Wall Street ended the week lower despite better-than-expected economic data after Microsoft walked away from its heavily hyped attempt to takeover Yahoo and crude prices continued to climb. All three indexes gave up ground, with the Dow Jones Industrial Average the biggest loser with a 2.4 percent fall, and the S&P 500 and Nasdaq Composite down 1.8 percent and 1.3 percent, respectively.

Microsoft was forced to abandon its bid for Yahoo after the two companies were unable to find a common ground on price, despite Microsoft upping its offer to $33 per share. According to reports, Yahoo co-founder and CEO Jerry Yang, with the backing of the board, refused to accept less than $37 and Microsoft was unwilling to take hostile action. By that point, Google had also entered the fray, offering to enter into a cooperative search advertising deal with Yahoo, which would pump cash into the takeover target and make a hostile bid from Microsoft more difficult. News of the deals collapse sent Yahoo shares sharply lower Monday.

Citigroup shares also plummeted this week, losing more than 9 percent, after newly minted CEO Vikram Pandit announced that he’s working to sell off about $400 billion worth of the company’s assets. Most of the cuts will be in the company’s consumer banking division, which has fallen on hard times. The move could knock the bank off its pedestal as the largest US bank by assets.

American International Group (AIG) also handed investors a nasty surprise this week, announcing a $7.8 billion drop in net income in the first quarter, its second straight quarterly loss. The insurer had been heavily invested in mortgage-backed securities and credit default swaps, and the firm had to take massive write-downs in the value of those securities. Although the credit ratings agencies haven’t yet said AIG’s credit rating is about to come under review, the company is being forced to raise $12.5 billion in capital to shore up its crumbling balance sheet.

Oil prices also weighed on the stock markets this week as they continued to set records by spiking to $126 a barrel today. Distillate supplies, particularly of diesel, fell in the US, and continued concerns about Nigeria’s ability to keep oil flowing helped drive the gains. The soaring prices prompted President Bush to announce he’ll ask OPEC to increase oil production during his visit to Saudi Arabia next week, a move to which the oil cartel has signaled it may be open.

High oil prices, coupled with some weakening in the US dollar, helped push the price of gold to its highest point since April 29, peaking today around $889.50 an ounce, as inflation concerns continue to weigh on investors.

Total vehicle sales fell in April to 14.4 million units from 15.1 million in March, with light vehicle sales down about 8 percent so far this year. That’s weighed heavily on both Detroit and foreign automakers, though producers of hybrid vehicles saw some relief: Sales on those models were up 46 percent in April versus the same period last year.

The jobs data this week were pretty solid, with initial jobless claims falling to 365,000 from an upwardly revised 383,000 in the previous week. Continuing claims also fell by 10,000 to 3.02 million, though the four-week moving average of claims continued to climb to 367,000. So although the top line data for the week showed a slight improvement, overall the market continues to look weak.

Nonfarm productivity for the first quarter showed a significant pickup, rising 2.2 percent over the previous quarter and up 3.2 percent from the same period last year. unit labor costs also rose, though less than expected, at a 2.2 percent pace despite economists’ expectations for a 2.6 percent rise.

The rise in productivity and modest increase in costs are indicative of a slowdown because more work is required of fewer workers and wages increase at a slower pace. When accounting for inflation and a contracting workforce, in the first quarter real hourly compensation rose only 0.1 percent and hours worked fell by 1.8 percent, the largest drop since the first quarter of 2003. Still, that sets the stage for improved wages and work hours when the economic recovery comes into to full swing.

That thesis is supported by a drawdown in wholesale inventories, which fell 0.1 percent in March as sales rose by 1.6 percent. That marks the first inventory decline since December 2006 and was led by a 5.6 percent drop in oil inventories and a 0.7 percent fall in auto inventories. That latter was largely due to the fact that, although domestic auto demand is falling, US automakers are finding more-eager markets overseas as the dollar remains relatively weak.

The current inventory-to-sales ratio, a measure of supply on hand, fell to 1.09 in March from 1.11 in February.

The International Council of Shopping Centers (ICSC) also reported positive year-over-year chain store sales, showing a 3.6 percent increase in sales in April. A big reason for that is the fact that Easter fell much earlier than usual this year, though wholesale clubs saw a significant boost of 9.2 percent as consumers look to stretch every dollar.

One point of note, given the state of the economy, was the 5 percent gain in sales at higher-end luxury stores. But the ICSC doesn’t expect those big gains to hold, projecting a 2 percent sales increase in May as economic worries and high gasoline prices continue to weigh on consumers. That number may surprise to the upside, though, as more than $1 billion in tax rebates should begin hitting stores this month.

Americans are still borrowing, though there’s some question as to whether or not that’s because of the economic problems or simply it’s hard to say “no” to wants. Outstanding consumer credit rose by $15.29 billion in March, ballooning to almost $2.6 trillion.

The flow of credit hasn’t ended, and as long as it’s available, we should continue to see solid spending numbers. But lenders will only make so much available. So when the musical chairs of easy money eventually come to an end, problems will arise.

Real estate data were a mixed bag, with month-over-month pending home sales continuing to fall, down 1 percent in March and off by 20.1 percent from the same month last year. There was a sizable gain in the Northeast region though, where sales were up 12.5 percent.

There was also a notable uptick in mortgage activity as contract rates fell across the board. The Mortgage Bankers Association’s mortgage applications index posted a 15.6 percent gain, with refinancing activity up 19.3 percent and conventional purchase activity up 11.7 percent.

The average contract interest rate for a 30-year fixed-rate mortgage fell to 5.91 percent from 6.01 percent, 15-year fixed-rates were down to 5.49 percent from 5.53 percent, and one-year adjustable-rate mortgages came in at 6.77 percent from 6.86 percent.

The economy continues to paint a picture of weakness, though hardly bad enough to warrant much of the doom and gloom floating around, particularly given that so far the problems in first quarter earnings have been mainly contained to the expected areas.

One area of the market that’s had a tough run since the middle of last year is the resource-focused master limited partnerships, which have taken a major hit along with most other income-producing securities. But Elliott Gue, editor of The Energy Letter, sees opportunity in the sector and makes a solid case for them in last week’s issue of that newsletter:

Publicly traded master limited partnerships (MLP) have had a rough run since last July despite generally strong fundamental performances. If history is any guide, this marks an outstanding buying opportunity for the group.

For those unfamiliar with these securities, MLPs aren’t corporations but partnerships that trade on the major exchanges just like any other stock. You can purchase MLPs through your broker and will pay normal commissions just as if you were buying IBM or GE; more than three-quarters, in fact, trade on the New York Stock Exchange (NYSE).

However, there are some key differences between MLPs and corporations. Chief among those are that MLPs pay no corporate-level taxation. Instead, these companies pass through the majority of their income to unitholders--MLP parlance for shareholders--as regular quarterly distributions.

These distributions aren't taxed as dividends but are extremely tax-advantaged. In most cases, MLP holders won’t have to pay tax on 70 to 90 percent of the distributions received until they sell their units. This allows significant tax deferral advantages.

Most US-traded MLPs focus on the energy business. The vast majority are involved in what are called midstream operations. This generally means owning energy infrastructure assets such as pipelines, oil and gas storage facilities and natural gas processing plants. Some MLPs have branched out into other energy-related businesses, such as owning tankers, leasing capacity on production platforms and even actually producing oil and natural gas.

The common thread linking most of these infrastructure businesses is that they’re extraordinarily steady and cash generative. For example, companies that own pipelines aren’t paid based on the value of oil or gas traveling through their pipes; instead, pipeline operators receive a fee linked to the volume of gas transported. In many cases, fees are partly or fully guaranteed under long-term contracts. In other words, once a pipeline is built, the owner can expect to receive regular, reliable cash fees with limited need for ongoing maintenance spending.

Because partnerships pay no corporate level tax, most of that cash finds its way into unitholders’ pockets. The average partnership in the industry benchmark Alerian MLP Index pays a yield of more than 7 percent; some pay yields of 13 percent or more. Even better, MLPs have a long history of increasing their distributions over time. In short, MLPs offer high, growing income.

Despite these defensive, recession-proof characteristics, MLPs aren’t always immune to market turmoil. The Alerian MLP Index pulled back by roughly 23.5 percent from its July 2007 highs to its March 2008 lows. This pullback, however, doesn’t appear to be grounded in fundamental reasons.

Typically, income-oriented stocks perform poorly when they cut their dividend distributions. Because most investors hold such stocks to get their regular dividend checks, investors have a tendency to run for the exits as soon as that income appears to be in jeopardy.
So, if you just look at the chart of the Alerian Index above, you might assume that the partnerships are having trouble sustaining their payouts. But nothing could be further from the truth; in fact, the vast majority have actually been raising their distributions over the past few quarters.

I studied all 50 publicly traded partnerships (PTP) in the Alerian Index over the past 12 months. Out of this universe, only one partnership, Calumet Specialty Products (NSDQ: CLMT), has cut its distribution over the past year. Just less than 84 percent of these partnerships have actually raised their distributions over the past six months. On average, the MLPs in this index have actually boosted their distributions by 13.7 percent year-over-year. Rising payouts is hardly the sign of an industry in trouble.

For the complete article, go to http://www.kciinvesting.com/3793_19958.htm.