Weekly Wrap

Below is Briefing.com's weekly recap:

The stock market tumbled 3.1% in a volatile week of trade, falling to its lowest level in nearly three months. Although weakness was broad-based, the financial sector was at the center of the market's decline, with concerns over further write-downs weighing on sentiment.

As expected, quarterly earnings from Lehman Brothers (LEH), Goldman Sachs (GS) and Morgan Stanley (MER) were poor compared to last year. But the results were better when compared to Wall Street's expectations; Goldman's earnings blew away forecasts, and Morgan Stanley beat estimates. Lehman's loss of $2.8 billion matched its preannouncement.

The stock market, and financials tanked on Tuesday despite Goldman's large beat. Ironically, the market sank when Goldman warned that U.S. banks may need to raise $65 billion in fresh capital in response to the subprime fallout. (U.S. financial companies have raised $159 billion so far).

Sure enough, the following day regional bank Fifth Third Bank (FITB) said it is going to raise $1 billion in fresh capital, sell $1 billion in assets and cut is dividend by 66% in an effort to shore up its balance sheet. Regional banks fell 9% for the week.

Citigroup compounded the financial sector's decline on Thursday, after announcing that it will face another barrage of write-downs in its second quarter, although the total amount should be less than its $19 billion first quarter write-down due decreased subprime exposure. Citi did note, however, that it will face a write-off on its bond insurer exposure similar to its first quarter amount ($1.5 billion), citing the widening in credit spreads of bond insurers -- which indicates the struggling bond insurers might not be able to pay claims on the assets they back up.

On a related note, Moody's cut its Aaa credit rating and put a negative outlook on the insurance units of both Ambac Financial (ABK) and MBIA (MBI ). Moody's lowered MBIA's unit by five notches and Ambac's unit by three notches, citing the difficulty the companies are having in writing new business and their limited ability to raise new capital.

Financials tumbled 4.7% for the week and is at its lowest level in five years.

Although financials were the driving force behind the negative sentiment this week, all ten economic sectors posted a decline and 86% of S&P 500 components fell.

Consumer discretionary tumbled 5%. Ford (F) and General Motors (GM) retreated 8% and 16% for the week, respectively, after Ford said it will be difficult for the company to "break-even" in 2009, and Standard & Poor's put a negative credit rating watch on both GM and Ford. Traders were also disappointed with earnings from retailers Best Buy (BBY), Circuit City (CC) and Pier 1 Imports (PIR).

FedEx (FDX) fell 6% after reporting quarterly earnings that missed the consensus estimate. The Memphis, Tenn.-based company issued fiscal year 2009 earnings guidance well below expectations, citing sluggish U.S. demand and record energy prices.

The managed health care group stumbled 11% after Coventry Health Care (CVH) slashed its earnings guidance well below expectations due to increases in its Medicare medical loss ratio and higher-than-expected outpatient utilization of its commercial business.

Economic data were largely overlooked as market participants focused on corporate news, although there were several notable releases.

May PPI rose by a higher-than-expected amount due to the spike in energy prices. However, core PPI -- which excludes food and energy -- was in-line with estimates. Weak consumer demand has limited the ability of producers to raise prices. The year-over-year increase in PPI is now 7.2%. The year-over-year increase in the core rate is 3.0%.

The housing industry is still depressed, but the pace of declines in housing starts is slowing -- which is a positive for the construction spending portion of GDP forecasts. Housing starts fell 3.3% from the prior month and building permits dipped 1.3%. Homebuilding stocks ended the week with a 1.3% gain.

Industrial production in May unexpectedly dipped, but the slowdown is still not near the levels seen during the 2001 recession. Specifically, production declined 0.2% from the prior month, which was worse than the forecast of a 0.1% increase. Capacity utilization slipped 0.2% to 79.4%.
The number of new unemployment claims held mostly steady from the prior week -- remaining elevated, but below the levels typically seen during recessionary environments.

In commodity trading, crude oil settled the week nearly unchanged at $134.62 per barrel after several wild swings, trading as high as $139.89 -- a new all-time high -- and as low as $131.19. Trading catalysts included the government's energy inventory report that showed a mixed picture of demand, news that China is increasing its price on gasoline and diesel, and reports that Israel performed a military exercise to simulate the bombing of nuclear facilities in Iran.

Commodities as a whole rose 2.1% as a weakening dollar (-1.5%) spurred some buying interest in gold (+3.6%) and silver (+5.1%).

The focal point next week will be the FOMC policy announcement on Wednesday. The market expects the fed funds rate to remain unchanged at 2.00%, but the uncertainty with respect to the wording of the policy directive means it has market-moving potential.