Newsletter | June 2012

June 6, 2012 – DJIA = 12,118 – S&P 500 = 1,278 – Nasdaq = 2,747

A Smaller Pool of 1%’ers
By the end of last week, being “occupied” was looking pretty attractive to many on Wall Street. Despite a strong first quarter, the markets turned into a bloodier battlefield than normal as bulls engaged in hand to hand combat with the bears. The recent battle lines revolved around the rally from the mid-May lows, which ran out of gas last week and reversed course. Stocks seemingly gave up the ghost on Friday as blue chips had their biggest daily loss of 2012.
Last week’s news flow was responsible for the swoon. Further signs of slowing Chinese growth combined with reports that the U.S. expansion was losing momentum helped to pressure stock prices. Of course, Europe’s turmoil played no small role in the selling. After Friday’s 274 point plunge, the Dow Jones Industrial Average had given back all of 2012’s gains. Below are the major averages weekly and year-to-date numbers.

    Last Week  2012
Dow Jones Industrial Average   -2.70%    -0.8%
S&P 500   -3.02%  +1.6%
Nasdaq Composite   -3.17% +5.5%
Russell 2000 -3.78% -0.5%

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly. These returns do not include dividends
As noteworthy as the stock market’s fall was, some other asset classes dropped. U.S. Treasurys, German bonds, U.K. gilts, and French, Dutch, Finnish and Austrian government bonds all reached record low yields on Friday. In fact the two-year German note remarkably traded at a negative yield of 0.012%. This means that buyers were willing to pay for the opportunity to own the security (they will receive back less than they invested). Further the U.S. Treasury note fell below 1.50% for the first time when the yield traded down to 1.437%

Undoubtedly falling yields are a function of slowing economic activity; however the European crisis played a larger role in last week’s credit markets. The uncertainty surrounding Greece, Italy, Spain and the future of the European Union caused investors to shift to even higher extremes of risk aversion. The comfort of relative assurance of the return of capital outweighed the allure of the return on capital. The U.S. yield curve finished the week with the 2-year note’s yield at 0.234% while the 10-year note and 30-year bond ended at 1.467% and 2.545% respectively.

The storm spread to the commodities markets as the Dow Jones UBS Commodity Index finished at a 52-week low. The index is down 9.86% for 2012. Among individual components, crude oil dropped to its lowest price in 17 months. Copper fell to 5-month lows while cotton dropped to levels not seen in almost 2 . years. Gold, reflecting both the flight to safety as well as the worry that policy responses will ultimately be inflationary, spiked 3.7% or $58 per ounce to close at $1,620.50.
Capital market analysis can take on many variations. Regardless the approach, the current landscape requires keen awareness of newswire headlines as comments from politicians, central bankers, and any other policy maker can move markets at any time of the day or night. It’s not enough to understand the new i-Phone’s latest domestic sales numbers or Facebook’s subscriber growth; investors must also factor in any breaking news concerning the global fiscal and monetary policy.
We think that part of the capital market’s turmoil reflects a confidence crisis. Specifically, traders are incredulous that the global leaders are capable of making the proper decisions to lead the financial system back to a normal and stable condition. As a result of selling valuations assume a higher probability of systemic issues.
In the short term the crisis of confidence could result in emotional panic but the global business community should make the necessary adjustments to return to self sustainability. For investors with long term horizons and strong stomachs there are opportunities.