J.L. Davis Weekly Market Update 5/16/2011

Quotes of the Week:
“If you would convince a man of anything, convince him first that you are his true and sincere friend.”
Abraham Lincoln.

“Listening is a magnetic and strange thing, a creative force. The friends who listen to us are the ones we move toward. When we are listened to, it creates us, makes us unfold and expand.”
Karl Menninger


We had the chance this past week to honor a friend and business associate of our family’s for over 30 years on the occasion of his 73rd birthday. Jeremy and I put together a celebration for 32 of his closest friends at the Buckhorn Exchange here in Denver. It was a very special time.

We were both reminded that there is nothing in life more important than a true friend. This week’s quotations are some of our favorites, because they identify a key characteristic of true friendship: listening. Pretty deep stuff for a Weekly Market Update, but if our elected officials can listen to one another and the citizenry as they solve the pressing financial issues facing government, we think an overwhelmingly positive market response is potentially in the cards.**


The Markets

An up and down week in the equity markets ended with a selloff on Friday. Nasdaq finished down 1.2% for the day, while the Dow and S&P 500 both finished down 0.8%, essentially leaving the indices back where they'd started the week. Commodities, which had been moving in lockstep with equities, also finished essentially flat for the week, with oil closing just under $100 a barrel. Investors had reason to be skittish: a strengthening dollar, renewed anxiety over the cost of the eurozone bailouts, an unexpected increase in U.S. crude oil reserves coupled with a reduced demand for gasoline, and inflationary pressures at home and abroad all led to concerns about the U.S. and global recoveries. A better-than-expected reduction in initial claims for unemployment benefits for the week, the only real positive news for the period, couldn't do much to assuage those fears.

Last Week's Headlines

• Despite record exports of $172.7 billion in March, the U.S. trade deficit widened to $48.2 billion, the largest monthly deficit since June 2010. The Bureau of Economic Analysis said part of the reason was that the United States imported more crude oil and petroleum products at higher prices. Petroleum imports soared to $37.3 billion in March, up 34% from February's $27.8 billion. In contrast, China reported a trade surplus of $11.4 billion for April. That far exceeded analyst expectations of $3 billion, and led to increased calls for China to let the yuan rise at a faster rate against the dollar.


• The Department of Labor reported that initial claims for unemployment benefits (seasonally adjusted) for the week ending May 7 totaled 434,000, a decrease of 44,000 from the previous week's revised figure of 478,000, and the steepest weekly decline since February 2010. However, the four-week moving average was 436,750, an increase of 4,500 from the previous week's revised average of 432,250.


• The Energy Information Administration reported that U.S. crude oil inventories increased by 3.8 million barrels from the previous week. The EIA also reported that gasoline inventories increased by 1.3 million barrels, and that demand for gasoline over the last 4 weeks has averaged approximately 9 million barrels per day, down 2.4% from the same period last year.


• The Consumer Price Index rose 0.4% in April, primarily because of higher food and energy costs (gasoline prices alone accounted for almost half the monthly increase). The Bureau of Labor Statistics (BLS) said the accelerating price increases (which were in line with expectations) helped push the year-over-year consumer inflation rate to 3.2% (unadjusted), the highest since October 2008. However, excluding volatile food and energy costs, core prices were up only 0.2% in April, and 1.3% year-over-year.


• Wholesale prices for finished goods (Producer Price Index) were up 0.8% in April, and 6.8% for the 12 months ended April 2011, the largest year-over-year gain since September 2008. As with the Consumer Price Index, higher food and energy costs were the culprit; excluding food and energy, core prices were up only 0.3% in April (2.1% year-over-year, unadjusted).


• The BLS also reported that import prices increased 2.2% in April following a 2.6% increase in March, the first time import prices increased by more than 2% in consecutive months since June 2008. The year-over-year increase was 11.1%, the largest 12-month gain since April 2009 to April 2010. Export prices increased 1.1% in April, and 9.6% year-over-year.
  
  

Eye on the Week Ahead

The looming deadline for increasing the U.S. debt ceiling, discussions in Brussels about the worsening Greek debt situation, and volatile commodity prices will all compete for investors' attention in the coming week.

Key dates and data releases: international capital flows (5/16); housing starts, industrial production (5/17); Federal Open Market Committee (FOMC) minutes (5/18); home resales (5/19); options expiration (5/20).


Data source: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. Equities data reflect price change, not total return.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Prepared by Lee Davis** and Forefield Inc. Copyright 2011