July 2nd, 2009
U.S. Treasuries rose for a third straight day on Monday with the yield coming down to 3.49%. A Chinese central bank Governor stated that his country would continue with its foreign currency reserve policy for now. China is the largest foreign holder of U.S. debt. The 10-year Treasury note began the year yielding a mere 2.21%, but the yield increased to 4.28% in recent weeks on fears of that the credit quality for the Treasury might be lowered as well as talk by several countries of moving incrementally away from the dollar as the world’s reserve currency. Last week’s auction of Treasury issues showed strong demand for U.S. paper.
In a sign that equity investors are becoming more comfortable with risk, the Chicago Board Options Exchange Volatility Index, or VIX, continued to decline, ending the day at around 25. The VIX peaked at over 89 last October after the collapse of Lehman Brothers. The average for the VIX since its start back in 1990 has been about 20 (20.18), and readings above 30 have been associated with elevated fear in the markets. The VIX nearly always rises as stocks fall.
Steve Jobs returned to work at Apple, Inc. following a liver transplant. Meanwhile, disgraced Ponzi-scheme operator Bernard Madoff was sentenced to 150 years in jail.
The Dow led the other market indices higher on Monday, posting a gain of over 1%.
The market got out of the gate well on Tuesday, encouraged by signs that home price declines may be abating. The S&P/Case-Shiller home price index decreased 18.1% from a year earlier in April, an improvement from the 18.7% annual drop measured in March. Yale professor Robert Shiller, whose name appears on the index, called the slowing of the price declines a “striking improvement” which suggests that home prices will soon level off. Foreclosure filings continue to be a problem, climbing 18% in May. The Institute for Supply Management-Chicago said its business barometer increased to 39.9. This better-than-expected reading is still below the neutral level of 50, however. Stocks turned sharply lower mid-morning as the Conference Board reported that consumer confidence slipped unexpectedly in June as consumers had a less rosy outlook on the jobs market. Hand wringing over the consumer confidence number overshadowed an improved 2010 global GDP forecast of 2.5% issued by Deutsche Bank. For the day, stocks essentially erased Monday’s gains, ending the second quarter and the first half of 2009. The 15% return posted by the S&P 500 marked the best quarter since the end of 1998, which followed the Asian and Russian currency crises and the failure of Long Term Capital Management.
Wednesday’s ADP jobs report for June was disappointing and suggested that the official government report on Thursday could be weak. Stock analysts are now seeing a year-over-year decline in profits of 34% and 22% for the just-ended second quarter and the third quarter, respectively. However, an earnings rebound of 62% is forecast for the fourth quarter. General Mills, the maker of Cheerios and Hamburger Helper, reported a nice earnings surprise for its staggered quarter that ended in May with profits increasing a whopping 94%.
In a sign that auto sales may be bottoming out, the companies former known as “The Big Three” reported the smallest decline in auto sales so far this year. The third quarter got off to a decent start led by the Dow’s 0.7% gain.
Today we received the most important reports of the week, all of them related to jobs. Initial jobless claims dropped in line with expectations, however, the number of jobs lost in June was 467,000, which was disappointing relative to expectations of 365,000. The unemployment rate increased to 9.5%. It would appear that companies are still not seeing sufficient signals to start the hiring process just yet. With plenty of pending legislative initiatives on Capital Hill that could have profound changes on the economy, such as the “Cap-and-Trade” bill, it is unreasonable to expect many business to hire until they know what they are up against and how it will impact their sales potential and energy costs. Expect employers to be on hold for some time to come.
In a week that most reports not related to jobs were positive and most reports related to jobs were negative, jobs carried the most weight, driving the S&P 500 down 2.8% for the day and 2.4% for the week.