Highlights of the Prior Week
The tone of last week's update was about what an uneventful week it was. Fast forward to this past week and we have all kinds of factors to consider.
The big day of course was Thursday when the S&P 500 fell 2% due to a confluence of news related to economic data, geopolitical tension, default in Argentina, the Fed and perhaps a few other things. For the week the S&P 500 was down 2.69%. The Dow 30 fell 2.76% on the week and is now down 50 basis points for the year.
The yield on the US Ten Year Treasury Note rose only slightly to 2.50%. It skyrocketed to 2.6% on Thursday but had a large decline Friday. Gold, surprisingly fell 1% on the week despite the decline in equities. The story there was likely that much of the decline is attributable to the Fed raising rates sooner than previously expected which would be bearish for gold. The CBOE Volatility Index had a wild ride, lifting 34% to 17.03 with of course most the move occurring on Thursday.
GDP for Q2 came out at 4.0% versus a contraction of 2.1% for Q1. Mark Yusko from Morgan Creek Capital noted on Opening Bell with Maria Bartiromo that he is expecting GDP for the year to come in at just under 2%. Much of the preliminary second quarter gain came from inventory building which is not necessarily a negative if that inventory is sold down in subsequent quarters.
Twitter (NYSE:TWTR) skyrocketed 20% on its earnings report. Part of the boost in its earnings came from the World Cup which was reportedly the most tweeted event ever. Monthly active users increased 24% year over year as did the company's revenue.
The ADP Jobs Report came in at 218,000, reasonably close to the expectations of 230,000. The more widely watched Non-Farm Payroll report showed 209,000 jobs added, an uptick in the headline unemployment rate to 6.2% and the participation rate also ticked up, it to 62.9%. The broader U6 rate was steady at 12.1%. The report was initially well received by markets. Before the report equities were indicated to open down significantly but managed to recover and open flat.
The reason for the somewhat positive reaction could have stemmed from concern raised earlier in the week from the Fed minutes which gave the impression to some that the Fed may be signaling it is moving up its timetable for raising its rates. The July jobs numbers may be being taken as a Goldilocks number for the short term.
The big news was that Argentina missed an interest payment on sovereign debt that was due this past week. This was the second time Argentina defaulted on its debt in 13 years. In a way, it is actually the same default as 13 years ago. The debt in question was restructured in 2005 and bought up by hedge funds. The Argentine government has been embroiled in litigation with those hedge funds over repayment of this now restructured debt. Argentina says repaying the debt would compromise the country's future even though a New York court ruled in favor of the hedge funds on this issue. The two sides have been trying to negotiate the matter but failed to do so by last Wednesday's deadline for the interest payment resulting in the default.
For a more complete recap of Argentina you can read Laif Meidell's blog post at Alpha Baskets.
As a follow up, or maybe a closeout, to the Banco Espirito Santo saga, the shares fell by 50% after it reported a loss of €3.49 billion for its second quarter. The stock is now down 80% year to date. The Portuguese government is going to split the bank into a "good" bank and "bad" bank to protect depositors but shareholders will not be spared.
Equity market action in Europe may be signaling trouble ahead as the FTSE 100, CAC 40 and Germany's DAX Index all breached their respective 200 day moving averages (DMA) which is often viewed as a warning sign of a bear market. This indicator gave several false positives for the S&P 500 in the current bull market so it remains to be seen whether the trend turns out to be significant but this is something global investors should monitor.
ETF News & Data
Most of the new ETFs last week were levered equity funds from Direxion. Direxion also launched a curious product called the iBillionaire Index ETF which tracks publicly disclosed holdings. There was also one dividend oriented global equity fund that started trading last week.
Noteworthy on the ETF redemption list was the Consumer Staples Sector SPDR (NYSEARCA:XLP) which had $1.1 billion in outflows. The reason to mention it is that staples stocks are generally considered defensive but with many paying large dividends the sector may turn out to be sensitive to rising rates.
High Country News considered The Death of Backpacking among young people. Some of the reasons given are that younger people when they get outdoors are more interested in adrenaline rushes and playing with gadgets. Included in the article was a great quote from the 1967 book On The Loose; "It feels good to say 'I know the Sierra' or 'I know Point Reyes,' but of course you don't - what you know better is yourself, and Point Reyes and the Sierra have helped."
ESPN posted a great, long read titled Playground Basketball is Dying. There are multiple forces at work here. One is the risk of injury. Nowadays parents invest a great deal of money over the course of many years to produce a Division 1 athlete. The risk of injury playing on a cement court with other hazards is too great. Another factor is the increased threat of inner-city violence. Based on the article, courts are no longer safe zones within tough neighborhoods like they used to be. There are also restrictions on where kids can play imposed by the NCAA.
Roger Nusbaum, AdvisorShares ETF StrategistSource: Google Finance, Yahoo Finance, Wall Street Journal, XTF.com, High Country News, MarketWatch
Weekly ETF Flows
For July 28, 2014 to August 1, 2014
Shares outstanding include totals as of current day NAV.S&P Sector Analysis
As for the sectors of the S&P 500, five outperformed the broad benchmark - Telecom, Healthcare, Discretionary, Utilities and Technology. The remaining five - Material, Staples, Financials , Industrials and Energy- each underperformed. The dispersion between the top-performing and bottom-performing sectors was roughly 2.91% this week, with Telecom outperforming all, and Energy coming in last.
For July 28, 2014 to August 1, 2014
Sector performances, as measured by the S&P 500 sector indices were:
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.