Week in Review: Stocks stagnant as investors look for convincing signs of global economic recovery

For the week ended May 29, 2009

Consumer confidence makes biggest one-month jump in six years
U.S. home sales up; prices down
Initial jobless claims fall from prior week
Time Warner set to break away from AOL
South Africa struck by first recession since 1992
Japan’s economy shrinks on declining exports, retail sales

Investors expressed cautious optimism as leading market indicators were relatively flat for the week amid consumer confidence gains. Other factors impacting investor decisions included a U.S. Treasury yield curve that reached a new high, and a gross domestic product that contracted 5.7% in the first quarter, a lower decline than the 6.3% drop in the last quarter of 2008.

U.S. Federal Reserve Board officials believe one indication of an eventual economic recovery may be a steepening of the Treasury yield curve to a record 2.75 percentage points (the difference between the 2- and 10-year Treasury notes). The previous record of 2.74 percentage points was set on August 13, 2003.

In April, durable goods orders gained 1.9%, their biggest gain in 16 months, suggesting the manufacturing slump may be easing. Overseas, Chile’s peso rose the most since May 15 amid increasing demand for the nation’s exports. Brazil’s real increased more than 8.3% in May, the biggest advance among the six most-traded currencies in Latin America.

Elsewhere, the dollar weakened against the euro and the yen, and the pound rose to its highest level against the dollar since November after a report showed U.K. house prices unexpectedly jumped in May. The MSCI World Index extended its monthly streak of gains after economic reports signaled the worst of the global recession may be over.

U.S. economic news

Consumer confidence soars to highest level in eight months
The Conference Board’s sentiment index of consumer attitudes rose to 54.9 in May from 40.8 in April. The jump, much larger than predicted by economists and the biggest one-month increase since April 2003, indicates more Americans are feeling optimistic about the economy.

Home sales rise slightly in April…
The National Association of Realtors reported that sales of previously owned homes rose 2.9% in April, an increase nearly reversing March’s sales decline. Sales of distressed properties, including homes in foreclosure, bolstered the market, accounting for 45% of April’s total sales. Sales of newly built homes were mostly flat, increasing just 0.3% in April, according to the U.S. Department of Commerce.

…but home price slide accelerates
The S&P/Case-Shiller National Home Price Index, a bellwether of real estate market direction, plummeted a record 19.1% during the first three months of 2009 compared with the first quarter of 2008. The Case-Shiller 20-city index dropped a record 18.7% compared to a year ago. The national index covers almost all homes sold throughout the United States while the 20-city index reports sales in 20 major metropolitan areas across the country.

Unemployment filings drop
Initial jobless claims fell by 13,000 to 623,000 in the week ended May 23, according to U.S. Department of Labor figures. The latest new filing numbers are down from 636,000 initial claims the prior week, seeming to indicate that the pace of job losses is lessening.

A number of banks still in financial peril
The Federal Deposit Insurance Corporation (FDIC) released figures showing that the number of U.S. banks at financial risk rose by 21% in the first quarter to the highest level since 1994. The data also indicate that a large number of banks still face tremendous challenges and asset quality remains a major concern for many institutions.

U.S. and global corporate news

General Motors plans to file for Chapter 11 bankruptcy protection on June 1. The automaker will be provided with financing by the U.S. Department of the Treasury while it attempts to sell most of its assets to a company that will be formed by the federal government.

Borders reported a $15.9 million first-quarter loss on sluggish inventory and declining sales. The loss was narrower than analysts had predicted after the book, music, and movie retailer slashed staffing expenses and reduced inventories by more than 20%.

With expected organic sales gains of just 1% to 3% next year, Procter & Gamble’s profit forecast for 2010 fell well below Wall Street projections. To offset stagnating sales in developed markets, including North America and Western Europe, the consumer brands giant plans to target new customers by continuing expansion efforts into emerging markets.

Reversing a failed merger that resulted in staggering financial losses, Time Warner formally announced plans to spin off AOL’s online advertising and Internet-access businesses into an independent, publicly traded company by the end of 2009. By separating from AOL’s Internet unit and focusing on its film and cable television businesses, Time Warner hopes to turn around declining sales and gain significant operational efficiencies.

Amid a prolonged recession and a challenging PC and laptop market, Dell’s PC sales dropped sharply in the first quarter, down 34% from one year ago. The world’s second-largest personal computer maker also reported first-quarter net income fell 63%.

Recent mergers and acquisitions activity
Plasma products maker CSL said the U.S. Federal Trade Commission is likely to block its $3.1 billion takeover of rival Talecris. India’s Bharti Airtel, the largest cellphone company in the country, has revived merger talks with South Africa’s MTN Group in a potential $23-billion deal. If the merger goes through, the combined company would be one of the world’s 10 biggest phone companies on a sales basis, with more than 200 million subscribers and potential annual revenue of $20 billion. After acquiring the toy-store chain, Toys “R” Us plans to continue operating FAO Schwarz’s two retail stores in New York and Las Vegas under the same name, along with the company’s Web site and catalog businesses.

Global economic news

Recession hits South Africa for first time in 17 years
Ending more than a decade of economic growth, South Africa’s gross domestic product fell an annualized 6.4%, pushing the country’s economy into recession for the first time since 1992.

Germany to name preferred bidder for Opel
Potentially setting up one of the biggest state-supported bailouts in the country’s history, the German government is hoping to name a preferred bidder for automaker Adam Opel GmbH. A decision was needed to prevent Opel from being caught up in possible General Motors’ insolvency procedures in the United States.

Russian president warns of deep budget cuts into 2010
Amid an economy hit hard by the global crisis, Russian President Dmitry Medvedev offered a pessimistic view of his country’s economic future, mandating deep budget cuts over the next three years. The ruble continued to fall and stocks retreated as low oil prices and a record drop in industrial production led to a slumping Russian economy.

Japan exports, retail sales fall
Japan, the world’s third-largest oil consumer behind the U.S. and China, saw its economy decrease by a record 15% last quarter as exports declined 26%. The country’s retail sales fell for an eighth straight month in April as worsening job prospects and declining wages kept shoppers home.

Arturo E. Miranda C.
VP International Sales
Thales Securities
amiranda@thalessecurities.com