Marc Aarons @ Money Managers Inc. Presents:

    A review of 2Q 2012

THE QUARTER IN BRIEF

After an all-but-flat April and an abysmal May, the Dow managed to advance nicely in June. The blue chips pulled back 2.51% in a quarter filled with major news items – the European Union’s struggle to bail out banks and governments while trying to stave off a Greek exit from the euro, the Supreme Court approval of the bulk of the Affordable Care Act, the Facebook IPO, a drop in oil and retail gas prices and another apparent “soft patch” in the U.S. recovery.1

DOMESTIC ECONOMIC HEALTH

The strong job growth of the first quarter faded. The unemployment rate ticked up from 8.1% to 8.2% in May, but the bigger story was payrolls expanding by just 69,000 new jobs, even fewer than the (revised) 77,000 net new hires in April. 2,3

Consumers were spending less and apparently worrying more by the quarter’s end. The price of gas had more than a little to do with that: average retail gas prices hit a peak of $3.94 in April, ending the quarter 12.3% lower at $3.45. Personal spending was flat in May for the first time in 6 months after a (revised) 0.1% gain in April. Consumer sentiment (as measured by the University of Michigan) hit a six-month low at the end of the quarter (73.2) while the Conference Board’s index declined in April, May and June, ending the quarter at 62.0. Producer prices dropped a full percent in May after a 0.2% retreat in April; by May, the annualized gain in the PPI was just 0.7%.3,4,5,6

The Institute for Supply Management’s much-watched PMI tracked a slowdown in American manufacturing. April’s short-term peak of 54.8 gave way to May and June readings of 53.5 and 49.7, the first contraction signal in 35 months. The Institute’s non-manufacturing index came in at 53.5 in April and 53.7 in May. Hard goods orders improved 1.3% in May after two months of declines, and factory orders were up 0.7% in May after slipping the same amount in April. New cars were being bought left and right, with GM’s sales up 16% from a year ago, Nissan’s up 28%, Ford’s up 7% and Chrysler’s car sales up 42%.7,8,9,10

Facebook’s IPO excited the market in May, but the NASDAQ fumbled the debut and shares did not soar. The Fed’s major move during the quarter was a minor one – an extension of its Operation Twist bond-buying program through the end of the year. The most controversial aspect of President Obama’s healthcare reforms passed a Supreme Court test: in a 5-4 vote, the Court decided that the oncoming requirement for individual health insurance was constitutional, characterizing it not as a legal mandate but as a tax. The Supreme Court nixed the Affordable Care Act’s expansion of Medicaid, saying that the federal government cannot threaten states with losing 100% of Medicaid funds if they do not expand the program.11,12

GLOBAL ECONOMIC HEALTH

At the start of Q1 2012, 12 European nations had slipped into recessions, including Great Britain, Spain, Italy, Ireland and the Netherlands. The quarter ended with Greece still in the euro and with strong evidence of a global manufacturing slowdown. After May’s Greek parliamentary elections failed to result in a workable coalition government, special elections were held in June. The Syriza party that had threatened to reject the latest EU bailout did not get the most votes. Two more moderate parties were left to create a coalition, with a Greek exit still a question mark over Europe.13

Other eurozone economic problems worsened in the quarter. S&P cut Spain’s credit rating from A to BBB+ and downgraded 11 Spanish banks, which cued a rescue. The EU jobless rate hit a Euro-era high of 11.1% in June and the Markit PMI index sat at 45.1 in both May and June (at that was better than the mid-30s, which is where it was in Q1 2009).The EU came up with a couple of bold ideas in June: it crafted a plan to recapitalize troubled banks with liquidity injections from the eurozone rescue fund (without adding to existing sovereign debt), and it proposed a single eurozone banking regulator.14,15,16,17,18

With dips in consumer demand around the world, key manufacturing economies saw declining PMIs. By the end of the quarter, the economies of China, Japan, Germany, Great Britain, Italy, France, South Korea and Taiwan all shared something in common: manufacturing sector contraction. India’s PMI stayed above 50 in June, but China’s HSBC PMI was at 48.2.19,20

WORLD MARKETS

The twin MSCI indexes reeled during the quarter. MSCI’s Emerging Markets Index fell 10.0%; the MSCI World Index lost 5.82%. Those global indices aside, national benchmarks hardly fared better: Sensex, -0.76%; CAC 40, -6.63%; DAX, -10.63%; FTSE 100, -3.42%; Hang Seng, -5.45%; Nikkei 225, -12.85%; All Ordinaries, -6.44%; TSX Composite, -7.97%; Shanghai Composite, -1.65%. (All this is measured in U.S. dollar terms by MSCI and Morningstar.)21,22

COMMODITIES MARKETS

The quarter was not kind to precious metals – or oil. In New York, gold ended the June at $1603.50 an ounce after its poorest quarter since 3Q 2008. Gold slipped 3.9%, palladium 10.6%, platinum 11.7% and silver 15.0% in Q2 2012. The U.S. Dollar Index advanced 3.3% in the quarter. Oil cratered, losing 17.5% with prices dropping $19.91 per barrel over May and June to end Q2 2012 at $84.96. Natural gas rose 33%; wheat futures rose 12%. Coffee futures fell 6.8%.23,24,25,26,27

REAL ESTATE

Things were looking up, or at least not so down. In May, the National Association of Realtors said existing home sales were 9.6% better than a year ago, with prices up 7.9% in the past 12 months and just a 6.6-month supply of unsold homes; the listed sales inventory was 20.4% smaller than in May 2011. NAR’s pending home sales index was at 95.5 in April and 101.1 in May. The Case-Shiller Home Price Index saw price gains in the majority of its metro markets for a second straight month in April. New home sales were up 7.6% in May according to the Census Bureau.28,29,30

Back on March 29, Freddie Mac had average mortgage interest rates as follows: 30-year FRMs, 3.99%; 15-year FRMs, 3.23%; 5/1-year ARMs, 2.90%; 1-year ARMs, 2.78%. On June 29, the averages were lower across the board: 30-year FRMs, 3.66%; 15-year FRMs, 2.94%; 5/1-year ARMs, 2.79%; 1-year ARMs, 2.74%.31

LOOKING BACK…LOOKING FORWARD

After the best June for the S&P 500 since 1999 (+3.96%), Q2 2012 didn’t look so dismal. The CBOE VIX ended the quarter at just 17.04 after a 9.94% Q2 rise.1

% CHANGE	Y-T-D	2Q CHG	1-YR CHG	10-YR AVG
DJIA	+5.42	-2.51	+5.05	+3.93
NASDAQ	+12.66	-5.06	+7.10	+10.06
S&P 500	+8.31	-3.29	+4.19	+3.76
REAL YIELD	6/29 RATE	1 YR AGO	5 YRS AGO	10 YRS AGO
10 YR TIPS	-0.46%	0.74%	2.65%	3.48%

Sources: cnbc.com, bigcharts.com, treasury.gov, treasurydirect.gov – 6/29/121,32,33,34
Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly.
These returns do not include dividends.

This third quarter may be a trying one for investors worldwide. Will we see Greece make a managed exit from the euro? Will the widespread recession in Europe deflate demand, translating to a summer and fall of weakness in global manufacturing and perhaps earnings? There could be a downside to any upside: if positive news rolls in (i.e., the EU manages to exert real control over its debt crisis and U.S. economic indicators provide pleasant surprises), the Fed might be convinced to abandon any notions of quantitative easing. With the 6-month extension of Operation Twist, the Fed has signaled a preference to stand back from the market – a preference that may be reaffirmed as a result of its upcoming policy meetings. It may be that the third quarter presents some jarring potholes for the markets, with investors faced with the challenge of hanging on until the promise of the fall arrives.

 

Citations.

1 – www.cnbc.com/id/48011828/ [6/29/12]

2 – blogs.barrons.com/stockstowatchtoday/2012/06/01/economy-added-69000-jobs-in-may-unemployment-back-to-8-2/ [6/1/12]

3 – money.msn.com/market-news/post.aspx?post=95f998bd-6fbe-4de1-9b51-8cb1f437973a [6/29/12]

4 – www.nasdaq.com/article/us-spending-flat-consumer-sentiment-dips-20120629-00663 [7/3/12]      

5 – www.businessweek.com/news/2012-06-26/consumer-confidence-in-u-dot-s-dot-dropped-to-a-five-month-low-in-june [6/26/12]

6 – www.bls.gov/news.release/ppi.nr0.htm [6/13/12]

7 – www.ism.ws/ISMReport/MfgROB.cfm [7/2/12]           

8 – www.ism.ws/ISMReport/NonMfgROB.cfm [6/5/12]   

9 – www.marketwatch.com/story/may-us-factory-orders-rise-07-2012-07-03-101034625 [7/3/12]            

10 – online.wsj.com/article/SB10001424052702304299704577504433416076536.html [7/3/12]

11 – www.thestreet.com/story/11588062/1/fed-extends-operation-twist-hints-at-more-action.html [6/20/12]

12 – www.latimes.com/news/politics/la-pn-justice-roberts-leads-supreme-court-support-of-healthcare-law-20120628,0,3606595.story [6/28/12]

13 – www.mfs.com/wps/portal/mfs/us-advisor-pub/market-outlooks/week-in-review [4/27/12]

14 – www.washingtonpost.com/world/winner-of-greek-elections-moves-to-form-government-that-will-embrace-bailout/2012/06/18/gJQArSvzkV_story.html [6/18/12]

15 – money.msn.com/market-news/post.aspx?post=0552b6eb-e56b-40c6-ad22-0751394ee803 [4/30/12]

16 – epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/ [7/2/12]

17 – online.wsj.com/article/SB10001424052702304211804577502070784242372.html [7/2/12]

18 – money.msn.com/market-news/post.aspx?post=95f998bd-6fbe-4de1-9b51-8cb1f437973a [6/29/12]

19 – www.reuters.com/article/2012/07/02/us-german-manufacturing-shrinks-at-faste-idUSBRE8610BL20120702 [7/2/12]

20 – in.reuters.com/article/2012/07/02/global-economy-idINL3E8I25G520120702 [7/2/12]

21 – mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [6/29/12]

22 – news.morningstar.com/index/indexReturn.html [6/29/12]

23 – bullionpricestoday.com/bullion-prices-decline-in-second-quarter-2012/ [6/30/12]

24 – online.wsj.com/mdc/public/npage/2_3050.html?mod=mdc_curr_dtabnk&symb=DXY [7/3/12]

25 – online.wsj.com/article/SB10001424052702304830704577499551320597874.html [7/1/12]

26 – blogs.wsj.com/marketbeat/2012/06/29/data-points-energy-metals-562/ [6/29/12]

27 – online.wsj.com/article/SB10001424052702303561504577494772331679462.html [7/1/12]

28 – montoyaregistry.com/Financial-Market.aspx?financial-market=common-financial-mistakes-and-how-to-avoid-them&category=29 [7/3/12]

29 – www.realtor.org/news-releases/2012/06/existing-home-sales-constrained-by-tight-supply-in-may-prices-continue-to-gain [6/28/12]

30 – www.mercurynews.com/business/ci_20963751/look-at-us-housing-market-at-glance [6/28/12]

31 – www.freddiemac.com/pmms/ [7/3/12]

32 – bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=6%2F29%2F11&x=0&y=0 [6/29/12]

32 – bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=6%2F29%2F11&x=0&y=0 [6/29/12]

32 – bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=6%2F29%2F11&x=0&y=0 [6/29/12]

32 – bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=6%2F28%2F02&x=0&y=0 [6/29/12]

32 – bigcharts.marketwatch.com/historical/default.asp?symb=COMP&closeDate=6%2F28%2F02&x=0&y=0 [6/29/12]

32 – bigcharts.marketwatch.com/historical/default.asp?symb=SPX&closeDate=6%2F28%2F02&x=0&y=0 [6/29/12]

33 – treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield [6/29/12]

33 – treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyieldAll [6/29/12]

34 – treasurydirect.gov/instit/annceresult/press/preanre/2002/ofm10902.pdf [1/9/02]

Money Managers Inc. Disclosure

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. BSE Sensex or Bombay Stock Exchange Sensitivity Index is a value-weighted index composed of 30 stocks that started January 1, 1986. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The DAX 30 is a Blue Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The FTSE 100 Index is a share index of the 100 most highly capitalized companies listed on the London Stock Exchange. The Hang Seng Index is a freefloat-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in Hong Kong. Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei average is the most watched index of Asian stocks. The S&P/ASX All Ordinaries Index represents the 500 largest companies in the Australian equities market. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The MSCI World Index is a free-float weighted equity index that includes developed world markets, and does not include emerging markets. The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The US Dollar Index measures the performance of the U.S. dollar against a basket of six currencies. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.