oil (June): $75.14 (from $86.15 last week)
Gold (June): $1,210 (from $1,180 last week)
USD/Euro: $1.2753 (from $1.3290 last week)
THIS WEEK
Data will be less important than market dynamics in the coming week. Reports on retail sales, consumer sentiment and industrial production will add to recovery sentiment – positive or negative, but will unlikely move markets.
COMMENTARY
It was a tumultuous week on Wall Street, culminating in the near 1000 point drop in a matter of minutes on Thursday. Two forces came together – a massive technological glitch plus fears of a European credit crisis, reinforcing the fragility of our trading system and breaking the confidence of investors. Both involved the issue of liquidity – the ability to move money through the system for trading, lending, buying and selling.
For this newsletter, we will focus on credit risks. In last Monday’s e-mail, we explained how contagion worries (sovereign debt troubles spreading to a number of countries) grabbed investor attention. This week, investors concentrated on European Banks and, in particular, the European Central Bank.
Risky debt from Greece, Portugal, Spain, etc. populates European bank balance sheets. As investors worry about increasing default risks, these loans are priced lower, creating issues with reserves. Some European banks are beginning to wonder how much they should be lending to other banks and companies. Already we are seeing some tightening of credit (less money flow). Sound familiar? Rumors are flying that Greece could be Europe’s Lehman Brothers.
To make their point, bankers across Europe urged the ECB, late last week, to do what the Federal Reserve did for US financial institutions and become the buyer of last resort. Although there was informal talk of a ECB run lending facility, formal discussions were postponed until this past weekend, leaving banks across the region wondering last week about the effectiveness of the EU and ECB.
The issue isn’t really Greece – it is the interconnectedness of the global banking system. Greece is just the potential catalyst. What would a default of Greek debt have on the banks in Europe? Asia? The U.S.? 2008 is all too recent in investors’ minds. Perceptions, accurate or inaccurate, can carry a great deal of weight. Result of this week’s fears? Increased volatility, risk aversion, rising spreads and falling prices.
To take a more positive view: many believe that the European debt issues are manageable and that investors should focus their attention elsewhere. Germany, the EU and the IMF have already approved the Greek debt package and the other contagion countries may not be at the brink of default. In addition, late Sunday the European Union Finance Ministers agreed to a $720B safety net to be provided by the EU and the International Monetary Fund.
The optimists recommend that investors focus on the U.S. – its positive earnings, low inflation and interest rates, increasing profit margins and growth prospects. Friday’s +290,000 jobs report was reassuring to many, even with an increase in unemployment to 9.9%. This higher number was explained by more job seekers entering the labor market, reflecting more optimism about the job prospects.
Our take away? The situation in Europe requires careful monitoring. As we (re)learned last week, markets can ascend and descend rapidly. The unknown has an uncanny way of asserting itself and influencing both perceptions and reality.
Sunday evening’s rescue package by the European Union is encouraging, and appears to be restoring much needed confidence. However, investors should be watching carefully for signs of any increasing strains on credit availability. Credit equals liquidity and sufficient liquidity is what we need for this global recovery to succeed.
Tune in to News Talk 630 WPRO and 99.7 FM daily for our "Making Money Updates". Get the latest market news and our take on the day's events with our market commentary at 8:10am and 5:32pm. For more information, visit www.StrategicPoint.com.
*Past performance is not indicative of future results. Indices are unmanaged and you cannot directly invest in them. The Nasdaq Composite Index measures all NASDAQ U.S. and non-U.S. based common stocks listed on the Nasdaq Stock Market. The S&P 500 index is based on the average performance of 500 industrial stocks monitored by Standard and Poor’s. The data referred to above was taken from sources believed to be reliable. StrategicPoint Investment Advisors has not verified such data and no representation or warranty, expressed or implied, is made by StrategicPoint Investment Advisors.
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