July 23, 2010

Market Wrap: for the week ending July 23, 2010

• Just 7 of 91 European banks failed a stress test and were ordered to raise their capital (Reuters)
• The U.K.'s economy grew a much stronger-than-expected 1.1% in Q2 (FT)
• German business sentiment hits three year high of 106.2 in July, up from 101.8 in June (FT)
• China overtakes the United States to become world’s largest energy consumer (IEA)
• Industrial new orders are up by 3.8% in the Euro area (Eurostat)
• US existing home sales fell 5.1% in June and are expected to keep sinking (AP)
• US 30-year mortgage rates hit new record low of 4.56% (AP)
• US Leading Economic Index declined 0.2% in June to 109.8 (Conference Board)
• Ben Bernanke said the US economic outlook remains unusually uncertain (AP)
• US President Obama signs the financial overhaul bill into law (Reuters)
• US housing starts declined 5.0% from the prior month, to 549,000 (ESA)
• Moody's lowered Ireland's credit rating to Aa2 from Aa1 (WSJ)

Weekly Market Barometers    
Stock-2010-0723   FX-2010-0723

Charts Of The Week
After passing the new financial overhaul bill, good company earnings reports (for the most part), a successful Bank Stress Test in Europe, and a fairly good week for the stock markets one could think that some level of confidence in our leaders and institutions would return in the view of the general public – or is it?  According to a recent Gallup Poll, the majority of Americans don’t have much confidence in some of the public institutions.  The bottom of the list is the Congress:

Gallup's 2010 Confidence in Institutions poll finds Congress ranking dead last out of the 16 institutions rated this year. Eleven percent of Americans say they have "a great deal" or "quite a lot" of confidence in Congress, down from 17% in 2009 and a percentage point lower than the previous low for Congress, recorded in 2008.

Source: www.gallup.com

Speaking Of Ratings
US President Obama signed the financial overhaul bill into law this week.  While nobody can possibly predict all of the far reaching effects of this new law, the financial news media will speculate on the intended as well as unintended consequences ad nauseum in coming weeks. 

One group that received much of the blame for the severity of the credit crisis was the Trio of US Credit Rating Agencies.  The much debated aspect of their involvement in certain financial debt instruments receiving AAA ratings has been at the center of the controversy. The root of the much heated debate lies in the fact that the companies issuing these controversial debt instruments paid the ratings agencies to rate their securities, leading to an undeniable conflict of interest.

Meanwhile, the ratings agencies have taken measures into their own hands and practiced some preventative risk management.  Please consider Bond Sale? Don't Quote Us, Request Credit Firms  

The nation's three dominant credit-ratings providers have made an urgent new request of their clients: Please don't use our credit ratings.  Standard & Poor's, Moody's Investors Service and Fitch Ratings are all refusing to allow their ratings to be used in documentation for new bond sales, each said in statements in recent days. Each says it fears being exposed to new legal liability created by the landmark Dodd-Frank financial reform law.

How about that?  This is along the lines of:  “Please pay me to give you an opinion, but please keep that opinion to yourself.”  Curious to see how the business of credit ratings will flourish in coming years...

Good luck and good investing!

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