Saturday, June 26, 2010

Weekly Wrap

The major indices tumbled this week in light trade as sentiment weakened. Market-related news was mostly negative, and the few positive news items failed to lift the major averages. A confluence of factors drove selling pressure, though disappointing housing data acted as a major catalyst.
Sell pressure was broad-based -- only 43 S&P 500 components posted a gain and all ten sectors declined. Energy (-5.9%) and consumer discretionary (-5.3%) fell the most.
It is feared that the housing industry is teetering on the edge of a double dip, though a hard conclusion will not be able to be made until after the July data are released. Both existing and new home sales surprised sharply to the downside in May.
Existing Home Sales in May unexpectedly fell to 5.66 mln from 5.79 mln, well below the 6.10 mln consensus. New home sales plunged to 300,000 from 446,000, well below the consensus of 430,000 and marking the lowest level on record.
Though the equity markets responded negatively to the releases, it is too soon to conclude that there is a double dip in the housing sector. Since a good portion of existing home sales are distressed properties, closings that used to take about four weeks are now taking six to eight weeks. The delays probably pushed some of the sales that were expected in May into June.
On the positive side, the 30-year fixed rate mortgage rate dropped to an all-time low of 4.69% according to Freddie Mac's weekly survey. The low mortgage rates, however, may not be enough to drive demand with the unemployment rate holding close to 10%.
In other developments, the Senate and House conference committee finally reached an agreement on financial reform. The Dodd-Frank bill, which is expected to be passed and signed into law by July 4, is less strict than some feared. According to reports, the bill will create a new consumer watchdog, have a plan for troubled financial firms, and increase capital standards for banks. It will also prohibit banks from making risky bets with their own money, but allows room for some firms to continue to invest in hedge funds and private equity funds.
News of the agreement helped the big banks gain in a relief trade on Friday, though they still ended down for the week.
The Dodd-Frank bill is also expected to be less harsh on regulation on interchange fees for debit cards, which helped give MasterCard (MA) and Visa (V) a boost.
Separately, the FOMC left the target range for the fed funds rate unchanged, as expected, at 0.00% to 0.25%.
In overseas news, China announced that it will allow more flexibility in the yuan. The peg will remain unchanged, but China will allow a larger trading range.
Retailers were under pressure this week as poor economic data raised growth concerns and the Chinese yuan announcement raised the possibility of increased costs for importers of Chinese goods. Department stores were hit especially hard, with the industry group falling 7.9% this week.
Best Buy (BBY) dropped 7.1% even as the company increased its dividend by 7%. It is currently yielding 1.5%. (AMZN) shed 3.8% for the week after it cut the price of its Kindle electronic reader from $259 to $189.
Walgreen (WAG) fell 10.5% for the week after posting top and bottom line results that missed expectations.
Nike (NKE) reported in-line earnings for its fiscal fourth quarter. But shares dropped 6.4% after the company gave a weak outlook, which resulted in analysts lowering their estimates.
Energy companies took a beating as oil continues to pour into the Gulf with the oil & gas drilling industry group shedding 7.7% for the week. A judge ruled against the Obama administration's moratorium on offshore drilling. Still, uncertainty regarding future regulatory actions took a toll on oil-related companies.
Treasuries gained as stocks fell. The 10-year note hit a 52-week low of 3.07% before ending the week at 3.11%.
Looking ahead, financial regulation will remain in focus as the G20 meets over the weekend.

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