U.S. Equity Market Diary (October 25, 2010)

U.S. Equity Market Diary (October 25, 2010)

The figure below shows the performance of each sector in the S&P 500 index for the week. Eight sectors gained and two declined. The best-performing sector was financials, up 1.9 percent. Other better-performing sectors included consumer discretion and industrials. The three worst-performing sectors were materials, utilities and telecom services.

Within the financials sector, the best-performing stock was Wells Fargo & Co., up 11 percent. Other top-five performers were SunTrust Banks Inc., PNC Financial Services Group Inc., Capital One Financial Corp. and CME Group Inc.

Strengths

• The diversified banks group was the best-performing group for the week, up 9 percent, led by the group’s largest member, Wells Fargo & Co. The company reported third quarter earnings above the consensus estimate, and it disclosed data on holdings of private label mortgage securities which apparently eased some investors’ concerns over exposure to mortgage repurchase risk.
• The diversified real estate investment trusts (REITS) group outperformed, gaining 4 percent, led by its single member, Vornado Realty Trust. The firm announced a joint venture transaction in which the Canada Pension Plan Investment Board acquired a 45 percent common ownership interest in two prime office properties in Washington, D.C. owned by Vornado.
• The specialized finance group outperformed, rising 4 percent, led by its largest member CME Group Inc. The company, parent of the Chicago Mercantile Exchange, announced that it had begun clearing over-the-counter (OTC) interest rate swaps.

Weaknesses

• The specialized consumer services group was the worst-performing group for the week, falling 13 percent, led by its single member, H&R Block, Inc. The company filed a lawsuit against HSBC Bank USA alleging that HSBC has not taken the necessary planning steps to ensure that H&R Block will be able to offer tax refund anticipation loans and checks during the 2011 tax season. H&R Block said that about 40 percent of its customers used one of these products during the 2010 tax season.
• The home furnishings group underperformed, losing 12 percent. The group’s single member, Leggett & Platt Inc, reported quarterly earnings below the consensus estimate, and it lowered its full-year earnings guidance. The company said that certain of its key markets, primarily related to residential furnishings, weakened noticeably in the third quarter.
• The diversified metals & mining group underperformed, down 4 percent, led by the group’s single member, Freeport-McMoRan Copper & Gold Inc. The price of gold declined during the week.

Opportunities

• There may still be an opportunity for gain in M&A (merger & acquisition) transactions in 2010. Corporate liquidity remains high, thereby providing the means to pursue acquisitions.

Threats

• As investors’ expectations for an improving economy are delayed, their impatience could be a threat to stock prices.
• As governments around the world continue to wind down the monetary and fiscal stimulus programs put in place during the economic crisis, this presents a headwind for stocks.