Monday, June 1, 2009

Weekly Stockmarket Report

Top news for the week:

*General Motors battered by the economic downturn, mounting debt and management problems, will file for bankruptcy Monday.

It will be the largest industrial bankruptcy in U.S. history and the fourth-largest overall and comes as smaller rival Chrysler appears ready to make an exit from its court proceedings.

The bankruptcy will give the government a 60 percent ownership stake and an unprecedented role in reshaping the auto industry.

President Barack Obama planned to announce his support for General Motors as it enters bankruptcy protection, by aiming to provide billions more in government aid and protect the taxpayers' investment without interfering with the company's day-to-day operations.

* World stock markets rose strongly Monday (1st of June) after closely-watched manufacturing surveys reinforced hopes that the global economy may start to recover by the second half of the year.

In China, brokerage CLSA Asia-Pacific Markets said its monthly purchasing managers index -- a broad gauge of activity -- rose to 51.2 in May from April's 50.1. Anything above 50 indicates an expansion. The state-sanctioned China Federation of Logistics and Purchasing said its own PMI eased slightly to 53.1 from April's 53.5 but still showed activity expanding.

Meanwhile, data provider Markit found that its manufacturing purchasing managers' index for 16 countries that use the euro was revised up to a seven month high of 40.7 in May from the previous estimate of 40.5, while the Chartered Institute of Purchasing and Supply said its purchasing managers index for Britain rose for the third month running to 45.4 in May from 43.1 in April.

*The U.S. economy sank at a 5.7 percent pace in the first quarter as the brute force of the recession carried over into this year. However, many analysts believe activity isn't shrinking nearly as much now as the downturn flashes signs of letting up.

The Commerce Department's updated reading on the gross domestic product, released Friday, showed the economy's contraction from January to March was slightly less deep than the 6.1 percent annualized decline first estimated last month. But the new reading was a tad worse than the 5.5 percent annualized drop economists were forecasting.

*Long-term borrowing rates fell back on Thursday as investors returned in numbers to pick up newly issued Treasury notes.

The 10-year Treasury note -- a widely used benchmark for home mortgages and other kinds of consumer loans -- gained nearly a point, sending its yield back down to 3.62 percent from 3.75 percent the day before.

Investors had sold off bonds on Wednesday, pushing long-term yields to their highest level in six months, on worries that the flood of U.S. government debt hitting the market this year would overwhelm demand.

Those concerns abated on Thursday after the Treasury Department saw solid demand at an auction of $26 billion in seven-year notes, the third and final auction this week in which the government sold a total of $101 billion of debt.

*U.S. banks turned a profit in the first quarter, but the number of problem banks jumped to the highest level in 15 years and tough conditions persist for the industry, the government said Wednesday.

The Federal Deposit Insurance Corp. said higher trading revenues and lower borrowing costs at big banks helped the industry earn a $7.6 billion profit in the January-March period, compared with a record loss of $36.9 billion in the fourth quarter. The profit was 61 percent below the $19.3 billion earned in the year-earlier period and followed the first quarterly loss in 18 years.

*Major oil producer Saudi Arabia spoke out Wednesday against reducing OPEC's output -- the latest sign that the 12-nation cartel will keep production at present levels. But instead of falling on the news, crude prices climbed to six-month highs.

Even before Saudi Oil Minister Ali Naimi spoke, the recent jump in oil prices was working against hardline OPEC members who were advocating even costlier crude. Naimi's comments reinforced expectations that OPEC oil ministers meeting Thursday would decide to not change oil production levels. The Saudis account for close to a third of OPEC's total production and what they say is usually informal policy for the rest of bloc.

Next take a look at the chart of the CBOE Volatility Index or VIX which is a gauge of investor fear.

The VIX has been on a downtrend since December 2008, which is good news for stock investors. Basically, the VIX and the sharemarket moves in the opposite direction to each other. When VIX goes up, investors are fearful and thus selling causes share prices to fall and vice versa.

Since VIX has been falling, the sharemarket has experienced a rally from March to June of this year. So investors seem cautiously optimistic about a recovery in the U.S. and global economy perhaps at the end of this year (since the stockmarket is usually 6-9 months ahead of the real economy).

Even the bankruptcy of GM has failed to depress investor optimism.

VIX is below its 20 and 40 day moving averages. VIX has recently made a move upwards and yet has come back down. The MACD is below 0 but above its signal. The slow stochastic is at 44.133 which is almost midway between its low and high thresholds. So the indicators are giving mixed messages i.e. VIX could move up or down this week depending on investors' reactions to this week's economic news.

Next take a look at the S&P 500 Index chart below.

The S&P 500 Index has been trading within a range in June and has neither been in a strong downtrend or uptrend.

The Index has finished above both the 20 and 40 day moving averages which is bullish for the index and is reflective of the investor optimism that was discussed above.

The MACD is positive which is bullish but is below its signal. The slow stochastic is at 66.522 which is approaching the high end of its range, so could be approaching overbought levels in the short term.

Thus depending on investor reactions to GM bankruptcy and other economic news this week, the sharemarket could continue to move up for 1 to 2 more days but come down a bit due to approaching overbought levels.

This is this week's economic calender:

Jun 1 8:30 AM Personal Income Apr
Jun 1 8:30 AM Personal Spending Apr
Jun 1 10:00 AM Construction Spending Apr
Jun 1 10:00 AM ISM Index May
Jun 2 10:00 AM Pending Home Sales Apr
Jun 2 2:00 PM Auto Sales May
Jun 2 2:00 PM Truck Sales May
Jun 3 8:15 AM ADP Employment Change May
Jun 3 10:00 AM Factory Orders Apr
Jun 3 10:00 AM ISM Services May
Jun 3 10:30 AM Crude Inventories 05/29
Jun 3 10:35 AM Crude Inventories 05/29
Jun 4 8:30 AM Initial Claims 05/30
Jun 4 8:30 AM Productivity-Rev. Q1
Jun 4 8:30 AM Unit Labor Costs Q1
Jun 5 8:30 AM Average Workweek May
Jun 5 8:30 AM Hourly Earnings May
Jun 5 8:30 AM Nonfarm Payrolls May
Jun 5 8:30 AM Unemployment Rate May
Jun 5 2:00 PM Consumer Credit Apr

Remember to sign up for future updates by filling in your email address and also please subscribe to the RSS feed.

To appreciate beauty; to find the best in others; to leave the world a bit better whether by a healthy child, a garden patch or a redeemed social condition; to know even one life has breathed easier because you have lived. This is to have succeeded.

Ralph Waldo Emerson