What I’m Watching This Week – 30 July 2012

Illness of Indecision….

Last week Mario Draghi, the European Central Bank President, announced that he would do everything possible to save the Euro.  Such words sent the market’s into an upward tizzy of remarkable proportions.  One thing that really took me by the ears was that nowhere in his comments or any other European leader, was that there was no discussion of European solvency, everything being discussed is revolving around Europe’s liquidity problem.  The real problem for Europe is the solvency of the southern countries, not liquidity.  The difference you ask?  Solvency is about going bankrupt because of losses that cannot be covered.  Liquidity is a problem where countries have a lack of cash to meet obligations.  Most of the Southern European countries are going broke because they have accumulated massive losses without adequate capital to cover the loss.  Their banks are broke as well as their national governments.  And no, they cannot just print money, like we do here in the U.S., inflation be damned.  The southern nations (Greece, Italy, Spain, and Portugal) have zero control over the Euro printing presses and the northern nations won’t allow any of that anyway, as that would simply bankrupt themselves if they keep advancing more money to the bankrupt southern countries without any opportunity to recoup those monies.  This is a solvency issue where each nation is positioning to protect its own financial survival.  Mr. Draghi never mentioned how he would make sure that the Euro wouldn’t fail.  One has to speculate that behind closed doors, there is a considerable amount of conversation about the ‘unthinkable’, several southern countries would need to be handed their walking papers and kicked out of the Euro Zone in order for its own solvency to remain intact.  The Illness of Indecision…doubtful there will be a comprehensive resolution before the end of this year and it can’t wait until 2013.  Rest assured this ‘Illness’ will continue to affect the U.S. markets.

U.S. equity indexes posted significant gains last week, ending with positive numbers across the board.  Global markets followed suit and there was nary a negative number to be seen by Friday. This week presents a rather interesting and difficult scenario.  The Fed and the ECB have announcements to make this week and the markets have repeatedly shown zero patience for anything other than instant gratification.

The 5 year Treasury note closed at 66 basis points, the 10 year at 1.55%, and the 30 year under 2.63%.   With the momentum being switched to equities and away from Treasuries, debt holders took note of the change in temperament and licked their wounds from the heightened expectation of further stimulus from both the Fed and the ECB.

Commodities ended the week heavily mixed with Wheat, Coffee, Oil and Natural Gas, all recoiling from their gains of previous sessions. Gold and Silver made upwards moves and I expect that to continue this week when the reality sets in that no solutions were provided last week and volatility didn’t take the hint and go on summer holiday .

The positives to take from last week included initial jobless claims declined 35, 000 to 353K, durable goods orders were up 1.6% and corporate earnings have continues to beat the lowered expectations, and revenue began to show that weakness really isn’t across the boards as initially speculated.  Home values are higher than this time last year as well.  GDP growth came in at 1.5% as expected, weak and sluggish yes, but considering the worldwide circumstances, it’s a net positive.  There remains a bullish attitude in most sectors, albeit a tepid one.  The Doom and Gloom noisemaker crowd are cheering for a recession even though the statistical evidence is refuting them.   I see little chance of a recession in the next six to nine months.   With more earning news coming out this week, employment numbers, personal income and more home info,  I certainly expect a good dose of volatility as the week progresses.  I’m continuing to remain optimistic.

What I’m Watching This Week – 23 July 2012

Sideways…I didn’t see the movie

We are in earnings season and I expected that a decent amount of companies would be beating forecast, momentum would be building from that and the markets would be moving positive.  That’s what I said last Monday, by week’s end the EU zombies sent financial markets running away from risk, panic-stricken, towards the U.S., only to find our own zombies with corporate revenues being missed across a number of sectors,  negative retail sales, and increases in monthly unemployment claims.   Yikes!!  The US, Asia and Europe are mired in the view that growth is slowing everywhere.  Data doesn’t suggest any sort of global recession, but growth across the board just isn’t picking up any momentum.  We’re moving sideways with violent and jarring dips and rises.   The illness of indecision is spreading weakness in the global economy and therefore into volatility in parts of the markets.

Except for the Russell 2000, U.S. equity indexes posted slight gains last week, Middle East unrest sent oil prices surging; bolting energy stocks skyward, while the financials kicked you in the shins as you digested the earnings reports from the big banks.  Global markets were mixed; The 12 major indexes split evenly between winners and losers.

The 5 year Treasury note closed under 60 basis points, the 10 year at 1.46%, and the 30 year under 2.55%.   European debt yields have gone negative on German, Dutch and Finnish paper. Emerging market bonds also continue to see demand.  Fixed income is the place to be as bond prices continue to soar and yields move lower.  U.S. bond holders are smiling right about now.

Oil has been moving ahead with the U.S. dollar, which is unusual, and natural gas is setting year to date highs.  Fundamentally nothing has changed materially, ignoring of course the Iranian saber-rattling and the drought conditions in some states.  It’s become rather difficult to decipher commodities and if the current rally has legs.  The U.S. dollar index remains dominant as the aforementioned EU debt crisis continues to create mayhem.  The Euro closed under $1.22, the Sterling went to $1.57 and the commodity currencies, the Aussie Dollar and Canadian Loonie, rose against the greenback.

The second quarter numbers we’re seeing, earnings are generally in line but they also display significant weakness in revenues.  It would seem that economic contraction is not out of the question.  At this point, the economic data isn’t indicating an out-an-out shift towards contraction, but a series of events could lead towards an end of summer period of trouble.   There are plenty of catalysts for concern, Europe and a military confrontation with Iran being the 800-pound gorilla in the room.  Let’s not forget our effervescent but ineffectual congress and the looming fiscal cliff.   I remain optimistic, however I suggest remaining conservative in a defensive posture and light on risk.   I’m optimistic.

What I’m Watching This Week – 16 July 2012

It’s July, summertime…wow, wasn’t it just January?

It looked kind of grim last week as each day presented a new dilemma and angst over the markets.  A massive advance on Friday erased the negative numbers allowing the S&P 500 and the Dow Jones to sneak out small gains for the week.  The NASDAQ and Russell 2000 couldn’t go the distance and ended the week with losses.  Global markets didn’t sustain very well either, as 8 of 12 foreign indexes posted losses, Germany’s DAX composite took home the lions share with an advance of nearly 2.3%.

Overall we gained a number of economic positives from the week.  Unemployment claims came in lower than expectations, and producer prices were indicative of further stabilization.  Earnings season changes the subject ever so briefly, as this week brings announcements from blue chips.   I’m expecting a positive reaction from the market to those earnings and therefore steer a positive action in the markets for the summer months.  Value is outperforming growth while the outlook for economic growth is so tentative and dividends are heavily demanded.  Keen investors will benefit by focusing on the market action and ignoring all the regular noise merchants of Blah did de Blah Blah Blah.

Treasuries played a back seat to the Muni as yields fell on the week overall, as alarm came into the market on the news of more municipal bankruptcy filings. Oh snap, you mean tax dollars that were marked for projects were shifted somewhere else?  Statements falsified, lies told?   Next you’re going to tell me that Dog’s don’t sit around and play poker with each other, aren’t you?  Oh agony!!

Commodities overall had a good week as Grains continued to advance. The (ahem, KING) U.S. Dollar Index continued to display strength but it fatigued by weeks end allowing the euro to climb back up from trading under $1.23.

I’m remain optimistic, knowing full well Europe is still hanging around, being relatively quiet, there is still plenty drama to rival the airings of teenage mother something on that music channel that used to play music videos.  Our well paid plus benefits having, elected federal officials continued to proudly do absolutely nothing.  No real surprise there, is there?   I’m optimistic because I suggest that; Earnings will be decent, momentum will be built, markets will move positive and summer will be enjoyably summer.  I’m optimistic.

What I’m Watching This Week – 9 July 2012

Ain’t no party like a slow down party…

Following the European summit meeting, the U.S. Dollar Index, in what I would lively call ‘Swagger’, has dominated over the world’s currency markets, the Dollar is king and everybody wants to own the king.  How did we get here and how long will it last?  The initial enthusiasm over the bank funding structure in Europe has begun to create a conversation of sobriety and reflection.   Spain hasn’t miraculously cured its ailments.  Spanish ten-year bond yields are hovering around an unsustainable 7%.  If the Euro were to re-test the June 2010 lows of under $1.20, summer could be in for a very rude awakening.  Mean old Mr. Greenback, might make an appearance in his boxer shorts, standing on the front porch; yelling at whomever to get off his lawn.   Embarrassingly as it would be, for a brief moment in time he will be correct.

They say it was not coordinated, but when the Bank of England, European Central Bank, and People’s Bank of China all moved to provide monetary accommodation to their struggling economies, within hours of each other… makes the mind perform a sort of mental gymnastics.  Terrified minds think alike, I say.  Paired against feeble manufacturing and payroll numbers coming out of the U.S.; U.S. equities opened the short week by continuing previous gains, but meager economic news cut the momentum off at the knees by weeks end.  Seven of the nine major S&P sectors recorded losses.  Nine of twelve major foreign indexes recorded gains.  Europe and China led the weakness in the latter part of the week.  Jaded and faded as economic reality took hold by the end of the week, has me wondering aloud what our friendly neighborhood miscreants in Congress are contemplating concerning the slowdown.

U.S. Treasury yields fell on the week as the economic news continues to send bond yields lower with the 5 and 10 year returning to levels of early June and the prices for them rising through the roof.  Corporate bonds extended their rally with the Dow Jones corporate bond price index making a new high.   Junk bonds, never known to miss out on a party, posted a week’s worth of gains as well.  Munis and TIPS were flat lined in the corner getting their faces written over with Sharpie ink.  Sucks to be you Bro, sucks to be you.

Commodities, attempting to maintain the prior week’s rally, should have just went and taken a seat next to Munis and TIPS.  Oil closed under $85 and Natural gas fell more than 5% Friday; Gold face planted under $1,600.  Even the grains lost momentum and faltered.  They couldn’t maintain, as my old college roommate would often say, those guys just couldn’t maintain.

With the fundamental concern duly noted, the markets are actually in pretty healthy positions.  Here comes 2nd quarter earnings reporting, smaller cap stocks are performing exceptionally well, Investor preference for dividends and dependable earnings in a low yield environment are rewarding those stocks that can produce earnings and cash flow.  Housing appears to be coming off the bottom; I don’t think this is a head fake; this looks to be the real deal.  But wait, Mr. Volatility is still hanging around this all summer party, so don’t get surprised.  There will be another pull back before too long.  I anticipate summer whipsaw trading, and would not be startled to see another down in the market.  I am optimistic but very eager.

 

What I’m Watching This Week – 2 July 2012

That Boom Boom Boom you’re hearing…that probably isn’t just firework

Last week’s EU Summit demonstrated that perhaps the EU leaders are more closely in tune to the reality of contagion than I’ve given them credit for.  The EU Summit produced an agreement to stabilize the regions bank’s and alleviate concern that banks will fail.  They also agreed to drop requirements that taxpayers get preferred creditor status on aid to Spain’s banks, which opens the way to recapitalize lenders directly without bailout funds once Europe sets up a single banking supervisor.   This permits the ESM bailout facility to directly provide bailouts to banks, thus relieving the current system of rendering the loan to the government and further impairing its credit rating.  Spanish and Italian bond yields dropped sharply on Friday, representing a substantial easing of the European debt crisis, which has recently been the main factor holding back the U.S. economy.  I’m, of course, optimistic that all the necessary gears will turn in synchronicity.  One thing I can take from this is the validation of a process of negotiation and compromise.  Something our own elected officials prove themselves completely ignorant of and repetitively incompetent in general.

Speaking of our team, Congress approved legislation on transportation and student loans, with significant bipartisan support.  As we move deeper into summer and ahem, election season, it is the “Silly Season” you know, expect the unexpected and believe none of it.  Now what about that fiscal cliff?  Unsurprisingly, the U.S. Supreme Court’s ruling to uphold Obamacare had a mixed impact on health care stocks with hospitals and Medicaid insurers moving higher while commercial insurance company stocks closed lower. The sector had played both sides of the fence and now that a decision has been made, clarity and transparency rule the day; the posturing can cease and profits will increase.  For some of you, the immortal words of Johnny Rotten will ring true, “Ever feel like you’ve been had?”

For this week, I don’t anticipate all too much activity.  Monday we’ll receive the ISM manufacturing index and then things will get quiet until Thursday when we will get the ECB rate decision, ADP private payrolls, and initial jobless claims.  Friday will bring the employment report.  Otherwise most trading activity will be light with many on vacation through the holiday.  Oh yeah, I expect there will be fireworks come Thursday and Friday.  This week may mark an especially important time for most investors.  You weren’t naive to think that Mr. Volatility was going on holiday also did you?

I’m allowing my optimism to remain strong going in to July, although the market of late seems to be inhabited by the hordes of amateurs interpreting rumors and political noise, there are many positives leading towards gain, most right in front of your face and not hidden behind a tree or something.  Also understand that Markets are by no means “efficient”, As Mr. Warren Buffett says, he would be on a street corner selling pencils from a tin cup if markets were efficient.

Happy Fourth of July !!!