Week in Review

The week that was:

After eeking out a small gain on Monday, the markets stumbled throughout the rest of the week.  The sharpest drop came on Wednesday when all 30 Dow stocks feel, and volume was higher than normal.  Federal Reserve officials announced on Tuesday that they will reinvest principal payments on mortgage bonds into long-term US Treasuries in an effort to bolster the economy.  Take directly from the Fed statement:

“Information received since the Federal Open Market Committee (FOMC) met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.

To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature.” FOMC press statement, August 10.

The Fed cannot cut the funds rate any further so this is the next best option.

Stocks:

The S&P 500 fell 42.39 points this week, or 3.78%, to 1079.25.  The Nasdaq Composite fell 114.99 points, or 5.02%, to 2173.48.  The Dow Industrials fell 350.41 points, or 3.29%, to 10303.15.  This snaps a three week winning streak for the Dow.

• Dynegy (DYN) will be acquired by Blackstone Group (BX) in a deal valued at $4.7 billion.  The deal price of $4.50/share represents a premium of 62% for Dynegy shareholders.  However, Blackstone’s structuring of the deal should be applauded since they are putting no money down and coming away with an immediate $800 million profit.  They are paying $540 million to DYN shareholders and assuming the company’s $4 billion debt.  After the deal closes, Blackstone plans to sell Dynegy’s best natural gas plants for $1.36 billion to NRG Energy.  Once the Dynegy shareholders are paid off, that leaves about $800 million for Blackstone.
• Cisco (CSCO) reported a 79% jump in profit for its fourth quarter as sales of networking gear surged, but fell short of Wall Street’s expectations.  The stock was crushed this week and fell 11.26%.  Analysts are saying that this was CSCO’s worst earnings report in a decade. 
• Hewlett-Packard (HPQ) continued to reel from the departure of CEO Mark Hurd.  HP shares are 12.63% lower since this news was announced on Friday, August 6^th.  This represents over $10B in market cap.
• General Motors is preparing for the second biggest IPO in US history ($16 billion) after posting $1.3 billion in second quarter profit.  GM also announced that Dan Akerson will assume the CEO role as of September 1^st.

Bonds:

End of week bond yields:

2 Year yield = 0.53%, up 3 bps from last week.

3 Year yield = 0.80%, up 5 bps from last week.

5 Year yield = 1.45%, down 5 bps from last week.

10 Year yield = 2.67%, down 15 bps from last week.

30 Year yield = 3.86%, down 14 bps from last week.

What to look for next week:

           

7:30 AM          Tuesday           Housing Starts

7:30 AM          Tuesday           Producer Price Index

• Expected to fall for the third straight month

8:15 AM          Tuesday           Industrial Production

Walmart, Home Depot, Target, and Gap will report fiscal second-quarter results as earnings season nears the end.  These retailers are expected to post modest improvement in sales and earnings.