The week that was:
US stocks closed lower for the week as economic data showed weakening and joblessness rose. Producer prices, announced on Tuesday, rose in the US thanks to the rising costs of raw materials. This news should help soothe deflation fears to some extent. The Labor Department reported on Thursday that weekly initial jobless claims came in at 500,000 for the first time since November 2009. This new data marks a step backward in the jobs recovery as investors had hoped for claims to fall below 450,000. In a healthy economy, initial claims average fewer than 400,000 per week. Jobless claims are now up for three weeks in a row and four out of the last five.
Japan’s GDP for the 2nd quarter confirmed that China is the biggest economy in Asia and the second-largest in the world. Japan’s GDP reading came in at $1.28 trillion, slightly less than $1.33 trillion for China. Some experts say that China will replace the US as the world’s biggest economy by 2030.
Stocks:
The S&P 500 fell 7.56 points this week, or 0.70%, to 1071.69. The Nasdaq Composite rose 6.28 points, or 0.29%, to 2179.76. The Dow Industrials fell 89.53 points, or 0.87%, to 10213.62. The S&P is down 4.45% over the last two weeks.
- Intel Corp (INTC) said Thursday that it will buy McAfee (MFE) for about $7.7 billion in cash. Interestingly enough, McAfee’s CFO was awarded thousands of stock units about two weeks ago, before MFE’s stock was bid up by the takeover premium. INTC is down over 11% over the trailing month, while MFE is up over 55%.
- Wal-Mart (WMT) said its second-quarter profit rose 3.6% as demand from Mexico and overseas markets carried the company’s growth while US spenders remain cautious. WMT is down 6% year-to-date.
Bonds:
| End of week bond yields: |
| 6 Month yield = 0.17%, up 1 bps from last week. |
| 2 Year yield = 0.49%, down 4 bps from last week. |
| 3 Year yield = 0.77%, down 3 bps from last week. |
| 10 Year yield = 2.61%, down 6 bps from last week. |
| 30 Year yield = 3.66%, down 20 bps from last week. |
- Treasury prices rose Friday, pushing short-term yields to new record lows and adding to weekly gains after Thursday’s surprisingly weak data that called into question the ability of the US to sustain a recovery. The stocks of the Dow Jones Industrial Average are now paying a higher yield than 10-year Treasuries. Many analysts are calling for bonds to be the next bubble to burst. I have a feeling that Professor Fama would say that bonds are appropriately priced currently because people really want safe assets, and there is a shortage of safe assets so naturally their price is very high.
- Johnson & Johnson (JNJ), one of the few remaining AAA-rated companies, recently sold $1.1 billion of corporate bonds with record low interest rates of 2.95% for 10 years and 4.5% for 30 years. What’s more interesting to me is that they were able to price 10-year bonds under 3% while the common stock pays a 3.6% dividend yield.
What to look for next week:
9:00 AM Tuesday Existing Home Sales
- Expected to have declined 4.3% since June
7:30 AM Wednesday Durable Goods Orders
8:15 AM Friday GDP
- Economists expect the US 2nd quarter GDP figure to be revised down to 1.4% growth from 2.4%.
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