Market Report – June 4, 2012

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In The Rear View Mirror: After concluding what was a dreadful May, U.S. equities started June on an ominous note, plunging to their worst one-day performance of the year on the back of what was a dreadful May non-farm payroll number. During the month of May, the S&P 500 and the Dow Jones Industrial Average each lost more than 6%. That was the worst one-month performance for the S&P 500 since September 2011. The Nasdaq lost more than 7%. May 2012 proved to be the worst month in two years for the Dow and the Nasdaq.

Yes…things can get worst

Those that surmised things couldn’t get any worse in June were proven wrong on Friday, the first trading day of the six month of the year. In economic news, the Labor Department said employers added 69,000 new jobs in May, well below the 150,000 new jobs economists expected. The unemployment rate rose to 8.2% from 8.1%.

China not helping either

In addition to the jobs report, the Institute for Supply Management said its manufacturing activity index slipped to 53.5 in May from 54.8 in April. Before U.S. markets even opened, there were signs it was going to be a tough day as China’s PMI data indicated more contraction in the world’s second-largest economy. The recent spate of glum economic data out of the U.S. and China explains the 17% May plunge for West Texas Intermediate crude oil futures, which fell another 3.7% Friday. The U.S. and China are the world’s two largest oil consumers.

The Markets @ 6/1/2012
Index Close Weekly % Change YTD Change YTD%
DJIA 12118.57 -336.26 -2.70% -98.99 -0.81%
NASDAQ 2747.48 -90.05 -3.17% 142.33 5.46%
S&P 500 1278.04 -39.78 -3.02% 20.44 1.63%
NYSE Comp 7292.23 -242.1 -3.21% -184.8 -2.47%
NYSE Amex 2175.93 -51.45 -2.31% -102.41 -4.49%
RUS 2000 737.42 -28.99 -3.78% -3.5 -0.47%
VANG INTL 12.49 -0.33 -2.57% -0.57 -4.36%
USX CHINA 4257.89 -103.04 -2.36% -271.91 -6.00%
EMERG MKTS 5847.34 -95.89 -1.61% -157.97 -2.63%


Market Report

The just completed week was one littered with trouble, both of the domestic and European varieties. As we’ve noted in previous weeks, traders have all but resigned themselves to the fact that Greece’s departure from the Euro Zone is a when not if proposition, but with each passing day it becomes more apparent that Spain will be the next European domino to fall.
No surprise here…Spain’s credit rating downgraded

Spain, the Euro Zone’s fourth-largest economy, is in dire need of a recapitalization plan for its ailing banking system, but no such plan is on the table at the moment. The country’s plan to bailout one of its largest lenders, Bankia, through the sale of sovereign bonds was rebuffed by European policymakers. Even the mere mention of the failed Bankia gambit sent yields on Spanish bonds soaring and during the week, ratings agency Egan-Jones downgraded Spain’s credit rating once again.

Oddly enough, Egan-Jones is the only ratings agency that has a junk rating on Spain. The unfortunate reality of what is going in global markets right now is that Europe remains a mess and there’s just no other way of putting it. China and India have been posting a long string of disappointing economic data and investors are growing more leery regarding the strength of the U.S. economic recovery. All of that is to say the higher the beta, the harder the fall is going to be in the coming weeks.

This is not getting ugly…it is UGLY

The six domestic indices we follow all were spray painted with RED numbers this week…a total reversal from what we saw only seven days ago.

Of the majors, Nasdaq and the NYSE indices led the downward march…both losing over 3%.

The Dow gave back over 336 points, down 2.7% and moving into negative YTD territory. The Russell 2000, our closely watched small-cap benchmark, lost 3.78% for the week and slipped into red numbers YTD. The S&P 500 and Nasdaq are the only indexes still in positive territory for the year.

China, Internationals and Emerging Markets continue to lose more ground

The China sector, international markets and emerging growth had nowhere to go down…and down they went.

“The emerging market equities spotlight is moving from China and Asia to Brazil and Latin America,” says Julian Thompson, Head of Emerging Market Equities at AXA Framlington.

Thompson pointed to the continued rapid slowdown in China, which started in the first quarter, and the Asian reliance on exports as reasons to move money westward to Latin America.

China has experienced a sharp slowdown so far this year, surprising analysts and Beijing leaders alike. “Everyone thought the first quarter was the bottom, but April continued to slow, and our expectation is that things will not pick up quickly from here.”

Crude Oil slips even more but Gold makes a strong bid for “Safe Haven Status”

WTI Crude Oil lost $7.63 to close at $83.23…down 3.8%.

Walter Zimmermann, chief technical analyst at United-ICAP, said $80 a barrel was a critical support level and that “crude oil is in deep trouble if it can’t hold that price.”

Oil prices dropped on 17 of 22 trading days in May on the New York Mercantile Exchange, the largest number of losing days in any month since January 1997…for May…that’s an 18% drop in prices.

Gold Bulls are Smiling

Friday morning’s gains in gold come on panic short covering (the buying back of previously sold, or short positions), bargain hunting and solid fresh safe-haven investment demand. The weak U.S. jobs data combined with the very uneasy status of the European Union and a weakening Chinese economy played right into the hands of the gold market bulls. Source: Jim Wyckoff, Kitco News

Gold gained $51.70 last week, closing at $1,620.50…and the US dollar continued its upward march, gaining 0.0054, closing at 0.8043 Euros… EUR/USD = 1.24.

The 10-year bond gained $2.656 to close at $102.750, and the 30-year bond continued a strong upward march, gaining $3.843 to close the week at $110.031.

The Bottom Line for Stocks

On the surface, this would appear to be a troubling environment in which to be bullish on micro-caps, but there is a silver lining emerging. We should say no pun intended because the silver lining comes courtesy of precious metals miners. There’s no getting around the fact that for most of 2012, gold has behaved as a risk asset, linked at the hip with the euro with no sign of safe haven status to be found.

However, on Friday as noted earlier, gold futures surged amid the global calamity and for several days, maybe even a couple of weeks prior, we had been seeing encouraging action among the precious metals miners.

Translation: Gold and silver miners are easily the preferred micro-cap sector to be involved with at the moment. South American Silver Corp. (SAC:CA) and Abzu Gold Ltd. (ABS:CA) are two stocks we have noticed lately and will continue to keep them on our radar. You might do the same.

Research and Editorial Staff
MicroCap MarkePlace