If you took a snapshot of the market last week, you'd have thought the end of the recession was in sight. The Dow briefly turned positive for the year at one point on Friday. And it's off to a strong start for June. For the week ended June 5:
S&P 500: Up 2.3% to 940.09
Dow: Up 3.1% to 8,763.13
Nasdaq: Up 4.2% to 1,849.42
But not so fast. Look past the ephemeral hope the market has exhibited while the economy is still in shoddy shape.
For a reality check, look at the jobs number from Friday: 345,000 jobs were lost in May, less than economists' expectations for a loss of 525,000 jobs. However, unemployment is now at 9.4% -- the highest since the early 1980s. That unemployment number suggests the underlying fundamentals aren't as good as stock prices might indicate.
Picking the market apart: commodities and financials
Taking a step back, commodity stocks and stabilized financials were the major groups to lead the indexes higher last week. Investors feel financial Armageddon is off the table and commodities are a strong bet against snarling inflation and towering deficits down the road.
Oil has been on a tear. After pushing above $70 a barrel for the first time since November on Friday, oil closed up $2.13 to $68.44 for the week. Oil's run is what has supported the recent surge in energy stocks. (Although I have to wonder if the rally is running out of steam.)
Investors should tread cautiously when looking at oil and gas stocks. There's nothing that justifies oil's current levels. The fundamentals (demand) aren't there. The price has been going up as the value of the dollar has eroded and people play the China card (China is thirsty for commodities).
While we should all be building our lists of retailers, transporters, and other consumer-driven stocks, the anticipation of economic recovery may already be priced into these stocks -- and too maturely at that. I'd wait for a pullback here.
Corporate news
Now let's look at some individual companies.
After he took six months off for health reasons, there is speculation that Apple's (Nasdaq: AAPL ) CEO Steve Jobs is coming back to support the latest iPhone.
The government appears to want a larger hand in Citigroup's (NYSE: C ) operations. According to The Wall Street Journal, the Federal Deposit Insurance Corp. wants to shake up Citi's executive ranks, putting CEO Vikram Pandit's job on the brink. US Bancorp's former CEO, Jerry Grundhofer, is being considered for Pandit's position. Reportedly, the FDIC is also calling for lowering Citi's health rating to "problem bank."
Citi's news came at the same time that Bank of America's (NYSE: BAC ) chief risk officer stepped down after a U.S. government review of the bank. And the government says it doesn't want to entangle itself in the day-to-day operations of banks ...
Anglo-Australian mining titan Rio Tinto (NYSE: RTP ) scrapped a deal with Aluminum Corp. of China and will now form a joint venture with former "suitor" BHP Billiton (NYSE: BHP ) and issue an equity offering to pay off its debt.
General Motors had a big week. The bankrupt car company announced plans to sell its Hummer brand to a Chinese company and its Saturn brand to Penske Automotive Group. GM also agreed to finance private equity firm Platinum Equity's acquisition of bankrupt auto-parts supplier Delphi. However, the bankruptcy court must approve the deal.
Chip king Intel (Nasdaq: INTC ) agreed to buy software company Wind River Systems (Nasdaq: WIND ) for $884 million as it tries to get more of its chips into more consumer electronics and mobile handheld devices -- outside the traditional PC and server markets.
Catalysts to watch for
And now for this week:
Monday:
The Fed will hold Treasury auctions this week -- from T-bills to 30-year bonds. Watch to see how much demand there is, as investors grow weary of inflation. This will be key.
Tuesday:
The wholesale trade number for the month of May comes out. Trade slipped 1.8% in April.
Wednesday:
The Fed's Beige Book comes out. The Beige Book is the central bank's comments on economic conditions around the country.
The federal budget balance for May, fiscal year 2009, is expected to be minus $175 billion, compared with minus $165.9 billion for May, fiscal year 2008.
April's trade balance numbers are due out. For March, the trade deficit was $27.6 billion.
Thursday:
Initial jobless claims for the week ended June 6 come out. For the previous week (May 29), initial claims jumped by 621,000.
May retail sales are projected to increase 0.3%, compared with a decline of 0.4% in April.
Business inventories for April are expected to decline 1%, the same percentage decrease reported for March.
Friday:
The University of Michigan's Consumer Sentiment index is expected to show confidence rising slightly from its reading of 68.7 in May.
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