MarketView for July 2

 

 

Summary  

 

Wall Street managed to lead into the Fourth of July holiday by turning in its worst week in two months. What is happening is easy to understand. Disappointing jobs data along with rather tepid economic reports that have been posted over the past week had investors heading for the sidelines until a more definitive trend of data becomes a reassurance that the economic recovery really is on track and not headed for a double dip recession.  

 

For example, non-farm payrolls fell in June for the first time this year, adding to a slew of economic reports signaling the U.S. recovery is slowing. From a technical perspective, it did not help that the S&P 500's 50-day moving average broke below its 200-day moving average, a break known as the "death cross."

 

According to technical analysts, a "death cross" occurs when a shorter-term average falls below a longer-term average. The phenomenon last occurred between the 50- and 200-day moving averages in December 2007, soon after the market began a decline that eventually took the S&P 500 to 12-year lows.

 

Financials and economically sensitive sectors were the biggest decliners. However, volume on Friday was among the five lightest days of the year, with many participants leaving early for the long Fourth of July holiday weekend. Low volume can exaggerate both gains and losses. For the week, the Dow Jones industrial average was down 4.5 percent, the S&P chalked up a 5 percent loss and the Nasdaq was down 5.9 percent.

 

Meanwhile, the Labor Department reported non-farm payrolls dropped by 125,000, the largest decline since October and affected by the loss of temporary government census jobs. The unemployment rate fell to 9.5 percent, the lowest level since July, but only because a flood of jobless workers gave up their employment search. Private hiring rose 83,000, the department said, up from the previous month.

 

Other weak data on Friday came in new factory orders, which showed the sharpest decline since the depth of the recession and the first decline in nine months.

 

U.S. pharmaceutical stocks advanced on rumor that the French pharmaceutical company, Sanofi-Aventis, was preparing an acquisition of $20 billion or more in the United States. Genzyme closed up 5.9 percent to $52.80 and Biogen Idec posted a gain of 5.8 percent to $49.42.

 

Employment Numbers Weak

 

The non-government payroll number was somewhat anemic in June and overall employment fell for the first time this year as thousands of temporary census jobs ended, indicating that the economic recovery still has a ways to go if it is going to right the ship of state.

 

According to the Labor Department private hiring rose by 83,000 after adding only 33,000 jobs in May. Total nonfarm employment actually dropped 125,000 -- the largest decline since October -- as the government laid off 225,000 temporary census workers. At the same time, the unemployment rate fell to 9.5 percent, the lowest level since July 2009, from 9.7 percent in May. However, much of the reason is being attributed to jobless workers who have given up their search for employment.

 

At the same time, the Commerce Department reported that factory orders in May suffered their largest decline since March of last year. One reason being proposed is the sovereign debt crisis in Europe, which some project will retard growth in the region as governments tighten belts to cut budget deficits.

 

Looking at the employment numbers, payrolls in the services sector rose by 91,000 workers after increasing 20,000 in May. Temporary help employment rose 20,500, while retail hiring fell 6,600.

 

In the goods-producing sector, employment fell by 8,000 after increasing by 13,000, pulled down by declines in construction. Home building activity has dropped sharply since late April when a tax credit for homebuyers expired.

 

Employment in the factory sector, which has led the recovery, rose by just 9,000 after a gain of 32,000 in May. Cash-strapped state and local governments were also a drag on employment last month.

 

At the same time, the workweek shortened to 34.1 hours from 34.2 hours in May and a slip in average hourly earnings. The decline in earnings is worrisome on two fronts: it could crimp consumer spending, and it may add to downward pressure on already weak inflation. In June, just over 45 percent of the total 14.6 million people unemployed had been out of work for more than 27 weeks, little changed from May.

 

GE says China and Obama Not In Sync

 

The Financial Times reported on Friday that General Electric Chief Executive Jeffrey Immelt said the Chinese government was growing increasingly protectionist and his manufacturing conglomerate was eyeing better prospects elsewhere, the Financial Times reported.

 

Immelt also called the national mood in the United States "terrible" and voiced concern about excessive federal regulation in response to the global financial crisis, saying it would mute a "tepid" economic recovery, the paper said. Immelt also accused President Obama of having a hostile relationship and of not being in sync with industry, the FT said.

 

Immelt accused China of being increasingly hostile to foreign multinationals, the FT reported. "I am not sure that in the end they want any of us to win, or any of us to be successful," it quoted him as saying in the report published on Thursday.

 

FT reported GE as saying in a statement that Immelt's remarks had been taken out of context and that he had "also discussed the attractiveness and importance of China as a market for GE."

 

Referring to the United States, the FT quoted him as saying, "People are in a really bad mood.

"We are a pathetic exporter ... we have to become an industrial powerhouse again, but you don't do this when government and entrepreneurs are not in synch."

 

General Motors Plans Public Offering in August

 

In what is almost a Phoenix arising from the ashes, General Motors plans to file its initial public offering in mid-August. General Motors is also in talks with banks for a revolving credit line worth $5 billion. Several large banks have already agreed to provide $500 million of credit each, with other banks still to be chosen. The credit line is expected to be finalized in the next two weeks, about a month before the automaker files for its IPO.

 

The Treasury Department, which owns nearly 61 percent of the automaker's common shares after a $50 billion bailout, plans to sell $10 billion to $12 billion in shares. However, a Treasury official said: "It is way too early to know. The pricing and ultimate size of the Treasury’s stake is a decision for later in the year."

 

GM, which declared bankruptcy last year, has emerged from Chapter 11 protection, and an IPO is a key step for the automaker to wean itself away from government support. GM is not expected to sell shares immediately, but plans to sell about $3 billion in mandatory convertible notes that convert into shares in the future. Proceeds from the IPO are expected to be used to repay debt and fund GM's pension liability.

 

GM had a $27 billion pension funding shortfall at the end of the first quarter, according to regulatory filings. GM, which was down to its last dollars before the bailout and bankruptcy financing, ended the first quarter with $35.7 billion in cash and marketable securities. It had $14.2 billion of debt at the end of March. Even if only Treasury and GM participate in the IPO, the $15 billion offering would be one of the largest of all time.

 

The governments of Canada and Ontario also own 11.7 percent of the company, the United Auto Workers healthcare trust has 17.5 percent and old GM, now known as Motors Liquidation, holds 10 percent.

 

The IPO would be an important political win for the Obama administration, which engineered bailouts for both GM and its smaller rival Chrysler in 2009 in the face of Republican criticism and public opposition.

 

A new credit line would provide GM with an additional liquidity cushion in the event of a possible double-dip recession and also bankroll GM's expansion in global markets including China, a source told Reuters.

 

The full underwriting syndicate has not been decided but JPMorgan and Morgan Stanley are the lead underwriters on the deal. Lazard and Boston Consulting Group are advising the Treasury on the IPO.