A Week in the Rearview – week ending 3/5/10
In the headlines
A look at some of the market movers over the past week:
- Job losses were less than expected and the unemployment rate stayed at 9.7%
- The Fed’s Beige Book showed continued economic improvement, though winter storms took their toll
- There was unrest in Greece as the country took on austerity measures in hopes of paving the way for European Union aid
- Prudential agreed to buy AIG’s Asian life insurance unit for $35.5 billion
- Merck agreed to buy Millipore for $7.2 billion
- Berkshire Hathaway released its much-awaited annual letter to shareholders
- Financial reform continued to struggle getting bipartisan support
- CIT Group lost $4 billion in 2009
- Donald Kohn announced that he will be retiring from the Federal Reserve
- Citigroup sold a $230 million stake in Primerica to Warburg Pincus ahead of an expected IPO of the unit
- The U.S. government may demand a brake-override system on new cars
- Dow Chemical sold its Styron plastics unit to Bain Capital for $1.6 billion
- The Treasury turned a handsome profit on Bank of America warrants
- Consumer borrowing increased in January after a record 11 straight declines
Commentary
The market got some hop back in its step this week. The S&P 500 index finished in the black all five trading days and racked up a 3.1% gain by week’s end. Thanks to the positive employment report, the market had its best day on Friday with a 1.4% bump. The S&P is now in the black by 2.1% year-to-date.
As Warren Buffett has been increasingly looked to as a general market sage — as opposed to just the Chairman of Berkshire Hathaway — the annual letter that he writes to Berkshire shareholders has become quite an event. For our purposes, Buffett didn’t reveal much in the way of thoughts on the broader economy. This was largely due to the fact that he thought the media misinterpreted some comments he made in last year’s letter. He did, however, note that he believes the residential housing market will stabilize over the next year.
Greece continued to be in the spotlight over the past week as the country tries to deal with an overwhelming debt load. Though the country is far from out of the woods, it did take some positive steps during the week. It was able to sell roughly $6.8 billion worth of bonds, suggesting that it does still have access to the capital markets. The bonds had to be sold with a considerable yield though, raising concerns that it will still be difficult for Greece to refinance much of its debt.
The country also instated austerity measures during the week, seeking to lower its budget deficit into a more manageable range and potentially open the possibility for European Union aid. While slashing the deficit is a necessary measure to get the Greek economy back on track, the specific measures that the government took have led to unrest and strikes in the country.
The U.S. economy, meanwhile, seems to continue heading in the right direction. The Fed’s Beige Book report was released midweek, and the overall tone was very similar to last month’s. Specifically, the economic conditions in most of the Fed regions appear to be seeing continued improvement, even though the stabilization was somewhat distorted by the violent East Coast snowstorms.
As in past months, a few select areas continue to hold out against recovery, notably commercial real estate, construction, and loan demand.
Potentially even more positive were the employment reports during the week. On Thursday, initial unemployment claims came in at 469,000, down from 498,000 the week prior and below the low end of expectations. Meanwhile, the unemployment rate held steady at 9.7%, despite some predictions that it would rise back into double digits.
The 36,000 payroll cuts during the month were fewer than expected. Many experts have further noted that without the sever winter weather during the month we may have seen net jobs added to the economy. Most expectations now seem to show the economy adding net jobs through the rest of the year, though it’s questionable whether the pace will significantly bring down the unemployment rate by year’s end.
Looking ahead
It will be a much quieter week for economic reports next week. Retail sales on Friday will be the focal point of the week. At the low end, expectations are that retail sales fell 0.2% last month after gaining 0.5% in January.
Initial unemployment claims will also continue to be a notable data point. Current forecasts show claims falling further next week, potentially as low as 445,000. In addition to unemployment claims, Friday’s sentiment report from the University of Michigan could draw some eyes. This will be the first reading for March and it’s expected that sentiment rose from the prior month.
Earnings will still be in full swing in the coming weeks, but market participants are paying less and less attention to the reports as broader market indicators. Alcoa is currently scheduled to kick off first quarter 2010 reporting on April 12, and there should be more focus on earnings as we approach that date. Not only will analysts start chattering about what they expect from the first quarter reports, but we will also likely hear some pre-announcements that will give a taste for what’s to come.
In the meantime, the week ahead will likely continue to focus on government action, both home and abroad. President Obama’s healthcare plan is still on the table and the Democrats seem set on finding a way to pass it sooner rather than later. Meanwhile, progress has been slow on financial reform, and there is sure to be more churning on that in the coming week. Overseas, Greece is far from out of the woods, and we should expect to hear more news coming from that country, as well as other EU member states as they debate giving Greece financial aid.
The merger market has fired back up lately and has been a nice catalyst for the market. Deals are often brought together over the weekend, so look for deal activity to be a potential positive driver early in the week.
