AND THAT’S THE WEEK THAT WAS…

For the Week Ended July 3, 2009

Market Matters…         

Unfortunately for Bernie Madoff, he will not be able to enjoy baseball, hot dogs, apple pie, and fireworks with his family again until July 4, 2159.  The judge threw the proverbial book at the Wall Street swindler by sentencing him to 150-years in prison and seizing much of his (and his wife’s) personal wealth.  Poor Ruth will be forced to live her twilight years on a mere $2.5 million.  (His clients should be so fortunate.)   While the symbolic gesture did little to compensate investors for their massive losses, some enjoyed a few jubilant “high fives” over the judge’s decisions.  The verdict could have sent a message to “greedy” Wall Street to reinvent itself, but a few firms apparently never saw the memo.  Analysts predict that per-employee compensation at Goldman Sachs will average $700,000 in 2009 and Morgan Stanley’s will top $350,000, levels that far exceed their 2008 pay structures and are more in line with those of pre-crisis 2007.

The 2nd quarter came to a close and equity indexes enjoyed their best results since 2003: Dow +11%, Nasdaq +20%, S&P 500 +15%.  While investors went bottom-fishing for bargains, the euphoria fizzled out over the past few weeks as many began to sense that the rally had moved too much too quickly (and the economy still has many issues yet to resolve).  Financials, energy, and basic material stocks led the upward surge last quarter, while emerging markets like India and China benefited greatly from the rise in commodities prices.  As investors increased their appetites for risk, government securities were among the big losers, though corporates (both high quality and high yield) performed well within the fixed income asset class. 

While the Treasury prepared to launch its Public-Private Investment Program (PPIP) to remove toxic assets from the books of troubled institutions, its magnitude seems likely to be scaled back dramatically.  In the early stage of development, Treasury Secretary Geithner spoke of providing $50 billion in government funds so approved investment firms could  purchase these assets.  Now the program seems to have been dwindled down to about $20 billion and some believe the “thawing” of the equity and credit markets has negated the need for such massive government participation.  Shifting to that other ailing industry (among others), Ford announced a smaller than expected decline in June domestic sales as the (non-bankrupt) automaker continued to take advantage of the hardships of its main rivals.  Even Toyota saw its monthly activity fall by 32% and lost out to Ford in total vehicles sold for the third consecutive month. 

With investors eager to hit the road for some R&R over the holiday weekend, most had to check out the crucial unemployment data (and did not like what they saw).  Weaker than expected releases (see below) sent equities into a tailspin and left the indexes down big for the week.  Oil fell below $67/barrel as traders perceived the expected post-recession increase in demand will not occur overnight.  While fixed income seemed primed to benefit from a “flight-to-quality,” some investors held off as they await the $136 billion in new treasury supply.  Despite the depressing end to the week, investors were left with one favorable thought…at least, they were not Madoff. 

Weekly Economic Calendar

A heavy week on the economic calendar kept investors from taking off early in observance of Independence Day (though many probably got a nice head start).  Most of the releases of the week offered some surprises (and not positive ones at that).  Consumer confidence dropped in June as folks continued to fear for their jobs (and rightfully so).  While the past few months offered a bit of optimism that the consumer was back to lead the economy into recovery, the recent data revealed that pessimism lingers.  Still, the index has risen dramatically since the historic lows experienced in February 2009.  Construction spending surprisingly fell in May to its lowest level in over five years, despite the expected boost (or lack thereof) from the economic stimulus package.  While manufacturing showed some signs of improvement, the data indicated that any real sector growth is still a few months away. 

Finally, the labor market proved again that it will remain a huge thorn in the side of the economy and the primary reason any recovery will be slow to develop.  The unemployment rate pushed closer to the dreaded 10% and now stands at 9.5%, its highest level in almost 26 years, as over 465,000 jobs were eliminated from the economy in June.  All told, over 6.5 million employees have moved to the ranks of the unemployed since the recession officially began in December 2007.  In the “misery loves company” category, the 16-country eurozone also reported a jobless rate of 9.5% in May, its worst showing in over 10-years.  Additionally, the British economy posted its weakest quarter in terms of growth (contraction) since 1958. 

Even before the dire labor picture was revealed, San Francisco Fed Chair Janet Yellen painted a negative outlook for the economy, stating that the pending recovery will be “frustratingly slow” and the Fed is likely to leave the funds rate at its current level (of around 0%) for some time.  Across the pond, the European Central Bank held its primary rate steady at 1% and indicated that its gradual recovery should include a return to positive growth by mid-2010. 

On the Horizon…Investors and economists return from the long weekend and face a light week on the economic calendar, BUT the initial stage of earnings season.  Alcoa gets the ball rolling on July 8.  While Thomson Reuters expects another dismal quarterly showing (down about 20% overall), its analysts are forecasting that strong earnings growth will reappear in the 4th quarter.   Investors try to make heads or tails of the recent economic data and future earnings reports as they map out the next direction for the markets.  While many believe the euphoric rally of the past quarter ended in recent weeks, some prognosticators remain torn between a retest of the March lows or sideways trading for the foreseeable future (until the “real” recovery emerges).  In the meantime, spend some money over the holiday and contribute to “real” economic growth. 

Brounes & Associates is a Houston-based consulting/marketing firm that performs research, marketing, and education projects for financial services companies and other professionals.  “And That’s the Week That Was” is a weekly market/economic commentary that is distributed each Friday afternoon.  Any financial professionals who have interest in rebranding the piece and sending to their investors should inquire to:

Ron Brounes

713-962-9986 (Direct)

ron@ronbrounes.com

(c) Brounes & Associates

www.ronbrounes.com