By Markos N. Kaminis
A slew of foreign factors along with regular economic reports played havoc with stocks again last week. While the Dow Jones Industrials Index only dropped fractionally, hidden within the weekly chart is a virtual roller coaster ride. The daily differences between high and low price marks swung wildly all week long, with Monday’s spread measuring 207 points; Tuesday’s gap marking 305 points; Wednesday measuring 273 points; Thursday swaying 307 points; and Friday settling after a 215 point swing. Believe it or not though, the week was relatively calm when compared to its near predecessors. The S&P Volatility Index, known affectionately to traders as the “VIX”, actually dropped 20% through the week. Still, the situation is like saying this latest hurricane did not kill as many people as the last. It has been an especially rough hurricane season, by the way, with stocks closing out their worst month in over a year as the Dow dropped 7.9%. Proponents of the old adage, “Sell in May and walk away,” could likewise walk with heads held high, as this year’s version of May looks to be the worst since 1962.
Driving the swings in shares were some old familiar faces and some new ones to keep things fresh. Europe is now a regular pain in the rear, and last week saw Spain’s government debt downgraded for the second time in a month. The poor Spanish, though, only sought to give their debt judges and European masters what they demanded. In a cruel twist of fate, Fitch downgraded the Spaniard’s sovereign debt rating because of their implementation of austerity measures, noting in their critical report that its latest prudent budget management would slow Spain’s economy. Talk about a lose lose situation! So what do you think Greece’s extreme austerity measures threaten to lead to in the motherland? Looks to me like the worst economic situation since World War II.
Regarding Spain, Fitch also noted the nation’s central bank bailout of one of its regional banks. This leads us to one of the few positive factors found in the spastic week. European Union Financial Services Commissioner Michel Barnier said last week that the EU should levy a tax on banks to secure an emergency pool of funds for the future orderly unwinding of important financial institutions. This reassuring announcement acted as a counter against rising rumors and collecting concern about the current financial well-being of EU area banks.
However, another rumor surfaced and weighed on stocks last week. It was an old concern that burdened US shares once before. The Chinese were rumored to be cutting back on European debt interests on fear that the EU credit crisis might become endemic to the region. The Chinese offered appropriate lip service to counter the rumors and protect their own interests, however, we are not so sure they are putting their money where their mouth is. Rather, we expect the Chinese are hoarding commodities, including precious metals, as global currencies seem to face an impending threat.
The week’s economic data was not all that supportive either last week, as first quarter GDP growth was revised lower to +3.0%, from the previously reported 3.2% rate. What was more worrisome was that economists were looking for an increase of 3.5%. Personal spending also ceased, but we found reason to blame that on the fall of Easter, as April’s data matched against stellar March growth. The week ahead should perpetuate rough trading seas, as it brings market-moving catalysts like the Employment Situation Report. Thus, you might want to check in with the Wall Street Greek blog in between martinis.