DJIA / Market Close for Friday, May 20, 2011

We ended the week on a down day. It was also a down week. For the week, DJIA was down -0.7%, Nasdaq -0.9%, S&P 500 -0.3% and Russell 2000 -0.8%. Year-to-date gains are +8.1% for DJIA, Nasdaq +5.7%, S&P 500 +6.0% and Russell 2000 +5.8%. PSVIX is up +7.16% year-to-date.

Tech stocks pushed the market lower after Hewlett-Packard disappointed investors and concerns over European debt continues to hurt investor confidence. The decline this week marked the S&P 500’s third consecutive loss.

Four of 10 sectors advanced, led by energy (+0.9%) and utilities (+0.6%). The heavyweight tech sector underperformed with a loss of 1.5%.

Hewlett-Packard (HPQ -11.0%), Home Depot (HD 0.1%) and Wal-Mart (WMT-0.8%) all underwhelmed with their earnings reports. They didn’t exactly miss expectations altogether. All topped earnings estimates for their reported quarter, but some element of their guidance, either sales or earnings or both, failed to gain investors’ spirits.

Hewlett-Packard’s shares came under pressure and played the primary role in the underperformance of the tech sector this week. Its guidance for the fiscal third quarter and full year was below current consensus estimates and was blamed in part on continued softness in sales of consumer PCs. The Dow component was forced to move up its earnings report date due to a leaked memo from the CEO who reportedly told staffers the company faces another tough quarter and that current headcount plans are unaffordable.

Dell (DELL -2.2% ) limited its losses this week despite the HP news after posting better-than-expected earnings and guidance.

Analog Devices (ADI 2.5%), Deere & Co. (DE -3.4%), Abercrombie & Fitch (ANF -0.1%), and Target (TGT -3.6%) all reported quarterly earnings that exceeded consensus estimates.

Retailers saw some selling pressure. Staples (-19.2%) had the largest percent decline in the S&P 500 followed by Gap (GAP -16.6%) after the retailers each reported disappointing earnings/guidance.

Barnes & Noble (BKS 31.1%) received a $17 per share buyout offer from Liberty Media.

Shares of social networking company LinkedIn (LNKD 109%) soared 109% in its public debut. Excluding ADRs, the one-day return marked the second highest IPO in the last 10 years ? Nymex Holdings rallied 125% its first day in 2006–but ranks only 157th in the last 30 years– VA Linux tops the list with a gain of 698% in 1999. Excluding the tech bubble years, LinkedIn’s one-day return ranks 18th.

Economically, initial claims for the week ended May 14 were better than expected, falling 29,000 to 409,000 ( consensus 420,000). Continuing claims for the week ended May 7 fell by 81,000 to 3.711 mln ( consensus 3.713 mln).

The claims level is still on the wrong side of 400,000, yet the rapid drop from the 478,000 claims reported on April 30 suggests the poor seasonal adjustment factors in April are working their way out of the system. We expect claims to move back toward the 380,000 level in the next few weeks; however, it is possible the effects of the flooding could forestall that move.

The yield of the 10 year Treasury note fell to a fresh 2011, but bounced higher a bit following the release of the FOMC meeting minutes to eventually settle the week largely unchanged at 3.15%. The recent moves in Treasuries have been primarily driven by inflation expectations.

Personally, I think we bounce next week.

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