Seems like just yesterday the stock market had completed its best performing first quarter in over a decade.  Companies were back in hiring mode; the economy was in full rebound; Greece’s bailout (part 2) put its woes in the rearview mirror; China was a bit worried about an overheating economy; and Prez O was smiling all the way to a second term, while Republicans bickered with each other in their primaries.  What a different a month makes.  With the Dow down over 6% in May, investors are scratching their collective heads, searching for solutions at home and abroad, and seeking the safe-haven of treasuries.  Meanwhile Republicans are basking in the glow of the weaker economic data and plummeting market, seemingly pleased to place blame on others, while offering few solutions (at least, any worth implementing before November elections…any job-creating ideas from your time at Bain Capital, Mr. Romney?).  Dems got into the finger-pointing act as well, claiming that R’s are responsible for the current problems as they failed to provide any bipartisan cooperation to the ongoing budgetary, tax, and job concerns.  (Political dissension is not reserved for Europe?)  Sadly, expect more of the same through the summer.

In the aftermath of the ill-fated Facebook offering, companies seem to be in no rush to follow in their footsteps.  Online travel site Kayak Software postponed its IPO (with lead underwriter Morgan Stanley of Facebook fame) during this prolonged period of damaged investor confidence.  Gores Group backed off its plans to acquire Pep Boys-Manny Moe and Jack’s due to diminished earnings.  Research in Motion may be looking to go the transaction route to help “bail-out” its struggling Blackberry biz, as the firm hired JP Morgan Chase to advise about future direction.  (Maybe some nice hedging strategies, Mr. Dimon?)  On a brighter note, FedEx is continuing expansion into Latin America with the purchase of Brazilian-based transport company Rapidão Cometa.  Automakers shrugged off all the ongoing negativity as Chrysler, Ford, and GM each posted solid sales increases in May and Toyota reported an 87% increase as it continues recovering from prior earthquake and recall setbacks. 

An early week stock market rally has been long forgotten as investors added domestic economic uncertainties to a list of worries that already included Greece, Spain, China, Japan, etc.  Suddenly the downturn shows no end in sight and the once stellar gains of the first quarter have disappeared in the blink of an eye.  The Dow Jones moved into negative territory for the year as investors sought a flight-to-quality that took the 10-year below 1.5%, to an all-time low yield.  Similarly, oil continued its freefall and those prior inflation fears (Iran) seem laughable at this point.  Crude plunged to an eight-month low to just over $83/barrel on fears of stifled demand and rising inventories.  (Guess that should be good news for vacation travelers…that is, if anyone can afford vacations these days.)  Bear in mind, the markets suffered similar fates over each of the past two summers and ultimately bounced back nicely.  (Maybe traders should start keeping teachers’ schedules and taking the summers off?)  This time around, politicians will be doing their best to make each side look bad and create even more uncertainty heading into the election. 

Economic Calendar

Europe took a backseat to the domestic data of the week as news from manufacturing and labor brought fear back to this country that double-dip may not only be an EU possibility.  Consumer confidence fell for the third straight month as folks again began worrying about their employment situations.  The GDP was revised downward in the first quarter (to 1.9% from 2.2% initially reported) as contagion actually may be spreading across the globe.  The ISM manufacturing index confirmed an earlier weak reading from Chicago’s regional report as the sector continues expansion, but at a much slower pace.  The jobs market, seemingly in high gear just a few months ago, looks to be a major concern again as the economy added a mere 69k new positions, the fewest monthly additions in a year, and the unemployment rate climbed to 8.2% in May.  

Fed watchers began calling for Bernanke and friends to take action though some analysts worry that the policymakers can do little at this point in time to stimulate growth.  Operations Twist (selling short maturing securities and buying longer ones) is set to expire at the end of June and many expect the Fed to extend that action to help keep borrowing costs low.  Then again, the fed funds rate has been at near-zero percent for 3.5 years and the yield on the 10-year treasury stands at an historic low, so the jury is out about the ultimate success of any such stimulus.  The Fed holds its next policy meeting on June 19-20. 

News out of Europe was just as dire (so what else is new?).  Spain’s debt rating was slashed again and one of its major lender, Bankia SA, may be in need of a spare $20 billion or so.  Regulators believe that a central “banking union” would prove helpful to the region and more effectively deal with the bank failures that are coming on the horizon, but Germany (and others) will surely raise major objections.  The purchasing managers’ index for the 17-country euro-zone plunged to a three-year low and suffered its 10^th consecutive month of sector contraction.  Additionally, the jobless rate climbed to its highest level on record as 17.4 million people currently remain on the unemployment line (including a few past Prime Ministers).  China, once the savings grace of the global economy, suffered another month of weak manufacturing activity and suddenly its government may be taking action to promote new growth.  Other emerging economies like those in Indonesia and South Korea are struggling as well. 

On the Horizon…The “bears” are out in force with no help on the horizon.  Then again, just when things look to be at their worst, something unexpected comes along to save the day (wishful thinking)?  Greek voters may now be favoring the tougher road with austerity.  Germany may be willing to “give and take” just a little.  The Fed has been on the sidelines for a while and may have something positive to add about the recovery.  Well, at least, gas prices are dropping.    

The information set forth was obtained from sources which we believe reliable but we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation by us of the purchase or sale of any securities. Past performance is not a guarantee of future performance.

(c) Brounes & Associates

www.ronbrounes.com

             
 

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