June 2010 – Market Commentary

• A slew of downbeat data sent the markets lower for the second consecutive month.  The Institute for Supply Management’s index of manufacturing activity fell unexpectedly to its lowest level of the year; auto makers reported lower US sales in June, and the Labor department announced a rise in claims for jobless benefits.

• Erasing what had started to be a strong month of corporate earnings and a 2.58% gain in the US stock market, the S&P 500 fell almost 8% in the last 8 trading days to finish a negative 5.39% return for the month.  In a reversal in the bond markets, corporate bonds – led by residential mortgage backed securities, outpaced government bonds in June.  The aggregate bond market gained 1.46%.

Economic News
• US companies have accumulated record levels of cash on hand in a clear sign of persistent worries about the financial markets and about the sustainability of the economic recovery.  It’s yet to be seen if large cash stockpiles are a permanent response to the credit dislocation in 2008 and 2009 or a temporary reaction.  Likewise, consumers are continuing to improve their own household balance sheets by reducing credit card debt by $8.5 billion in April.  Revolving credit balances now stand at $838 billion, down from a record peak of $976 billion in September 2008.

• EU ministers set up a $527 billion backstop facility to support sovereign debt issues in struggling EU nations.  The US called for European Bank stress test results to be made public as the European Central Bank indicated that Euro Banks will face $240 billion in asset write downs due to sovereign debt crisis.  The Euro hit a four year low on 6/2.

• First quarter GDP was revised downward to 2.7% from 3%.  The US economy added 41,000 private sector jobs in May.  Total new jobs were 431,000 with the balance of additional jobs being Census employees.  The unemployment rate fell to 9.7%.

Regulatory News
• The House agreed to a sweeping rewrite of the nation’s financial regulations in June, moving the initiative one step closer to becoming law.  The measure would give regulators new powers to seize and dismantle failing financial companies; bolster the Federal Reserve’s authority over the country’s largest firms; toughen scrutiny over exotic financial instruments known as derivatives; and create a new regulator to police mortgages and credit cards among other things.  Focus now shifts to the Senate.

• In a surprising move, the Chinese government agreed to relax restrictions on its currency, and allow it to appreciate versus other major currencies.  The move is expected to be a gradual increase that will help improve trade balances between China and other nations as domestic demand is likely to increase.

Corporate News
• BP agreed to suspend its dividend for the next three quarters and to fund a $20 billion fund for claims related to the Gulf oil spill.  HP announced that it will be investing roughly $1 billion to revamp its technology services division, and that the increased efficiencies will result in the shedding of 9000 jobs in that division. Fannie Mae and Freddie Mac were forced to delist from the NYSE at the request of their regulator.

Market News
• Fear and uncertainty remain prevalent in the market, as volatility has climbed back to early 2009 levels.

• After months of pounding, international equities were less affected in June  – down 1.34% compared to US stocks which were down 5.39%.  Commodity prices have fallen 11% in 2010, after a strong gain of 19% last year.  Concerns over global economic slowdowns, primarily in Europe, are seen as the primary cause.

Index Performance – June:
US Large Cap Stock (S&P 500) -5.23%
International Stock (FTSE AW ex US) -1.12%
US Broad Bonds (Barcap Aggregate) +1.57%
US Government Bond (Barclay’s Govt) +1.71%
Cash (ML 3 Mnth T-Bill) +0.01%


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