REVIEW OF ECONOMY AND FINANCIAL MARKETS FOR WEEK ENDED MAY 22 2009

Market Statistics 52 week

Low

High
Dow Jones +8.68 points

+0.10%

to

8277.32

6,547.05 13,058.20
Nasdaq +11.87points

+0.71%

to

1692.01

1,268.64 2,549.94
S&P 500 +4.12 points

+0.47%

to

887.00

676.53 1,426.63
Crude Oil +$5.33/barrel

+9.46%

to

$61.67

$33.87 $145.29
Gold +$27.60/oz

+2.96%

to

$958.50

$704.90 $1,001.8
10 Year Tsy +0.33% to

3.455%

2.04% 4.32%

WALL ST JOURNAL

OVERVIEW:

The modest market gains from the previous week masked the trend of a good start on Monday, followed by four days of losses in the Dow and S&P and three in the Nasdaq.

Whatever positive news is announced, the market cannot ignore fundamentals which are not improving. Job loss remains high and the housing market remains weak. On top of this, while the big Bank Stress Tests have, for now, allayed fears about their survival, there are still concerns about the large number of small and mid size banks and their exposure to commercial real estate loans, which was brought into focus this past week with the failure of Bank United, Florida ,the 34th (and biggest) bank failure this year.

The stock markets experienced their steepest losses for the week on Thursday as concerns focused on the US as a debtor nation with S&P credit warning on the United Kingdom that predicts it’s borrowing would reach 100% of GDP over the next few years. It downgraded the country from “stable” to “negative”. Any borrowing reaching 80% would result in a downgrade in credit rating from the prized AAA, resulting in higher borrowing costs. Investors saw parallels to the US economy with it’s large deficits to fund bailouts, stimulus spending and social programs. Any direct comparisons to the UK economy are misleading, however, due to the sheer comparative size of the US economy .Nevertheless a warning was clearly sent that the AAA rating is not a given when related to the US economy. We have been put on notice.

STOCK MARKET:

We continue to maintain that the economic fundamentals do not warrant a sustained upturn, for reasons described above. It is no longer going to rise just on  relief that the economy is not in a deep downward spiral, there will have to be consistently improving economic data.  We do not see it happening this year and into early 2010.There is increasing regulation of businesses and it is difficult to see when, if at all  the government spending will take effect,  as we are concerned that much of the spending we have seen, appears to be less focused on economic growth through job creation via infrastructure spending as it is on entitlements.

COMMODITY MARKET:

Oil had a strong week despite the global recession continuing, which reflected a combination  of factors, including the effect of  OPEC production cuts over the past few months, attacks on foreign oil company pipelines in Nigeria, (Africa’s largest producer )and continued market speculation.

The strength in gold this week reflected it’s “safe haven” status as the US Dollar fell to its lowest level against the Euro this year and the 10 Year Treasury rose to a six month high. The negative economic news of the week led to gold in positive territory each of the last four trading sessions , inversely related to the broader stock market.

CREDIT MARKET:

We have talked in previous blogs  about the importance of the 10 Year yield, which is used to set some mortgage rates and corporate bond yields. There  is a continuing need for the Government to offset the Treasury auctions to finance new debt  by purchasing Treasuries, to ensure yields do not rise to a point where they negatively effect the economy by increasing mortgage rates ,further depressing the housing sector, for example. It is generally thought that a 10 Year yield of 3.50% would cause 30 year fixed mortgage rates to rise above 5%,a level the Government ,it is believed wants to keep. The rise this week up to the 3.455% level was seen as a reaction by the market to concerns about the rise in debt as  % of GDP in the context of the S&P downgrade of the UK. The market  needs to see a more aggressive buying program to lower yields in the weeks to come in the face of mounting Treasury supplies.

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