REVIEW OF ECONOMY AND FINANCIAL MARKETS FOR WEEK ENDED MAY 15 2009

Market Statistics

52 week

Low

High

Dow Jones (306.01points)

(3.57%)

to

8268.64

6,547.05 13,058.20
Nasdaq (58.86  points)

(3.38%)

to

1680.14

1,268.64 2,549.94
S&P 500 (46.35 points)

(4.99%)

to

882.88

676.53 1,426.63
Crude Oil ($2.29/barrel)

(3.91%)

to

$56.34

$33.87 $145.29
Gold +$16.50/oz

+1.80%

to

$930.90

$704.90 $1,001.80
10 Year Tsy (0.168%) to

3.125%

2.04% 4.32%

.

WALL ST JOURNAL

OVERVIEW

The previous week’s market optimism disappeared as reality took hold. We have referred in our previous blogs that the stock  market recovery from the March low’s has been a relief response to the Obama Administration actions to stabilize the financial system.

We also stated that while the relief response could continue, our concern is that in order for the markets to have sustained rallies, we need to see trends suggesting that the consumer has enough disposable income to feel comfortable spending again and that credit markets have loosened up enough for banks to be lending to corporations. We are nowhere near either of these scenarios, yet. As the drop in retail sales in April against an expected flat number shows, the consumer is still cautious, with good reason and since  consumer spending makes up around 70% of GNP, we do not see any contribution to economic growth other than from the $787 billion Economic Stimulus Plan unveiled by the Government. As some observers have noted, the Plan contains only about $200 billion in actual economic stimulus, too little to produce any meaningful growth. Further, Banks remained saddled with the toxic assets on their books which have yet to be effectively addressed.

So, where does that leave us? Economists cannot decide which letter type recovery we face. Is it a V/W or even as one has suggested a Square Root sign ?We will add another letter to the myriad of suggestions ,a long, flat U shape!( We are somewhere close to the bottom left hand corner of the U.)We believe that the Government has succeeded in fighting off financial catastrophe, but has been ineffective in implementing an economic plan for restoring economic growth (the upside of the U).So we can expect a  long flat line well into 2010 as long as consumers and corporations remain under pressure and the Government continues to play the dominant role in the economy,including the private sector.

STOCK MARKET:

The market gave back most of its gains from the previous week. As we have said above, there is nothing in the fundamentals to push the markets higher on a sustained basis, so that further increases will likely be a continuation of the relief rally with investors (largely institutional ) engaging in short term profit taking to keep the markets in trading ranges.

COMMODITY MARKET:

Oil prices have risen substantially this year (up 26%) due to a combination of OPEC attempts to cut output, the US and global economy being seen as stabilizing and of late, optimism in the US for the upcoming summer driving season To the extent the US economy expands, then oil, along with other commodities will continue to rise .We do not expect this to happen, for reasons given in the overview above.

Gold, is seen as a “safe haven” against financial risk as well as an inflation hedge and rises and falls based on these perceptions. It rose again this week as the stock markets fell and the continued belief  that dominant Government involvement in the  economy to offset deflation, by in effect printing money (termed quantitative easing),will have inflationary consequences down the road .

CREDIT MARKET:

The continued Government action in purchasing 10 year Treasury Bonds in the absence of any large scale sales until after Memorial Day, as well as a drop in the stock market, caused a rally in Treasuries this past week ,resulting in  the yield dropping to 3.125%. As we have pointed out, the 10 Year Bond is used to set some mortgage rates and corporate bond yields and the Government is interested to ensure yields do note rise to the point 30 year fixed rate mortgages reach and stay above 5%, so that the weak housing market deteriorates further. This would likely happen if the 10 year rose above 3.5%.

Here at New Era we talk to lending officers at a variety of financial  institutions, on a regular basis to determine their risk appetite for lending to  small and mid size business. There are banks out there funding. We know who they are and they include  institutions who were not active players in the derivatives markets resulting in toxic assets affecting their balance sheet in a material way,  did not receive TARP funding and were not subject to the  Stress Tests. We can discuss this in more detail with our clients and introduce them to the appropriate institutions which may fit their needs.

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