U.S. Debt Ceiling and Greek Woes Weighed Heavy on the Week

Markets:

For the week of July 11, 2011 through Thursday, July 14, 2011

• Standard & Poor’s 500 Index: -2.60%
• Dow Jones Industrial Average: -1.74%
• NASDAQ Composite: -3.40%

There were a few issues weighing down the market this week. The U.S. debt ceiling debate rages, while little progress is made. News from Europe sparked fears and a flight to safety into U.S. Treasuries, as contagion from Greece has affected core European Union nation Italy. Italy has a debt to GDP ratio of 120% and is the third largest economy in the EU. If the Italian economy started to stumble, or they needed a bailout, the consequences could greatly affect the whole eurozone economy. Other euro worries include Ireland’s debt being downgraded to junk status this week by Moody’s, further hurting the EU. On the bright side, earnings releases are off to a great start showing growth is happening, albeit at a slow pace.

Politics

• United States Debt Ceiling
  • There has been little progress in Washington to reach a deal to raise the debt ceiling by the August 2 deadline when a default should occur.
  • We feel that a deal will be reached by then to keep our AAA credit rating and avoid a technical default, or default.
  • What the terms of that agreement will be, who knows, but talks continue.
• The European Union was scrambling this week as it seems contagion from the peripheral countries may be spreading.
  • Italy, with a 120% debt to gross domestic product (GDP) ratio, has been under the microscope this week.
  • Ireland’s credit rating has been downgraded to junk by Moody’s.
  • Fear of a crisis in the eurozone has lead investors to the safety of U.S. Treasuries.

Economic Data

• Federal Open Market Committee Minutes
  • The second round of Quantitative Easing, or QE2, ended on June 30, 2011.
  • The Federal Funds Rate is expected to remain in the 0% to 0.25% range for a while.
  • Inflation is expected to remain rather flat for the rest of the year.
  • GDP growth is forecasted to accelerate the second half of the year, but only slightly, while the labor market should improve.
• Jobless Claims were 405,000 for the week, dropping 22,000.
  • Data for the previous week was revised to 418,000.
  • The drop was larger than expected, but
    • This time of year it is difficult to decipher the data with the July 4^th holiday and seasonal factory shutdowns.
• Retail Sales picked up 0.1% in June.
  • Surprisingly, automobile sales picked up in June, while gasoline sales fell.
  • Leading the charge were:
    • Apparel retailers;
    • Auto dealers;
    • Department stores, and
    • Building supply stores.
• Producer Price Index showed that finished goods prices were down 0.4% for the month of June.
  • This is the first drop in 12 months.
  • Fuel price declines helped push overall prices down.
  • Core prices for finished goods, excluding food and energy actually rose 0.3%.

Company News

• Alcoa, Inc. (NYSE: AA) just missed earnings estimates by $0.01, with $0.32 per share earnings.
  • Revenue came in at $6.59 billion, which was more than the estimated $6.28 billion and last year’s $5.19 billion.
  • Alcoa projects aluminum demand to grow at 12% this year.
  • Shares fell 1.25% on the news.
• JPMorgan Chase & Co. (NYSE: JPM) produced good numbers this quarter.
  • JPMorgan Chase beat analysts’ forecasts with earnings of $1.27 per share earning $5.4 billion.
    • Last year’s numbers were $1.09 per share and $4.8 billion.
  • Income rose 13%, lead by a 49% increase in investment banking revenue.
  • Loan loss reserves were reduced by $1 billion.

Interest Rates

• Two-year Treasury yield fell to 0.37%, just above the November 2010 all-time low of 0.33%.
• The five-year Treasury yield was down to 1.48%, down 0.25% in the past few weeks.
• The 10-year Treasury rate dipped to 2.91%, still below the 3% level.
• The 30-year Treasury yield dropped to 4.21%, well below the 4.75% rate seen at the beginning of the year.

Disclosures

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