Week in Review: Economic weakness weighs on markets

U.S. economic news

U.S. weekly jobless claims reach 500,000
Initial unemployment claims rose unexpectedly again, hitting 500,000 for the week ended August 14. Claims increased by 12,000, though economists surveyed by Dow Jones Newswires had predicted a decline of 4,000. The four-week moving average rose by 8,000 to 482,500. The weekly jobless claims number and the four-week average reached their highest levels since late in 2009. As previously reported, the economy lost 131,000 jobs in July. Together, these reports signal a struggling economic recovery.


Philadelphia-area manufacturing index weakens
The Federal Reserve Bank of Philadelphia’s general economic index turned negative in August, signaling an economic contraction for the first time since July 2009. The widely watched survey fell to minus 7.7 from plus 5.1 in early July. Economists surveyed by Bloomberg News had forecast a rise to plus 7.


Industrial production up slightly
U.S. industrial production rose 1% from June to July, the U.S. Federal Reserve Board reported. This was slightly better than expected.


Producer prices perk up, deflation fears ease
The U.S. Department of Labor’s Producer Price Index increased 0.2% in July after a drop of 0.5% in June. It was the index’s first rise in three months and helped ease growing concerns about deflation.

U.S. and global corporate news

BHP Billiton aims to take over Potash Corp.
Australian mining powerhouse BHP Billiton said it would ask Saskatchewan-based Potash Corp.’s shareholders directly to approve its $38.6 billion all-cash takeover bid after the fertilizer company’s board rejected the offer. The proposed acquisition needs approval from at least 50% of Potash shareholders.


Intel to acquire McAfee
Computer maker Intel agreed to pay $7.7 billion to buy computer-security software maker McAfee in the latest in a series of technology company acquisitions as profitable companies take advantage of low valuations to make bargain purchases.


GM files for an IPO
General Motors filed for a public stock offering that would allow the federal government to begin selling its 61% stake in the automaker and help GM raise money for its turnaround. GM’s interim CEO, Edward E. Whitacre, Jr., who oversaw the automaker’s dramatic return to profitability this year, will step down as chief executive September 1 and as chairman at year end. Last week, GM announced a second-quarter profit of $1.3 billion, its strongest quarter in six years.


Tech bellwethers post profits
Hewlett-Packard and Dell both reported improved profits for the quarter just ended, signaling strength in the technology sector. HP posted a 6% increase in profits on an 11% rise in revenue. Rival computer maker Dell’s profit rose 15% and its revenues were 22% higher than a year earlier.


Deere’s profit leaps
Deere & Company, the world’s largest manufacturer of farm machinery, announced a 47% jump in quarterly earnings as sales of large farm machinery and construction equipment rebounded. U.S. sales rose because of robust commodity prices, strong cash receipts from farming, and low interest rates. However, European demand continued to be weak.


Wal-Mart earnings up on non-U.S. results
Wal-Mart Stores posted a 3.6% increase in second-quarter earnings, with strong international results leading the way. The discount retail chain’s international sales and operating income had double-digit growth. However, its U.S. same-store sales fell for the fifth straight quarter.


Williams-Sonoma earnings soar
Williams-Sonoma, a retailer of housewares and home decor, posted a $30.8 billion profit for its quarter ended July 31, compared with just $399,000 during the same period a year ago. Excluding restructuring and other charges, the company grew its earnings six-fold. Revenue rose 15% and same-store sales grew 14%.

Global economic news

China passes Japan as world’s second-largest economy
In the latest reminder of China’s growing clout and Japan’s decline as an economic giant, China replaced Japan as the world’s second-largest economy in the second quarter. China’s economic output was valued at $1.33 trillion in the second quarter while Japan’s economy stood at $1.28 trillion. Japan has had the world’s second-largest economy for most of the last four decades. In comparison, U.S. second-quarter gross domestic product was $14.6 trillion, according to the U.S. Department of Commerce.


German central bank raises economic forecast
The Deutsche Bundesbank raised its 2010 forecast for German economic growth to 3% from 1.9% after second-quarter figures released last week showed surprising strength. The country's economy grew at its fastest pace in 20 years, fueled by robust growth in exports.


Japan’s GDP slows to a crawl
Japan’s economy grew at an anemic 0.4% in the second quarter, falling far below expectations because of stagnant consumption and weak exports. Strength in the yen is weighing down demand for Japanese exports.


Taiwan economy grows
Taiwan’s economy grew at a robust 12.53% in the second quarter, much faster than the median forecast of 10.5% in a Dow Jones Newswires poll, prompting the Taiwanese government to raise its full-year GDP growth forecast to 8.24% for 2010, from 6.14%.


Inflation climbs in eurozone, eases in India
An increase in eurozone inflation and a decrease in the rate of rising prices in India could both be considered good news. Higher energy prices in Europe caused the eurozone annual inflation rate to rise to 1.7%, its highest annual rate since November 2008, but still below the European Central Bank’s target of 2.0%. In India, wholesale inflation tapered to 9.97% in July from 10.55% in June.

Stay focused and diversified
In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By working closely with your financial advisor, you can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon, and tolerance for risk. Diversification does not guarantee a profit or protect against loss.

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Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times; boston.com.

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Market Week: For Week Ending 8-13

The Markets

Cautious words from the Fed, a wider than expected trade deficit, slowing Chinese imports, worse-than-expected weekly initial unemployment claims, and a resulting pessimism about global economic growth for the rest of 2010 all helped push the four major domestic equities indexes back into negative territory for the year once again. Wednesday saw a 265-point drop in the Dow, while small caps and the NASDAQ were hit even harder. Treasury prices rose as the 10-year note's yield fell to a 16-month low. Oil prices fell to roughly $75 a barrel, hit by concerns over the potential for a double-dip global recession.

Market/Index	2009 Close	Prior Week	As of 8/13	Week Change	YTD Change
DJIA	10428.05	10653.56	10303.15	-3.29%	-1.20%
NASDAQ	2269.15	2288.47	2173.48	-5.02%	-4.22%
S&P 500	1115.10	1121.64	1079.25	-3.78%	-3.21%
Russell 2000	625.39	650.68	609.49	-6.33%	-2.54%
Global Dow	1984.48	1908.24	1827.75	-4.22%	-7.90%
Fed. Funds	.25%	.25%	.25%	0 bps	0 bps
10-year Treasuries	3.85%	2.86%	2.68%	-18 bps	-117 bps

Last Week's Headlines

• The Federal Reserve Board said it will continue to help support the weak economy by buying Treasury and mortgage-backed bonds with the proceeds of maturing bonds it already holds.
• The U.S. trade deficit widened dramatically in June, jumping 18.8% from May's $42.1 billion to just under $50 billion. Imports, especially consumer goods, rose while exports fell during the month. The deficit is the largest since October 2008, the Commerce Department said. Meanwhile, China announced that its imports grew more slowly in July. That raised concerns that any decline in demand by emerging economies for products manufactured in the U.S. and elsewhere might hamper economic recovery worldwide.
• Inflation at the consumer level remained low despite a 0.3% increase in July. That translates to a 1.2% annual inflation rate, according to the Bureau of Labor Statistics.
• The faster we go, the behinder we get: Even though Americans worked longer hours in the year's second quarter, overall business productivity fell. After five quarters of strong growth, business productivity declined at an annual rate of 0.9%. The 3.6% increase in the total number of hours worked was the biggest jump since Q1 2006, according to the Bureau of Labor Statistics, while the output produced by those workers increased only 2.6%.
• Freddie Mac followed Fannie Mae in asking for an additional $1.8 billion ($1.5 billion for Fannie) from the U.S. Treasury to help it cope with ongoing losses on bad mortgages. Though Fannie Mae had said the previous week that its Q2 loss was the smallest in three years, Freddie's losses continued to rise during the second quarter.

Eye on the Week Ahead

Wholesale inflation data will be watched for any signs of deflation, and Thursday's leading economic indicators report will suggest what the next few months may hold. Other than that, earnings reports and end-of-week options expiration are the most likely catalysts for domestic equities, which could continue to see light trading volume.

Key data releases: International capital flows (8/16); housing starts, wholesale inflation, industrial production (8/17); leading economic indicators (8/19); options expiration (8/20).

Data source: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

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