Saturday, May 17, 2008

Weekly Wrap

Here is a look at Briefing.com's Weekly Recap:

Oil prices came within a hair of $128 this week, industrial production was reported to have declined 0.7% in April, Moody's expressed new concerns about the financial strength of the bond insurers, Fed Chairman Bernanke said conditions in the financial markets are still far from normal, Wal-Mart's guidance for the current quarter was conservative and the stock market... well, the stock market gained 2.5%.

It was another example this week of the marked improvement in sentiment since the bailout of Bear Stearns in mid-March. While bad news was attended to, it was the good news - and the thought of good news - that carried the market this week.

On this note, it wasn't lost on participants that the effects of the fiscal stimulus are starting to kick in with the arrival of tax rebate checks. Additionally, it's starting to register that this is just about the time the first of the Fed's rate cuts should start to impact the real economy. Since last September the Fed, in a series of eight rate cuts, has knocked 325 basis points off the fed funds rate.

These pleasing considerations helped mitigate the effects of bad news and placed a higher premium on relatively good news such as retail sales, weekly initial claims, the consumer price index and April housing starts all being better than expected.

The retail sales report was arguably the most pleasant surprise in this week's economic reports. On Tuesday the Department of Commerce reported retail sales rose 0.5% in April, excluding autos. The better news, though, was that retail sales were up about 0.6%, excluding autos and gasoline. This positive number suggests there is still a decent underlying trend in consumer spending despite the macro headwinds.

If not the most pleasant surprise, the report that housing starts rose 8.2% in April to an annualized rate of 1.032 million units may have been the biggest surprise. Granted that increase was driven by starts on multi-unit dwellings, yet the April number was almost exactly equal to the average level of 1.031 million for the prior four months.

This doesn't mean the housing recession is over, but it does provide some hope that stability is returning to the housing market such that residential construction won't be near the drag on GDP growth that it has been in past quarters.

The industrial production report, admittedly, wasn't good news from an economic standpoint and both the Empire State Index and Philadelphia Fed Index showed negative readings that signaled a contraction in manufacturing activity in those respective regions. Strikingly, though, the business outlook component for those regional manufacturing surveys was in positive territory and comfortably above the prior month's level, which reflects a more favorable view of the outlook for the economy.

Earnings news this week slowed noticeably from prior weeks, but like past weeks, the majority of reports were better than expected. Dow component Hewlett-Packard (HPQ), which announced an acquisition of Electronic Data Systems (EDS) for $13.9 billion, also reported preliminary fiscal second quarter results that topped consensus estimates.

Separately, Freddie Mac (FRE) reported a sizable first quarter loss, yet its loss wasn't as great as feared and its stock rallied as a result, gaining 9% the day of the report.

Numerous retailers also beat quarterly expectations. Wal-Mart (WMT) was one of them, but its conservative guidance and the understanding that its stock had gained approximately 15% in the two months leading up to its report, left the stock pretty much flat for the week.

In other corporate developments, Carl Icahn made proxy fight waves for Yahoo! (YHOO) while General Electric (GE) said it is reviewing strategic options for its appliance business.

Friday's session, which included an options expiration, marked a fitting end to the week. Stocks sold off early on profit-taking activity, with the S&P 500 dropping 9 points, or 0.7%, before mounting an afternoon recovery that left it with a slight gain at the closing bell.

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