China Leads the World in Green Energy, Gaming, Gambling

NagaCorp Ltd, which we also own, ought to see huge growth, as it will remain the sole casino operator within 125 miles of Phnom Penh, the capital, until 2035. Political instability and poor infrastructure are a concern as always, but because the country enjoys low tax rates and staff costs, it has emerged as a favorable climate for IR development. Goldman Sachs, in fact, projects a 19 percent jump in gross gaming revenue (GGR), making Cambodia the second-fastest growing gaming market in all of Asia.

The new land of the rising sun.

After attending the CLSA China Forum, Xian’s confidence in China as an attractive place to grow your money remains strong. To be sure, the country has a host of problems it must resolve, including widespread pollution, less-than-satisfactory infrastructure inland and a weak housing sector.

But consider this: early next decade, China will likely have over 670 middle class consumers, more than the populations of the U.S. and Canada combined, all of them able to spend their money on discretionary merchandise and services. With so much potential and bandwidth, China well deserves the attention of investors across the globe.

Someone else who justly deserves everyone’s attention is our very own San Antonio Spurs, who face the Miami Heat this Sunday in Game 2 of the NBA Finals. Look past the heat of a sometimes volatile market and spur your own capital growth by focusing on the strengths in the market.

Index Summary

• Major market indices finished higher this week.  The Dow Jones Industrial Average rose 1.24 percent. The S&P 500 Stock Index gained 1.34 percent, while the Nasdaq Composite advanced 1.86 percent. The Russell 2000 small capitalization index rose 2.71 percent this week.
• The Hang Seng Composite fell 0.09 percent; Taiwan gained 0.65 percent while the KOSPI eked out a 0.03 percent gain.
• The 10-year Treasury bond yield rose 11 basis points to finish the week at 2.59 percent.

Domestic Equity Market

The S&P 500 Index experienced a broad based rally again this week with financial shares leading the way. The market made new highs this week as global monetary policy remains accommodative and risky assets are responding.

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Strengths

• The financial sector was the best performer, rising 2.3 percent. The sector had been a laggard year to date with a flattening yield curve and government and regulatory pressures weighing on sentiment of the group. With this week’s “risk on” mentality, many of the large index heavyweights that have trailed for much of the year outperformed, such as Bank of America, JP Morgan and Citigroup.
• The industrials sector was also strong this week as Joy Global rose 12 percent after reporting earnings that beat market expectations. Even with very weak coal prices and lackluster demand for their products in the mining sector, the company positively surprised the market, leading some to speculate that the stock has bottomed. Caterpillar also responded positively to this news and rallied almost 6 percent for the week.
• Broadcom was the best performer in the S&P 500, rising 19 percent this week. The company announced on Monday that it is seeking strategic alternatives to its cellular baseband business, including a possible sale or wind down. By exiting the baseband business, the company expects to save $700 million that can be redeployed elsewhere.

Weaknesses

• The telecommunication services sector was the worst performer this week as AT&T and Verizon were both down more than 1 percent on concerns of intensifying competition.
• The casino and gaming stocks were hit hard this week, as Macau gaming revenue for May disappointed. Wynn Resorts fell by 4.6 percent.
• PVH Corp. was the worst performer in the S&P 500, falling 9 percent. The reported earnings came in below expectations and also guided second quarter earnings per share below consensus, citing a challenging North American retail landscape.

Opportunities

• The European Central Bank (ECB) cut interest rates and took additional monetary easing steps, which bodes well for the global growth outlook and supports equity valuations going forward.
• The bounce in cyclicals the past three weeks has been very encouraging and likely indicates confidence regarding not only the U.S. economic recovery but also the global trajectory. This bodes well for quality growth stocks with reasonable valuations.
• The S&P 500 closed at a new high again this week, and while there are still some concerns in the market, the path of least resistance is higher.

Threats

• Sell in May has not worked so far this year, but with a dearth of earnings or market moving economic data, a June swoon can’t be ruled out.
• At almost 18 times trailing earnings, the S&P 500 is not “cheap.” Valuation may be a headwind for future market gains.
• Housing data remains disappointing overall. If growth does not accelerate, this threatens the robustness of the broader economic recovery.

The Economy and Bond Market

After falling roughly 20 basis points in May, 10-year Treasury bond yields reversed course this week and rocketed higher. Mid-week last week, the 10-year Treasury yield touched 2.40 percent intraday but analysts and market watchers were having trouble explaining why. In classic financial market fashion, yields moved sharply higher this week, not only reversing last week’s move, but moving even higher. The key stories were the ISM manufacturing index posted solid results, nonfarm payrolls were in-line with expectations, and the European Central Bank (ECB) eased as expected but also gave the market more unconventional easing measures that exceeded expectations. It is hard to ascribe the move in bond yields to fundamental data, so the best explanation appears to be the market pendulum swung too hard on the way down and just reversed that this week.

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Strengths

• The ECB delivered the interest rate cut the market was looking for and more. The ECB cut the rate on excess reserves held by banks at the central bank to negative 10 basis points to incentivize banks to lend those reserves. The ECB also implemented unconventional easing measures designed to spur non-mortgage lending by facilitating cheap long-term financing for banks.
• The ISM Manufacturing index rose to 55.4 from 54.9 in May, which is a level consistent with solid economic growth.
• Nonfarm payrolls grew 217,000 in May and met market expectations. While not a blow-out report, the economy does consistently grind out about 200,000 jobs per month and shows steady, incremental economic improvement.

Weaknesses

• Construction spending in April rose 0.2 percent but was less than expected.
• The U.S. trade deficit hit a two-year high in April, even as domestic oil production has increased substantially.
• Eurozone inflation hit a five-year low, rising 0.5 percent year-over-year. Europe is dangerously close to deflation and it is possible the ECB took too long to act.

Opportunities

• Retail sales for May will be released next week, and bodes well for a strong report, with consumer credit expanding and early indicators pointing toward good growth for retailers that have already released information.
• With key global central banks back into easy policy mode and inflation trending lower in many parts of the world, the path of least resistance for bond yields is likely down.
• There are many moving parts to the taper decision and while the Fed began the process it is very possible that tapering could be delayed if the economy stumbles

Threats

• Long-term bonds have posted strong returns so far year to date and with economic data looking supportive a modest sell off wouldn’t be surprising.
• While the ECB is moving toward easing, U.K. policymakers at the Bank of England are considering raising interest rates as the housing market has been very strong along with retail sales.
• Housing data remains mixed and the spring selling season has disappointed so far. If activity doesn’t pick up soon, housing may not be the positive catalyst many were expecting for 2014.

June 5, 2014 Will the PMI Revision Strengthen Investors’ Confidence?	June 4, 2014 We’re Witnessing a Technological Revolution in Energy	May 30, 2014 Small Caps, Huge Potential

Gold Market

For the week, spot gold closed at $1,253.25, up $3.52 per ounce, or 0.28 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, gained 0.73 percent. The U.S. Trade-Weighted Dollar Index rose 0.04 percent for the week.

Date	Event	Survey	Actual	Prior
June 2	Germany May Consumer Price Index	1.1%	0.9%	1.3%
June 2	U.S. May ISM Manufacturing	55.5	55.4	54.9
June 5	ECB Interest Rate Decision	0.1%	0.15%	0.25%
June 6	U.S. May Change in Nonfarm Payrolls	215K	217K	282K
June 9	U.S. Fed’s Bullard Speech in Florida	–	–	–
June 13	China May Retail Sales	12.1%	–	11.9%
June 13	Germany May CPI	0.9%	–	0.9%
June 13	U.S. May Producer Price Index	2.4%	–	2.1%

Strengths

• Gold rose $9.77 per ounce on Thursday after the European Central Bank (ECB) cut its deposit rate to 0.1 percent. The ECB became the first major central bank to take one of its main