Archive for May, 2011

The Dow shed 93 pts today and closed down 0.66 percent for the week. In fact, it was the third straight weekly decline for the Dow and S&P 500, an indication of the growing unease among investors after the nice market run-up over the last several months.

Retailers were in focus this week as many of the big retail chains reported first quarter earnings. Despite strong performance from the company’s credit card business, Target’s results were fine although slightly below analyst expectations. Wal-Mart faired worse and reported a 1.1 percent decline in same-store sales – the eighth consecutive quarterly drop. Clothing retailers also reported weaker profits due to higher raw material costs. Gap, Ralph Lauren, JC Penny, Urban Outfitters, and Aeropostale all suffered big share price declines today.

In Europe, Fitch ratings agency downgraded Greek debt by three notches to “B+”. The yield on 10-year Greek bonds is now 16.5 percent. Compare that to the relative safety of 10-year US Treasuries, which are yielding 3.14 percent. The Greek downgrade pushed the euro down in relation to the dollar and contributed to the weak US market today.

Next week, new home sales, durable orders, and consumer confidence data are released. Also, Q1 GDP (second estimate) will be out on Wednesday. Analysts expect 2 percent GDP growth, up slightly from the first estimate of 1.8 percent.

May, thus far, has been unkind to investors. The Dow, S&P 500, and Nasdaq are all down almost 2 percent for the month. Gold is down more than 4 percent, while silver lost over 25 percent of its value since May 1st. Ouch!

As our chief researcher, Nat Beebe, mentioned last week, volatile commodity prices put pressure on stocks and that trend carried into this week. Both the Dow and S&P 500 finished negative for the week. One impetus for these negative trends is the stronger dollar, which gained 1.2 percent versus the euro. Renewed concerns about Greece’s debt problem prompted funds to flow out of the euro and into the dollar. A stronger dollar makes commodities denominated in US dollars, like crude oil, more expensive to buy and thus less attractive to speculative investors, which is why we’ve seen crude go from above $110/barrel to $98/barrel just in the last two weeks. With the Fed determined to keep interest rates low through this year (see next paragraph), we expect the dollar to resume its weakness relative to other currencies.

One reason we expect interest rates to stay put, other than Bernanke saying as much at the most recent Fed meeting, is that inflation data continues to be tame. The consumer price index for April was released today and showed only a 0.2 percent increase for core inflation – well within the normal range. Weekly unemployment claims, however, were higher than expected at 434,000.

Next week, housing and manufacturing data will give investors something to chew on. Target, Wal-mart, Dell, Home Depot, and HP report first quarter earnings, as well.