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The Navigator Weekly Commentary August 27, 2010
The commentary is updated weekly, or sooner if market conditions warrant. For a print version please click here.
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"Thanks for all your great guidance."
Madeline Giordano, New York, NY
Fidelity Navigator and No-Load Navigator subscriber since 2001

This is the "Navigator Weekly Commentary" for the week ending August 20, 2010. The full Navigator Newsletter is available through a password protected login on our web site.

The bulls were able to cap a rough week on a high note after a revision to second quarter domestic output in the US was smaller than expected as a result of an upward fine-tuning to the reading on consumer spending, and after Federal Reserve Chairman Ben Bernanke firmed his confidence in the economic recovery and said that the Fed stands ready to respond if necessary, in a speech at the Fed's annual economic symposium. The bidding war for 3PAR continued after both Dell and Dow component Hewlett-Packard made revised bids for the data storage company, while elsewhere in the tech sector, Intel lowered guidance saying it saw weaker-than-expected demand for PCs. Elsewhere on the equity front, Boeing delayed the delivery of its 787 Dreamliner again, and J. Crew Group and Tiffany & Co. reported earnings that bested analysts' forecasts. The long end of the yield curve steepened as Treasuries were patently lower on the day.

The Dow Jones Industrial Average jumped 164 points (1.7%) to 10,151, the S&P 500 Index gained 17 points (1.7%) to 1,065, and the Nasdaq Composite was 35 points (1.7%) higher at 2,154. In moderate volume, 1.1 billion shares were traded on the NYSE and 2.1 billion shares were traded on the Nasdaq. Crude oil gained $2.05 to $75.41 per barrel, wholesale gasoline was $0.04 higher at $1.91 per gallon, and the Bloomberg gold spot price rose $0.47 to $1,238.07 per ounce. Elsewhere, the Dollar Index - a comparison of the US dollar to six major world currencies - fell 0.4% to 82.91. For the week, including dividends, the DJIA declined 0.6%, the S&P 500 Index lost 0.7%, and the Nasdaq Composite shed 1.2%.

If you are feeling "unusually uncertain," consider the Navigator Income Model Portfolio. Over the past 75 years, the worst two years in the stock market were 2002 and 2008. In those two years combined, the markets were down more than 60%; for those same two years, Navigator's Income model was up 1%.

The second look at Gross Domestic Product for the second quarter, the broadest measure of economic output, was released this morning and showed a 1.6% annualized rate of growth, compared to the downward revision to 1.4% expected by a survey of economists by Bloomberg, as personal consumption was upwardly revised to 2.0% from 1.6%, and was expected to remain unadjusted.

The GDP Price Index rose 1.9%, above the consensus of economists, which called for the number to remain at 1.8%, and the core PCE Index, which excludes food and energy, increased 1.1%, inline with estimates of an unrevised figure.

The speech from Fed Chair Ben Bernanke at the annual economic symposium held in Jackson Hole, Wyoming was released after the market open. The 17-page speech indicated that the Fed stands ready to provide more stimulus if needed, as Bernanke said that while the Fed's recent decision to stabilize its balance sheet "should promote financial conditions supportive of recovery," but that, "Additional purchases of longer-term securities, should the FOMC choose to undertake them, would be effective in further easing financial conditions." Bernanke gave a thorough analysis of the economy, saying that growth has been "too slow" and joblessness "too high." The Fed Chair said that the initial recovery was driven by fiscal stimulus and inventory building, but that a handoff appears underway to growth in private final demand, notably consumer spending and business investment, which can create sustained expansion. Bernanke said that businesses remain reluctant to add permanent employees, "citing slow growth of sales and elevated economic and regulatory uncertainty." While he said consumer spending may grow relatively slowly in the near term, Bernanke expects the economy to continue to expand in the second half of 2010, albeit at a "relatively modest pace," and said that despite weaker data recently, "the preconditions for a pickup in growth in 2011 appear to remain in place."

In his discussion about the policy options for further easing, Bernanke reiterated three tools previously discussed, such as additional purchases, modifying the FOMC's communication and reducing the interest paid on excess reserves, but also commented on a fourth strategy proposed by several economists, that the FOMC increase its inflation goals, by saying he sees no support for this option on the FOMC, adding that it was "inappropriate" for the US in current circumstances. Bernanke said that the FOMC has not agreed on specific criteria or triggers for further action, but said that should further action prove necessary, policy options were available but that they would require a "careful comparison" of benefit and cost.

Debate over the state of American consumers has been rampant over the past year. Given their status as the world's shoppers, their importance is hard to overstate. The consumer remains cautious in the face of uncertainty, amid high unemployment and the roller coaster in the stock market. Elsewhere, the final University of Michigan Consumer Sentiment Index was revised lower to 68.9 in August, while the expectation of economists was that the reading would be unchanged from the original estimate of 69.6. However, the reading was still above the 67.8 hit in July, which was the lowest since November 2009. The downward revision came as the economic outlook component was adjusted to 62.9 from 64.1 in the preliminary reading, but is still above the 62.3 mark of July, while the current economic conditions component of the report was 78.3, and the economic outlook component rose from 60.6 to 62.3. The report also revealed that inflation expectations for one-year from now are 2.7% and 2.8% for the five-year time horizon.

Treasuries were lower and the yield curve steepened on the economic data and Bernanke's speech. The yield on the two-year note was 4 basis points higher at 0.56%, the yield on the 10-year note jumped 16 basis points to 2.64%, and the 30-year bond yield was 17 basis points higher at 3.69%.

In European economic news, the UK released revised second quarter GDP data, saying the economy rose 1.2% quarter-over-quarter as construction expanded faster than previously estimated, with gains also coming as inventories rose, and consumer spending gained 0.7%, offsetting declines in fixed investment. Additionally, the German import price index fell less than expected month-over-month.

There was little in the way of economic news in the Asia/Pacific region, but Japan's Prime Minister Kan made additional comments on the country's currency situation, saying the government is "ready when necessary to take bold measures," as the near 15-year high on the yen versus the dollar and eight-year high relative to the euro hurts the prospects of the nation's exporters. After markets closed in Japan, Kan added that stimulus measures will be outlined on August 31, as the nation faces a difficult economic situation, highlighted by reports today that consumer prices fell for a 17th month and household spending rose less than forecast. Kan's government is under pressure ahead of elections next month.

Despite today's rally, the equity markets suffered for most of the week amid a number of disappointing economic reports, most notably from the housing sector. New home sales for the month of July unexpectedly fell 12.1% month-over-month to an annual rate of 276,000 units, the lowest level since 1963, and well below the forecasted flat reading of 310,000 units. The report came a day after existing-home sales showed a 27.2% month-over-month plunge in July to an annual rate of 3.83 million units, far short of the 13.4% decline to 4.65 million units that economists surveyed by Bloomberg had expected. Further exacerbating the negative sentiment earlier in the week, durable goods orders rose a meager 0.3% month-over-month in July, much lower than the forecast of a 3.0% increase by economists, while the Kansas City Fed's manufacturing index fell to a reading of zero from 14 in July, right at the line that denotes neither expansion nor contraction. Other than today's better-than-expected revision to second quarter GDP and Bernanke's speech at the Fed's annual symposium demonstrating his confidence in the economic recovery, the only bright spot in the week's economic calendar came from a larger-than-expected decline in weekly initial jobless claims to a level of 473,000, moving away from the 500,000 mark from last week.

While barely helping sentiment, a number of M&A deals dominated the corporate headlines early in the week, most notably from the week-long bidding war for 3PAR between Dell Inc. and Hewlett-Packard. Elsewhere, a number of other possible suitors are reportedly eyeing Potash Corp. of Saskatchewan Inc. after it formally rejected the $38.6 billion, $130 per share, unsolicited buyout from BHP Billiton, Campbell Soup Co. is reportedly considering a $2.3 billion offer for part of privately-held United Biscuits Plc, and HSBC Holdings Plc said it is in talks with financial group Old Mutual Plc to buy a 70% controlling stake in South Africa's fourth-largest bank.

The currency markets garnered additional attention this week, as the yen touched fresh 15-year highs against the US dollar, troubling investors as the recent surge in the Asian currency has dampened the outlook for profits of companies in the nation that rely on sales abroad, and has pulled the Nikkei 225 Index down 22% from its April high.

There were NO changes to the Navigator Fidelity, Schwab or Vanguard portfolios this past week.

Next week starts off slow, with Tuesday's reading of the S&P/CaseShiller Home Price Index, which lags the sales data by a month, and is forecasted to rise 3.5% year-over-year and 0.25% month-over-month in June.

However, traders will likely pay more attention to Tuesday's midday release of the minutes from the August Federal Open Market Committee (FOMC) meeting. The Fed moved to stem a decline in its balance sheet at the last meeting, by keeping its holdings constant, after downgrading its assessment of the economy and the jobs market, saying that the pace of recovery was slower than expected. While there was only one formal dissenting vote at the meeting, the Wall Street Journal reported that seven of the seventeen policymakers at the meeting either spoke against the proposal or had reservations, and market participants will be scouring the minutes for enlightenment about these discussions. Some of the fireworks from the report are likely to be outweighed by Bernanke's Jackson Hole speech, which described in detail his outlook on the economy and potential policy actions, adding that the FOMC has not agreed on specific criteria or triggers for further action.

Readings on the economy in August will continue with Wednesday's ISM Manufacturing Index, expected to decline to 53.0 in August from 55.5 in July, while the ISM Non-Manufacturing Index, to be released on Friday, is forecasted to decline to 53.5 in August from 54.3 in July. The level that separates expansion from contraction is 50.0.

The week ends with the release of nonfarm payrolls on Friday, expected to fall 100,000 in August, after declining by 131,000 in July, while excluding government employment, which has been falling as temporary Census workers decline, private sector payrolls are expected to increase 49,000, after expanding by a disappointing 71,000 in July. The unemployment rate is estimated to increase to 9.6% from 9.5%, as workers re-enter the workforce as job openings increase.

Other releases on the US economic calendar include MBA Mortgage Applications, the Conference Board's measure of consumer confidence, final second quarter productivity, initial jobless claims, factory orders, and pending home sales.

Elsewhere in the Americas, Canada releases second quarter GDP and Brazil releases industrial production.

In Europe, releases include euro-zone and UK manufacturing and services PMI reports, euro-zone consumer confidence, CPI, unemployment, and retail sales, UK consumer confidence, mortgage approvals, and housing prices, as well as German unemployment and retail sales. In Asia/Pacific, Japan is slated to announce industrial and vehicle production, housing starts, and capital spending, while Australia will report retail sales, building approvals, and second quarter GDP. India releases second quarter GDP. In central bank action, the European Central Bank and Bank of Brazil meet to discuss monetary policy.

Thank you for being a Navigator reader and have a great weekend!

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