Treading Water

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It was another see-saw week with respect to the equity markets, as the biggest news on the five-day trading week was General Motor’s initial public offering on Thursday, which raised over $18.1 billion in shares.  The other action surrounded the Federal Reserve as Ben Bernanke & Co. continued their quantitative easing program, and actually went before Congress to politely defend the Fed’s actions.  This came in spite of the raucous criticism of the plan from all corners of academia and giant bond houses like PIMCO.

As for the overall market, there was a plethora of activity but little change in prices.  The Dow Jones Industrial Average closed out the week being up just 0.1%, to a level of 11,203.55.  The broader Standard & Poor’s 500 finished the past week basically where it was the previous Friday, and now stands at the 1,1999.73 mark.  Meanwhile, technology shares also took a breather as the Nasdaq Composite index rose just 0.7% and closed out the five trading sessions at 2,518.12.  Thankfully the smaller cap stocks as represented by the Russell 2000 continued their hot streak as of late and finished higher by 0.71%.  As it now stands, on a year to date basis the Dow is higher by 7.44%; the S&P 500 higher by 7.59%; the Nasdaq is up 10.97%; and the Russell 2000 is up by 15.83%.

Going back to the General Motor’s story, it was somewhat ironic to witness this historic initial public offering, as it capped a remarkable two-year turnaround for the car maker as it went from begging for a government bailout to posting its first profit in more than six years.  GM sold around 478 million shares, which were priced at the close of trading this past Wednesday at $33 a share.  Buyers of the GM shares included giant pension and hedge funds, as well as GM factory workers and retirees. One of the biggest beneficiaries of this IPO was our own U.S. government, which will receive a boatload of money for the $49.5 billion it spent on its controversial rescue of the company a couple of years ago.  The government will go from owning nearly 61% of the stock to around 26% once the dust finally settles.  The government still needs GM shares to rise sharply over the coming years for it to be repaid in full.  While the U.S has agreed not to sell additional shares for six months, after that it is expected to gradually offload the rest of its stake.

With respect to the bond market, all the hysteria provided by QE2 (quantitative easing; round two) has produced somewhat of a leap in real interest rates.  The benchmark 10-year notes’ yield rose 11 basis points (hundredths of a percentage point) to 2.877% last week, after hitting 2.95% earlier in the week.  The 30-year bond yield, meanwhile, edged down two basis points to a mark of 4.25%.  On the shorter end of the maturity curve, the two-year note yield was basically unchanged, to a level of 0.509%.

 

We’d be remiss if we didn’t mention in this column the forthcoming optimism surrounding this year’s Black Friday shopping spree.  With Wal-Mart rolling out its door-busters at midnight, Toys “R” Us opening before our turkey has been digested, and Sears pedaling its wares even as the Macy’s parade is still winding through the streets of Manhattan, retailers are banking on a huge turnout at the cash registers.  After two lackluster years of retrenchment, it looks like the American consumer is about to flex their wallets once again.

As a result of a slight improvement in the overall economy, retailers are very likely to enjoy a jolly holiday season, with retail sales expected to be up nearly 4% thus far this year, compared to last year’s meager 04%.  Remember, consumer spending accounts for more than 70% of our gross domestic product (GDP), so this traditional beginning of the holiday shopping season is vital for all retailers.  And although many American consumers still have too much debt, and the potential headwinds of renewed inflation, rising interest rates and higher taxes, could all prove to be formidable obstacles to a recovery in spending.  However, it’s our guess that both John Q. Wal-Mart and Jane Q. Saks will come to the rescue of our retailers and drop a lot of cash at the registers.  And that will be even without yours truly fighting the masses at our local malls.

That being said, all of here at Money Management Services, Inc. wishes each and all a great Thanksgiving week.   In addition, with the Iron Bowl right around the corner, it’ll be a great time to reconnect with friends and family.  Until next week, investors will have a lot more to chew on than just turkey, but that shouldn’t deter you from having a blessed holiday!

Sources:  Barron’s, Wall Street Journal, Reuters, Associated Press, SmartMoney & Bloomberg

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