Sunday, June 24, 2007

Weekly Wrap

Here is the weekly recap from

After a slow start to the week, the stock market action picked up on Wednesday following a number of reports discussing the troubles of two Bear Stearns mortgage hedge funds. By Friday's closing bell, there was little mistaking the bearish bias that governed the week and which left the major indices with some sizable losses that were exacerbated late Friday in the wake the Russell rebalancing.

Worries about a potential domino effect related to the troubles at the aforementioned funds took a toll on market sentiment, which was already wavering given the recent jump in interest rates.

The yield on the 10-year note dipped as low as 5.08% on Tuesday, but by Thursday's close, it was back at 5.19%. A flight-to-saftety trade on Friday drove the yield down to 5.13%, but it looks as if a 5.0%+ yield could easily hold.

The latter realization has effectively sapped the momentum from the market, and combined with reports of hedge fund troubles, it diminished investors' appetite for buying stocks in the past week.

The sell-off in the market was broad-based, but in light of the concerns about rising rates and the uncertainty regarding the hedg fund community's exposure to the subprime fallout, it was little surprise to see the financial sector pacing the broader market's retreat.

REITs and investment banks were some of the hardest hit industry groups, as were other rate-sensitive areas such as homebuilding, electric utilities, and real estate management.

Private equity firm Blackstone (BX) was a standout in the financial sector, though, as its emergence as a publicly-traded company on Friday got a warm reception. Blackstone priced at $31, the high end of its range, and traded as high as $38 in its first day of trading.

BX settled at $35.06, however, as poor market conditions and reports the House is angling to pass legislation that will raise taxes sharply on the "carried interest" for investment firms like Blackstone took some of the wind out of the stock's sails.

That news also weighed on the broader market, which feared a successful passage of such legislation could curtail LBO activity. That fear was misplaced. Higher taxes will impact the valuation of affected companies, but it is interest rates that drive LBO activity. So, if the market were to fear anything on this front, it should fear rising interest rates.

There were no major economic reports in past week.

The May Housing Starts and Permits report was mixed and did not have much impact on economic expectations or the market since the data were largely from a period before the recent spike in interest rates. The trend in new claims for unemployment remained steady and continued to reflect tight labor market conditions.

Meanwhile, the Philadelphia Fed reported a much stronger than expected report on regional manufacturing activity, but that report didn't have any real impact ahead of next week's FOMC meeting (June 27-28).

On the earnings front, there were a number of well-known companies that reported their results. They included Best Buy (BBY), Carnival (CCL), Darden Restaurants (DRI), Circuit City (CC), FedEx (FDX), Morgan Stanley (MS), H&R Block (HRB), and Jabil Circuit (JBL).

Most notably, electronics retailer Best Buy reported first quarter earnings that missed analysts' expectations and lowered its fiscal year outlook, as increased sales of lower-margin products weighed on results.

The weak forecast raised some concerns about the impact of industry competition and some residual concerns about the health of consumer spending. It would be remiss not to add, though, that Best Buy's revenues were actually up 14% for the period, so consumers clearly haven't shut their wallets.

As expected, moderating economic growth had a negative impact on FedEx's fiscal fourth quarter results, which also came in below analysts' estimate.

In other corporate news, Home Depot (HD) announced a massive $22.5 billion increase in its stock repurchase plan, which gave the Dow component a nice lift during a week when most stock prices were depressed.


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