J.L. Davis Market Update 6/7/2010

QUOTE OF THE WEEK:
There can be no rainbow without a cloud and a storm. - J.H Vincent

THE MARKETS:

Ongoing worries about the European debt crisis combined with a disappointing jobs report on Friday drove the markets lower last week.

Part of Friday’s drop can be attributed to missed expectations. Economists surveyed by Briefing.com had forecast an overall gain of 500,000 jobs in May, so when the number came in at 431,000 – 411,000 of which are estimated to be census jobs – investors reacted negatively. This lower-than-expected number raises questions about whether government stimulus money intended to increase hiring is accomplishing enough. On the bright side, much of the underlying data on the jobs report was positive, with both wages and hours worked showing an increase. After nearly two years of constant job losses, the U.S. economy has added 982,000 jobs so far in 2010, adding workers in every month. This is a good sign that the labor market is improving beyond the short-term Census jobs, underscoring the fact that it is important not to read too much into one month’s results.

Investors were also shaken by news that Hungary is facing debt problems. While headlines about the PIIGS (Portugal, Ireland, Italy, Greece and Spain) have become commonplace, the news about Hungary added to the argument that problems are spreading throughout Europe. Upon further inspection though, comments made by Hungarian officials look more like political maneuvering than credible concerns.

Since peaking on April 26th, the Dow has lost 11.4% and is now sitting firmly in correction territory. Since rally highs on April 23rd, the S&P has lost 12.5%, and the Nasdaq 12.3%. History shows that a fall of more than 15% from market highs will generally trigger a bear market (losses of greater than 20%), but analysts are conflicted about whether the current correction will push us into bear territory. Ed Crotty, chief investment officer at Davidson Investment Advisors commented, “From a macro perspective, the environmental disasters, political issues, you name it, there's plenty to worry about, but in looking at the economic potential of companies, the risk-reward looks pretty good.”

Key things to watch this week:
Monday – Consumer Credit
Wednesday – Ben Bernanke Speaks
Thursday – International Trade, Jobless Claims, Treasury Budget
Friday – Retail Sales, Consumer Sentiment, Business Inventories

HEADLINES:

A containment cap placed over BP's gushing undersea oil well captured 6,077 barrels of oil during its first 24 hours in operation, between a quarter and a half of the amount that is spilling into the Gulf of Mexico each day, authorities said Saturday.

A new study shows that aging may improve your state of mind. The results, published online May 17th in the Proceedings of the National Academy of Sciences, found that stress declines from age 22 onward, reaching its lowest point at 85. Worry stays fairly steady until 50, then sharply drops off. Anger decreases steadily from 18 on, and sadness rises to a peak at 50, declines to 73, then rises slightly again to 85. Enjoyment and happiness have similar curves: they both decrease gradually until we hit 50, rise steadily for the next 25 years, and then decline very slightly at the end.

The Group of 20 major economic powers (G-20) agreed Saturday to finish work on tightened banking standards ahead of their stated goal, while European governments are expected to report specific rules as early as Monday, according to a news report.

The drumbeat from some Federal Reserve officials for the central bank to raise interest rates grew louder on Thursday. The Fed's most visible rate hawk, Thomas Hoenig, the president of the Kansas City Federal Reserve Bank, used a speech to lay out his preferred upward path for short-term interest rates that would have the federal funds rate rise from near-zero to 1% by the end of summer.

The time has come for the United States to "fully embrace" clean energy technologies, President Barack Obama said Wednesday, as BP kept up its struggle to contain its runaway oil well in the Gulf of Mexico.

Sources:
Marketwatch
The Wall Street Journal Online
Barrons
CNN Money
http://www.washingtonpost.com/wp-dyn/content/article/2010/06/05/AR2010060503883.html http://www.nytimes.com/2010/06/01/health/research/01happy.html http://www.marketwatch.com/story/g20-nearing-agreement-on-rules-for-banks-report-2010-06-05
http://www.marketwatch.com/story/drumbeat-for-fed-rate-hike-gets-louder-2010-06-03 http://www.marketwatch.com/story/obama-calls-for-us-to-embrace-clean-energy-2010-06-02-124100

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