Portugal Gets a Bailout Deal

Portugal Bailout5/04/11: In the markets, as in life, there are no guarantees but everyone is entitled to their opinion. Here’s my opinion on the financial markets today.

The Nitty Gritty Details:

U.S. stocks opened marginally lower this morning after ADP reported 179,000 private sector jobs were created last month, slightly below expectations near 200,000.  Other noteworthy economic data due out today includes the ISM Services report, while retailers will report same-store sales results over the next two days.  Earnings will continue to garner attention, with several consumer staples, financial, and media companies out with results today.  Stocks are following the recent pattern of selling off toward the end of earnings season (over 70% of results are in).  Meanwhile, two decent-sized merger announcements (semiconductors and food) continue recent healthy M&A trends that have helped support the market-leading mid cap stocks this year.  European stocks fell on weakness in mining stocks on lower copper and silver prices again this morning.  Asian markets are mostly lower as rate hike fears continue to weigh on sentiment in India and elsewhere in the region.

Looking back at Tuesday, a late rally was not enough to get the S&P 500 back to even, although the more defensive Dow ended the day unchanged.  Traders continued to take profits in commodity stocks as Energy and Materials lost 2.4% and 1%, respectively, most among the S&P sectors, while the broad CRB Commodity Index lost about 1%.  Silver prices are down 12% the past two sessions on yet another increase in margin requirements (third in a week) and some high-profile sellers.  Oil prices slid more than $2 to $111 while the dollar enjoyed a rare up day.  Defensive sectors occupied three of the top four spots in Tuesday’s sector rankings, led by the interest-rate sensitive Telecom and Utilities sectors on a day when the 10-year yield dipped three basis points.  Most of the reporting companies saw their shares drop following results, most notably energy producers, though a large financial company’s results were well received and helped lift other lenders.

Around our financial planning firm this morning, we were discussing four items that we thought would be of particular interest to our readers:

The Markets Broken Down:

  1. Portugal has reached a deal with the EU and IMF for a $116 billion three-year bailout. This gives the nation three years to get their finances in order before they have to raise money in the capital markets.  It sets a target of reducing the budget deficit to 3% of GDP by 2013 from 9.1% last year.  While some questions exist about the ability of Portugal to agree to any deal after a previous attempt at an austerity plan brought down the government, the opposition party helped the outgoing Prime Minister to create the EU-IMF package.
  2. The total number of S&P 500 companies that have reported first quarter earnings so far is 373. While it has been a solid earnings season with over 70% of companies beating estimates, the positive microeconomic perspective reflected in the earnings results typically gives way at this point in the earnings season to a return of focus to the macroeconomic data – which isn’t as positive.  The past few earnings seasons have seen stocks rally until this point when the momentum halted as the perspective shifted back to the economy.
  3. U.S. retailers are poised to report their largest monthly sales gain so far this year. As a late Easter boosted year-over-year comparisons, April numbers are likely to be strong across the board.  The months ahead may not be so rosy due to rising gas prices and the fact that real incomes fell in March and have been flat for the past five months.  The Consumer Discretionary sector has performed in line with the market this year.
  4. More on the ADP employment report. As discussed above, this morning’s ADP report release showed a 179,000 increase – a bit below expectations, but close to the 200,000 we expect each month this year.  The ISM non-manufacturing index is due out later today and is expected to show a strong, but slowing, service sector.

As always, email me here with your questions or comments.  I love to hear from you and thoroughly enjoy the “intellectual debate” with our clients and friends that these opinions generate.

Greg Powell, CIMA
Wealth Consultant

Note: The opinions voiced in this material are for general information and are not intended to be specific advice. Any indices such as the S & P 500 can’t be invested into directly. Past performance is no assurance of a future result.

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