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.