Week in Review: Investors look to wealth of economic data for economy's prospects

For the week ended August 7, 2009

Manufacturing orders rise in July
“Cash for Clunkers” program leads to surge in auto sales
Personal income drops; spending increases
U.S. existing home sales jump
Toyota posts loss, outlook remains uncertain
Prudential, Allstate report strong earnings
European investors flock to purchase corporate bonds
U.K. central bank keeps rate steady

Investors continued to express cautious optimism while waiting for a litany of economic data to be released this week. Stocks fluctuated but rose overall amid positive manufacturing, jobs, and housing data, and worse-than-predicted data on nonmanufacturing activity.

Data for the manufacturing sector, often considered a leading indicator for the rest of the economy, suggest that the economy may begin to experience growth in the third quarter if current trends persist. As a result, several economists upgraded gross domestic product forecasts for the second half of 2009.

U.S. economic news

Favorable manufacturing report shows jump in new orders and production
An increase in new manufacturing orders and production led the Institute for Supply Management’s manufacturing index to increase to 48.9 in July, up from 44.8 in June. While the figure is the seventh straight monthly increase for the index, it still falls short of the 50 level that indicates growth in the sector.
“Cash for Clunkers” trade-in program lures car buyers
Auto sales rose to their highest level in 11 months in July as shoppers hit showrooms in droves, hoping to take advantage of the federal government’s “Cash for Clunkers” car allowance incentive program. The $4,500 car trade-in program may be the most successful of all the federal government’s recent stimulus efforts. Lawmakers this week approved an additional $2 billion in funding to help ensure that the program will continue operating.

Personal income slips; spending edges up
According to the U.S. Department of Commerce, personal income fell 1.3% in June, slightly more than the 1.1% decline projected by leading analysts. The decrease, following a 1.3% increase in May, is the biggest drop since January 2005. Spending by individuals rose 0.4% in June, after a 0.1% increase in May.

Existing home sales rise for fifth straight month
Spurred by tax incentives and a glut of foreclosed property on the market, pending home sales jumped 3.6% in June, the fifth straight monthly gain, according to the National Association of Realtors. Home sales are up 6.7% from their level a year ago.

U.S. and global corporate news

Toyota Motor posted a smaller-than-projected net operating loss of 194.9 billion yen for the quarter ended in June. The loss beat the 210.4 billion yen net loss that had been predicted by analysts, according to data compiled by Thomson Reuters. The figure also marks a significant improvement over the net loss of 765.8 billion yen for the quarter ended in March.
Amid increased competition and lower demand for networking systems, Cisco Systems posted an 18% drop in sales in the quarter ended July 25. Cisco’s revenue fell to $8.5 billion, from $10.4 billion a year earlier. Profit was $1.1 billion, down from $2.01 billion one year ago.

British Unilever, the world’s third-largest food and consumer goods company, beat analysts’ projections by posting a 4.1% rise in sales for the second quarter. U.S. rival Procter & Gamble reported an 11% decrease in sales for the same period.

Prudential Financial reported a profit of $538 million, compared with $556 million a year earlier. Meanwhile, Allstate Corp.’s second-quarter earnings were up dramatically, to $389 million, from $25 million a year ago.

Despite a slowdown in new subscribers, Comcast recorded a 53% increase in second-quarter profits, as its earnings rose to $967 million from $632 million a year earlier. DirecTV’s profits fell 11% for the same period, posting earnings of $407 million, down from $455 million a year ago.

Wendy’s/Arby’s Group, formed in September when Arby’s owner Triarc acquired Wendy’s, reported a second-quarter profit of $14.9 million.

GMAC posted a $3.9 billion loss for the second quarter, up from $2.48 billion a year earlier. The lender tied the loss, its seventh in the past eight quarters, to rising loan defaults.

Global economic news

Sales of corporate bonds surge in Europe
Corporate bond sales set an all-time record of $1.1 trillion in Europe, beating the previous mark set in 2007. Investors have been attracted by the best returns since at least 1998, with investment-grade securities in euros providing bondholders a 10.2% return year to date, according to Merrill Lynch & Co. index data.

Bank of England holds key rate, extends bond purchases
The Bank of England voted to keep its benchmark interest rate unchanged at 0.5%. The central bank also decided to pump an additional 50 billion pounds, or $85 billion, into the country’s financial system, on top of the 125 billion pounds it has already spent to spur lending. While there have been encouraging signs throughout the British economy, the bank decided to expand its asset-purchasing plan after issuing a statement saying, “the recession appears to have been deeper than previously thought.”

Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times.

Arturo E. Miranda C.
VP International Sales
Thales Securities