The markets were down in May, the first decidedly down month since last August, but are still up for the year.
Index May 2011 YTD 2011
Oil prices declined by 11% during the month due to multiple factors: a slowing economy, the strengthening of the US dollar, fewer refinery shut-downs for maintenance, and increased margin requirements by the commodities exchange. Core inflation was reported at a more manageable 0.2% for April, while the savings rate declined slightly to 4.9%.
Personal income and personal spending adjusted for inflation flattened out this month after rising in the prior two months. The most recent Thomson Reuters/University of Michigan survey shows that consumer sentiment has picked up as gas prices have come down the past few weeks. If these lower fuel prices are sustained, we would expect this to help stimulate the economy in the months ahead.
We are still seeing effects from the March earthquake in Japan as durable goods orders for autos and related parts fell 4.4% primarily due to supply disruptions from the disaster. Japan tipped into a recession as its GDP declined 3.7% in the first quarter, and the debt rating agencies lowered their outlook from stable to negative. We continue to anticipate that rebuilding will result in positive numbers in the second half of 2011 and into 2012.
The US dollar has recently strengthened vs. the euro given ongoing political and economic unrest in North Africa and the Middle East along with continued sovereign debt concerns in Europe. A change in leadership at the International Monetary Fund is delaying progress on European debt reform.
We are still committed to our Agricultural commodity investment (NYSEARCA:DBA) ETF in the Alternative Strategy portfolio. Continued flooding and cool temperatures in the Midwest have resulted in well below average corn plantings and emergence.
It would appear that significant acreage may be switched to soybeans due to the late planting season. In the South, farmers are switching acreage back to cotton due to record prices, further reducing food production. (Source: USDA) Also taking into consideration poor crop conditions in foreign regions, wheat and corn (and perhaps even soybean) prices are likely to rise.
Many market observers are concerned about the prospect of rising interest rates when the second round of Federal Reserve quantitative easing, or “QE2”, ends next month. However, the yield on 10-year Treasuries dropped by 60 basis points to 3.05% since this year’s peak in early February. It appears to us that the Federal Reserve has a plan to keep monetary policy loose.
We believe major buyers of US Treasuries and other developed markets’ debt are the faster growing emerging market countries that are trying to avoid appreciation of their own currencies. For export economies dependent on the US consumer, a rising currency versus the US dollar makes their goods more expensive.
During May we trimmed our position in Target Corp. (NYSE: TGT) in our Core Equity portfolio due to our concerns regarding near-term sales of higher-margined discretionary items such as electronics and apparel. This month’s earnings report and management’s near-term outlook indicated that our concerns were well-founded.
El Paso (NYSE: EP) announced that it plans to split into two separate entities: oil & exploration and pipeline operations. At the same time management raised earnings expectations for 2011. The stock price rallied 11% since the May 24th announcements. Analysts have raised price targets based on expectations that each company can accelerate growth as a stand alone entity.
Hewlett-Packard (NYSE: HPQ) shares fell on a disappointing outlook for near term earnings due to reorganization plans from the new CEO. We concur with management’s plans to add or expand higher-margined software and services, and thus become a true one-stop for enterprise spending. Shares now trade at their lowest valuation in ten years, so we are willing to be patient during the reorganization yet watchful of market share.
Starbucks (NASDAQ: SBUX) raised prices on its packaged coffee by 17% due to sharply higher bean costs, following many of its competitors. Analysts were encouraged by the action compared with management’s prior guidance of “modest” pricing action.
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