What I’m Watching This Week – 25 June 2012

Who invited ‘That Guy’?

It was a mixed picture for U.S. equities last week with benign market actions beginning on Monday into heavy selling on Thursday.  Oh yes, Mr. Volatility decided it was the appropriate time to make an appearance.  Volatility willingly is ‘That Guy’ we all are unfortunately familiar with.

Seven of the nine major S&P sectors recoiled on the week, having to lick their collective wounds from the whooping they took on Thursday.  Global markets were mixed with five of the twelve major Global markets indexes gaining by week’s end, while seven recorded losses.  Psss…‘That Guy’ is here; he hasn’t done something crazy just yet, but give him a few…this is going to be the party of the summer.

The U.S. Treasury indicated that “operation twist” would expand and thereby stimulate borrowing and growth.  Yields on Treasuries reacted with upwards momentum followed by Municipals and TIPS.  Corporate bond didn’t participate in the move and retreated.

Weak economic data cast further doubt on commodities as WTI crude plummeted nearly 5% on the week. Gold sold down 3.5% and the softs were generally weak.  Geopolitical pressures (That Guy) can and most certainly trigger or encourage volatility to the global economy in a time when it is struggling.  The U.S. Dollar continued its advance last week as the Sterling, Swiss Francs, Yen, Aussie and Canadian dollars all pulled back on U.S. dollar strength.  Concerns for economic growth have taken center stage along with a flight to safety; coupled with another higher than expected set of unemployment claims data, the numbers defined in more detail slow growth ahead going into 3rd quarter.

‘That Guy’ is making me more cautious but not nervous.  The general outlook has weakened as the economy struggles, the political incompetence (American That Guy) in regards to a resolution of the “fiscal cliff” facing the U.S. at year’s end.   The European debt crisis (European That Guy) and will European leaders have the courage and resolve to create an enduring solution?   Optimistically, I’m giving allowance that ‘That Guy” will behave himself for the time being or at least until September / October.  He may knock over a table or spill something on the floor or someone between now and then but hopefully he won’t be kicking in doors and knocking holes into the walls immediately.  Mr. Volatility always seems to get invited by someone, and even then he constantly changes his appearance, negating your defenses.  Look for a volatile week ahead…just saying.

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What I’m Watching This Week – 18 June 2012

What?  Did you think you were going to arrive late to this party?

Investors face a high level of uncertainty.  Yet financial markets seem surprisingly optimistic about the entire affair.  Against this outlook, global equity markets, and the U.S. in particular, have kicked off summer trading on a note of strength.  Will that be dashed come Monday morning?   Eerily I’m seeing shades of 2011, as this market is clearly politically event-driven and that fundamentals are again being ignored to our detriment.   Hopefully we won’t be pushed into a media driven panic but I certainly expect a lot of whipsaw action ahead as the news from Europe begins to penetrate the markets psyche.

Last week’s economic data laid out for all to see, a recipe of a slowing economic recovery: industrial production, capacity utilization and retail sales ticking down, inventories and unemployment claims up, consumer confidence slipping.  This week brings housing data and durable goods orders but the attention will again be concentrated on Europe.

The U.S. markets last week, added another solid weekly performance.  Each of the major indexes recorded gains as all nine major S&P sectors ended the week in the black, led by the energy stocks with an advance of nearly 2.5%.  Rather unexpectedly, Tech stocks even showed up to the party (BYOB of course).  The global markets participated in what I dare not call a rally, because it really wasn’t, with eleven of the twelve major indexes recording gains.  Investors are favoring stable earnings and dividends as we move into 2nd quarter’s earnings season.

Treasury yields, which had self-destructed at the end of May then returned a little in the first week of June, once again went the other direction.   The 10 year bond yield approached 1.7% and retreated.  The 30 year bond ran into resistance at 2.8%.   Bond strength stretched to corporate and municipal issues, as well as TIPS, which performed on Friday, in my speculation, due to the Greek elections.  Across the Atlantic yields on bunds, gilts and JGBs dropped, while Spanish and Italian yields rose to above  7% and just over 6% respectively, by the close.  The hands of the central bankers are playing out right in front of our eyes, as they prepare to possibly flood the markets with liquidity and drive down yields across the globe.  This continues to become more and more interesting as the days grow longer.

Commodities appeared to move back into a buying mode, as Oil maintained above $80, and gold rose last week. Copper also seemed to bottom with some upward momentum ready to push past resistance. Unfortunately the grains, livestock, and most of the softs, saw continuing downward pressure.

The U.S. dollar index came back just under the January high as most of the major currencies gained ground against the greenback.  The euro managed to consolidate and ended the week above $1.26.   The British Sterling on Friday, after British officials designated more monetary support for the struggling economy made a big move upwards against the Euro and dollar.  Any further action/reaction depends on what happens across the Atlantic, as well as the Fed here at home.

There is some cause for optimism.  The last time we saw significant Quantitative Easing (QE), strong rallies ensued.  There is good reason to expect something similar going forward both in Europe, Asia and here.  There is a great deal of uncertainty in having a political news driven market, so we need to stay cautiously alert.  There is likely to be a morass of pain around the corner, however, trouble arrives at the party hand in hand with opportunity and who doesn’t like opportunity?

What I’m Watching This Week – 11 June 2012

Caution continues to dictates the next move…

The overall market was indecisive last week as market activity seemed more bullish than bearish, but I am continuing to be extremely cautious.  The situation in Spain has deteriorated to the point where they absolutely had to look to the Eurozone for a bailout to the tune of 100 Billion Euros to shore up its financial system.  Spain’s borrowing costs are still very high, indicating investor restraint about lending to Spain is rampant and that the initial gains to be seen from the bailout perhaps will not be long term. The EU capital markets punted and the Eurozone has no other choice but to catch the ball and prepare to move forward.  This is a significant step toward a resolution to the crisis but it does not solve the situation whatsoever.

German and EU officials seemed to be moving closer to creating some mechanism for issuing debt. These solutions may help Spain, Italy, and other troubled countries raise capital in the debt markets at more equitable rates; however that may just ultimately just be a bandage that would kick the can down the road yet again.  Yes that is skepticism you are reading from me, massive skepticism. While European officials are, ahem, “working” on solving their problems, China cut its interest rates to try and boost its economy after its growth indicated signs of being actually slower than previously expected. The overall market reacted positively to this news as a slower than expected Chinese growth had already been priced in.

Here in the states, The Federal Reserve’s program to reduce long term interest rates, Operation Twist, is set to expire at the end of the month. Our recent employment numbers continue to indicate a slower pace of job growth; the Fed is coming under more pressure to launch another program to support the economy. However, Ben Bernanke did not mention any plans in Congressional testimony last week. With interest rates already at historic lows it will be harder for the Fed to come up with a program that could have an evocative impact. Nonetheless, the markets demand actions since previous Fed moves have been catalysts for rallies.  Expect the typical noise makers (or know and do nothings as they actually are) to fill the airwaves with regurgitated cow patties, pointing fingers to prove their incompetence and dereliction of duty.  A pox on their houses I say (with many apologies to Shakespeare) as both political entities will again prove to be effectively useless.  The US faces a tempestuous second half of 2012 with the Presidential election and continued Congressional absurdity. It is unclear how the market will react to the campaign season, the eventual winner and the fools in Congress.

Finally, my ever present optimism makes an appearance.  With all of the adverse sentiment over the past couple of months, the market is positioning for positive surprises in the second quarter’s earnings season, which begins in early July.  First quarter’s earnings season marked the end of the rally and since then it’s only been negative news.  US corporations are in good financial shape (with 2 Trillion sitting on the side lines, why wouldn’t they be?) and if they beat expectations, which more than likely will be reduced by July, the market could have another reason to rally going into Third Quarter.  I remain optimistic.

What I’m Watching This Week – 4 June 2012

Tough week that ended with a ruthless clock cleaning…

The financial markets ended the week by providing the worst day of the year.  No escaping that reality as the unease of major economic issues continues to weigh on the markets.  When the closing bell sounded on Friday, the broader indexes finished in the negative; down 2.22% for the Dow Industrials, down 2.46% for the S&P 500, and 2.82% for the NASDAQ.   Global sentiment wasn’t much better with the FTSE 100 down 1.14% and the Hang Seng Index down .38%.

Widespread weakness and under performance ruled the week as the economic and political situation in Europe continue to endlessly dance on a razors edge.  Continued fears of a global economic slowdown are resonating more loudly now as insufficient job formation and stagnant personal earnings growth accentuate an environment that is shadowing over the U.S, Europe and emerging countries.

The Dow Jones Industrial Average has wiped out all of its 2012 gains as U.S. jobs growth during May slowed to its smallest increase in a year. All 10 industry sectors in the S&P 500 finished lower, with financial stocks taking the hardest hits. Energy stocks also are sharply lower as crude oil prices continued their sharp decline and natural gas fell to $2.32.  Gold, unsurprisingly, moved higher as the U.S. dollar reversed its recent surge following the disappointing jobs report.

Last month’s manufacturing growth in the U.S. slowed as factories adjusted back production and trimmed inventories in response to weakness in the global economy. Manufacturing activity in China slowed considerably last month, elsewhere, in Britain, the manufacturing sector shrank at its fastest pace in three years.  Canada, however, saw its best growth in eight months. All this expresses continued uncertainty and volatility. The growing recognition of political dysfunction regarding a synchronized global slowdown is startling. Where are the world’s leaders?   The U.S. congress continues to demonstrate its outright incompetence.  The G7 and IMF can show neither legitimacy nor credibility in handling these circumstances. And the G20 is whistling past the graveyard.  Effective policy making is only effective if other policy-making entities are both able and willing to actually accomplish a task at hand. I remain hopeless optimistic that a comprehensive solution will rule the day and that the world’s political class will shed the need to campaign on every solitary issue rather than resolve the problems.  Disappointingly, if the last five months are any indication of what we can expect going forward, it’s going to be a very long and hot summer.