Saturday, March 28, 2009

week in review:take 2

Weekly Wrap The S&P 500 continued its rally off its March 6 lows, surging 6.2% on the week, led by gains in financials as Treasury Secretary Geithner unveiled his plan to purchase bad assets from banks and housing data came in better-than-expected.
The bulk of the gains were made on Monday with the major indices gaining around 6% and financials spiking 17.7% as the Treasury Department released details regarding its plan to remove troubled assets from the balance sheets of banks. The Treasury plans to create a series of public-private investment funds to buy $500 billion to $1 trillion in legacy loans and securities. To encourage participation from the private sector, the government is taking on much of the risk and offering subsidies. In a show of support, Bill Gross, co-Chief Investment Officer of the world's largest bond fund, told Reuters that Pimco plans to participate in the program.

Also giving the market a boost on Monday was news that existing home sales in February rose 5.1% month-over-month to a seasonally adjusted annual rate of 4.72 million, according to the National Association of Realtors. Economists expected a 0.9% month-over-month drop to 4.45 million. A substantial portion of the sales were from first time homebuyers and distressed properties.

Later in the week, the Census Bureau released upside new home sales reports. February new home sales increased 4.7% month-over-month at an annualized rate of 337,000, topping the consensus estimate that called for a 2.9% decline. Though the result was better-than-expected, it is important to note the increase is at 4.7% +-18.3% (range of -13.6% to +22.7% ), which the Census Bureau notes makes it not statistically significant because it is not clear if the sales rose or fell. Meanwhile, sales are still down 41.1% +-7.9% from the previous year and are at their second lowest rate on records dating back to 1963. Still, traders took the data as an encouraging sign of a potential bottoming in new home sales.

While low interest rates and increased affordability are encouraging developments, the housing sector continues to face high levels of inventory, tight credit conditions and the deleveraging of consumers.

In other economic data, February durable goods orders increased 3.4%, marking the first time in six months that orders increased. Excluding transportation, orders increased 3.9%. Economists expected respective declines of 2.5% and 2.0%, respectively. Separately, final fourth quarter GDP reading showed a 6.3% annualized rate of contraction, a slight decrease from the preliminary -6.2%, but better then the 6.6% decline that was expected.

Though not normally stock market-moving events, Treasury auctions were widely watched after a U.K. offering failed on Wednesday and a U.S. five year offering had disappointing demand, resulting in a sharp drop in Treasuries and a brief pullback in the stock market. But a 7-year auction on Thursday had solid demand, giving the stock market a boost and easing concerns that the U.S. cost of borrowing will increase in the face of record borrowing. On a related note, there was some speculation the movement in Treasuries had to do with China, which this week said it wants an international currency instead of using U.S. dollars. In addition, the Federal Reserve said began its $300 bln long-term Treasury purchase program on Wednesday.

As has been the case for the last several months, Capitol Hill was in focus throughout the week. Fed Chairman Bernanke and Treasury Secretary Geithner testified before the House Financial Services Committee hearing regarding the rescue of AIG (AIG ). Bernanke and Geithner expressed their own frustrations and opinions regarding executive compensation, efforts to protect the economy, and risk-taking constraints. Separately, Treasury Secretary Geithner testified before the House Financial Services Committee that an overhaul of financial regulation is needed. The changes would aim to limit risk in order to prevent future financial crises.

World governments are likely to garner attention next week, as the G-20 meets April 2. Tighter regulation over the financial markets is expected to be an area of focus.

In corporate news, Best Buy (BBY) surged 17.8% on the week after posting better-than-expected fourth quarter earnings of $1.61, $0.21 better than the consensus. The retailer also provided full year guidance that was well above expectations. Accenture (ACN) lowered its outlook for the full year, sending its stock down 8.4% for the week.

In the end, all ten sectors posted solid gains for the week. Financials advanced 12.2% , industrials gained 10.5% and consumer discretionary advanced 8.8%. Defensive sectors underperformed on a relative basis, with utilities up 1.5%.

The S&P 500 is now up 22.4% from its March 6 low.

Index Started Week Ended Week Change % Change YTD %
DJIA 7278.38 7776.18 497.80 6.8 -11.4
Nasdaq 1457.27 1545.20 87.93 6.0 -2.0
S&P 500 768.54 815.94 47.40 6.2 -9.7
Russell 2000 400.11 429.00 28.89 7.2 -14.1

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