MarketView for April 30

Summary 

Stock prices fell sharply on Friday resulting n the major equity indexes chalking up their worst week since January as news of a criminal probe into Goldman Sachs unnerved investors. Shares of Goldman Sachs fell 9.4 percent on Friday to a more than nine-month low, a day after news of a criminal investigation by federal prosecutors accelerated the company's crisis.

The reported criminal investigation also prompted at least three analysts to downgrade their ratings for Goldman. In addition, the yield spread over Treasuries of Goldman Sachs' 5.375 percent notes due in 2020 widened to about 206 basis points in heavy trading volume on Friday, from 184 basis points late on Thursday.

Prosecutors in New York began an investigation into the investment bank, raising the possibility of criminal charges two weeks after the SEC accused the bank of fraud. Goldman's stock fell 9.4 percent to $145.20, and the company has lost more than $20 billion of its market value since the SEC charges were filed.

This week's losses, which took place against a backdrop of growing concerns over the potential for sovereign debt defaults in Greece, Spain and Portugal, cut short eight weeks of gains for the Dow industrial average and the Nasdaq. For the week, the Dow fell 1.2 percent, the S&P 500 lost 2.5 percent, and the Nasdaq dropped 2.7 percent. The week was the worst since the week ending January 24.

However, share prices overall were up in April, the result of strong earnings numbers. So far almost 80 percent of S&P 500 companies have beaten earnings estimates. For the month of April, the Dow rose 1.4 percent, the S&P 500 gained 1.5 percent, and the Nasdaq climbed 2.6 percent.

The massive oil spill in the Gulf of Mexico continued to weigh on the market as concerns grew regarding the potential economic and regulatory impact if the disaster escalates. The White House said it will halt new offshore oil drilling until a review is conducted into the spill. Halliburton fell 3 percent to close at $30.65 and Transocean was down 7.7 percent at $72.45.

Comments by Samsung Electronics that it will "substantially increase" capital spending in 2010, raised concerns over the possibility of excess semiconductor supply. The semiconductor index .SOXX closed down 4.5 percent, dragged lower by Intel and Micron Technology. Intel fell 2.8 percent to close at $22.84 while Micron Technology was down 8.4 percent at $9.35. Advanced Micro Devices lost 6.8 percent to end the day at $9.06.

Meanwhile, shares of MEMC Electronic, which provides silicon wafers to semiconductor makers, fell 18.6 percent to $12.97 a day after reporting worse-than-expected results. Two brokers cut their price targets on the stock and another investment firm cut its recommendation following MEMC's results.

McAfee was down 12.1 percent to $34.75 a day after the security software maker said the cost of fixing a bug that shut down PCs at more than 100 large corporate customers will help push second-quarter earnings below expectations.

Continental Airlines and United Airlines have ironed out the last remaining wrinkle in their merger talks, paving the way for a deal that would create the world's largest carrier. The airlines have agreed to an exchange ratio of 1.05 UAL shares for each Continental share in all-stock deal.

Based on United's stock price of $21.83 on Friday afternoon, and Continental's 139.6 million outstanding shares as of April 21, United would pay $3.2 billion for Continental.

Economy Shows Solid Growth

GDP rose at a 3.2 percent annual rate in the first quarter as consumers increased spending at the fastest pace in three years, the strongest sign yet a sustainable recovery may be taking hold. Although the rate of growth slowed from the fourth-quarter's rapid 5.6 percent pace and was a touch weaker than economists expected, the details of Friday's report from the Commerce Department were upbeat.

The economy has now grown for three straight quarters at an average of 3.7 percent. Consumer spending, which normally accounts for about 70 percent of all domestic economic activity, added nearly 2.6 percentage points to gross domestic product growth last quarter, making it the largest contribution by consumers since the fourth quarter of 2006.

Consumer spending rose at a 3.6 percent rate in the January-March period, more than double the fourth quarter's 1.6 percent pace and the biggest gain since the start of 2007.

The welcome but moderate pace of U.S. growth meant the Federal Reserve could bide its time before raising benchmark interest rates from their current levels near zero, particularly with unemployment hovering around 9.7 percent.

The Commerce Department report showed that business inventories increased $31.1 billion in the first quarter, adding 1.57 percentage points to GDP growth, as firms restocked to meet rising demand. It was the first inventory increase since the first quarter of 2008. Businesses also continued to spend on software and equipment, though a bit less vigorously than in the prior quarter, boding well for the economic recovery and jobs.

Last month, the economy registered its strongest jobs growth in three years as private employers stepped up hiring. Yet, new home construction was a drag on growth in the first quarter after two straight quarters of gains, with residential investment contracting at a 10.9 percent rate.

Business spending on structures subtracted from GDP for a sixth straight quarter. A bigger trade deficit as export growth slowed sharply also weighed on first-quarter GDP.

Signs of a durable economic recovery were bolstered by other reports showing manufacturing activity in the Chicago area rose to a five-year high and increased for a ninth consecutive month in New York City.

The Thomson Reuters/University of Michigan's Surveys of Consumers showed sentiment falling in April from March as consumers saw the recovery as well underway, but slow. However, their view on how the economy will look 12 months from now improved from the prior month.

Fed Gets Ambitious

The Federal Reserve on Friday authorized a new mechanism that it said can eventually be used to withdraw excess cash from the banking system. The program, called the term deposit facility, enables Federal Reserve banks to pay interest on longer term deposits to firms already eligible to receive interest on the overnight reserves they hold at the Fed.

The Fed stressed in a statement that the development of the mechanism "is a matter of prudent planning and has no implication for the near-term conduct of monetary policy." The Fed this week renewed its pledge to keep benchmark interest rates extraordinarily low, near zero, for an extended period.

The Fed said it expects to conduct small-value offerings of term deposits in coming months to test the mechanism.

"Term deposits will be one of several tools that the Federal Reserve could employ to drain reserves when policymakers judge that it is appropriate to begin moving to a less accommodative stance of monetary policy," the Fed said.

In its effort to battle the worst financial crisis since the Great Depression, the Fed has deployed an extraordinary array of emergency measures, leading to a surge in its balance sheet to more than $2 trillion. Other tools the Fed could use for tightening include large-scale reverse repurchase agreements and outright sales of assets.