Week in Review, April 23

While volatility continued in the stock market last week, the S&P 500 and the Dow Jones Industrial Average both managed to end in positive territory for the week. On a total return basis the S&P 500 was up +0.61% while the Dow rose +1.43%. Bonds were flat for the week, with yields only moving 1 or 2 basis points across the curve. The 10-year currently yields 1.96%.

Good earnings reports from Microsoft, GE, and McDonald's helped the Dow, while a decline in Apple hurt the S&P and led the Nasdaq Composite into negative territory for the week. In the past two weeks Apple shares have declined almost -10%. That is a decrease in market cap of roughly $66 billion, or approximately the entire value of Caterpillar. Despite the drop, Apple still strongly remains the largest company in the world based on market cap ($530 billion).

Overseas shares in Europe, Hong Kong, and mainland China were up between +1.5% and +2% for the week. Japanese shares declined about -1% while the worst performance came from Spain's stock market (down almost -3%). The Spanish government had a fairly successful bond auction during the week; however borrowing costs remain elevated as their 10-year closed the week yielding almost 6%.

"I am...not a thug," offered Argentine President Cristina Kirchner (channeling her inner Richard Nixon!) as she explained last Monday the nationalization of the oil company YPF from owner Repsol of Spain. The EU denounced the act and Repsol claims they will contest it.

G-20 finance chiefs met in Washington on Thursday and pledged more than $430 billion in additional funds to the IMF. Emerging market economies such as China and Brazil offered to help, but made support contingent upon receiving more clout within the IMF. Meanwhile the U.S. suggested that Europe is rich enough to solve its problems on its own.

Economic data last week was a bit mixed, but overall continued to signal economic growth. Retail sales rose +0.8% in March and beat expectations (YoY retail sales have grown +6.5%). ISI suggests consumer spending has remained strong as "acceptable job growth is offsetting high gasoline prices, at least to date." The housing market continues to find a bottom as the number of new housing projects came in below forecast and existing home sales declined. Industrial production remained flat while leading indicators rose for the sixth consecutive month.

Voters in France will go to the polls this Sunday in the first round of their presidential election. The current president, Nicolas Sarkozy, is seeking reelection with an approval rating of only 36%. There are 10 candidates on the ballot in the first round, and Sarkozy's strongest competition comes from Socialist Party candidate Francois Hollande. In order to be elected the president must win a popular majority and therefore the election is likely to be finalized in a runoff on May 6. The Bank Credit Analyst notes that the last time France elected a socialist candidate was 1981 and the markets did not respond well; within one month after the election stocks fell over -30% and bond yields rose 250 basis points.

Next week is fairly busy for economic data and events. Look for S&P Case-Shiller home prices, two different readings on consumer confidence, durable goods orders, and the initial estimate for Q1 GDP (consensus estimates are calling for +2.5% annualized growth for the quarter). Also next week the Treasury will auction 2, 5, and 7 year notes and the FOMC meets on Tuesday and Wednesday. No change in rates is expected, but the FOMC will be providing an update to their economic forecasts and Chairman Bernanke will hold one of his quarterly press conferences following the meeting.

Nicholas Case

Investment Analyst