May 2011 Archives

The major indexes closed the month with a rally, sparked perhaps by hopes that the European powers will extend another bailout package to Greece. The Dow gained 128 points, the Nasdaq rose by 38, and the S&P 500 advanced 14. Twenty-nine of the Dow’s 30 components gained ground, led by Pfizer (PFE), which rose more than 2%. Shares of Nokia (NOK) fell 14% after the company warned that sales in the present quarter are “substantially below” previous estimates. Volume was moderate, and advancing issues outnumbered decliners by about three to one on the NYSE and by about five to two on the Nasdaq. The prices of Treasuries strengthened, while the price of gold futures lost 0.03% to $1,536.80 an ounce. The price of crude oil on the New York Mercantile Exchange gained 2% to $102.70 a barrel.

In Other Business News:

Wells Fargo Daily Advantage just turned 10, which put us in a nostalgic mood. We combed through the archives to find memorable moments from the past ten years and found too many to count. Below are a few favorites of ours and our readers. Any you'd like to see re-published? Let us and know in the comments. If you've been with us from the beginning or are just tuning in, we thank you, and hope you'll stay with us during the next ten years.

Consumer confidence, as measured by The Conference Board’s index, fell to 60.8 in May, a significant drop from April’s number. Not only did the present situation component of the index decline, so, too, did the expectations component. However, despite declining confidence, retail sales have continued to press forward. This demonstrates the old maxim in economics: Watch what people do, don’t listen to what they say.

One significant factor weighing on consumer confidence is the staleness of the labor market. While the private sector continues to create jobs, it’s at a slow pace—not what you’d expect as we approach the two-year anniversary of the official end of the recession.

The job recovery remains slow, primarily because the pace of new job creation isn’t accelerating as quickly as job destruction is slowing. This is manifesting itself not only in high unemployment, but also in low growth (if not shrinking) of real incomes.

Going forward, domestic companies can still be successful even if consumers aren’t all that positive. Those with jobs, and with skills in demand, will continue to spend. Also, even though the U.S. is a big market, it’s not the only market. Keep in mind that when it comes to making an investment decision, it’s more important to know where a company does business than where it is headquartered.

So far during this recovery, manufacturing strength in the U.S. has been able to somewhat counter the weak jobs picture and moribund housing market, but the past few weeks have shown signs of a slowing manufacturing sector. Last week continued the trend, with a report showing that durable goods orders were down 3.6% in April. The pace of manufacturing activity will likely have to moderate even more to match the drop in orders.

Also last week, the personal income report was a mixed bag. Personal income increased 0.4% during the month of April, but most of those strong gains were offset by high food and energy prices.

The Commerce Department released its second estimate of first-quarter gross domestic product that reaffirmed the 1.8% annualized pace shown in the first estimate. Consumer spending was weaker than previously thought, which was offset by larger-than-expected inventories, keeping the rate of growth unchanged.

The major indexes advanced modestly on light volume as many Wall Streeters headed for the doors early to begin the holiday weekend. The Dow gained 38 points, the Nasdaq rose by 13, and the S&P 500 advanced 5. Twenty-three of the Dow’s 30 components gained ground, led by Bank of America (BAC) and Johnson & Johnson (JNJ), both of which gained about 2%. Volume was light. Advancing issues outnumbered decliners by about three to one on the NYSE and by about five to three on the Nasdaq. The prices of Treasuries weakened, while the price of gold futures gained 0.8% to $1,537.30 an ounce. The price of crude oil on the New York Mercantile Exchange gained 0.3% to $100.59 a barrel. The three major stock indexes declined fractionally this week.

In Other Business News:

The path of the economy affects decisions of the Federal Reserve, and those decisions affect the choices professional investors make when managing their funds. So, in light of the economy's path, what's ahead for taxable bonds, and where might opportunities lie? Here with some answers is Jay N. Mueller, CFA, and senior portfolio manager for Wells Capital Management's Fixed-Income team. Jay manages the Wells Fargo Advantage Ultra Short-Term Income Fund and the Wells Fargo Advantage Short-Term Bond Fund.

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This website is accompanied by current prospectuses for Wells Fargo Advantage Funds^®.

The major indexes retreated in the early hours on weak economic signals, and then they rebounded to close modestly higher for the session. The Dow gained 8 points, the Nasdaq rose by 21, and the S&P 500 advanced 5. Nineteen of the Dow’s 30 components gained ground, led by Microsoft (MSFT), which led the tech sector sharply higher with a gain of 2%. Volume was light, and advancing issues outnumbered decliners by about five to two. The prices of Treasuries strengthened, while the price of gold futures lost 0.2% to $1,522.80 an ounce. The price of crude oil on the New York Mercantile Exchange lost 1% to $100.23 a barrel.

David Einhorn, who is manager of the hedge fund Greenlight Capital, made two splashes on Wall Street today: In the first, he called on Microsoft’s CEO Steve Ballmer to step down, saying Ballmer is the reason the stock’s price has languished in recent years; and in the second, Einhorn paid $200 million for a minority share of the New York Mets baseball team. Microsoft’s shares (MSFT) climbed 1% on the news, and the Mets, well, at the closing bell, the Mets were up one run to nothing in the fourth inning of a game against the Cubs in Chicago.

In Earnings News:

Today marks the 115th anniversary of the creation of the Dow Jones Industrial Average.  While it’s not the most representative index of our economy, it is the most iconic.  To celebrate, we’ve put together a few lesser-known facts about the index and its history.

• The index was started on May 26, 1896 by Charles Dow, who was a journalist studying market movements.
• It’s not the oldest stock index – Mr. Dow created the first index, the Dow Jones Transportation Index, 12 years earlier on July 3, 1884.
• The index initially launched with 12 stocks and increased to 30 in 1928.  The stocks that make up the DJIA have changed 48 times in the past 115 years.
• The index closed at 40.94 on its first day.  If you could have invested on the first day, your return between then and now would have been over 30,000%.
• The index’s largest intraday point swing was 1,018.77 on October 10, 2008, with a net change of -128.

The high points:

• The all-time high was 14,164.53 on October 9, 2007
• The biggest percentage gain was 15.34% on March 15, 1933 (86 points)
• The biggest point gain was 936.42 points on October 13, 2008 (11%)

The low points:

• The all-time low was 28.48 during the summer of 1896.
• The biggest percentage loss was 22.6% on Black Monday, October 19, 1987 (508 points)
• The biggest point loss was 777.68 points on September 29, 2008 (6.98%)

And finally, how did we know that the Dow had hit the big time?  When it became the subject of its very own Broadway show: How Now, Dow Jones.

LinkedIn took off last week. Here’s a list of other hot IPOs over the past 30 years.

Morningstar on the debt limit debate.

China finds that central planning isn’t easy: Chinese utilities rebelling at price controls.

What does LinkedIn’s valuation say about its implied growth rate? Mark Hulbert does the math.

Intellectual copyright in the age of the internet: Is sharing stealing?  The case of the space shuttle photo.

OK, maybe social media has gone too far: you can now “friend” your Toyota on Facebook.

United Kingdom downgraded…by China.

The major indexes were relatively calm, despite further confirmation of a slowing manufacturing sector in the form of declining durable goods orders in April. Yet another report showed home prices declining significantly year over year, a sign that the housing market could have some way to fall before hitting bottom.

The Dow gained 38 points, with 18 of its 30 components advancing; the S&P 500 was up 4; and the Nasdaq closed higher by 15. Advancers led decliners by about two to one on the NYSE and the Nasdaq. The prices of Treasuries weakened. Silver futures gained $1.51 to settle at $37.64, gold futures rose $3.40 to close at $1,526.70 an ounce, and a falling dollar helped the price of crude oil gain $1.73 to settle at $101.32 a barrel.

In Other Business News:

Fortunately for most of us, the world did not cease to exist last weekend. To be sure, many of these "Doomsday Prophets" have some explaining to do. But we will not cast stones, since we readily admit that forecasting is not an easy business, particularly because it involves the future! Consequently, our outlook on profits has been below consensus in recent quarters, as well as below reality. A combination of solid growth in emerging markets, taut corporate income statements, and the ever-weaker U.S. dollar has resulted in earnings growth that has been well ahead of our expectations. While our recent track record may have proved too conservative when prophesying on profits, we'll also have some explaining to do, such as being mindful of rising commodity costs and the potential for flatter margins.

Read the full article.

New orders for durable goods decreased by 3.6% in April. The decline was broad-based, confirming that there is a slowdown in the manufacturing sector of the U.S. economy. This is unfortunate because manufacturing was staging a tremendous run from the recessionary lows of June 2009. But while manufacturing may be taking a bit of a breather, this is likely only a temporary setback.

Inventories have increased for 16 consecutive months and now stand at their highest level since records began in 1992. Anyone hoping that a strong inventory rebound will accelerate U.S. growth for the balance of the year is likely going to be disappointed. That inventory rebound has already occurred. Now it's time for shipments to pick up and new orders to increase.

I believe job gains and production could stay muted as manufacturers take a wait-and-see approach, wanting to see new orders come in before adding to already bloated inventories. However, this may not bode well for an acceleration of economic growth, so I believe it is increasingly important to invest in companies rather than sectors. It's crucial to remember that even with slow growth, some companies can grow faster than others.

The major indexes meandered above and below the neutral line most of the day, finishing modestly lower. The indexes likely would have closed lower, except for positive momentum from energy stocks, which were bolstered by rising crude oil prices after bullish forecasts on the commodity from two investment banks. New home sales rose in April, which was a pleasant surprise, but the number of sales were still at very low levels.

The Dow fell 25 points, with 21 of its 30 components closing lower; the S&P 500 gave up 1; and the Nasdaq was down 12. Decliners and advancers were nearly in line on the NYSE, and decliners led advancers by about three to two on the Nasdaq. The prices of Treasuries strengthened. Gold futures rose $7.90 to close at $1,523.30 an ounce, and the price of crude oil was up $1.89 to settle at $99.59 a barrel.

In Other Business News:

Investors could be forgiven for thinking that the world is replaying the spring of 2010. The sovereign debt crisis in Europe again hit the front pages, while another volcano erupted in Iceland, threatening air travel in the region. A few rough days in Europe helped strengthen the dollar, which put pressure on the prices of commodities, particularly crude oil.

The Dow fell 130 points, with only McDonald’s higher on the day; the S&P 500 was off 15; and the Nasdaq lost 44. Decliners led advancers by about four to one on the NYSE and the Nasdaq. The prices of Treasuries strengthened. Gold futures gained $6.50 to close at $1,515.40 an ounce, while the price of crude oil dropped $2.40 to settle at $97.70 a barrel.

In Earnings News:

• Ahead of its quarterly earnings report on Thursday, Sony Corp. today said that it lost $3.2 billion for the fiscal year, its third-straight year of losses. The company said it wrote off $4.4 billion in deferred tax assets after the earthquake and tsunami in Japan. Sony’s shares (SNE) fell 1%.

For companies that aren’t named “LinkedIn,” economic data released last week showed that they might have a tougher time in the near future. And for all we know, LinkedIn might have tough times ahead as well, but that didn’t stop investors anxious to buy a slice of the first major social media company to go public. The company’s shares were priced at $45 but were quickly bid up to $122. The company ended the week at $93.09, signaling either that investors were hungry for the next growth industry or that we’re on the verge of another dot-com-type bubble.

The troublesome reports last week came in the form of housing (dismal as always, but even more disappointingly so) and what appeared to be a slackening in the industrial sector. Housing starts in April fell 10.6%, while existing home sales dipped 0.8% to an annualized pace of just over five million homes. The market is oversaturated with existing homes and especially foreclosures, with the months-supply of homes rising from 8.3 months to 9.2 months. The downward pressure on prices looks to continue.

A dearth of strong earnings reports and renewed concerns about European sovereign debt appeared to dampen spirits on Wall Street. The Dow lost 93 points, the Nasdaq fell 19, and the S&P 500 declined by 10. Retail stocks were weak following disappointing earnings reports on Thursday evening from Gap (GPS) and Aeropostale (ARO), which lost 17% and 14%, respectively, today. Twenty-eight of the Dow's 30 components lost ground, led by Alcoa (AA), which fell 2%. Volume was light, and declining issues outnumbered advancers by almost two to one on the NYSE and by almost three to two on the Nasdaq. The prices of Treasuries strengthened, while the price of gold futures gained 1.1% to $1,508.90 an ounce. The price of crude oil on the New York Mercantile Exchange gained 1.1% to $100.10 a barrel.

For the week, the three major stock averages all fell fractionally.

In Earnings News:

Recent volatility in commodity prices has focused attention on the sustainability of gains in commodities and, by extension, the strength of emerging markets equities. How will a potential pullback in commodities affect emerging markets? Are there opportunities to be found? Here with some insight is Derrick Irwin, senior analyst for Wells Capital Management's International Emerging Markets Equity team. Led by Jerry Zhang, the team manages the Wells Fargo Advantage Emerging Markets Equity Fund.

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This website is accompanied by current prospectuses for Wells Fargo Advantage Funds^®.

Today we have a guest post by Derrick Irwin, CFA, senior analyst on Wells Capital Management’s Berkeley Street Emerging Markets Team. Derrick examines this topic from the point of view of the portfolio and provides specific examples as this week’s guest for On the Trading Desk.

Recent volatility in commodity prices has focused attention on the sustainability of commodity prices and, by extension, emerging markets equities. These asset classes are to some degree correlated, and near-term performance is often driven by investors’ willingness to hold risk assets. However, emerging market economies are not completely tied to commodities markets, and in the past few months, it would be more accurate to say that commodities prices are being driven by the complex interaction between emerging market industrial demand and developed-world sovereign crises.

The major indexes experienced choppy trading following disappointing economic data and an explosive IPO by LinkedIn. The Dow gained 45 points, the Nasdaq rose 8, and the S&P 500 advanced 2. Nineteen of the Dow’s 30 components gained ground, led by American Express (AXP) and McDonald’s (MCD), which both gained more than 1%. The initial public offering of LinkedIn stock (LNKD), which was priced at $45 a share, soared to more than $120 a share before closing at $94.33 a share for a gain of more than 100%. In contrast, the price of Intel shares (INTC) fell 1% after a downgrade for Goldman Sachs. Volume was light. Advancing issues outnumbered decliners on the NYSE by about three to two and by a nose on the Nasdaq. The prices of Treasuries were mixed, while the price of gold futures edged lower by 0.2% to $1,492.40 an ounce. The price of crude oil on the New York Mercantile Exchange lost 1.6% to $98.93 a barrel.

In Earnings News:

• Sears Holdings announced earnings fell from 14 cents a share a year ago to a loss of $1.58 a share in the latest quarter. The company blamed inclement spring weather, which may have discouraged shoppers from going out to the stores, and a falloff in sales of appliances, which may have suffered from an end to government subsidies for energy-efficient models. The price of the company’s shares (SHLD) fell 2% in today’s session.

The major indexes recovered today after losing ground the past three sessions. The energy sector was bolstered by recovering crude oil prices, and investors took well to fairly detailed hints (as far as these things go) from the Federal Reserve about how it plans to gradually back away from its loose monetary policy.  

The Dow gained 80 points, with 23 of its 30 components higher; the S&P 500 was up 11; and the Nasdaq rose 31. Advancers led decliners by just under seven to two on the NYSE and three to one on the Nasdaq. The prices of Treasuries weakened. Silver futures rebounded nearly 5% to $35.097, while gold futures rose $15.80 to close at $1,495.80 an ounce. The price of crude oil bounced back after a government report showed crude inventories were unchanged, rising $3.19 to settle at $100.10 a barrel.

In Earnings News:

Out-of-shape football players? Agents tell players not to work out during lockout.

Inflation in the United Kingdom heats up, leading to fears of the “S-word” (stagflation).

With the arrest of the International Monetary Fund’s president this week, it’s a good time to ask, “Just what is the IMF, and what does it do?”

Cash-rich Google issues the first bonds in its history.

Sony’s CEO on the defensive over his company’s reaction to its mammoth data breach.

The cost of communication continues to fall.

Meet what Peter Kafka calls the “Hulu of magazines.”

Calculated Risk parses the latest minutes from the Federal Open Market Committee.

Lackluster earnings reports from Wal-Mart and Hewlett-Packard helped put a damper on the markets today, as did an unexpected drop in housing starts. Also, April’s industrial production report from the Federal Reserve was stagnant, weighing on industrials and materials stocks in the Dow and other indexes. Caterpillar (CAT) fell 3% and Alcoa (AA) was down 2%.

The Dow closed lower by 68 points, with 15 of its 30 components losing ground; the S&P 500 lost less than a point; and the Nasdaq managed a small gain of less than a point. Decliners led advancers by about four to three on both the NYSE and the Nasdaq. The prices of Treasuries strengthened. Silver futures fell 64 cents to close at $33.49 an ounce, and gold futures were off $10.60 to close at $1,480.00 an ounce. The price of crude oil fell 46 cents to settle at $96.91 a barrel.

In Earnings News:

The U.S. hit its debt limit, the International Monetary Fund suddenly became leaderless, and the pace of manufacturing expansion in the New York area slowed more than expected. The major indexes all lost ground. Tech stocks led the Nasdaq down, with Yahoo! (YHOO) and Amazon.com (AMZN) each posting more than 4% losses. Metals and oil pulled back as well, with silver, gold, and oil all retreating.

The Dow fell 47 points, with 21 of its 30 components lower; the S&P 500 pulled back 8; and the Nasdaq dropped 46. Decliners led advancers by just over two to one on the NYSE and by nearly four to one on the Nasdaq. The prices of Treasuries strengthened. Silver futures fell 86 cents to $34.15 an ounce. Gold futures fell $3 to $1,490.60 an ounce, while the price of crude oil dropped $2.28 to $97.37 a barrel. Gasoline futures fell 4.7%.

In Earnings News:

As of May 16, the dollar amount of federal debt outstanding that is subject to the debt ceiling limit has now been reached. Treasury Secretary Geithner has urged Congress to lift the debt ceiling, lest investors lose faith in the ability of the U.S. government to honor its obligations. But if anyone thinks the U.S. government will not pay interest on U.S. Treasury securities, they are mistaken.

I believe the U.S. will not default on its debt, regardless of the outcome of the debt ceiling debate. Section 4 of the 14th Amendment of the U.S. Constitution states, "The validity of the public debt of the United States ... shall not be questioned." In 1935 the U.S. Supreme Court (in a case called Perry v. United States) said that Congress could not authorize incurring debt without being obligated to satisfy the debt. The Supreme Court wrote, "To say that Congress may withdraw or ignore that pledge is to assume that the Constitution contemplates a vain promise, a pledge having no other sanction than the pleasure and convenience of the pledgor." Numerous cases have cited this principle. There is even a statute specifying that the Treasury must pay interest on the debt (Section 3123 of Title 31 of the United States Code).

The inflation picture got a bit murkier last week. The Producer Price Index and the Consumer Price Index for April both came in slightly higher than expected, with wholesale prices up 0.8% and consumer prices up 0.4% for the month. Import prices, meanwhile, shot up 2.2%. As has been the case for the past several months, the culprit was higher commodities prices, particularly crude oil and gasoline. Is this truly inflation, or is it just transitory price increases sparked by the temporarily skewed prices of commodities? See our own Dr. Brian Jacobsen’s take on the subject.

If it’s only a temporary spike in commodities that’s driving prices higher, then the beginnings of relief were felt the past two weeks after crude oil prices came tumbling down to below $100 a barrel, while silver dropped to $35.69 and gold fell below $1,500 an ounce, as of Friday’s close. Melissa Duller, CIMA, took a look at potential reasons behind the precious metals volatility. The question now is whether the drop-off in commodity prices represents a lower plateau or if global growth—particularly from an inflation-prone China—gives prices another kick higher.

The major indexes retreated, and the dollar rallied as new concerns were raised about the debt crisis in the eurozone. The Dow lost 100 points, the Nasdaq declined 34, and the S&P 500 lost 10. Twenty-six of the Dow’s 30 components lost ground, led by The Travelers Companies (TRV), which fell 2.4%. Volume was light, and declining issues outnumbered advancers by about three to one. The prices of Treasuries strengthened, while the price of gold futures lost 0.88% to $1,493.60 an ounce. The price of crude oil on the New York Mercantile Exchange gained 0.69% to $99.65 a barrel.

For the week, the Dow and the S&P 500 were down fractionally, and the Nasdaq moved fractionally higher.

In Other Business News:

Last week's slide in commodity prices, after a stunning run-up, have people wondering if the commodity boom was a bubble. Here with a unique perspective, as a manager devoted to socially responsible investments, is Lloyd Kurtz, CFA, chief investment officer at Nelson Capital Management, a subadvisor to Wells Fargo Advantage Funds. Lloyd manages the Wells Fargo Advantage Social Sustainability Fund^SM. He is also a research fellow at the Haas Center for Responsible Business at the University of California, Berkeley.

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This website is accompanied by current prospectuses for Wells Fargo Advantage Funds^®.

The Consumer Price Index (CPI) increased 0.4% from March to April, while average hourly earnings rose only 0.1%. Combine the two, and you get a 0.3% decline in real average hourly earnings. Not only did real average hourly earnings decline, so did real average weekly earnings. To put this in perspective, real average weekly earnings have fallen 1.7% since October 2010. So while consumer prices have gone up, earnings haven’t kept pace. That is not inflation, but rather a decline in the average standard of living.

It’s not inflation, but it’s still unpleasant
The distinction between broad-based inflation (that is, all prices, including wages, home prices, and other asset prices) and “mere” consumer-price inflation (consumer prices going up without wages and home prices going up) is important to understand. Broad-based inflation typically leads to higher interest rates, while mere consumer-price inflation crimps consumer welfare. Because of today’s consumer-price inflation, I believe interest rates could stay low, and I’d shy away from investing too much in consumer discretionary and consumer staples stocks.

A jump in the price level is not a jump in inflation
It is also essential to recognize the distinction between a jump in the price level and an increase in inflation. Inflation, a continued rise in the price level, is painful for those who have to pay the now higher price. But unless the price keeps rising—instead of just staying at the higher level—then that is not inflation. This is why the Fed can say that the effect of higher commodity prices on inflation is “transitory.” The Fed is looking at continued changes in the price level, not a persistent jump. Thus, by definition, a move to a higher price level has a transitory effect on the rate of inflation.

I believe U.S. growth is sustainable, but at a low level. In fact, my forecast for U.S. growth at the beginning of the year was on the low side of market forecasts (2.5% versus 4.0%). Based on the current environment, I think investors will shift their worries from inflation to concerns about the strength of consumer spending.

The major indexes rebounded from an early morning retreat. The Dow, which was down over 93 points at its lowest, gained 65 points. The Nasdaq rose by 17 points and the S&P 500 advanced 6. Retail stocks were strong after an optimistic outlook from Kohl’s (KSS), which rose 4%. Twenty-two of the Dow’s 30 components gained ground, led by IBM (IBM), which rose almost 2%. Volume was light to moderate, and advancing issues outnumbered decliners by about five to three on the NYSE and by about two to one on the Nasdaq. The prices of Treasuries weakened, while the price of gold futures gained 0.35% to $1,506.80 an ounce. The price of crude oil on the New York Mercantile Exchange gained 0.77% to $98.97 a barrel.

In Earnings News:

Hypervigilant about inflation, China fines Unilever for planning to raise prices.

Get ready for paper computers.

Company that safeguards passwords gets hacked.

Calculated Risk’s take on job openings, which are now back to 2008 levels.

And speaking of job openings, we’ve dropped from seven unemployed workers for every job to four.

Google gets into the online music business.

Say goodbye to cash: Visa brings the e-wallet closer to reality.

In early March, I wrote a post describing why gold prices had risen so dramatically. One factor in isolation couldn’t account for the increase; prices appeared to be driven by several fundamental trends, not pure speculation or irrational behavior. If that were the case, why did precious metals prices retreat so significantly last week and why have they been so volatile since then?

Despite the myriad of reasons why gold prices may be justified at recent high levels (high government debt levels, inflation fears, increased diversification of sovereign currency reserves, weak trade-weighted dollar, symbolic of wealth etc.,) some investors are concerned that gold and now silver prices are in a bubble, poised to crash down to earth similar to the housing bubble or the dot com bubble that burst in 2000. Also, with the end of the latest quantitative easing response by the Fed (QE2) drawing near, investors may be anticipating higher interest rates in the future, which could create competition for precious metal investments.

The volatility of commodities was, again, the story of the day. Concerns about Portugal and Greece weakened the euro, which in turn strengthened the dollar and sent the prices of commodities tumbling, particularly crude oil, gasoline, and silver. Also hurting crude oil prices was a report showing larger-than-expected inventory. Energy stocks suffered accordingly, with Exxon Mobil (XOM) down 2%.

The Dow lost 130 points, with 26 of its 30 components losing ground; the S&P 500 fell 15; and the Nasdaq was off 26. Decliners led advancers by eight to three on the NYSE and by three to one on the Nasdaq. The prices of Treasuries strengthened. Silver futures plummeted 7.7% to settle at $35.52 an ounce, gold futures were off $15.50 to close at $1,501.40 an ounce, and crude oil fell $5.67 to settle at $98.21 a barrel. Gasoline futures fell 7%, with circuit breakers halting trading at one point.

In Earnings News:

Microsoft announced the biggest deal in its history: an $8.5 billion all-cash purchase of internet-phone and video-streaming service Skype. The stock market took well to the news in general, with the major indexes climbing on the day, but perhaps thought Microsoft overpaid, sending shares of the tech giant 0.62% lower.

The Dow gained 75 points, with 26 of its 30 components gaining ground; the S&P 500 was up 10; and the Nasdaq was higher by 28. Advancers led decliners by four to one on the NYSE and by three to one on the Nasdaq. The prices of Treasuries weakened. Silver futures continued to rebound from their dramatic fall last week, rising 3.7% to settle at $38.49 an ounce. Gold futures also rose, up $13.70 to close at $1,516.90 an ounce. Crude oil futures added $1.33 to settle at $103.88 a barrel.

In Earnings News:

Yogi Berra’s famous phrase might be applicable to the Treasury market these days. The market appears to be replicating its 2010 behavior, i.e., rallying in the spring in response to a perceived softening in the economic indicators. If the 2010 pattern is sustained in the months ahead, Treasuries today might not be the strongest investments.

Treasury yields fell sharply from April through August last year, with the yield on the benchmark 10-year note falling from near 4% in April to 2.50% in late August. Fears that the economy might slip back into recession—a so-called double dip—emerged last spring. Gross domestic product (GDP) growth slowed to only 1.7% in the spring quarter, after two consecutive quarters of very healthy growth. The debt crisis in Europe also contributed to the Treasury rally because it set off a flight to safety among foreign investors. Foreign purchases of Treasuries were averaging $80 billion per month in the spring-summer months.

CME Group, which operates the New York Mercantile Exchange, took another step to remove speculative froth from the commodity markets by increasing margin requirements on crude oil and gasoline contracts. This comes just a week after CME Group introduced something similar with silver contracts. While not stated as a matter of policy, it may have the effect of driving speculators from these markets.

Personally, I love speculators. They help markets function effectively, creating liquidity when there otherwise would be none and assisting in the price discovery process. When news hits the wire, speculators are usually the first ones to move and help prices adjust accordingly. As with all things, however, along with the benefits come the costs.

Ever since August 2010, when the Federal Reserve announced its second large-scale asset purchase program, commodities have found a second wind. Originally, the story behind commodity price increases was that the fast-growing emerging markets would need to buy up all the raw materials in the world to satisfy their thirst for growth. It was almost as though it was a repeat of what Will Rogers said many decades ago, “Buy land. They ain’t making any more of the stuff.”

Well, we all know now that a bet on land doesn’t always pan out.

Crude oil prices rallied after their rout last week, helping materials and energy stocks in the process. Silver and gold were also up significantly but are still well below their recent highs. Investors largely shrugged off yet another report showing that housing prices continued to decline during the first quarter and that Greece’s debt was downgraded further.

The Dow gained 45 points, with 20 of its 30 components higher; the S&P 500 was up 6; and the Nasdaq rose 15. Advancers led decliners by five to four on the NYSE and by just under two to one on the Nasdaq. The prices of Treasuries were mixed. Silver futures jumped $1.83 to settle at $37.12 an ounce, and the price of gold gained $11.60 to close at $1,503.20 an ounce. The price of crude oil leapt $5.37 to settle at $102.55 a barrel. 

The biggest news of the week was the death of bin Laden, but the biggest economic news was the dramatic fall of commodities. Silver futures began freefalling after the CME Group raised margin requirements on silver positions. Gold soon followed, as did crude oil, which faced the further pressure of an unexpected surge in crude oil stockpiles. By the end of the week, the three commodities were all well off their recent highs. The major indexes dropped for the week as well, with the Dow down 1.3% and both the S&P and Nasdaq off by 1.6%.

Also last week, the Department of Labor released its employment situation report for April. A much better-than-expected 244,000 jobs were added to the nation's payrolls last month, with particular strength coming from the retail and manufacturing sectors. The unemployment rate rose from 8.8% to 9%, however. (The unemployment rate results from a separate survey.) The Labor Department's Friday report was significantly higher than ADP's employment report released last Wednesday, which showed that private employers added 179,000 jobs during the month, lower than expected.

A strong jobs report sparked an early rally in the major indexes, with the Dow climbing 175 points to its high of the session. But the bulls lost momentum, and the gains ebbed away until the Dow finished higher by 54 points. The Nasdaq rose by 12 points, and the S&P 500 advanced 5. Twenty-five of the Dow’s 30 components gained ground, led by Kraft Foods (KFT), which rose 2%. Volume was moderate. Advancing issues outnumbered decliners by two to one on the NYSE and by three to two on the Nasdaq. The prices of Treasuries were mixed, while the price of gold futures gained 0.6% to $1,491.60 an ounce. The price of crude oil rallied in the early trading, but then it slumped to close on the New York Mercantile Exchange lower by 2.6% to $97.18 a barrel.

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Extreme events are normally unlikely to happen. But when people begin to think that they are going to become regular occurrences, it leaves investors wondering, “will regular occurrences of unlikely events become the norm?” Is there a fat-tail phenomenon? Here to educate us is a good friend of the program, Dr. Brian Jacobsen, CFA, CFP. Brian is chief portfolio strategist with Wells Fargo Funds Management, LLC.

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The prices of commodities dropped, and the dollar strengthened after the European Central Bank’s president failed to signal the bank would be raising interest rates to cool off inflation. Wall Street was expecting that signal, and when it didn’t come, markets apparently concluded the economic recovery is slowing down. The Dow lost 139 points, the Nasdaq fell 13, and the S&P 500 declined 12. Twenty-seven of the Dow’s 30 components lost ground, led by Alcoa (AA) and ExxonMobil (XOM), which each lost more than 2%. Volume was light to moderate on the NYSE and heavy on the Nasdaq. Declining issues outnumbered advancers by about two to one on the NYSE and by about four to three on the Nasdaq. The prices of Treasuries strengthened, while the price of gold futures fell 2% to $1,481.40 an ounce. The price of crude oil on the New York Mercantile Exchange lost 9% to $99.80 a barrel.

In Earnings News:

Economists discuss the effects of bin Laden’s death on the markets.

Increasing number of newly formed households could help reduce housing stock, according to Calculated Risk.

Emerging markets central banks still buying gold.

A look at falling commodities.

First Sony PlayStation, now this: password-managing site LastPass might have been hacked, urges users to change their master passwords.

High gas prices lead to more stranded cars as drivers push their luck on near-empty tanks.

More on Intel’s new 3D microchip.

A disappointing report on the services sector, a lower-than-expected employment report from ADP, and falling commodity prices combined to send the major indexes lower for the day. Gold, silver, and oil continued their descent, with silver settling below $40 and crude oil below $110. The metals fell partly due to a report that billionaire George Soros’s hedge fund sold most of its gold and silver positions because his concerns about deflation have eased.

The Dow fell 83 points, with 22 of its 30 components losing ground; the S&P 500 lost 9; and the Nasdaq was down 13. Decliners led advancers by five to two on the NYSE and by eight to three on the Nasdaq. The prices of Treasuries strengthened. Silver futures continued their fall, dropping 7% to close at $39.38 an ounce. Gold futures fell $25.10 to close at $1,515.30 an ounce, and crude oil prices were down $1.81 to settle at $109.24 a barrel. Crude oil inventories rose 3.4 million barrels last week, much higher than the expected increase of 1.7 million.

In Earnings News:

We just posted the latest Market Roundup from our Capital Markets Strategists: Brian Jacobsen, Jim Kochan, and John Lynch.

Two memes—terms that spread from person to person within a culture—are being used these days to describe the markets. Sometimes the meme is "Teflon market." At other times it’s "climbing a wall of worry." These phrases can be cute, and sometimes even useful, but they don’t perfectly characterize what’s going on in the financial markets, so they can create dissonance when they break down. "Teflon market," for example, means that no matter what bad news you throw at it, market prices keep going up. "Climbing a wall of worry" means that people are skeptical about the likelihood of a continued economic recovery. Newscasters will pick up on whichever of these two memes is appropriate for the day. If the market is up, it’s a Teflon market. If the market is down, it’s because we’re still climbing a wall of worry.

Maybe we need a new meme: The market is as the market does. There is good news and bad news, and the market will react accordingly. This was demonstrated in April, as the market moved up on the good news despite plenty of worries: high commodity prices, geopolitical unrest, geological disasters, and other bumps in the night. In this Market Roundup, we attempt to identify some of today’s risks and opportunities in the economy, equities, and bonds.

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I remember playing a round of golf in eastern Wisconsin shortly after I joined Wells Fargo. In between slicing my drive into uninhabitable territory and declaring a mulligan, I noticed that one of the holes was sponsored by Wells Fargo. I paused for a moment to take great pride in the fact that I was playing on a hole sponsored by my company, and then I proceeded to slice another ball into a different dimension of space-time (this anecdote is not based on personal memory but is more a description of what happens every single time I stand over a golf tee).

This weekend, Wells Fargo showcases more than just a single hole in Wisconsin; we've got our own major event on the PGA tour—the Wells Fargo Championship at the Quail Hollow Club in Charlotte, NC.

Investors turned to more defensive sectors today after a few lackluster earnings reports and ahead of the jobs report on Friday. Treasuries and utilities rose, while more volatile commodities like oil pulled back, as did the energy sector. The major indexes closed mixed.

Dow-component Pfizer’s disappointing first-quarter revenue helped keep the index flat for the day, up less than a point, with 20 of its 30 components advancing; the S&P 500 fell 4; and the Nasdaq was off 22. Decliners led advancers by two to one on the NYSE and seven to three on the Nasdaq. The prices of Treasuries strengthened. Silver futures fell 7.6% to $42.59 an ounce in reaction to higher margin requirements to trade the metal. Gold futures fell $16.70 to close at $1,540.40 an ounce, and the price of crude oil declined $2.47 to settle at $111.05 a barrel.

In Earnings News:

Statisticians around the world probably couldn’t help but take a little delight in the attention probability distributions got during the financial crisis. The “normal distribution” and “fat-tails” suddenly became part of the common vernacular when events that were previously considered nearly impossible—like falling housing prices—became regular occurrences. This is likely reminiscent of the slight joy zoologists felt during the avian flu crisis where people learned that “avian” means “bird.” Joy turned to dismay when people started calling it the “avian bird flu,” which is a clear case of use turning to abuse. So it is with fat-tails. Now, suddenly, the tails aren’t only fat, they’re ubiquitous. That is the Fat-Tail Fallacy: thinking you are always in a fat-tail.

A fat-tail is “fat” relative to a normal probability distribution’s tail. Simply put, it means that extreme events are not as rare as you may have thought. This is hardly news to anyone familiar with statistics. A popular example of a distribution with fat-tails was derived back in 1908 by William Gossett while he worked at Guinness Brewery. He derived the famous “t-distribution,” which is like a normal distribution, but with fatter tails. There is a huge menu of different distribution commonly used in quality control, insurance pricing, and—yes—even finance, that all have fat-tails.

May began with the historic news that U.S. forces successfully located and killed Osama bin Laden in a compound in Pakistan. The news was greeted enthusiastically by market participants, although the actual effect of the developments on stocks was short-lived. The major indexes were up modestly throughout much of the day but dipped into negative territory toward the end of the trading session.

The Dow finished lower by three points, with 11 of its 30 components lower; the S&P 500 fell two; and the Nasdaq was off nine. Decliners led advancers by just under three to two on the NYSE and two to one on the Nasdaq. The prices of Treasuries strengthened. Gold futures gained 70 cents to close at $1,557.10 an ounce. Silver, which had been soaring, fell 5% after the CME Group raised the cash requirements for speculative positions. Crude oil futures fell 41 cents to settle at $113.52 barrel.

In Earnings News:

Bernanke speaks, and when he speaks he says some interesting things. At his historic press conference this past Wednesday, Fed Chairman Ben Bernanke gave mostly expected answers but raised some eyebrows when he finally clarified a phrase that has puzzled market watchers for some time: "extended period" does not mean "six months or more," but rather, "a couple of meetings." That means the Fed could act to raise interest rates in two months or so (if conditions warrant, of course). Also at the press conference, Bernanke confirmed that QE2 would end as scheduled in June, at which point he did not expect any market turbulence as the Fed ceases its $600 billion bond-purchasing program.

Earnings season continued its good start, with many companies coming ahead of estimates on both revenue and profit. Buoyed by the solid results, the S&P 500 gained 2% for the week. However, there were signs that future quarters might provide an interesting test of earnings, as some companies, like Pepsico, noted that margins are starting to be squeezed by higher commodity prices.

In housing news, March’s signed housing contract increased 5.1%, according to the National Association of Realtors. Existing home sales also showed positive momentum in March, rising 11% from a dismal February.