May 2010 – Market Commentary

• US Treasuries and the dollar were the big winners in May as the ‘flash crash’ and the worsening crisis in Europe resulted in an official market correction.  International stocks led the decline – falling 10%, with US stock falling closely behind down 8%.  US Government bonds enjoyed a boost from the flight to quality, gaining 1.53% – while corporate bonds fell slightly.

• The European Union agreed on a one trillion dollar bailout package in an effort to stop the growing sovereign debt crises from spreading throughout Europe.  The markets remain uncertain, however, that it will succeed.  The unprecedented move casts aside the notion that each EU country should manage its own finances and ushers in an era in which the member of the common currency take on responsibility for each other’s fiscal troubles.

Economic News
• US inflation fell to its lowest level in 44 years as high unemployment and excess production keep wages and prices down in much of the developed world.  Increasing production related costs are a strong signal, however, that prices may move higher soon.

• Contrary to conventional wisdom, mortgage rates fell below 5% in May providing an unexpected windfall for American homebuyers.  Rates were pushed lower by international money flowing in to the safe haven of US Treasuries.

• Existing home prices have stabilized and sales of newly built homes soared in May.  The outlook remains weak, however, as concerns about the strength of the economy linger.

• Fallout continues from last month’s explosion on the Deepwater Horizon drilling rig and the massive oil leak into the gulf that has ensued.  The direct impact on the economy remains unclear but its effect on the food industry is expected to be severe.

Regulatory News
• The Senate approved the most extensive overhaul of financial-sector regulation since the 1930’s.  If approved by the House, the legislation would set up new regulatory bodies and restrict the actions of banks and other financial firms.

• Federal prosecutors and securities regulators opened a criminal investigation into whether several major Wall Street banks misled investors about their roles in mortgage-bond deals.  The banks under scrutiny include JP Morgan Chase, Citigroup, Deutsche Bank, and UBS.

Corporate News
• Apple surpassed Microsoft in market value, marking a changing of the guard in the technology sector.  GM reported its first quarterly profit in three years, driven by sharp cost reductions and improved global sales.  Cisco posted a 63% jump in quarterly profit signaling that a rebound in technology spending is gaining momentum.

Market News
• Reminiscent of late 2008 and early 2009, extreme volatility and late days sell offs returned to the market in May.  Major US and International markets have fallen by more than 10% from their April highs – signaling an official market ‘correction’.

• The stock markets were jolted by a sharp, unexplained selloff in May that ultimately rebound just as quickly.  Many trades between 2:20pm and 3:00pm on Thursday, May 6 were deemed erroneous and were canceled.  The precise cause of the event has yet to be determined – in the mean time, the major exchanges agreed to introduce temporary trading limits on individual stock moves.

Index Performance – May:
US Large Cap Stock (S&P 500)                      -7.99%
International Stock (FTSE AW ex US)          -10.5%
US Broad Bonds (Barcap Aggregate)             +.84%
US Government Bond (Barclay’s Govt)        +1.53%

Cash (ML 3 Mnth T-Bill)                               +0.04%


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